Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No.

L-28896 February 17, 1988 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents. CRUZ, J.: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law. We deal first with the procedural question. The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as 1 delinquency income taxes for the years 1958 and 1959. On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received 2 on the same day in the office of the petitioner. On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending 3 protest. A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, 4 who deferred service of the warrant. On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be

served. Sixteen days later, on April 23, 1965, Algue filed a petition for review of the 6 decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the 7 decision or ruling challenged. It is true that as a rule the warrant of distraint and levy 8 is "proof of the finality of the assessment" and renders hopeless a request for 9 reconsideration," being "tantamount to an outright denial thereof and makes the said 10 request deemed rejected." But there is a special circumstance in the case at bar that prevents application of this accepted doctrine. The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted," the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed. Now for the substantive question. The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the petitioner had Originally claimed these 12 promotional fees to be personal holding company income but later conformed to 13 the decision of the respondent court rejecting this assertion. In fact, as the said court found, the amount was earned through the joint efforts of the persons among
11

whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other 14 persons to invest in it. Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC 15 properties. For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to 16 the aforenamed individuals. There is no dispute that the payees duly reported their respective shares of the fees 17 in their income tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also found, after examining the evidence, that no distribution of 18 dividends was involved. The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different 19 amounts as each payee's need arose. It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received 20 by him or her, to make up the total of P75,000.00. Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation. We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development 21 Co. to the private respondent was P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions (a) Expenses: (1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other 22 compensation for personal services actually rendered; ... and Revenue Regulations No. 2, Section 70 (1), reading as follows: SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows: Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.) It is worth noting at this point that most of the payees were not in the regular employ 23 of Algue nor were they its controlling stockholders. The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts

exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner. ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs. SO ORDERED. Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma, plaintiff-appellant, vs. J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee. Ernesto J. Gonzaga for appellant. Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.: This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act. Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of the export taxes." In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise a tax equivalent to the difference between the money value of the rental or consideration collected and the amount representing 12 per centum of the assessed value of such land. Republic of the Philippines SUPREME COURT Manila EN BANC According to section 6 of the law SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be known as the 'Sugar Adjustment and

Stabilization Fund,' and shall be paid out only for any or all of the following purposes or to attain any or all of the following objectives, as may be provided by law. First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial position of the Philippine sugar in the United States market, and ultimately to insure its continued existence notwithstanding the loss of that market and the consequent necessity of meeting competition in the free markets of the world; Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so that all might continue profitably to engage therein;lawphi1.net Third, to limit the production of sugar to areas more economically suited to the production thereof; and Fourth, to afford labor employed in the industry a living wage and to improve their living and working conditions: Provided, That the President of the Philippines may, until the adjourment of the next regular session of the National Assembly, make the necessary disbursements from the fund herein created (1) for the establishment and operation of sugar experiment station or stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of excess cane lands, and (g) on other problems the solution of which would help rehabilitate and stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to organize the necessary agency or agencies to take charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein created of the necessary amount or amounts needed for salaries, wages, travelling expenses, equipment, and other sundry expenses of said agency or agencies. Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the

crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17). The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power. This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121). As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857). Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no

reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579). That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251). From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it might have been applied;" and that "the legislative authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893). Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations, without any part of such money being channeled directly to private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400). The decision appealed from is affirmed, with costs against appellant. So ordered. Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L- 41383 August 15, 1988 PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs. ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity as National Treasurer, defendantsappellants. Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.: What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees? This question has been brought before this Court in the past. The parties are, in effect, asking for a re-examination of the latest decision on this issue. This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund of registration fees paid under protest. The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and Traffic Code. The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engaged in the air transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the National Government during the life of this franchise a tax of two per cent of the gross revenue or gross earning derived by the grantee from its operations under this franchise. Such tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied, established or collected by any municipal, provincial or national automobiles, Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the receipt of the assessment. The grantee shall pay the tax on its real property in conformity with existing law. On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, not been paying motor vehicle registration fees. Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees. Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount of P19,529.75 as registration fees of its motor vehicles. After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its legislative franchise. Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862. Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action. In support of the motion to dismiss, defendants

repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of the police power of the state. They contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on the merits. On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the case to us. Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at bar. Resolving the issue in the Philippine Rabbit case, this Court held: "The registration fee which defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees shall be charged." (lbid., Subsection H) The conclusion is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police power. Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay certificate to meet such an obligation. Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on privatelyowned passenger automobiles, motorcycles and scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created and its title expressly sets forth that a tax on privately-owned passenger automobiles, motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee under the Motor Vehicle Act. There cannot be any

clearer expression therefore of the legislative will, even on the assumption that the earlier legislation could by subdivision the point be susceptible of the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where the legislative body relies on its authority to tax it expressly so states, and where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969 In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand, held: The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles are in section 8 of that law called "fees". But the appellation is no impediment to their being considered taxes if taxes they really are. For not the name but the object of the charge determines whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional. for purposes of regulation and inspection and are for that reason limited in amount to what is necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by statute for the service to be person,-When by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the government whose officer or officers collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.) From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle Office are but a small portion about 5 per centumof the total collections from motor vehicle registration fees. And as proof that the money collected is not intended for the expenditures of that office, the law itself provides that all such money shall accrue to the funds for the construction and maintenance of public roads, streets and bridges. It is thus obvious that the fees are not collected for regulatory purposes, that is to say, as an incident to the enforcement of regulations governing the operation of motor vehicles on public highways, for their express object is to provide revenue with which the Government is to discharge one of its principal functionsthe construction and maintenance of public highways for everybody's use. They are veritable taxes, not merely fees. As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it provides that "no other taxes or

fees than those prescribed in this Act shall be imposed," thus implying that the charges therein imposedthough called fees are of the category of taxes. The provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads: Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur, by any municipal corporation, the provisions of any city charter to the contrary notwithstanding: Provided, however, That any provincial board, city or municipal council or board, or other competent authority may exact and collect such reasonable and equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as may be authorized and approved by the Secretary of Public Works and Communications, and also for the use of such public roads, as may be authorized by the President of the Philippines upon the recommendation of the Secretary of Public Works and Communications, but in none of these cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214) Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621. Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398). Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained unsegregated, by Rep. Act Nos. 587 and 1603) states: Section 73. Disposal of moneys collected.Twenty per centum of the money collected under the provisions of this Act shall accrue to the road and bridge funds of the different provinces and chartered

cities in proportion to the centum shall during the next previous year and the remaining eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the construction and maintenance of national and provincial roads and bridges. as well as the streets and bridges in the chartered cities to be alloted by the Secretary of Public Works and Communications for projects recommended by the Director of Public Works in the different provinces and chartered cities. .... Presently, Sec. 61 of the Land Transportation and Traffic Code provides: Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of this Act shall be deposited in a special trust account in the National Treasury to constitute the Highway Special Fund, which shall be apportioned and expended in accordance with the provisions of the" Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and equip the Land Transportation Commission but not to exceed twenty per cent of the total collection during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved August 6, 1971). It appears clear from the above provisions that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. On the other hand, thePhilippine Rabbit case mentions a presumption arising from the use of the term "fees," which appears to have been favored by the legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads: Sec. 13. Payment of taxes upon registration.No original registration of motor vehicles subject to payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of the taxes due thereon has been presented to the Commission. referring to taxes other than those imposed on the registration, operation or ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended). Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. Isabela such case, the fees may properly be regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593). Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears as Section 591-593). in the Land Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a " tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law could have referred to an original tax and not one in addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted. It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly purposes in the exercise of the State's police powers. Over

the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes." In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program. May the respondent administrative agency be required to refund the amounts stated in the complaint of PAL? The answer is NO. The claim for refund is made for payments given in 1971. It is not clear from the records as to what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative franchises similar to that invoked by PAL in this case. In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals , et al. (G.R. No. 615)." July 11, 1985), this Court ruled: Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In 1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that its franchise tax of one and one-half percentum (11/2%) of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby expressly exempted." The issue raised to this Court now is the validity of the respondent court's decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads: "(d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under Sections

24 (c) (1) of this Code shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the government, including the Government Service Insurance System and the Social Security System but excluding educational institutions, shall pay such rate of tax upon their taxable net income as are imposed by this section upon associations or corporations engaged in a similar business or industry. " An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide that no franchise shall be granted to any individual, firm, or corporation except under the condition that it shall be subject to amendment, alteration, or repeal by the legislature when the public interest so requires. There is no question as to the public interest involved. The country needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the respondent court is affirmed. Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the tax exemption in the franchise of PAL was repealed during the period. However, an amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides: In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the lifetime of this franchise whichever of subsections (a) and (b) hereunder will result in a lower taxes.) (a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the Internal Revenue Code; or (b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all

specific. without distinction as to transport or nontransport corporations; provided that with respect to international airtransport service, only the gross passengers, mail, and freight revenues. from its outgoing flights shall be subject to this law. The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature or description imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government, agency, now or in the future, including but not limited to the following: xxx xxx xxx (5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of airtransport equipment, motor vehicles, and all other personal or real property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979). PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration and licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted. WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590. SO ORDERED. Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Grio Aquino and Medialdea, JJ., concur. Republic of the Philippines SUPREME COURT Manila

SPECIAL FIRST DIVISION G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. RESOLUTION CORONA, J.: ARTICLE II Declaration of Principles and State Policies Section 15. The State shall protect and promote the right to health of the people and instill health consciousness among them. ARTICLE XIII Social Justice and Human Rights Section 11. 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. The 1 State shall endeavor to provide free medical care to paupers. For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner 2 Philippine Health Care Providers, Inc. We recall the facts of this case, as follows: Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.

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xxx

xxx

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documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE. Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid. SO ORDERED. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case. xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED. Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code. On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the nature of a non-life insurance contract subject to DST. WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, 3 citing Blue Cross Healthcare, Inc. v. Olivares and Philamcare Health Systems, Inc. v. 4 CA. We also ruled that petitioners contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business. Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments: (a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company. (b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CAs disposition that health care services are not in the nature of an insurance business. (c) Section 185 should be strictly construed.

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(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002. (e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those contemplated under Section 185. (f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered by Section 185. (g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185. (h) The June 12, 2008 decision should only apply prospectively. (i) Petitioner availed of the tax amnesty benefits under RA 9480 for the taxable year 2005 and all prior years. Therefore, the questioned 6 assessments on the DST are now rendered moot and academic. Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009. In its motion for reconsideration, petitioner reveals for the first time that it availed of a 7 tax amnesty under RA 9480 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the year 8 ending December 31, 2005. We find merit in petitioners motion for reconsideration. Petitioner was formally registered and incorporated with the Securities and Exchange 9 Commission on June 30, 1987. It is engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it: Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and advices on diet, exercise and other healthy habits, and immunization; Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and the like and
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Curative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an injury or sickness on the part of the enrolled 10 member. Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services are to be provided only by petitioner's 11 physicians, i.e. those directly employed by it or whose services are contracted by 12 it. Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and general 13 nursing care. If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other health care providers for the 14 services rendered, at pre-agreed rates. To avail of petitioners health care programs, the individual members are required to sign and execute a standard health care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time. Health Maintenance Organizations Are Not Engaged In The Insurance Business We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility 15 used in the transaction of the business. Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is 16 liable for DST on its health care agreements. A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious. Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

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Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied) It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is 17 preferred over that which makes some words idle and nugatory. This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the 18 interpretation which gives effect to the whole of the statute its every word. From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of indemnity and (2)the maker should be transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance). Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid 19 premium." The payments do not vary with the extent, frequency or type of services provided. The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it was not. Section 2 (2) of PD 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or "transacting an insurance business:"
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a) making or proposing to make, as insurer, any insurance contract; b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. Various courts in the United States, whose jurisprudence has a persuasive effect on 21 our decisions, have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance. Applying the "principal object and purpose test," there is significant American case law supporting the argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business. The rule was enunciated in Jordan v. Group Health Association wherein the Court of Appeals of the District of Columbia Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the distribution of health care services rather than the assumption of insurance risk. xxx Although Group Healths activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk
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and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered. That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its 24 principal object purpose. (Emphasis supplied) In California Physicians Service v. Garrison, the California court felt that, after scrutinizing the plan of operation as a whole of the corporation, it was service rather than indemnity which stood as its principal purpose. There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service
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rather than indemnity is its principal object and purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, lowcost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of a high order 26 and not indemnity. (Emphasis supplied) American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of 27 New Jersey is clear on this point: The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy. xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corp orations plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws. A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make 28 payment directly to the participating provider. (Emphasis supplied) Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical services as needed, with payment made 29 directly to the provider of these services. In short, even if petitioner assumes the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business.

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By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating health providers would still be incidental to petitioners purpose of providing and arranging for health care services and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object. In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep members from developing medical conditions or 30 diseases. As an HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize the possibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health 31 and medical services needed to prevent such loss or damage. Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of petitioners business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business. It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to those cases. What we are stating is that, for the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful that there are other American authorities who have found 32 particular HMOs to be actually engaged in insurance activities. Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not supervised by the Insurance Commission but 33 by the Department of Health. In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained 34 in Nestle Philippines, Inc. v. Court of Appeals:

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias 35 Sugar Central, Inc. vs. Commissioner of Customs, the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to the government agency officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they 36 frequently are the drafters of the law they interpret. A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997 Section 185 states that DST is imposed on "all policies of insurance or oblig ations of the nature of indemnity for loss, damage, or liability." In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of indemnity and are therefore insurance contracts: It is incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury. Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner. Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, 37 that is, among all the other members of the health care program. This is insurance.

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We reconsider. We shall quote once again the pertinent portion of Section 185: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bondsor obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied) In construing this provision, we should be guided by the principle that tax statutes are 38 strictly construed against the taxing authority. This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the 39 government. Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not 40 specifically provided. We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross andPhilamcare are applicable here. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur: 1. The insured has an insurable interest; 2. The insured is subject to a risk of loss by the happening of the designed peril; 3. The insurer assumes the risk; 4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk and 5. In consideration of the insurers promise, the insured pays a premium.
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Do the agreements between petitioner and its members possess all these elements? They do not. First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance: It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the essentia l purpose of such a contract is not to render personal services, but to indemnify against loss and damage 42 resulting from the defense of actions for malpractice. (Emphasis supplied) Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements. Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g.laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part.

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Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury. In Michigan Podiatric Medical Association v. National Foot Care Program, 43 Inc., although the health care contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that "the primary activity of the defendant (was) the provision of podiatric services to subscribers in 44 consideration of prepayment for such services." Since indemnity of the insured was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of 45 assumptions made relative to the insured. However, assuming that petitioners commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer. In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code. There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section 185 of the NIRC of 1997 is the

provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise 46 known as the "Internal Revenue Law of 1904") enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit: ARTICLE XI Stamp Taxes on Specified Objects Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following: xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied) On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained. On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917. Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the same.

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Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1 Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the 47 NIRC of 1977 was renumbered as Section 198. And under Section 23 of EO 273 dated July 25, 1987, it was again renumbered and became Section 185. On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax. Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was retained as the present Section 48 185. In 2004, amendments to the DST provisions were introduced by RA 9243 but Section 185 was untouched. On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, 49 there are 36 registered HMOs with a total enrollment of more than 2 million. We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an 50 HMO. Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the 51 constituency who is to pay it. So potent indeed is the power that it was once opined 52 that "the power to tax involves the power to destroy." Petitioner claims that the assessed DST to date which amounts to P376 million is 54 way beyond its net worth ofP259 million. Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private 55 enterprise. Petitioner, just like any concern organized for a lawful economic activity, 56 has a right to maintain a legitimate business. As aptly held in Roxas, et al. v. CTA, 57 et al.: The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill 58 the "hen that lays the golden egg." Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter-productive and ultimately subversive of the nations thrust 59 towards a better economy which will ultimately benefit the majority of our people. Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840 Petitioner asserts that, regardless of the arguments, the DST assessment for taxable 60 years 1996 and 1997 became moot and academic when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paidP5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and 61 prior years. Far from disagreeing with petitioner, respondent manifested in its memorandum:
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Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years. In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said 62 amnesty law. (Emphasis supplied) Furthermore, we held in a recent case that DST is one of the taxes covered by the tax 63 amnesty program under RA 9480. There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480. Is The Court Bound By A Minute Resolution In Another Case? Petitioner raises another interesting issue in its motion for reconsideration: whether 64 65 this Court is bound by the ruling of the CA in CIR v. Philippine National Bank that a health care agreement of Philamcare Health Systems is not an insurance contract for purposes of the DST. In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal in Philippine National Bank (G.R. No. 66 148680). Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract. 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 67 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 68 sustained. But what is its effect on other cases? With respect to the same subject matter and the same issues concerning the same 69 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 70 not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a previous 71 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 72 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 73 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. Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the fact that petitioners health care agreements are not subject to DST. A Final Note Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage. It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer advantages over the payfor-service system (wherein individuals are charged a fee each time they receive medical services), including the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens with affordable health services.

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The rate of DST under Section 185 is equivalent to 12.5% of the premium 74 charged. Its imposition will elevate the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the indispensability of the services offered by HMOs. WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax. No costs. SO ORDERED.

FERNANDO, C.J.: The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of 2 3 taxable partnership, (f) adjusted gross income. Petitioner as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a4 vis those which are imposed upon fixed income or salaried individual taxpayers. He characterizes the above sction as arbitrary amounting to class legislation, oppressive 5 and capricious in character For petitioner, therefore, there is a transgression of both 6 the equal protection and due process clauses of the Constitution as well as of the 7 rule requiring uniformity in taxation. The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after two extensions were granted the 8 Office of the Solicitor General, was filed on May 28, 1982. The facts as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in 9 their] Special and Affirmative Defenses." The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit. This Court finds such a plea more than justified. The petition must be dismissed. 1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-59431 July 25, 1984 ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents. Antero Sison for petitioner and for his own behalf. The Solicitor General for respondents.

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2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines. 3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as petitioner here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm. 4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18 5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the 20 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 benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in law as though they 21 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. 22 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 23 limitation.'" 7. Petitioner likewise invoked the kindred concept of uniformity. According to the 24 Constitution: "The rule of taxation shag be uniform and equitable." This requirement 25 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 26 subject may be found. " He likewise added: "The rule of uniformity does not call for 27 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 28 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

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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 30 placed in similar situation." 8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income. 9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the arbitrary character of the assailed 31 provision; (2) the force of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and businessman certainly not a suspect classification, WHEREFORE, the petition is dismissed. Costs against petitioner. Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur. Teehankee, J., concurs in the result. Plana, J., took no part.

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Separate Opinions

AQUINO, J., concurring: I concur in the result. The petitioner has no cause of action for prohibition. ABAD SANTOS, J., dissenting: This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they claim all sort of deduction justified or not I vote for dismissal.

Separate Opinions AQUINO, J., concurring: I concur in the result. The petitioner has no cause of action for prohibition. ABAD SANTOS, J., dissenting: This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such circumtance does not necessarily result in lower tax payments for these receiving compensation income. In fact, the reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they claim all sort of deduction justified or not I vote for dismissal. Footnotes 1 Petitioner must have realized that a suit for declaratory relief must be filed with Regional Trial Courts.

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2 Batas Pambansa Blg. 135, Section 21 (1981). 3 The respondents are Ruben B. Ancheta, Acting Commissioner, Bureau of Internal Revenue; Romulo Villa, Deputy Commissioner, Bureau of Internal Revenue; Tomas Toledo, Deputy Commissioner, Bureau of Internal Revenue; Manuel Alba, Minister of Budget; Francisco Tantuico, Chairman, Commissioner on Audit; and Cesar E. A. Virata, Minister of Finance. 4 Petition, Parties, par. 1. The challenge is thus aimed at paragraphs (a) and (b) of Section 1 further Amending Section 21 of the National Internal Revenue Code of 1977. Par. (a) reads: "(a) On taxable compensation income. A tax is hereby imposed upon the taxable compensation income as determined in Section 28 (a) received during each taxable year from all sources by every individual, whether a citizen of the Philippines, determined in accordance with the following schedule: Not over P2,500 Over P 2,500 but not over P 5,000 Over P 5,000 but not over 10,000 Over P 10,000 but not over P 20,000 Over P 20,000 but not over P 40,000 Over P 40.000 but not over P 60,000 Over P 60,000 but not over P100,000 Over P100,000 but not over P250,000 Over P250,000 but not over P500,000 Over P500,000 0% 1% P 25 + 3% of excess over P 5,000 P 175 + 7 % of excess over P 10,000 P 875 + 11%, of excess over P 20,000 P 3,075 + I 15% of excess over P 40,000 P 6,075 + 19% of excess over P 60,000

(a) received during each taxable year from all sources by every individual, whether a citizen of the Philippines, or an alien residing in the Philippines determined in accordance with the following schedule: Not over P10,000 Over P 10,000 but not over P 30,000 Over P 30,000 but not over P150,000 Over P150,000 but not over P500,000 Over P500,000 5 Ibid Statement, par. 4. 6 Article IV, Section 1 of the Constitution reads: "No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the equal protection of the laws." 7 Article VII, Section 7. par. (1) of the Constitution reads: "The rule of taxation shall be uniform and equitable. The Batasang Pambansa shall evolve a progressive system of taxation." 8 It was filed by Solicitor General Estelito P. Mendoza. He was assisted by Assistant Solicitor General Eduardo D. Montenegro and Solicitor Erlinda B, Masakayan. 9 Answer, pars. 1-6. 10 Ibid, par. 6. 11 Agricultural Credit and Cooperative Financing Administration v. Consideration of Unions in Government Corporation and Offices, L21484, November 29, 1969, 30 SCRA 649, 662. 12 Cf, Vera v. Fernandez, L-31364, March 30, 1979, 89 SCRA 199, per Castro, J. 13 Sarasola v. Trinidad, 40 Phil. 252, 262 (1919). 5%

P 500 + 15% of excess over P 10,00

P 3,500 + 30% of excess over P 30,0

P 39,500 + 45% of excess over P150

P197,000 + 601% of excess over P5

P 13,675 + 24% excess over P100,000

P 49,675 + 29% of excess over P250,000

P 122,175 + 35% of excess over P500,000 Par. (b) reads: "(b) On taxable net income. A tax is hereby imposed upon the taxable net income as determined in Section 29

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14 McColloch v. Maryland 4 Wheaton 316, 15 306 US 466 ( 938).

29 Manila Race Horse Trainers Asso. v. De la Fuente, 88 Phil. 60,65 (1951). 30 Uy Matias v. City of Cebu, 93 Phil. 300 (1953).

16 Ibid, 489 17 Ibid. 490. 18 Cf. Ermita-Malate Hotel and Motel Operator S Association v. Hon. City Mayor, 127 Phil. 306, 315 ( 1967); U.S. v. Salaveria, 39 Phil. 102,111 (1918) and Ebona v. Daet, 85 Phil, 369 (1950). Likewise referred to is O'Gorman and Young v. Hartford Fire Insurance Co 282 US 251, 328 (1931). 19 Cf. Manila Gas Co. v. Collector of Internal Revenue, 62 Phil. 895 (1936); Wells Fargo Bank and Union Trust Co. v. Collector, 70 Phil. 325 (1940); Republic v. Oasan Vda. de Fernandez, 99 Phil. 934 (1956). 20 The excerpt is from the opinion in J.M. Tuason and Co. v. The Land Tenure Administration, L-21064, February 18, 1970, 31 SCRA 413, 435 and reiterated in Bautista v. Juinio, G.R. No. 50908, January 31, 1984, 127 SCRA 329, 339. The former deals with an eminent domain proceeding and the latter with a suit contesting the validity of a police power measure. 21 Tigner v. Texas, 310 US 141, 147 (1940). The City Legal Officer for respondents City Mayor and City Treasurer. 22 98 Phil. 148 (1955). 23 Ibid, 153. MELENCIO-HERRERA, J.: 24 Article VIII, Section 17, par. 1, first sentence of the Constitution 25 69 Phil. 420 (1940). 26 Ibid, 426. 27 Ibid, 424. 28 Eastern Theatrical Co. v. Alfonso, 83 Phil. 852, 862 (1949). This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on behalf of other videogram operators adversely affected. It assails the constitutionality of Presidential Decree No. 1987 entitled "An Act Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the videogram industry (hereinafter briefly referred to as the BOARD). The Decree was promulgated on October 5, 1985 and took effect on April 10, 1986, fifteen (15) days after completion of its publication in the Official Gazette. 31 While petitioner cited figures to sustain in his assertion, public respondents refuted with other figures that argue against his submission. One reason for requiring declaratory relief proceedings to start in regional trial courts is precisely to enable petitioner to prove his allegation, absent an admission in the answer. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-75697 June 18, 1987 VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner, vs. VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION, CITY MAYOR and CITY TREASURER OF MANILA, respondents. Nelson Y. Ng for petitioner.

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On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential Decree No. 1994 amended the National Internal Revenue Code providing, inter alia: SEC. 134. Video Tapes. There shall be collected on each processed video-tape cassette, ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally manufactured or imported blank video tapes shall be subject to sales tax. On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers, Importers and Distributors Association of the Philippines, and Philippine Motion Pictures Producers Association, hereinafter collectively referred to as the Intervenors, were permitted by the Court to intervene in the case, over petitioner's opposition, upon the allegations that intervention was necessary for the complete protection of their rights and that their "survival and very existence is threatened by the unregulated proliferation of film piracy." The Intervenors were thereafter allowed to file their Comment in Intervention. The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows: 1. WHEREAS, the proliferation and unregulated circulation of videograms including, among others, videotapes, discs, cassettes or any technical improvement or variation thereof, have greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection of sales, contractor's specific, amusement and other taxes, thereby resulting in substantial losses estimated at P450 Million annually in government revenues; 2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum from rentals, sales and disposition of videograms, and such earnings have not been subjected to tax, thereby depriving the Government of approximately P180 Million in taxes each year; 3. WHEREAS, the unregulated activities of videogram establishments have also affected the viability of the movie industry, particularly the more than 1,200 movie houses and theaters throughout the country, and occasioned industry-wide

displacement and unemployment due to the shutdown of numerous moviehouses and theaters; 4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the Government to create an environment conducive to growth and development of all business industries, including the movie industry which has an accumulated investment of about P3 Billion; 5. WHEREAS, proper taxation of the activities of videogram establishments will not only alleviate the dire financial condition of the movie industry upon which more than 75,000 families and 500,000 workers depend for their livelihood, but also provide an additional source of revenue for the Government, and at the same time rationalize the heretofore uncontrolled distribution of videograms; 6. WHEREAS, the rampant and unregulated showing of obscene videogram features constitutes a clear and present danger to the moral and spiritual well-being of the youth, and impairs the mandate of the Constitution for the State to support the rearing of the youth for civic efficiency and the development of moral character and promote their physical, intellectual, and social wellbeing; 7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb these blatant malpractices which have flaunted our censorship and copyright laws; 8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people and betraying the national economic recovery program, bold emergency measures must be adopted with dispatch; ... (Numbering of paragraphs supplied). Petitioner's attack on the constitutionality of the DECREE rests on the following grounds: 1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local government is a RIDER and the same is not germane to the subject matter thereof;

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2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of the due process clause of the Constitution; 3. There is no factual nor legal basis for the exercise by the President of the vast powers conferred upon him by Amendment No. 6; 4. There is undue delegation of power and authority; 5. The Decree is an ex-post facto law; and 6. There is over regulation of the video industry as if it were a nuisance, which it is not. We shall consider the foregoing objections in seriatim. 1. The Constitutional requirement that "every bill shall embrace only one subject which shall be expressed in the title thereof" 1 is sufficiently complied with if the title be comprehensive enough to include the general purpose which a statute seeks to achieve. It is not necessary that the title express each and every end that the statute wishes to accomplish. The requirement is satisfied if all the parts of the statute are related, and are germane to the subject matter expressed in the title, or as long as 2 they are not inconsistent with or foreign to the general subject and title. An act having a single general subject, indicated in the title, may contain any number of provisions, no matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such subject by providing for the method and means of carrying out the general 3 object." The rule also is that the constitutional requirement as to the title of a bill should not be so narrowly construed as to cripple or impede the power of 4 5 legislation. It should be given practical rather than technical construction. Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a rider is without merit. That section reads, inter alia: Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a reproduction of any motion picture or audiovisual program. Fifty percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other fifty percent (50%) shall acrrue to the municipality where the tax is collected;

PROVIDED, That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila Commission. xxx xxx xxx The foregoing provision is allied and germane to, and is reasonably necessary for the accomplishment of, the general object of the DECREE, which is the regulation of the video industry through the Videogram Regulatory Board as expressed in its title. The tax provision is not inconsistent with, nor foreign to that general subject and title. As a 6 tool for regulation it is simply one of the regulatory and control mechanisms scattered throughout the DECREE. The express purpose of the DECREE to include taxation of the video industry in order to regulate and rationalize the heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those preambles explain the motives of the lawmaker in presenting the measure. The title of the DECREE, which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to express all those objectives 7 in the title or that the latter be an index to the body of the DECREE. 2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive, confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not cease to be valid merely because it regulates, 8 discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in 9 the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. 10 The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the realization that earnings of videogram establishments of around P600 million per annum have not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user tax, imposed on retailers for every videogram they make available for public viewing. It is similar to the 30% amusement tax imposed or borne by the movie industry which the theaterowners pay to the government, but which is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all videogram operators. The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of

26

pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition. The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. 11 It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation". 12 Taxation has been made the implement of the state's police power. 13 At bottom, the rate of tax is a matter better addressed to the taxing legislature. 3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by the former President under Amendment No. 6 of the 1973 Constitution providing that "whenever in the judgment of the President ... , there exists a grave emergency or a threat or imminence thereof, or whenever the interim Batasang Pambansa or the regular National Assembly fails or is unable to act adequately on any matter for any reason that in his judgment requires immediate action, he may, in order to meet the exigency, issue the necessary decrees, orders, or letters of instructions, which shall form part of the law of the land." In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause sufficiently summarizes the justification in that grave emergencies corroding the moral values of the people and betraying the national economic recovery program necessitated bold emergency measures to be adopted with dispatch. Whatever the reasons "in the judgment" of the then President, considering that the issue of the validity of the exercise of legislative power under the said Amendment still pends resolution in several other cases, we reserve resolution of the question raised at the proper time. 4. Neither can it be successfully argued that the DECREE contains an undue delegation of legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the direct assistance of other agencies and units of the government and deputize, for a fixed and limited period, the heads or personnel of such agencies and units to perform enforcement functions for the Board" is not a delegation of the power to legislate but merely a conferment of authority or discretion as to its execution, enforcement, and implementation. "The true distinction is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and conferring authority or discretion as to its execution to be exercised under and in pursuance of the law. The first cannot be done; to the latter,

no valid objection can be made." 14 Besides, in the very language of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and limited period" with the deputized agencies concerned being "subject to the direction and control of the BOARD." That the grant of such authority might be the source of graft and corruption would not stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will not be without adequate remedy in law. 5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or different testimony than the law required at the time of the commission of the offense." It is petitioner's position that Section 15 of the DECREE in providing that: All videogram establishments in the Philippines are hereby given a period of forty-five (45) days after the effectivity of this Decree within which to register with and secure a permit from the BOARD to engage in the videogram business and to register with the BOARD all their inventories of videograms, including videotapes, discs, cassettes or other technical improvements or variations thereof, before they could be sold, leased, or otherwise disposed of. Thereafter any videogram found in the possession of any person engaged in the videogram business without the required proof of registration by the BOARD, shall be prima facie evidence of violation of the Decree, whether the possession of such videogram be for private showing and/or public exhibition. raises immediately a prima facie evidence of violation of the DECREE when the required proof of registration of any videogram cannot be presented and thus partakes of the nature of an ex post facto law. The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et al. 15 ... it is now well settled that "there is no constitutional objection to the passage of a law providing that the presumption of innocence may be overcome by a contrary presumption founded upon the experience of human conduct, and enacting what evidence shall be sufficient to overcome such presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the "legislature may enact that when certain facts have been proved that they shall be prima facie evidence of the existence of the guilt of the accused and shift the burden of proof provided there be a rational connection between the facts proved and the ultimate

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facts presumed so that the inference of the one from proof of the others is not unreasonable and arbitrary because of lack of connection between the two in common experience". 16 Applied to the challenged provision, there is no question that there is a rational connection between the fact proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE, besides the fact that the prima facie presumption of violation of the DECREE attaches only after a forty-five-day period counted from its effectivity and is, therefore, neither retrospective in character. 6. We do not share petitioner's fears that the video industry is being over-regulated and being eased out of existence as if it were a nuisance. Being a relatively new industry, the need for its regulation was apparent. While the underlying objective of the DECREE is to protect the moribund movie industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government revenues due to the drop in theatrical attendance, not to mention the fact that the activities of video establishments are virtually untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in business. 17 The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video industry. On the contrary, video establishments are seen to have proliferated in many places notwithstanding the 30% tax imposed. In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of the DECREE. These considerations, however, are primarily and exclusively a matter of legislative concern. Only congressional power or competence, not the wisdom of the action taken, may be the basis for declaring a statute invalid. This is as it ought to be. The principle of separation of powers has in the main wisely allocated the respective authority of each department and confined its jurisdiction to such a sphere. There would then be intrusion not allowable under the Constitution if on a matter left to the discretion of a coordinate branch, the judiciary would substitute its own. If there be adherence to the rule of law, as there ought to be, the last offender should be courts of justice, to which rightly litigants submit their controversy precisely to maintain unimpaired the supremacy of legal norms and prescriptions. The attack on the validity of the challenged provision likewise insofar as there may be objections, even if valid and cogent on its wisdom cannot be sustained. 18

In fine, petitioner has not overcome the presumption of validity which attaches to a challenged statute. We find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as unconstitutional and void. WHEREFORE, the instant Petition is hereby dismissed. No costs. SO ORDERED. Teehankee, (C.J.), Yap, Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 166715 August 14, 2008
1

ABAKADA GURO PARTY LIST (formerly AASJS) OFFICERS/MEMBERS SAMSON S. ALCANTARA, ED VINCENT S. ALBANO, ROMEO R. ROBISO, RENE B. GOROSPE and EDWIN R. SANDOVAL, petitioners, vs. HON. CESAR V. PURISIMA, in his capacity as Secretary of Finance, HON. GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue, and HON. ALBERTO D. LINA, in his Capacity as Commissioner of Bureau of Customs, respondents. DECISION CORONA, J.: This petition for prohibition seeks to prevent respondents from implementing and 2 enforcing Republic Act (RA) 9335 (Attrition Act of 2005). RA 9335 was enacted to optimize the revenue-generation capability and collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). The law intends to encourage BIR and BOC officials and employees to exceed their revenue targets by providing a system of rewards and sanctions through the creation of a
1

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Rewards and Incentives Fund (Fund) and a Revenue Performance Evaluation Board 3 (Board). It covers all officials and employees of the BIR and the BOC with at least six 4 months of service, regardless of employment status. The Fund is sourced from the collection of the BIR and the BOC in excess of their revenue targets for the year, as determined by the Development Budget and Coordinating Committee (DBCC). Any incentive or reward is taken from the fund and allocated to the BIR and the BOC in proportion to their contribution in the excess 5 collection of the targeted amount of tax revenue. The Boards in the BIR and the BOC are composed of the Secretary of the Department of Finance (DOF) or his/her Undersecretary, the Secretary of the Department of Budget and Management (DBM) or his/her Undersecretary, the Director General of the National Economic Development Authority (NEDA) or his/her Deputy Director General, the Commissioners of the BIR and the BOC or their Deputy Commissioners, two representatives from the rank-and-file employees and a 6 representative from the officials nominated by their recognized organization. Each Board has the duty to (1) prescribe the rules and guidelines for the allocation, distribution and release of the Fund; (2) set criteria and procedures for removing from the service officials and employees whose revenue collection falls short of the target; (3) terminate personnel in accordance with the criteria adopted by the Board; (4) prescribe a system for performance evaluation; (5) perform other functions, including 7 the issuance of rules and regulations and (6) submit an annual report to Congress. The DOF, DBM, NEDA, BIR, BOC and the Civil Service Commission (CSC) were tasked to promulgate and issue the implementing rules and regulations of RA 8 9335, to be approved by a Joint Congressional Oversight Committee created for 9 such purpose. Petitioners, invoking their right as taxpayers filed this petition challenging the constitutionality of RA 9335, a tax reform legislation. They contend that, by establishing a system of rewards and incentives, the law "transform[s] the officials and employees of the BIR and the BOC into mercenaries and bounty hunters" as they will do their best only in consideration of such rewards. Thus, the system of rewards and incentives invites corruption and undermines the constitutionally mandated duty of these officials and employees to serve the people with utmost responsibility, integrity, loyalty and efficiency. Petitioners also claim that limiting the scope of the system of rewards and incentives only to officials and employees of the BIR and the BOC violates the constitutional guarantee of equal protection. There is no valid basis for classification or distinction

as to why such a system should not apply to officials and employees of all other government agencies. In addition, petitioners assert that the law unduly delegates the power to fix revenue targets to the President as it lacks a sufficient standard on that matter. While Section 7(b) and (c) of RA 9335 provides that BIR and BOC officials may be dismissed from the service if their revenue collections fall short of the target by at least 7.5%, the law does not, however, fix the revenue targets to be achieved. Instead, the fixing of revenue targets has been delegated to the President without sufficient standards. It will therefore be easy for the President to fix an unrealistic and unattainable target in order to dismiss BIR or BOC personnel. Finally, petitioners assail the creation of a congressional oversight committee on the ground that it violates the doctrine of separation of powers. While the legislative function is deemed accomplished and completed upon the enactment and approval of the law, the creation of the congressional oversight committee permits legislative participation in the implementation and enforcement of the law. In their comment, respondents, through the Office of the Solicitor General, question the petition for being premature as there is no actual case or controversy yet. Petitioners have not asserted any right or claim that will necessitate the exercise of this Courts jurisdiction. Nevertheless, respondents acknowledge that public policy requires the resolution of the constitutional issues involved in this case. They assert that the allegation that the reward system will breed mercenaries is mere speculation and does not suffice to invalidate the law. Seen in conjunction with the declared objective of RA 9335, the law validly classifies the BIR and the BOC because the functions they perform are distinct from those of the other government agencies and instrumentalities. Moreover, the law provides a sufficient standard that will guide the executive in the implementation of its provisions. Lastly, the creation of the congressional oversight committee under the law enhances, rather than violates, separation of powers. It ensures the fulfillment of the legislative policy and serves as a check to any over-accumulation of power on the part of the executive and the implementing agencies. After a careful consideration of the conflicting contentions of the parties, the Court finds that petitioners have failed to overcome the presumption of constitutionality in favor of RA 9335, except as shall hereafter be discussed. Actual Case And Ripeness An actual case or controversy involves a conflict of legal rights, an assertion of 10 opposite legal claims susceptible of judicial adjudication. A closely related requirement is ripeness, that is, the question must be ripe for adjudication. And a

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constitutional question is ripe for adjudication when the governmental act being 11 challenged has a direct adverse effect on the individual challenging it. Thus, to be ripe for judicial adjudication, the petitioner must show a personal stake in the outcome of the case or an injury to himself that can be redressed by a favorable decision of the 12 Court. In this case, aside from the general claim that the dispute has ripened into a judicial controversy by the mere enactment of the law even without any further overt 13 act, petitioners fail either to assert any specific and concrete legal claim or to demonstrate any direct adverse effect of the law on them. They are unable to show a personal stake in the outcome of this case or an injury to themselves. On this account, their petition is procedurally infirm. This notwithstanding, public interest requires the resolution of the constitutional issues raised by petitioners. The grave nature of their allegations tends to cast a cloud on the presumption of constitutionality in favor of the law. And where an action of the legislative branch is alleged to have infringed the Constitution, it becomes not 14 only the right but in fact the duty of the judiciary to settle the dispute. Accountability of Public Officers Section 1, Article 11 of the Constitution states: Sec. 1. Public office is a public trust. Public officers and employees must at all times be accountable to the people, serve them with utmost responsibility, integrity, loyalty, and efficiency, act with patriotism, and justice, and lead modest lives. Public office is a public trust. It must be discharged by its holder not for his own personal gain but for the benefit of the public for whom he holds it in trust. By demanding accountability and service with responsibility, integrity, loyalty, efficiency, patriotism and justice, all government officials and employees have the duty to be responsive to the needs of the people they are called upon to serve. Public officers enjoy the presumption of regularity in the performance of their duties. This presumption necessarily obtains in favor of BIR and BOC officials and employees. RA 9335 operates on the basis thereof and reinforces it by providing a system of rewards and sanctions for the purpose of encouraging the officials and employees of the BIR and the BOC to exceed their revenue targets and optimize their 15 revenue-generation capability and collection.

The presumption is disputable but proof to the contrary is required to rebut it. It cannot be overturned by mere conjecture or denied in advance (as petitioners would have the Court do) specially in this case where it is an underlying principle to advance a declared public policy. Petitioners claim that the implementation of RA 9335 will turn BIR and BOC officials and employees into "bounty hunters and mercenaries" is not only without any factual and legal basis; it is also purely speculative. A law enacted by Congress enjoys the strong presumption of constitutionality. To justify its nullification, there must be a clear and unequivocal breach of the 16 Constitution, not a doubtful and equivocal one. To invalidate RA 9335 based on petitioners baseless supposition is an affront to the wisdom not only of the legislature that passed it but also of the executive which approved it. Public service is its own reward. Nevertheless, public officers may by law be rewarded for exemplary and exceptional performance. A system of incentives for exceeding the set expectations of a public office is not anathema to the concept of public accountability. In fact, it recognizes and reinforces dedication to duty, industry, efficiency and loyalty to public service of deserving government personnel. In United States v. Matthews, the U.S. Supreme Court validated a law which awards to officers of the customs as well as other parties an amount not exceeding one-half of the net proceeds of forfeitures in violation of the laws against smuggling. 18 Citing Dorsheimer v. United States, the U.S. Supreme Court said: The offer of a portion of such penalties to the collectors is to stimulate and reward their zeal and industry in detecting fraudulent attempts to evade payment of duties and taxes. In the same vein, employees of the BIR and the BOC may by law be entitled to a reward when, as a consequence of their zeal in the enforcement of tax and customs laws, they exceed their revenue targets. In addition, RA 9335 establishes safeguards to ensure that the reward will not be claimed if it will be either the fruit of "bounty hunting or mercenary activity" or the product of the irregular performance of official duties. One of these precautionary measures is embodied in Section 8 of the law: SEC. 8. Liability of Officials, Examiners and Employees of the BIR and the BOC. The officials, examiners, and employees of the [BIR] and the [BOC] who violate this Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by any business establishment or taxpayer as a result of such violation,
17

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negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence. Equal Protection Equality guaranteed under the equal protection clause is equality under the same conditions and among persons similarly situated; it is equality among equals, not similarity of treatment of persons who are classified based on substantial differences 19 in relation to the object to be accomplished. When things or persons are different in fact or circumstance, they may be treated in law differently. In Victoriano v. Elizalde 20 Rope Workers Union, this Court declared: The guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws upon all citizens of the [S]tate. It is not, therefore, a requirement, in order to avoid the constitutional prohibition against inequality, that every man, woman and child should be affected alike by a statute. Equality of operation of statutes does not mean indiscriminate operation on persons merely as such, but on persons according to the circumstances surrounding them. It guarantees equality, not identity of rights. The Constitution does not require that things which are different in fact be treated in law as though they were the same. The equal protection clause does not forbid discrimination as to things that are different. It does not prohibit legislation which is limited either in the object to which it is directed or by the territory within which it is to operate. The equal protection of the laws clause of the Constitution allows classification. Classification in law, as in the other departments of knowledge or practice, is the grouping of things in speculation or practice because they agree with one another in certain particulars. A law is not invalid because of simple inequality. The very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality. All that is required of a valid classification is that it be reasonable, which means that the classification should be based on substantial distinctions which make for real differences, that it must be germane to the purpose of the law; that it must not be limited to existing conditions only; and that it must apply equally to each member of the class. This Court has held that the standard is satisfied if the classification or distinction is based on a reasonable foundation or rational basis and is not palpably arbitrary. In the exercise of its power to make classifications for the purpose of enacting laws over matters within its jurisdiction, the state is recognized as enjoying a wide range of discretion. It is not necessary that the classification be based on scientific or marked differences of things or in their relation.

Neither is it necessary that the classification be made with mathematical nicety. Hence, legislative classification may in many cases properly rest on narrow distinctions, for the equal protection guaranty does not preclude the legislature from recognizing degrees of evil or harm, and legislation is 21 addressed to evils as they may appear. (emphasis supplied) The equal protection clause recognizes a valid classification, that is, a classification 22 that has a reasonable foundation or rational basis and not arbitrary. With respect to RA 9335, its expressed public policy is the optimization of the revenue-generation 23 capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes, customs duties, fees and charges. The BIR performs the following functions: Sec. 18. The Bureau of Internal Revenue. The Bureau of Internal Revenue, which shall be headed by and subject to the supervision and control of the Commissioner of Internal Revenue, who shall be appointed by the President upon the recommendation of the Secretary [of the DOF], shall have the following functions: (1) Assess and collect all taxes, fees and charges and account for all revenues collected; (2) Exercise duly delegated police powers for the proper performance of its functions and duties; (3) Prevent and prosecute tax evasions and all other illegal economic activities; (4) Exercise supervision and control over its constituent and subordinate units; and (5) Perform such other functions as may be provided by law. xxx xxx xxx (emphasis supplied)
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On the other hand, the BOC has the following functions:

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Sec. 23. The Bureau of Customs. The Bureau of Customs which shall be headed and subject to the management and control of the Commissioner of Customs, who shall be appointed by the President upon the recommendation of the Secretary[of the DOF] and hereinafter referred to as Commissioner, shall have the following functions: (1) Collect custom duties, taxes and the corresponding fees, charges and penalties; (2) Account for all customs revenues collected; (3) Exercise police authority for the enforcement of tariff and customs laws; (4) Prevent and suppress smuggling, pilferage and all other economic frauds within all ports of entry; (5) Supervise and control exports, imports, foreign mails and the clearance of vessels and aircrafts in all ports of entry; (6) Administer all legal requirements that are appropriate; (7) Prevent and prosecute smuggling and other illegal activities in all ports under its jurisdiction; (8) Exercise supervision and control over its constituent units; (9) Perform such other functions as may be provided by law. xxx xxx xxx (emphasis supplied)
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forth therein the policy to be executed, carried out or implemented by the 26 delegate. It lays down a sufficient standard when it provides adequate guidelines or limitations in the law to map out the boundaries of the delegates authority and 27 prevent the delegation from running riot. To be sufficient, the standard must specify the limits of the delegates authority, announce the legislative policy and identify the 28 conditions under which it is to be implemented. RA 9335 adequately states the policy and standards to guide the President in fixing revenue targets and the implementing agencies in carrying out the provisions of the law. Section 2 spells out the policy of the law: SEC. 2. Declaration of Policy. It is the policy of the State to optimize the revenue-generation capability and collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) by providing for a system of rewards and sanctions through the creation of a Rewards and Incentives Fund and a Revenue Performance Evaluation Board in the above agencies for the purpose of encouraging their officials and employees to exceed their revenue targets. Section 4 "canalized within banks that keep it from overflowing" power to the President to fix revenue targets:
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the delegated

SEC. 4. Rewards and Incentives Fund. A Rewards and Incentives Fund, hereinafter referred to as the Fund, is hereby created, to be sourced from the collection of the BIR and the BOC in excess of their respective revenue targets of the year, as determined by the Development Budget and Coordinating Committee (DBCC), in the following percentages: Excess of Collection of the Excess the Revenue Targets 30% or below More than 30%

Both the BIR and the BOC are bureaus under the DOF. They principally perform the special function of being the instrumentalities through which the State exercises one of its great inherent functions taxation. Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. Undue Delegation Two tests determine the validity of delegation of legislative power: (1) the completeness test and (2) the sufficient standard test. A law is complete when it sets

Percent (%) of the Excess Collection to the Fund 15% 15% of the first 30% plus 20% of the excess

The Fund shall be deemed automatically appropriated the year immediately following the year when the revenue collection target was exceeded and shall be released on the same fiscal year. Revenue targets shall refer to the original estimated revenue collection expected of the BIR and the BOC for a given fiscal year as stated in the Budget of Expenditures and Sources of Financing (BESF) submitted by the President to Congress. The BIR and the BOC shall submit to the DBCC the distribution of the agencies revenue targets as allocated among

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its revenue districts in the case of the BIR, and the collection districts in the case of the BOC. xxx xxx xxx (emphasis supplied)

Revenue targets are based on the original estimated revenue collection expected respectively of the BIR and the BOC for a given fiscal year as approved by the DBCC 30 and stated in the BESF submitted by the President to Congress. Thus, the determination of revenue targets does not rest solely on the President as it also undergoes the scrutiny of the DBCC. On the other hand, Section 7 specifies the limits of the Boards authority and identifies the conditions under which officials and employees whose revenue collection falls short of the target by at least 7.5% may be removed from the service: SEC. 7. Powers and Functions of the Board. The Board in the agency shall have the following powers and functions: xxx xxx xxx

(c) To terminate personnel in accordance with the criteria adopted in the preceding paragraph: Provided, That such decision shall be immediately executory: Provided, further, That the application of the criteria for the separation of an official or employee from service under this Act shall be without prejudice to the application of other relevant laws on accountability of public officers and employees, such as the Code of Conduct and Ethical Standards of Public Officers and Employees and the Anti-Graft and Corrupt Practices Act; xxx xxx xxx (emphasis supplied)

Clearly, RA 9335 in no way violates the security of tenure of officials and employees of the BIR and the BOC. The guarantee of security of tenure only means that an employee cannot be dismissed from the service for causes other than those provided 31 by law and only after due process is accorded the employee. In the case of RA 9335, it lays down a reasonable yardstick for removal (when the revenue collection falls short of the target by at least 7.5%) with due consideration of all relevant factors affecting the level of collection. This standard is analogous to inefficiency and incompetence in the performance of official duties, a ground for disciplinary action 32 under civil service laws. The action for removal is also subject to civil service laws, rules and regulations and compliance with substantive and procedural due process. At any rate, this Court has recognized the following as sufficient standards: "public interest," "justice and equity," "public convenience and welfare" and "simplicity, 33 economy and welfare." In this case, the declared policy of optimization of the revenue-generation capability and collection of the BIR and the BOC is infused with public interest. Separation Of Powers

(b) To set the criteria and procedures for removing from service officials and employees whose revenue collection falls short of the target by at least seven and a half percent (7.5%), with due consideration of all relevant factors affecting the level of collection as provided in the rules and regulations promulgated under this Act, subject to civil service laws, rules and regulations and compliance with substantive and procedural due process: Provided, That the following exemptions shall apply: 1. Where the district or area of responsibility is newly-created, not exceeding two years in operation, as has no historical record of collection performance that can be used as basis for evaluation; and 2. Where the revenue or customs official or employee is a recent transferee in the middle of the period under consideration unless the transfer was due to nonperformance of revenue targets or potential nonperformance of revenue targets: Provided, however, That when the district or area of responsibility covered by revenue or customs officials or employees has suffered from economic difficulties brought about by natural calamities or force majeure or economic causes as may be determined by the Board, termination shall be considered only after careful and proper review by the Board.

Section 12 of RA 9335 provides: SEC. 12. Joint Congressional Oversight Committee. There is hereby created a Joint Congressional Oversight Committee composed of seven Members from the Senate and seven Members from the House of Representatives. The Members from the Senate shall be appointed by the Senate President, with at least two senators representing the minority. The Members from the House of Representatives shall be appointed by the Speaker with at least two members representing the minority. After the Oversight Committee will have approved the implementing rules and regulations (IRR) it shall thereafter become functus officio and therefore cease to exist.

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The Joint Congressional Oversight Committee in RA 9335 was created for the purpose of approving the implementing rules and regulations (IRR) formulated by the DOF, DBM, NEDA, BIR, BOC and CSC. On May 22, 2006, it approved the said IRR. From then on, it became functus officio and ceased to exist. Hence, the issue of its alleged encroachment on the executive function of implementing and enforcing the law may be considered moot and academic. This notwithstanding, this might be as good a time as any for the Court to confront the issue of the constitutionality of the Joint Congressional Oversight Committee created under RA 9335 (or other similar laws for that matter). The scholarly discourse of Mr. Justice (now Chief Justice) Puno on the concept of 34 congressional oversight in Macalintal v. Commission on Elections is illuminating: Concept and bases of congressional oversight Broadly defined, the power of oversight embraces all activities undertaken by Congress to enhance its understanding of and influence over the implementation of legislation it has enacted. Clearly, oversight concerns post-enactment measures undertaken by Congress: (a) to monitor bureaucratic compliance with program objectives, (b) to determine whether agencies are properly administered, (c) to eliminate executive waste and dishonesty, (d) to prevent executive usurpation of legislative authority, and (d) to assess executive conformity with the congressional perception of public interest. The power of oversight has been held to be intrinsic in the grant of legislative power itself and integral to the checks and balances inherent in a democratic system of government. x x x x x x x x x Over the years, Congress has invoked its oversight power with increased frequency to check the perceived "exponential accumulation of power" by th the executive branch. By the beginning of the 20 century, Congress has delegated an enormous amount of legislative authority to the executive branch and the administrative agencies. Congress, thus, uses its oversight power to make sure that the administrative agencies perform their functions within the authority delegated to them. x x x x x x x x x Categories of congressional oversight functions The acts done by Congress purportedly in the exercise of its oversight powers may be divided intothree categories, namely: scrutiny, investigation and supervision.

a. Scrutiny Congressional scrutiny implies a lesser intensity and continuity of attention to administrative operations. Its primary purpose is to determine economy and efficiency of the operation of government activities. In the exercise of legislative scrutiny, Congress may request information and report from the other branches of government. It can give recommendations or pass resolutions for consideration of the agency involved. xxx b. Congressional investigation While congressional scrutiny is regarded as a passive process of looking at the facts that are readily available, congressional investigation involves a more intense digging of facts. The power of Congress to conduct investigation is recognized by the 1987 Constitution under section 21, Article VI, xxx xxx xxx c. Legislative supervision The third and most encompassing form by which Congress exercises its oversight power is thru legislative supervision. "Supervision" connotes a continuing and informed awareness on the part of a congressional committee regarding executive operations in a given administrative area. While both congressional scrutiny and investigation involve inquiry into past executive branch actions in order to influence future executive branch performance, congressional supervision allows Congress to scrutinize the exercise of delegated law-making authority, and permits Congress to retain part of that delegated authority. Congress exercises supervision over the executive agencies through its veto power. It typically utilizes veto provisions when granting the President or an executive agency the power to promulgate regulations with the force of law. These provisions require the President or an agency to present the proposed regulations to Congress, which retains a "right" to approve or disapprove any regulation before it takes effect. Such legislative veto provisions usually provide that a proposed regulation will become a law after the expiration of a certain period of time, only if Congress does not affirmatively disapprove of the regulation in the meantime. Less frequently, the statute provides that a proposed regulation will become law if Congress affirmatively approves it. xxx xxx

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Supporters of legislative veto stress that it is necessary to maintain the balance of power between the legislative and the executive branches of government as it offers lawmakers a way to delegate vast power to the executive branch or to independent agencies while retaining the option to cancel particular exercise of such power without having to pass new legislation or to repeal existing law. They contend that this arrangement promotes democratic accountability as it provides legislative check on the activities of unelected administrative agencies. One proponent thus explains: It is too late to debate the merits of this delegation policy: the policy is too deeply embedded in our law and practice. It suffices to say that the complexities of modern government have often led Congress-whether by actual or perceived necessity- to legislate by declaring broad policy goals and general statutory standards, leaving the choice of policy options to the discretion of an executive officer. Congress articulates legislative aims, but leaves their implementation to the judgment of parties who may or may not have participated in or agreed with the development of those aims. Consequently, absent safeguards, in many instances the reverse of our constitutional scheme could be effected: Congress proposes, the Executive disposes. One safeguard, of course, is the legislative power to enact new legislation or to change existing law. But without some means of overseeing post enactment activities of the executive branch, Congress would be unable to determine whether its policies have been implemented in accordance with legislative intent and thus whether legislative intervention is appropriate. Its opponents, however, criticize the legislative veto as undue encroachment upon the executive prerogatives. They urge that any post-enactment measures undertaken by the legislative branch should be limited to scrutiny and investigation; any measure beyond that would undermine the separation of powers guaranteed by the Constitution. They contend that legislative veto constitutes an impermissible evasion of the Presidents veto authority and intrusion into the powers vested in the executive or judicial branches of government. Proponents counter that legislative veto enhances separation of powers as it prevents the executive branch and independent agencies from accumulating too much power. They submit that reporting requirements and congressional committee investigations allow Congress to scrutinize only the exercise of delegated law-making authority. They do not allow Congress to review executive proposals before they take effect and they do not afford the opportunity for ongoing and binding expressions of congressional intent. In contrast, legislative veto permits Congress to participate prospectively in the approval or disapproval of "subordinate law" or those enacted by the executive branch pursuant to a delegation of authority by Congress. They

further argue that legislative veto "is a necessary response by Congress to the accretion of policy control by forces outside its chambers." In an era of delegated authority, they point out that legislative veto "is the most efficient means Congress has yet devised to retain control over the evolution and implementation of its policy as declared by statute." In Immigration and Naturalization Service v. Chadha, the U.S. Supreme Court resolved the validity of legislative veto provisions. The case arose from the order of the immigration judge suspending the deportation of Chadha pursuant to 244(c)(1) of the Immigration and Nationality Act. The United States House of Representatives passed a resolution vetoing the suspension pursuant to 244(c)(2) authorizing either House of Congress, by resolution, to invalidate the decision of the executive branch to allow a particular deportable alien to remain in the United States. The immigration judge reopened the deportation proceedings to implement the House order and the alien was ordered deported. The Board of Immigration Appeals dismissed the aliens appeal, holding that it had no power to declare unconstitutional an act of Congress. The United States Court of Appeals for Ninth Circuit held that the House was without constitutional authority to order the aliens deportation and that 244(c)(2) violated the constitutional doctrine on separation of powers. On appeal, the U.S. Supreme Court declared 244(c)(2) unconstitutional. But the Court shied away from the issue of separation of powers and instead held that the provision violates the presentment clause and bicameralism. It held that the one-house veto was essentially legislative in purpose and effect. As such, it is subject to the procedures set out in Article I of the Constitution requiring the passage by a majority of both Houses and presentment to the President. x x x x x x x x x Two weeks after the Chadha decision, the Court upheld, in memorandum decision, two lower court decisions invalidating the legislative veto provisions in the Natural Gas Policy Act of 1978 and the Federal Trade Commission Improvement Act of 1980. Following this precedence, lower courts invalidated statutes containing legislative veto provisions although some of these provisions required the approval of both Houses of Congress and thus met the bicameralism requirement of Article I. Indeed, some of these veto 35 provisions were not even exercised. (emphasis supplied) In Macalintal, given the concept and configuration of the power of congressional oversight and considering the nature and powers of a constitutional body like the Commission on Elections, the Court struck down the provision in RA 9189 (The Overseas Absentee Voting Act of 2003) creating a Joint Congressional Committee. The committee was tasked not only to monitor and evaluate the implementation of the

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said law but also to review, revise, amend and approve the IRR promulgated by the Commission on Elections. The Court held that these functions infringed on the 36 constitutional independence of the Commission on Elections. With this backdrop, it is clear that congressional oversight is not unconstitutional per se, meaning, it neither necessarily constitutes an encroachment on the executive power to implement laws nor undermines the constitutional separation of powers. Rather, it is integral to the checks and balances inherent in a democratic system of government. It may in fact even enhance the separation of powers as it prevents the over-accumulation of power in the executive branch. However, to forestall the danger of congressional encroachment "beyond the legislative sphere," the Constitution imposes two basic and related constraints on 37 Congress. It may not vest itself, any of its committees or its members with either 38 executive or judicial power. And, when it exercises its legislative power, it must follow the "single, finely wrought and exhaustively considered, procedures" specified 39 under the Constitution, including the procedure for enactment of laws and presentment. Thus, any post-enactment congressional measure such as this should be limited to scrutiny and investigation. In particular, congressional oversight must be confined to the following: (1) scrutiny based primarily on Congress power of appropriation and the budget hearings conducted in connection with it, its power to ask heads of departments to appear before and be heard by either of its Houses on any 40 matter pertaining to their departments and its power of confirmation and (2) investigation and monitoring of the implementation of laws pursuant to 42 the power of Congress to conduct inquiries in aid of legislation. Any action or step beyond that will undermine the separation of powers guaranteed by the Constitution. Legislative vetoes fall in this class. Legislative veto is a statutory provision requiring the President or an administrative agency to present the proposed implementing rules and regulations of a law to Congress which, by itself or through a committee formed by it, retains a "right" or "power" to approve or disapprove such regulations before they take effect. As such, a legislative veto in the form of a congressional oversight committee is in the form of an inward-turning delegation designed to attach a congressional leash (other than through scrutiny and investigation) to an agency to which Congress has by law 43 initially delegated broad powers. It radically changes the design or structure of the
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Constitutions diagram of power as it entrusts to Congress a direct role in enforcing, 44 applying or implementing its own laws. Congress has two options when enacting legislation to define national policy within 45 the broad horizons of its legislative competence. It can itself formulate the details or it can assign to the executive branch the responsibility for making necessary 46 managerial decisions in conformity with those standards. In the latter case, the law must be complete in all its essential terms and conditions when it leaves the hands of 47 the legislature. Thus, what is left for the executive branch or the concerned administrative agency when it formulates rules and regulations implementing the law is to fill up details (supplementary rule-making) or ascertain facts necessary to bring 48 the law into actual operation (contingent rule-making). Administrative regulations enacted by administrative agencies to implement and interpret the law which they are entrusted to enforce have the force of law and are 49 entitled to respect. Such rules and regulations partake of the nature of a 50 statute and are just as binding as if they have been written in the statute itself. As such, they have the force and effect of law and enjoy the presumption of constitutionality and legality until they are set aside with finality in an appropriate case 51 by a competent court. Congress, in the guise of assuming the role of an overseer, may not pass upon their legality by subjecting them to its stamp of approval without disturbing the calculated balance of powers established by the Constitution. In exercising discretion to approve or disapprove the IRR based on a determination of whether or not they conformed with the provisions of RA 9335, Congress arrogated judicial power unto itself, a power exclusively vested in this Court by the Constitution. Considered Opinion of Mr. Justice Dante O. Tinga Moreover, the requirement that the implementing rules of a law be subjected to approval by Congress as a condition for their effectivity violates the cardinal 52 constitutional principles of bicameralism and the rule on presentment. Section 1, Article VI of the Constitution states: Section 1. The legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives, except to the extent reserved to the people by the provision on initiative and referendum. (emphasis supplied) Legislative power (or the power to propose, enact, amend and repeal laws) is vested in Congress which consists of two chambers, the Senate and the House of Representatives. A valid exercise of legislative power requires the act of both
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chambers. Corrollarily, it can be exercised neither solely by one of the two chambers nor by a committee of either or both chambers. Thus, assuming the validity of a legislative veto, both a single-chamber legislative veto and a congressional committee legislative veto are invalid. Additionally, Section 27(1), Article VI of the Constitution provides: Section 27. (1) Every bill passed by the Congress shall, before it becomes a law, be presented to the President. If he approves the same, he shall sign it, otherwise, he shall veto it and return the same with his objections to the House where it originated, which shall enter the objections at large in its Journal and proceed to reconsider it. If, after such reconsideration, two-thirds of all the Members of such House shall agree to pass the bill, it shall be sent, together with the objections, to the other House by which it shall likewise be reconsidered, and if approved by two-thirds of all the Members of that House, it shall become a law. In all such cases, the votes of each House shall be determined by yeas or nays, and the names of the members voting for or against shall be entered in its Journal. The President shall communicate his veto of any bill to the House where it originated within thirty days after the date of receipt thereof; otherwise, it shall become a law as if he had signed it. (emphasis supplied) Every bill passed by Congress must be presented to the President for approval or veto. In the absence of presentment to the President, no bill passed by Congress can become a law. In this sense, law-making under the Constitution is a joint act of the Legislature and of the Executive. Assuming that legislative veto is a valid legislative act with the force of law, it cannot take effect without such presentment even if approved by both chambers of Congress. In sum, two steps are required before a bill becomes a law. First, it must be approved 54 by both Houses of Congress. Second, it must be presented to and approved by the 55 56 President. As summarized by Justice Isagani Cruz and Fr. Joaquin G. Bernas, 57 S.J. , the following is the procedure for the approval of bills: A bill is introduced by any member of the House of Representatives or the Senate except for some measures that must originate only in the former chamber. The first reading involves only a reading of the number and title of the measure and its referral by the Senate President or the Speaker to the proper committee for study.

The bill may be "killed" in the committee or it may be recommended for approval, with or without amendments, sometimes after public hearings are first held thereon. If there are other bills of the same nature or purpose, they may all be consolidated into one bill under common authorship or as a committee bill. Once reported out, the bill shall be calendared for second reading. It is at this stage that the bill is read in its entirety, scrutinized, debated upon and amended when desired. The second reading is the most important stage in the passage of a bill. The bill as approved on second reading is printed in its final form and copies thereof are distributed at least three days before the third reading. On the third reading, the members merely register their votes and explain them if they are allowed by the rules. No further debate is allowed. Once the bill passes third reading, it is sent to the other chamber, where it will also undergo the three readings. If there are differences between the versions approved by the two chambers, a conference 58 committee representing both Houses will draft a compromise measure that if ratified by the Senate and the House of Representatives will then be submitted to the President for his consideration. The bill is enrolled when printed as finally approved by the Congress, thereafter authenticated with the signatures of the Senate President, the 59 Speaker, and the Secretaries of their respective chambers The Presidents role in law-making. The final step is submission to the President for approval. Once approved, it 60 takes effect as law after the required publication. Where Congress delegates the formulation of rules to implement the law it has enacted pursuant to sufficient standards established in the said law, the law must be complete in all its essential terms and conditions when it leaves the hands of the legislature. And it may be deemed to have left the hands of the legislature when it becomes effective because it is only upon effectivity of the statute that legal rights and obligations become available to those entitled by the language of the statute. Subject to the indispensable requisite of publication under the due process 61 clause, the determination as to when a law takes effect is wholly the prerogative of 62 Congress. As such, it is only upon its effectivity that a law may be executed and the executive branch acquires the duties and powers to execute the said law. Before that

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point, the role of the executive branch, particularly of the President, is limited to 63 approving or vetoing the law. From the moment the law becomes effective, any provision of law that empowers Congress or any of its members to play any role in the implementation or enforcement of the law violates the principle of separation of powers and is thus unconstitutional. Under this principle, a provision that requires Congress or its members to approve the implementing rules of a law after it has already taken effect shall be unconstitutional, as is a provision that allows Congress or its members to overturn any directive or ruling made by the members of the executive branch charged with the implementation of the law. Following this rationale, Section 12 of RA 9335 should be struck down as unconstitutional. While there may be similar provisions of other laws that may be invalidated for failure to pass this standard, the Court refrains from invalidating them wholesale but will do so at the proper time when an appropriate case assailing those 64 provisions is brought before us. The next question to be resolved is: what is the effect of the unconstitutionality of Section 12 of RA 9335 on the other provisions of the law? Will it render the entire law unconstitutional? No. Section 13 of RA 9335 provides: SEC. 13. Separability Clause. If any provision of this Act is declared invalid by a competent court, the remainder of this Act or any provision not affected by such declaration of invalidity shall remain in force and effect. In Tatad v. Secretary of the Department of Energy, rules:
65

The exception to the general rule is that when the parts of a statute are so mutually dependent and connected, as conditions, considerations, inducements, or compensations for each other, as to warrant a belief that the legislature intended them as a whole, the nullity of one part will vitiate the rest. In making the parts of the statute dependent, conditional, or connected with one another, the legislature intended the statute to be carried out as a whole and would not have enacted it if one part is void, in which case if some parts are unconstitutional, all the other provisions thus dependent, conditional, or connected must fall with them. The separability clause of RA 9335 reveals the intention of the legislature to isolate and detach any invalid provision from the other provisions so that the latter may continue in force and effect. The valid portions can stand independently of the invalid section. Without Section 12, the remaining provisions still constitute a complete, intelligible and valid law which carries out the legislative intent to optimize the revenue-generation capability and collection of the BIR and the BOC by providing for a system of rewards and sanctions through the Rewards and Incentives Fund and a Revenue Performance Evaluation Board. To be effective, administrative rules and regulations must be published in full if their purpose is to enforce or implement existing law pursuant to a valid delegation. The IRR of RA 9335 were published on May 30, 2006 in two newspapers of general 66 67 circulation and became effective 15 days thereafter. Until and unless the contrary is shown, the IRR are presumed valid and effective even without the approval of the Joint Congressional Oversight Committee. WHEREFORE, the petition is hereby PARTIALLY GRANTED. Section 12 of RA 9335 creating a Joint Congressional Oversight Committee to approve the implementing rules and regulations of the law is declared UNCONSTITUTIONAL and therefore NULL and VOID. The constitutionality of the remaining provisions of RA 9335 is UPHELD. Pursuant to Section 13 of RA 9335, the rest of the provisions remain in force and effect. SO ORDERED. Puno, C.J., Quisumbing, Ynares-Santiago, Carpio, Austria-Martinez, Corona, CarpioMorales, Azcuna, Tinga, Chico-Nazario, Velasco, Jr., Nachura, Reyes, Leonardo-deCastro, Brion, JJ., concur.

the Court laid down the following

The general rule is that where part of a statute is void as repugnant to the Constitution, while another part is valid, the valid portion, if separable from the invalid, may stand and be enforced. The presence of a separability clause in a statute creates the presumption that the legislature intended separability, rather than complete nullity of the statute. To justify this result, the valid portion must be so far independent of the invalid portion that it is fair to presume that the legislature would have enacted it by itself if it had supposed that it could not constitutionally enact the other. Enough must remain to make a complete, intelligible and valid statute, which carries out the legislative intent. x x x

Republic of the Philippines SUPREME COURT

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EN BANC G.R. No. 168056 September 1, 2005 ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO, Petitioners, vs. THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent. x-------------------------x G.R. No. 168207 AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M. LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners, vs. EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, Respondent. x-------------------------x G.R. No. 168461 ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO; PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the name and style of "SHELL GATE N. DOMINGO"; BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the name and style of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing 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, vs. 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, Respondent. x-------------------------x G.R. No. 168463 FRANCIS JOSEPH G. ESCUDERO, 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, vs. 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, Respondent. x-------------------------x G.R. No. 168730

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BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner, vs. HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of the Bureau of Customs, Respondent. 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. 1 No. 9337) 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 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
2

January 27, 2005, the House of Representatives approved the bill on second and third reading. House Bill No. 3705 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. 4 1950 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. 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
5 3

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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 6 this Court. . . . 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 provisoauthorizing 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:

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(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 4 VAT collection to at least 2 /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 "noamendment 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 forcertiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

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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, 7 119, 121, 125, 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 exceedingP1,000,000.00, 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

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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, 8 exchange or lease of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the 9 10 buyer, with the seller acting merely as a tax collector. 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 11 else. Examples are individual and corporate income taxes, transfer taxes, and 12 residence taxes. 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 value13 added tax payable. 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, 14 inputs and imports. 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 15 10% on all sales using the "tax credit method." E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, R.A. No. 17 8241 or the Improved VAT Law, R.A. No. 8424 or the Tax Reform Act of 18 1997, 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
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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 19 the nation, either at all, or at least with decency, deliberation, and order. " 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.

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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, 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 cr eation 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 rd 2nd or 3 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 21 of members have agreed to a particular 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 22 deleting provisions in the House and Senate bills. Akin to the Farias case, 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

20

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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 23 vs. Secretary of Finance, 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 24 constitutional provision but is only an internal rule of each house." 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 on every sale of goods general on sales of goods of 10% VAT on sale of or properties (amending or properties and reduced goods or properties Sec. 106 of NIRC); 12% rates for sale of certain (amending Sec. 106 of VAT on importation of locally manufactured goods NIRC), 10% VAT on sale goods (amending Sec. and petroleum products of services including sale 107 of NIRC); and 12% and raw materials to be of electricity by VAT on sale of services used in the manufacture generation companies, and use or lease of thereof (amending Sec. 106 transmission and properties (amending of NIRC); 12% VAT on distribution companies, Sec. 108 of NIRC) importation of goods and and use or lease of reduced rates for certain properties (amending imported products including Sec. 108 of NIRC) 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 be absorbed by generation of transmission companies or sellers, companies and respectively, and shall not distribution companies, be passed on to consumers as well as those of franchise grantees of electric utilities shall not apply to residential end-users. VAT shall be absorbed by generation, transmission, and distribution companies. With regard to 70% limit on input tax credit Provides that the input No similar provision Provides that the input tax credit for capital tax credit for capital goods on which a VAT goods on which a VAT has been paid shall be has been paid shall be equally distributed over equally distributed over 5 5 years or the years or the depreciable depreciable life of such life of such capital goods; capital goods; the input the input tax credit for tax credit for goods and goods and services other services other than than capital goods shall capital goods shall not not exceed 90% of the exceed 5% of the total output VAT. 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.

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tax, although it crafted its own language as to the amount of the limitation on With regard to amendments to be made to NIRC provisions regarding income andoutput excise taxes tax credits No similar provision No similar provision Provided for input amendments to and the manner of computing the same by providing thus: several NIRC provisions regarding corporate income, percentage, (A) Creditable Input Tax. . . . 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 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 25 "settle" is synonymous to "reconcile" and "harmonize." 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

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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 26 basically simple, lets keep the VAT simple. (Emphasis supplied) Rep. Teodoro Locsin further made the manifestation that the no pass-on provision 27 "never really enjoyed the support of either House." 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 28 apparent disadvantage." 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. 29 30 Prado and Tolentino vs. Secretary of Finance, the Court recognized the longstanding 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 31 acted as a third legislative chamber is thus without any basis. (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 Repo rt in these cases must have undergone three readings in each of the two houses. If that be the case, there

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

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.

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

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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 33 on the enactment of such laws. (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 34 present conditions. (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 valueadded 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.

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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 35 business will be there to share the burden. 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 36 they will have to pay as a result of VAT. 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 valueadded tax to twelve percent (12%), after any of the following conditions has been satisfied.

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(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 valueadded 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 valueadded tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded 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

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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 37 own constitutionally allocated sphere. 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 38 delegari potest which means "what has been delegated, cannot be delegated." 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 39 his own judgment and not through the intervening mind of another. 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 40 determine the expediency of its enactment. 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 41 policy to be executed, carried out, or implemented by the delegate; and (b) fixes a standard the limits of which are sufficiently determinate and determinable to 42 which the delegate must conform in the performance of his functions. 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 43 under which the legislative command is to be effected. Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed 44 to step into the shoes of the legislature and exercise a power essentially legislative. In People vs. Vera, 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
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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 46 to determine when the specified contingency has arisen.(Emphasis supplied). In Edu vs. Ericta,
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including the power to determine the existence of facts on which its operation 50 depends. 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 51 such information is proper. 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 52 properly to investigate. 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 wordshall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative 53 obligation and is inconsistent with the idea of discretion. Where the law is clear and

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 48 necessary resources of flexibility and practicability. (Emphasis supplied). 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 49 prescribe sufficient standards, policies or limitations on their authority. 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,

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unambiguous, it must be taken to mean exactly what it says, and courts have no 54 choice but to see to it that the mandate is obeyed. 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 55 Cushing, is "subject to the direction of the President." 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 56 will is to take effect. 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 4 exceeds two and four-fifth percent (2 /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 57 a law. This is constitutionally permissible. 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 58 frequently the only way in which the legislative process can go forward. 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 59 province of the Court to inquire into, its task being to interpret the law. 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 shortlived. 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

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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 4 12%, the VAT collection goes below the 2 /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 60 a forbidden ground that only Congress may tread upon. 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 61 subtraction. Petitioners also contend that the increase in the VAT rate, which was allegedly an 4 incentive to the President to raise the VAT collection to at least 2 /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 62 rate. 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 63 treasury of the state. It simply means that sources of revenues must be adequate to meet government 64 expenditures and their variations. 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.

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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 65 out of this debt spiral is really have a front-end adjustment in our revenue base. 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 theFarias 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 66 not suffice to bring them within the range of judicial cognizance.

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 67 wisdom, justice or expediency of legislation." 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 68 such a showing, the presumption of validity must prevail. 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 valueadded 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

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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 69 the excess, which has to be paid to the Bureau of Internal Revenue (BIR); 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 70 taxpayers option. 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 71 payment of the tax is the seller. 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 72 away property, which was vested by virtue of such rights. 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 VAT73 registered persons against the output tax was introduced. This was adopted by the

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Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 75 8424). 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 76 input tax in this case amounts to a 4-year interest-free loan to the government. In the same breath, Congress also justified its move by saying that the provision was 77 designed to raise an annual revenue of 22.6 billion. 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 78 deterred. 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:

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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

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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 79 of the actual input VAT directly or attributable to the taxable transaction. The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable transactions with the 80 government. 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 becreditable 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 81 be less than 5%, the difference is treated as income. 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 valueadded. 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, 82 as Shakespeare describes life in Macbeth, "full of sound and fury, signifying nothing." Whats more, petitioners contention assumes the proposition that there is n o 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 83 persons or other classes in the same place and in like circumstances." 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 84 absent a clear showing of unreasonableness, discrimination, or arbitrariness. 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.

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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 85 these same particulars. 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 86 people at all times. 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 87 particular class. 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 88 gross annual sales or receipts not exceeding P1,500,000.00. Also, basic marine and 89 agricultural food products in their original state are still not subject to the tax, thus ensuring that prices at the grassroots level will remain accessible. As was stated 90 in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan: 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 91 92 products and natural gas were reduced. Percentage tax on domestic carriers was 93 94 removed. Power producers are now exempt from paying franchise tax. 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 95 32%. Intercorporate dividends of non-resident foreign corporations are still subject to 15% final withholding tax but the tax credit allowed on the corporations domicile 96 was increased to 20%. The Philippine Amusement and Gaming Corporation 97 (PAGCOR) is not exempt from income taxes anymore. Even the sale by an artist of his works or services performed for the production of such works was not spared.

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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 98 person affected. 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 evo lve 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 99 transactions. (R.A. No. 7716, 4 amending 103 of the NIRC) 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, 100 each may be brought to account, either by impeachment, trial or by the ballot box. The words of the Court in Vera vs. Avelino 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.
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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. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-39086 June 15, 1988 ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs. HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE,respondents.

That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the amount of P5,140.31 and back taxes and penalties from the promulgation of this decision; That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated to apply for the payment of the back taxes and for the redemption of the property in question, if the amount is less than P6,000.00, the remainder must be returned to the Director of Pedro Borgonia, who represents the plaintiff herein; That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be returned to said Municipal Treasurer of Bangued, Abra; And finally the case is hereby ordered dismissed with costs against the plaintiff. SO ORDERED. (Rollo, pp. 22-23) Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at Bangued, Abra, for nonpayment of real estate taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him. On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss the complaint. On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the

PARAS, J.: This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads: IN VIEW OF ALL THE FOREGOING, the Court hereby declares: That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia located at Bangued, Abra, is valid;

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complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101103) on August 31, 1972. On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108). On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB Check No. 904369. On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. Said Stipulations reads: STIPULATION OF FACTS COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the following agreed stipulation of facts: 1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone who is actually holding the position of Provincial Treasurer of the Province of Abra; 2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon located in Bangued, Abra under Original Certificate of Title No. 0-83; 3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit A; 4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public auction for the satisfaction of the unpaid real property taxes thereon and the same was sold to

defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant Municipal Treasurer. 5. That all other matters not particularly and specially covered by this stipulation of facts will be the subject of evidence by the parties. WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation of facts on the point agreed upon by the parties. Bangued, Abra, April 12, 1973.

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G R I P I N O B R I L L A N T E S

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l F i s c a l

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o f B a n g u e d , A b r a S g d . D e m e t r i o V . P r e

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The succeeding n Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, o filed a Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they opined "that based on the evidence, M the laws applicable, court decisions and jurisprudence, the school building and school i lot used for educational purposes of the Abra Valley College, Inc., are exemptedl from the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 andl 49). a Nonetheless, r the trial court disagreed because of the use of the second floor by the e Director of petitioner school for residential purposes. He thus ruled for the government and rendered the assailed decision. ( R After having been granted by the trial court ten (10) days from August 6, 1974 within o which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; l Rollo, p. 57) petitioner instead availed of the instant petition for review l on certiorari with o prayer for preliminary injunction before this Court, which petition was filed on August , 17, 1974 (Rollo, p.2). p dated August 16, 1974, this Court resolved to give DUE COURSE to In the resolution p the petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, . p. 74). 1 the following assignments of error: Petitioner raised 7 I 1 8 THE COURT ) A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER. II THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING. III THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is recognized by the government and is offering Primary, High School and College Courses, and has a school population of more than one thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance building; (c) that the elementary pupils are housed in a two-storey building across the street; (d) that the high school and college students are housed in the main building; (e) that the Director with his family is in the second floor of the main building; and (f) that the annual gross income of the school reaches more than one hundred thousand pesos. From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or not the lot and building in question are used exclusively for educational purposes. (Rollo, p. 20)

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IV THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2) The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes." Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void. On the other hand, private respondents maintain that the college lot and building in question which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and rented by a commercial establishment, the Northern Marketing Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]). Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes ... Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise known as the Assessment Law, provides: The following are exempted from real property tax under the Assessment Law: xxx xxx xxx (c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, scientific or educational purposes.

xxx xxx xxx In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof. As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still these do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation. In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in religious functions. The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera vs. Quezon City Board of assessment Appeals , 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430). The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

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It must be stressed however, that while this Court allows a more liberal and nonrestrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purposeeducational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education. It will be noted however that the aforementioned lease appears to have been raised for the first time in this Court. That the matter was not taken up in the to court is really apparent in the decision of respondent Judge. No mention thereof was made in the stipulation of facts, not even in the description of the school building by the trial judge, both embodied in the decision nor as one of the issues to resolve in order to determine whether or not said properly may be exempted from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even after it was raised in this Court. Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not squarely raised below, still in the interest of substantial justice, this Court is not prevented from considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]). Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved. PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner. SO ORDERED.

Yap, C.J., Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9637 April 30, 1957

AMERICAN BIBLE SOCIETY, plaintiff-appellant, vs. CITY OF MANILA, defendant-appellee. City Fiscal Eugenio Angeles and Juan Nabong for appellant. Assistant City Fiscal Arsenio Naawa for appellee. FELIX, J.: Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and doing business in the Philippines through its Philippine agency established in Manila in November, 1898, with its principal office at 636 Isaac Peral in said City. The defendant appellee is a municipal corporation with powers that are to be exercised in conformity with the provisions of Republic Act No. 409, known as the Revised Charter of the City of Manila. In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines and translating the same into several Philippine dialects. On May 29 1953, the acting City Treasurer of the City of Manila informed plaintiff that it was conducting the business of general merchandise since November, 1945, without providing itself with the necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure, within three days, the corresponding permit and license fees, together with compromise covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of P5,821.45 (Annex A). Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit and pay under protest the sum of P5,891.45, if suit was to be taken in court regarding the same (Annex B). To avoid the closing of its business as well as

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further fines and penalties in the premises on October 24, 1953, plaintiff paid to the defendant under protest the said permit and license fees in the aforementioned amount, giving at the same time notice to the City Treasurer that suit would be taken in court to question the legality of the ordinances under which, the said fees were being collected (Annex C), which was done on the same date by filing the complaint that gave rise to this action. In its complaint plaintiff prays that judgment be rendered declaring the said Municipal Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of P5,891.45 paid under protest, together with legal interest thereon, and the costs, plaintiff further praying for such other relief and remedy as the court may deem just equitable. Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the Municipal Board of the City of Manila by virtue of the power granted to it by section 2444, subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949, by section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter of the City of Manila, and praying that the complaint be dismissed, with costs against plaintiff. This answer was replied by the plaintiff reiterating the unconstitutionality of the often-repeated ordinances. Before trial the parties submitted the following stipulation of facts: COME NOW the parties in the above-entitled case, thru their undersigned attorneys and respectfully submit the following stipulation of facts: 1. That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac Peral, Manila, Bibles, New Testaments, bible portions and bible concordance in English and other foreign languages imported by it from the United States as well as Bibles, New Testaments and bible portions in the local dialects imported and/or purchased locally; that from the fourth quarter of 1945 to the first quarter of 1953 inclusive the sales made by the plaintiff were as follows: Quarter 4th quarter 1945 1st quarter 1946 2nd quarter 1946 3rd quarter 1946 Amount of Sales P1,244.21 2,206.85 1,950.38 2,235.99

4th quarter 1946 1st quarter 1947 2nd quarter 1947 3rd quarter 1947 4th quarter 1947 1st quarter 1948 2nd quarter 1948 3rd quarter 1948 4th quarter 1948 1st quarter 1949 2nd quarter 1949 3rd quarter 1949 4th quarter 1949 1st quarter 1950 2nd quarter 1950 3rd quarter 1950 4th quarter 1950 1st quarter 1951 2nd quarter 1951 3rd quarter 1951 4th quarter 1951 1st quarter 1952

3,256.04 13,241.07 15,774.55 14,654.13 12,590.94 11,143.90 14,715.26 38,333.83 16,179.90 23,975.10 17,802.08 16,640.79 15,961.38 18,562.46 21,816.32 25,004.55 45,287.92 37,841.21 29,103.98 20,181.10 22,968.91 23,002.65

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2nd quarter 1952 3rd quarter 1952 4th quarter 1952 1st quarter 1953

17,626.96 17,921.01 24,180.72 29,516.21

graduated taxes (Sec. 3 of Ordinance No. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, as amended by Ordinance No. 3364). IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so holds that this case should be dismissed, as it is hereby dismissed, for lack of merits, with costs against the plaintiff. Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which certified the case to Us for the reason that the errors assigned to the lower Court involved only questions of law. Appellant contends that the lower Court erred: 1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not unconstitutional; 2. In holding that subsection m-2 of Section 2444 of the Revised Administrative Code under which Ordinances Nos. 2592 and 3000 were promulgated, was not repealed by Section 18 of Republic Act No. 409; 3. In not holding that an ordinance providing for taxes based on gross sales or receipts, in order to be valid under the new Charter of the City of Manila, must first be approved by the President of the Philippines; and 4. In holding that, as the sales made by the plaintiff-appellant have assumed commercial proportions, it cannot escape from the operation of said municipal ordinances under the cloak of religious privilege. The issues. As may be seen from the proceeding statement of the case, the issues involved in the present controversy may be reduced to the following: (1) whether or not the ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are constitutional and valid; and (2) whether the provisions of said ordinances are applicable or not to the case at bar. Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides that: (7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religion test shall be required for the exercise of civil or political rights.

2. That the parties hereby reserve the right to present evidence of other facts not herein stipulated. WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties may present further evidence on their behalf. (Record on Appeal, pp. 15-16). When the case was set for hearing, plaintiff proved, among other things, that it has been in existence in the Philippines since 1899, and that its parent society is in New York, United States of America; that its, contiguous real properties located at Isaac Peral are exempt from real estate taxes; and that it was never required to pay any municipal license fee or tax before the war, nor does the American Bible Society in the United States pay any license fee or sales tax for the sale of bible therein. Plaintiff further tried to establish that it never made any profit from the sale of its bibles, which are disposed of for as low as one third of the cost, and that in order to maintain its operating cost it obtains substantial remittances from its New York office and voluntary contributions and gifts from certain churches, both in the United States and in the Philippines, which are interested in its missionary work. Regarding plaintiff's contention of lack of profit in the sale of bibles, defendant retorts that the admissions of plaintiff-appellant's lone witness who testified on cross-examination that bibles bearing the price of 70 cents each from plaintiff-appellant's New York office are sold here by plaintiff-appellant at P1.30 each; those bearing the price of $4.50 each are sold here at P10 each; those bearing the price of $7 each are sold here at P15 each; and those bearing the price of $11 each are sold here at P22 each, clearly show that plaintiff's contention that it never makes any profit from the sale of its bible, is evidently untenable. After hearing the Court rendered judgment, the last part of which is as follows: As may be seen from the repealed section (m-2) of the Revised Administrative Code and the repealing portions (o) of section 18 of Republic Act No. 409, although they seemingly differ in the way the legislative intent is expressed, yet their meaning is practically the same for the purpose of taxing the merchandise mentioned in said legal provisions, and that the taxes to be levied by said ordinances is in the nature of percentage

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Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529 and 3000, as respectively amended, are unconstitutional and illegal in so far as its society is concerned, because they provide for religious censorship and restrain the free exercise and enjoyment of its religious profession, to wit: the distribution and sale of bibles and other religious literature to the people of the Philippines. Before entering into a discussion of the constitutional aspect of the case, We shall first consider the provisions of the questioned ordinances in relation to their application to the sale of bibles, etc. by appellant. The records, show that by letter of May 29, 1953 (Annex A), the City Treasurer required plaintiff to secure a Mayor's permit in connection with the society's alleged business of distributing and selling bibles, etc. and to pay permit dues in the sum of P35 for the period covered in this litigation, plus the sum of P35 for compromise on account of plaintiff's failure to secure the permit required by Ordinance No. 3000 of the City of Manila, as amended. This Ordinance is of general application and not particularly directed against institutions like the plaintiff, and it does not contain any provisions whatever prescribing religious censorship nor restraining the free exercise and enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows: SEC. 1. PERMITS NECESSARY. It shall be unlawful for any person or entity to conduct or engage in any of the businesses, trades, or occupations enumerated in Section 3 of this Ordinance or other businesses, trades, or occupations for which a permit is required for the proper supervision and enforcement of existing laws and ordinances governing the sanitation, security, and welfare of the public and the health of the employees engaged in the business specified in said section 3 hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT THEREFOR FROM THE MAYOR AND THE NECESSARY LICENSE FROM THE CITY TREASURER. The business, trade or occupation of the plaintiff involved in this case is not particularly mentioned in Section 3 of the Ordinance, and the record does not show that a permit is required therefor under existing laws and ordinances for the proper supervision and enforcement of their provisions governing the sanitation, security and welfare of the public and the health of the employees engaged in the business of the plaintiff. However, sections 3 of Ordinance 3000 contains item No. 79, which reads as follows: 79. All other businesses, trades or occupations not mentioned in this Ordinance, except those upon which the City is not empowered to license or to tax P5.00

Therefore, the necessity of the permit is made to depend upon the power of the City to license or tax said business, trade or occupation. As to the license fees that the Treasurer of the City of Manila required the society to pay from the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including the sum of P50 as compromise, Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028 prescribes the following: SEC. 1. FEES. Subject to the provisions of section 578 of the Revised Ordinances of the City of Manila, as amended, there shall be paid to the City Treasurer for engaging in any of the businesses or occupations below enumerated, quarterly, license fees based on gross sales or receipts realized during the preceding quarter in accordance with the rates herein prescribed: PROVIDED, HOWEVER, That a person engaged in any businesses or occupation for the first time shall pay the initial license fee based on the probable gross sales or receipts for the first quarter beginning from the date of the opening of the business as indicated herein for the corresponding business or occupation. xxx xxx xxx

GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are not yet subject to the payment of any municipal tax, such as (1) retail dealers in general merchandise; (2) retail dealers exclusively engaged in the sale of . . . books, including stationery. xxx xxx xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance No. 2529, as amended, are not imposed directly upon any religious institution but upon those engaged in any of the business or occupations therein enumerated, such as retail "dealers in general merchandise" which, it is alleged, cover the business or occupation of selling bibles, books, etc. Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2) of said legal body, as amended by Act No. 3659, approved on December 8, 1929, empowers the Municipal Board of the City of Manila: (M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or both, and (b) retail dealers in new (not yet used) merchandise, which dealers are not yet subject to the payment of any municipal tax.

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For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in general merchandise, and (2) retail dealers exclusively engaged in the sale of (a) textiles . . . (e) books, including stationery, paper and office supplies, . . .: PROVIDED, HOWEVER, That the combined total tax of any debtor or manufacturer, or both, enumerated under these subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned herein, SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS PER ANNUM. and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were enacted in virtue of the power that said Act No. 3669 conferred upon the City of Manila. Appellant, however, contends that said ordinances are longer in force and effect as the law under which they were promulgated has been expressly repealed by Section 102 of Republic Act No. 409 passed on June 18, 1949, known as the Revised Manila Charter. Passing upon this point the lower Court categorically stated that Republic Act No. 409 expressly repealed the provisions of Chapter 60 of the Revised Administrative Code but in the opinion of the trial Judge, although Section 2444 (m-2) of the former Manila Charter and section 18 (o) of the new seemingly differ in the way the legislative intent was expressed, yet their meaning is practically the same for the purpose of taxing the merchandise mentioned in both legal provisions and, consequently, Ordinances Nos. 2529 and 3000, as amended, are to be considered as still in full force and effect uninterruptedly up to the present. Often the legislature, instead of simply amending the pre-existing statute, will repeal the old statute in its entirety and by the same enactment re-enact all or certain portions of the preexisting law. Of course, the problem created by this sort of legislative action involves mainly the effect of the repeal upon rights and liabilities which accrued under the original statute. Are those rights and liabilities destroyed or preserved? The authorities are divided as to the effect of simultaneous repeals and re-enactments. Some adhere to the view that the rights and liabilities accrued under the repealed act are destroyed, since the statutes from which they sprang are actually terminated, even though for only a very short period of time. Others, and they seem to be in the majority, refuse to accept this view of the situation, and consequently maintain that all rights an liabilities which have accrued under the original statute are preserved and may be enforced, since the re-enactment neutralizes the repeal, therefore, continuing the law in force without interruption. (Crawford-Statutory Construction, Sec. 322). Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and wider concept of taxation and is different from the provisions of Section 2444(m-2) that the former cannot be considered as a substantial re-enactment of the

provisions of the latter. We have quoted above the provisions of section 2444(m-2) of the Revised Administrative Code and We shall now copy hereunder the provisions of Section 18, subdivision (o) of Republic Act No. 409, which reads as follows: (o) To tax and fix the license fee on dealers in general merchandise, including importers and indentors, except those dealers who may be expressly subject to the payment of some other municipal tax under the provisions of this section. Dealers in general merchandise shall be classified as ( a) wholesale dealers and (b) retail dealers. For purposes of the tax on retail dealers, general merchandise shall be classified into four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each class but where commodities of different classes are sold in the same establishment, it shall not be compulsory for the owner to secure more than one license if he pays the higher or highest rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax as such, as may be provided by ordinance. For purposes of this section, the term "General merchandise" shall include poultry and livestock, agricultural products, fish and other allied products. The only essential difference that We find between these two provisions that may have any bearing on the case at bar, is that, while subsection (m-2) prescribes that the combined total tax of any dealer or manufacturer, or both, enumerated under subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned therein,shall not be in excess of P500 per annum, the corresponding section 18, subsection (o) of Republic Act No. 409, does not contain any limitation as to the amount of tax or license fee that the retail dealer has to pay per annum. Hence, and in accordance with the weight of the authorities above referred to that maintain that "all rights and liabilities which have accrued under the original statute are preserved and may be enforced, since the reenactment neutralizes the repeal, therefore continuing the law in force without interruption", We hold that the questioned ordinances of the City of Manila are still in force and effect. Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved by the President of the Philippines as per section 18, subsection (ii) of Republic Act No. 409, which reads as follows: (ii) To tax, license and regulate any business, trade or occupation being conducted within the City of Manila,not otherwise enumerated in the preceding subsections, including percentage taxes based on gross sales or

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receipts, subject to the approval of the PRESIDENT, except amusement taxes. but this requirement of the President's approval was not contained in section 2444 of the former Charter of the City of Manila under which Ordinance No. 2529 was promulgated. Anyway, as stated by appellee's counsel, the business of "retail dealers in general merchandise" is expressly enumerated in subsection ( o), section 18 of Republic Act No. 409; hence, an ordinance prescribing a municipal tax on said business does not have to be approved by the President to be effective, as it is not among those referred to in said subsection (ii). Moreover, the questioned ordinances are still in force, having been promulgated by the Municipal Board of the City of Manila under the authority granted to it by law. The question that now remains to be determined is whether said ordinances are inapplicable, invalid or unconstitutional if applied to the alleged business of distribution and sale of bibles to the people of the Philippines by a religious corporation like the American Bible Society, plaintiff herein. With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028, appellant contends that it is unconstitutional and illegal because it restrains the free exercise and enjoyment of the religious profession and worship of appellant. Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the freedom of religious profession and worship. "Religion has been spoken of as a profession of faith to an active power that binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his relations to His Creator and to the obligations they impose of reverence to His being and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any restraints of such right can only be justified like other restraints of freedom of expression on the grounds that there is a clear and present danger of any substantive evil which the State has the right to prevent". (Taada and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license fee herein involved is imposed upon appellant for its distribution and sale of bibles and other religious literature: In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a license be obtained before a person could canvass or solicit orders for goods, paintings, pictures, wares or merchandise cannot be made to apply to members of Jehovah's Witnesses who went about from door to door distributing literature and soliciting people to "purchase" certain religious books and pamphlets, all published by the Watch Tower Bible & Tract Society. The "price" of the books was twenty-five cents each, the

"price" of the pamphlets five cents each. It was shown that in making the solicitations there was a request for additional "contribution" of twenty-five cents each for the books and five cents each for the pamphlets. Lesser sum were accepted, however, and books were even donated in case interested persons were without funds. On the above facts the Supreme Court held that it could not be said that petitioners were engaged in commercial rather than a religious venture. Their activities could not be described as embraced in the occupation of selling books and pamphlets. Then the Court continued: "We do not mean to say that religious groups and the press are free from all financial burdens of government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quite different, for example, from a tax on the income of one who engages in religious activities or a tax on property used or employed in connection with activities. It is one thing to impose a tax on the income or property of a preacher. It is quite another to exact a tax from him for the privilege of delivering a sermon. The tax imposed by the City of Jeannette is a flat license tax, payment of which is a condition of the exercise of these constitutional privileges. The power to tax the exercise of a privilege is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of this religious practice can make its exercise so costly as to deprive it of the resources necessary for its maintenance. Those who can tax the privilege of engaging in this form of missionary evangelism can close all its doors to all those who do not have a full purse. Spreading religious beliefs in this ancient and honorable manner would thus be denied the needy. . . . It is contended however that the fact that the license tax can suppress or control this activity is unimportant if it does not do so. But that is to disregard the nature of this tax. It is a license tax a flat tax imposed on the exercise of a privilege granted by the Bill of Rights . . . The power to impose a license tax on the exercise of these freedom is indeed as potent as the power of censorship which this Court has repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory measure to defray the expenses of policing the activities in question. It is in no way apportioned. It is flat license tax levied and collected as a condition to the pursuit of activities whose enjoyment is guaranteed by the constitutional liberties of press and religion and inevitably tends to suppress their exercise. That is almost uniformly recognized as the inherent vice and evil of this flat license tax." Nor could dissemination of religious information be conditioned upon the approval of an official or manager even if the town were owned by a

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corporation as held in the case of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself as held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme Court expressed the opinion that the right to enjoy freedom of the press and religion occupies a preferred position as against the constitutional right of property owners. "When we balance the constitutional rights of owners of property against those of the people to enjoy freedom of press and religion, as we must here, we remain mindful of the fact that the latter occupy a preferred position. . . . In our view the circumstance that the property rights to the premises where the deprivation of property here involved, took place, were held by others than the public, is not sufficient to justify the State's permitting a corporation to govern a community of citizens so as to restrict their fundamental liberties and the enforcement of such restraint by the application of a State statute." (Taada and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306). Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, provides: SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall not be taxed under this Title in respect to income received by them as such (e) Corporations or associations organized and operated exclusively for religious, charitable, . . . or educational purposes, . . .: Provided, however, That the income of whatever kind and character from any of its properties, real or personal, or from any activity conducted for profit, regardless of the disposition made of such income, shall be liable to the tax imposed under this Code; Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff from this tax and says that such exemption clearly indicates that the act of distributing and selling bibles, etc. is purely religious and does not fall under the above legal provisions. It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit. For this reason We believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit before any person can engage in any of the businesses, trades or occupations enumerated therein, We do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this point was elucidated as follows: An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or otherwise, circulars, handbooks, advertising, or literature of any kind, whether said articles are being delivered free, or whether same are being sold within the city limits of the City of Griffin, without first obtaining written permission from the city manager of the City of Griffin, shall be deemed a nuisance and punishable as an offense against the City of Griffin, does not deprive defendant of his constitutional right of the free exercise and enjoyment of religious profession and worship, even though it prohibits him from introducing and carrying out a scheme or purpose which he sees fit to claim as a part of his religious system. It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not applicable to plaintiff-appellant and defendantappellee is powerless to license or tax the business of plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said business, trade or occupation of the plaintiff. Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision appealed from, sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected from it. Without pronouncement as to costs. It is so ordered. Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia, JJ., concur.

Republic of the Philippines SUPREME COURT Manila

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EN BANC G.R. No. L-4376 May 22, 1953

ASSOCIATION OF CUSTOMS BROKERS, INC. and G. MANLAPIT, INC., petitioners-appellants, vs. THE MUNICIPALITY BOARD, THE CITY TREASURER, THE CITY ASSESSOR and THE CITY MAYOR, all of the City of Manila, respondents-appellees. Teotimo A. Roja for appellants. City Fiscal Eugenio Angeles and Assistant Fiscal Eulogio S. Serrano for appellees. BAUTISTA ANGELO, J.: This is a petition for declaratory relief to test the validity of Ordinance No. 3379 passed by the Municipal Board of the City of Manila on March 24, 1950. The Association of Customs Brokers, Inc., which is composed of all brokers and public service operators of motor vehicles in the City of Manila, and G. Manlapit, Inc., a member of said association, also a public service operator of the trucks in said City, challenge the validity of said ordinance on the ground that (1) while it levies a socalled property tax it is in reality a license tax which is beyond the power of the Municipal Board of the City of Manila; (2) said ordinance offends against the rule of uniformity of taxation; and (3) it constitutes double taxation. The respondents, represented by the city fiscal, contend on their part that the challenged ordinance imposes a property tax which is within the power of the City of Manila to impose under its Revised Charter [Section 18 (p) of Republic Act No. 409], and that the tax in question does not violate the rule of uniformity of taxation, nor does it constitute double taxation. The issues having been joined, the Court of First Instance of Manila sustained the validity of the ordinance and dismissed the petition. Hence this appeal. The disputed ordinance was passed by the Municipal Board of the City of Manila under the authority conferred by section 18 (p) of Republic Act No. 409. Said section confers upon the municipal board the power "to tax motor and other vehicles operating within the City of Manila the provisions of any existing law to the contrary notwithstanding." It is contended that this power is broad enough to confer upon the City of Manila the power to enact an ordinance imposing the property tax on motor vehicles operating within the city limits.

In the deciding the issue before us it is necessary to bear in mind the pertinent provisions of the Motor Vehicles Law, as amended, (Act No. 3992) which has a bearing on the power of the municipal corporation to impose tax on motor vehicles operating in any highway in the Philippines. The pertinent provisions are contained in section 70 (b) which provide in part: No further fees than those fixed in this Act shall be exacted or demanded by any public highway, bridge or ferry, or for the exercise of the profession of chauffeur, or for the operation of any motor vehicle by the owner thereof: Provided, however, That nothing in this Act shall be construed to exempt any motor vehicle from the payment of any lawful and equitable insular, local or municipal property tax imposed thereupon. . . . Note that under the above section no fees may be exacted or demanded for the operation of any motor vehicle other than those therein provided, the only exception being that which refers to the property tax which may be imposed by a municipal corporation. This provision is all-inclusive in that sense that it applies to all motor vehicles. In this sense, this provision should be construed as limiting the broad grant of power conferred upon the City of Manila by its Charter to impose taxes. When section 18 of said Charter provides that the City of Manila can impose a tax on motor vehicles operating within its limit, it can only refers to property tax as a different interpretation would make it repugnant to the Motor Vehicle Law. Coming now to the ordinance in question, we find that its title refers to it as "An Ordinance Levying a Property Tax on All Motor Vehicles Operating Within the City of Manila", and that in its section 1 it provides that the tax should be 1 per cent ad valorem per annum. It also provides that the proceeds of the tax "shall accrue to the Streets and Bridges Funds of the City and shall be expended exclusively for the repair, maintenance and improvement of its streets and bridges." Considering the wording used in the ordinance in the light in the purpose for which the tax is created, can we consider the tax thus imposed as property tax, as claimed by respondents? While as a rule an ad valorem tax is a property tax, and this rule is supported by some authorities, the rule should not be taken in its absolute sense if the nature and purpose of the tax as gathered from the context show that it is in effect an excise or a license tax. Thus, it has been held that "If a tax is in its nature an excise, it does not become a property tax because it is proportioned in amount to the value of the property used in connection with the occupation, privilege or act which is taxed. Every excise necessarily must finally fall upon and be paid by property and so may be indirectly a tax upon property; but if it is really imposed upon the performance of an act, enjoyment of a privilege, or the engaging in an occupation, it will be considered an excise." (26 R. C. L., 35-36.) It has also been held that

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The character of the tax as a property tax or a license or occupation tax must be determined by its incidents, and from the natural and legal effect of the language employed in the act or ordinance, and not by the name by which it is described, or by the mode adopted in fixing its amount. If it is clearly a property tax, it will be so regarded, even though nominally and in form it is a license or occupation tax; and, on the other hand, if the tax is levied upon persons on account of their business, it will be construed as a license or occupation tax, even though it is graduated according to the property used in such business, or on the gross receipts of the business. (37 C.J., 172) The ordinance in question falls under the foregoing rules. While it refers to property tax and it is fixed ad valoremyet we cannot reject the idea that it is merely levied on motor vehicles operating within the City of Manila with the main purpose of raising funds to be expended exclusively for the repair, maintenance and improvement of the streets and bridges in said city. This is precisely what the Motor Vehicle Law (Act No. 3992) intends to prevent, for the reason that, under said Act, municipal corporation already participate in the distribution of the proceeds that are raised for the same purpose of repairing, maintaining and improving bridges and public highway (section 73 of the Motor Vehicle Law). This prohibition is intended to prevent duplication in the imposition of fees for the same purpose. It is for this reason that we believe that the ordinance in question merely imposes a license fee although under the cloak of an ad valorem tax to circumvent the prohibition above adverted to. It is also our opinion that the ordinance infringes the rule of the uniformity of taxation ordained by our Constitution. Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways. The distinction is important if we note that the ordinance intends to burden with the tax only those registered in the City of Manila as may be inferred from the word "operating" used therein. The word "operating" denotes a connotation which is akin to a registration, for under the Motor Vehicle Law no motor vehicle can be operated without previous payment of the registration fees. There is no pretense that the ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highway. The fact that they are benefited by their use they should also be made to share the corresponding burden. And yet such is not the case. This is an inequality which we find in the ordinance, and which renders it offensive to the Constitution. Wherefore, reversing the decision appealed from, we hereby declare the ordinance null and void.

Paras, C.J., Bengzon and Tuason, JJ., concur. Montemayor, Reyes, Jugo and Labrador, JJ., concur in the result.

Separate Opinions FERIA, J., concurring: I concur on the ground that it is a license tax. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-27588 December 31, 1927 THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as representative of the Roman Catholic Apostolic Church, plaintiff-appellant, vs. THE PROVINCIAL BOARD OF ILOCOS NORTE, ET AL., defendants-appellants. Vicente Llanes and Proceso Coloma for plaintiff-appellant. Provincial Fiscal Santos for defendant-appellants.

AVANCEA, J.: The plaintiff, the Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia, possesses and is the owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all four sides of which face on public streets. On the south side is a part of the churchyard, the convent and an adjacent lot used for a vegetable garden, containing an area off 1,624 square meters, in which there is a stable and a well for the use of the convent. In the center is the remainder of the churchyard and the church. On the north is an old cemetery with two of its walls still standing, and a portion where formerly stood a tower, the base of which still be seen, containing a total area of 8,955 square meters.

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As required by the defendants, on July 3, 1925 the plaintiff paid, under protest, the land tax on the lot adjoining the convent and the lot which formerly was the cemetery with the portion where the tower stood. The plaintiff filed this action for the recovery of the sum paid by to the defendants by way of land tax, alleging that the collection of this tax is illegal. The lower court absolved the defendants from the complaint in regard to the lot adjoining convent and declared that the tax collected on the lot, which formerly was the cemetery and on the portion where the lower stood, was illegal. Both parties appealed from this judgment. The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative Code) refers to the home of the parties who presides over the church and who has to take care of himself in order to discharge his duties. In therefore must, in the sense, include not only the land actually occupied by the church, but also the adjacent ground destined to the ordinary incidental uses of man. Except in large cities where the density of the population and the development of commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a house and, in the case of a convent, it use is limited to the necessities of the priest, which comes under the exemption.lawphi1.net In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it used for commercial purposes and, according to the evidence, is now being used as a lodging house by the people who participate in religious festivities, which constitutes an incidental use in religious functions, which also comes within the exemption. The judgment appealed from is reversed in all it parts and it is held that both lots are exempt from land tax and the defendants are ordered to refund to plaintiff whatever was paid as such tax, without any special pronouncement as to costs. So ordered. Johnson, Street, Villamor, Ostrand, Johns and Villa-Real, JJ., concur.

MALCOLM, J., dissenting: The Assessment Law exempts from taxation "Cemeteries or burial grounds . . . and all lands, buildings, and improvements use exclusively for religious . . . purposes, but this exemption shall not extend to property held for investment, or which produces income, even though the income be devoted to some one or more of the purposes above specified." (Administrative Code, sec. 344; Act No. 2749, sec. 1.) That is the applicable law. The facts may be taken as found by the judge of First Instance, who made his findings more certain by an ocular inspection of the property under consideration. The testimony and the inspection disclosed that the lot Known as "huerta" was not devoted to religious purposes, and that the old cemetery had long since leased to be used as such and had been planted to corn. Those are the facts. The test to be applied to the combined law and facts must be the actual use of the property. The property legally exempt from the payment of taxes must be devoted to some purpose specified in the law. A "huerta" not needed or used exclusively for religious purposes is not thus exempt. A cemetery or burial ground no longer a cemetery or a burial ground is not thus exempt. Accordingly, I prefer to vote for the affirmance of Judge Mariano's decision. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-60126 September 25, 1985 CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents. Quasha, De Guzman Makalintal & Barot for petitioner. AQUINO, J.: This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax amounting to P75,149.73 for the more than seven-month period of the year 1969 in addition to franchise tax. The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its payment of 3% tax on its gross earnings from the sale of electric current is

Separate Opinions

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"in lieu of all taxes and assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted" (Sec. 3). On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making liable for income tax all corporate taxpayers not specifically exempt under paragraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the "provisions of existing special or general laws to the contrary". Thus, franchise companies were subjected to income tax in addition to franchise tax. However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective August 4, 1969, by authorizing the petitioner to furnish electricity to the municipalities of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de Oro City and the municipalities of Tagoloan and Opol. The amendment reenacted the tax exemption in its original charter or neutralized the modification made by Republic Act No. 5431 more than a year before. By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue in a demand letter dated February 15, 1973 required the petitioner to pay deficiency income taxes for 1968-to 1971. The petitioner contested the assessments. The Commissioner cancelled the assessments for 1970 and 1971 but insisted on those for 1968 and 1969. The petitioner filed a petition for review with the Tax Court, which on February 26, 1982 held the petitioner liable only for the income tax for the period from January 1 to August 3, 1969 or before the passage of Republic Act No. 6020 which reiterated its tax exemption. The petitioner appealed to this Court. It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the petitioner is a commutative tax which already includes the income tax; (2) in holding that Republic Act No. 5431 as amended, altered or repealed petitioner's franchise; (3) in holding that petitioner's franchise is a contract which can be impaired by an implied repeal and (4) in not holding that section 24(d) of the Tax Code should be construed strictly against the Government. We hold that Congress could impair petitioner's legislative franchise by making it liable for income tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its franchise. The Constitution provides that a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV, 1973 Constitution),

Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the provisions of the Constitution and to the terms and conditions established in Act No. 3636 whose section 12 provides that the franchise is subject to amendment, alteration or repeal by Congress. Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioner's exemption from income tax. The Tax Court acted correctly in holding that the exemption was restored by the subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption. Hence, the petitioner is liable only for the income tax for the period from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act No. 5431. It is relevant to note that franchise companies, like the Philippine Long Distance Telephone Company, have been paying income tax in addition to the franchise tax. However, it cannot be denied that the said 1969 assessment appears to be highly controversial. The Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason not to pay income tax because of the tax exemption in its franchise. For this reason, it should be liable only for tax proper and should not be held liable for the surcharge and interest. (Advertising Associates, Inc. vs. Commissioner of Internal Revenue and Court of Tax Appeals, G. R. No. 59758, December 26, 1984,133 SCRA 765; Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024; C.M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511.) WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the petitioner is liable only for the tax proper and that it should not pay the delinquency penalties. No costs. SO ORDERED. Concepcion, Jr., Abad Santos, Escolin, Cuevas and Alampay, JJ., concur. Republic of the Philippines SUPREME COURT Manila

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EN BANC G.R. No. 3473 March 22, 1907

The defendant accordingly imposed upon these properties the tax mentioned in section 134, which tax, as has before been stated, plaintiff paid under protest. The only question in the case is whether this section 134 is void or valid.

J. CASANOVAS, plaintiff-appellant, vs. JNO. S. HORD, defendant-appellee. F.G. Waite for appellant. Attorney-General Araneta for appellee. WILLARD, J.: The plaintiff brought this action against the defendant, the Collector of Internal Revenue, to recover the sum of P9,600, paid by him under protest as taxes on certain mining claims owned by him in the Province of Ambos Camarines. Judgment was rendered in the court below in favor of the defendant, and from that judgment the plaintiff appealed. There is no dispute about the facts. In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of the 14th of May, 1867, granted to the plaintiff certain mines in the said Province of Ambos Camarines, of which mines the plaintiff is now the owner. That there were valid perfected mining concessions granted prior to the 11th of April, 1899, is conceded. They were so considered by the Collector of Internal Revenue and were by him said to fall within the provisions of section 134 of Act No. 1189, known as the Internal Revenue Act. That section is as follows: SEC. 134. On all valid perfected mining concessions granted prior to April eleventh, eighteen hundred and ninety-nine, there shall be levied and collected on the after January first, nineteen hundred and five, the following taxes: 2. (a) On each claim containing an area of sixty thousand square meters, an annual tax of one hundred pesos; (b) and at the same rate proportionately on each claim containing an area in excess of, or less than, sixty thousand square meters. 3. On the gross output of each an ad valorem tax equal to three per centum of the actual market value of such output.

I. It is claimed by the plaintiff that it is void because it comes within the provision of 1 section 5 of the act of Congress of July 1, 1902 (32 U.S. Stat. L., 691), which provides "that no law impairing the obligation of contracts shall be enacted." The royal decree of the 14th of May, 1867, provided, among other things, as follows: ART. 76. On each pertenencia minera (mining claim) of the area prescribed in the first paragraph of article 13 (sixty thousand square meters) there shall be paid annually a fixed tax of forty escudos (about P20.00). The pertenencia referred to in the second paragraph of the same article, though of greater area than the others (one hundred and fifty thousand square meters), shall pay only twenty escudos (about P10.00). ART. 78. Pertenencia of iron mines and mines of combustible minerals shall be exempt from the annual tax for a period of thirty years from the date of publication of this decree. ART. 80. A further tax of three per centum on the gross earnings shall be paid without deduction of costs of any kind whatsoever. All substances enumerated in section one shall be exempt from said tax of three per centum for a period of thirty years. ART. 81. No other taxes than those herein mentioned shall be imposed upon mining and metallurgical industries. The royal decree and regulation for its enforcement provided that the deeds granted by the Government should be in a particular form, which form was inserted in the regulations. It must be presumed that the deeds granted to the plaintiff were made as provided by law, and, in fact, one of such concessions was exhibited during the argument in this court, and was found to be in exact conformity with the form prescribed by law. The deed is as follows: Don Camilo Garcia de Polavieja, Marquez de Polavieja, Teniente General de los Ejercitos Nacionales, Caballero Gran Cruz de la Real y Militar Orden de San Hermenegildo, de la Real y distinguida de Isabel la Catolica, de la del Merito Militar Roja, de la de la Corona de Italia, Comendador de Carlos Tercero, Bennemerito de la Patria en grado eminente, condecorado con varias cruses de distincion por meritos de guerra, Capitan General y Gobernador General de Filipinas.

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Whereas I have granted to Don Joaquin Casanovas y Llovet and to Don Martin Buck the concession of a gold mine entitled "Nueva California Segunda" in the jurisdiction of Paracale, Province of Ambos Camarines: Now, therefore, in the name of His Majesty the King (whom God preserve), and pursuant to the provisions of article 37 of the royal decree of May 14, 1867, regulating mining in these Islands, I issue, this fifth day of November, eighteen hundred and ninety-six, this title deed to four pertenencias, comprising an area of two hundred and forty thousand square meters, as shown in the attached sketch map drafted by the engineer Don Enrique Abella y Casariego, and dated at Manila December sixteenth of the said year, subject to the following general terms and conditions: 1. That the mine shall be worked in conformity with the rules in mining, the grantee and his laborers to be governed by the police rules established by existing regulations. 2. That the grantee shall be liable for all damages to third parties that may be caused by his operations. 3. That the grantee shall likewise indemnify his neighbors for any damage they may suffer by reason of water accumulated on his works, if, upon being requested, he fail to drain the same within the time indicated. 4. That he shall contribute for the drainage of the adjacent mines and for the general galleries for drainage or haulage in proportion to the benefit he derives therefrom, whenever, by authority of the Governor-General, such works shall be opened for a group of pertenencias or for the entire mining locality in which the mine is situated. 5. That he shall commence work on the mine immediately upon receipt of this concession unless prevented by force majeure. 6. That he shall keep the mine in active operation by employing at the rate of at least four laborers for eachpertenencia for at least six months of each year. 7. That he shall strengthen the walls of the mine within the time indicated whenever, by reason of mismanagement of the work, it threatens to cave in, unless he be prevented by force majeure. 8. That he shall not render further profitable development of the mine difficult or impossible by avaricious operation.

9. That he shall not suspend the operation of the mine with the intention of abandoning the same without first informing the Governor of his intention, in which case he must leave the mine in a good state of timbering. 10. That he shall pay taxes on the mine and its output as prescribed in the royal decree. 11. Finally, that he shall comply with all the requirements contained in the royal decree and in the regulations for concessions of the same nature as the present. Without special conditions. Now, therefore, by virtue of this title deed, I grant to Don Joaquin Casanovas y Llovet and to Don Martin Buck the ownership of the said mine for an unlimited period of time so long as they shall comply with the foregoing terms and conditions, to the end that they may develop the same and make free use and disposition of the output thereof, with the right to alienate the said mine subject to the provisions of existing laws, and to enjoy all the rights and benefits conceded to such grantees by the royal decree and by the mining regulations. And for the prompt fulfillment and observance of the said conditions, both on the part of the said grantees and by all authorities, courts, corporations, and private persons whom it may concern, I have ordered this title deed to be issued given under my hand and the proper seal and countersigned by the undersigned Director-General of Civil Administration. It seems very clear to us that this deed constituted a contract between the Spanish Government and the plaintiff, the obligation of which contract was impaired by the enactment of section 134 of the Internal Revenue Law above cited, thereby infringing the provisions above quoted from section 5 of the act of Congress of July 1, 1902. This conclusion seems necessarily to result from the decisions of the Supreme Court of the United States in similar cases. In the case of McGee vs. Mathis (4 Wallace, 143), it appeared that the State of Arkansas, by an act of the legislature of 1851, provided for the sale of certain swamp lands granted to it by the United States; for the issue of transferable scrip receivable for any lands not already taken up at the time of selection by the holder; for contracts for the making of levees and drains, and for the payment of contractors in scrip and otherwise. In the fourteenth section of this act it was provided that To encourage by all just means the progress and completion of the reclaiming of such lands by offering inducements to purchasers and contractors to take up said lands, all said swamp and overflowed lands shall

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be exempt from taxation for the term of ten years or until they shall be reclaimed. In 1855 this section was repealed and provision was made by law for the taxation of swamp and overflowed lands, sold or to be sold, precisely as other lands. McGee, before this appeal, had become the owner by transfer from contractors of a large amount of scrip issued under the Act of 1851, and with this scrip, after the repeal, took up and paid for many sections and parts of sections of the granted lands. Taxes were levied by the State on the lands so taken up by McGee. The Supreme Court held that these taxes could not be collected. The Court said at page 156: It seems quite clear that the Act of 1851 authorizing the issue of land scrip constituted a contract between the State and the holders of the land scrip issued under the act. In the case of the Home of the Friendless vs. Rouse (8 Wallace, 430), it appeared that on the 3d day of February, 1853, the legislature of Missouri passed on act to incorporate the Home of the Friendless in the city of St. Louis. Section 1 of the act provided that All property of said corporation shall be exempt from taxation. The court held that the State had no power afterwards to pass laws providing for the levying of taxes upon this institution. The Court said among other things at page 438: The validity of this contract is questioned at the bar on the ground that the legislature had no authority to grant away the power of taxation. The answer to this position is, that the question is no longer open for argument here, for it is settled by the repeated adjudications of this court, that a State may be contract based on a consideration exempt the property of an individual or corporation from taxation, either for a specified period or permanently. And it is equally well settled that the exemption is presumed to be on sufficient consideration, and binds the State if the charter containing it is accepted. In the case of The Asylum vs. The City of New Orleans (105 U.S., 362), it appears that St. Ariva's Asylum was incorporated by an act of the legislature of Louisiana, approved April 29, 1853. The law incorporating it provided that it should enjoy the same exemption from taxation which was enjoyed by the Orphan Boys' Asylum of New Orleans. The law relating to the last named institution provided (page 364): That, from and after the passage of this act, all the property, real and personal, belonging to the Orphan Boys' Asylum of New Orleans be, and the

same is hereby exempted from all taxation, either by the State, parish, or city in which it is situated, any law to the contrary notwithstanding. It was held that the State had no power by subsequent legislation to impose taxes upon the property of this institution. That the doctrine announced in these cases is still maintained in that court is apparent from the case of Powers vs.The Detroit, Grand Haven and Milwaukee Railway which was decided on the 16th of April, 1906, and reported in 201 U. S., 543. Section 9 of the act of the legislature of Michigan, incorporating the railway company, provided: Said company shall, on or before the 1st day of July, pay to the State treasurer, an annual tax of one per cent on the capital stock of said company, pain in, which tax shall be in lieu of all other taxation. The court said at page 556: It has often been decided by this court, so often that a citation on authorities in unnecessary, that the legislature of a State may, in the absence of special restrictions in its constitution, make a valid contract with a corporation in respect to taxation, and that such contract can be enforced against the State at the instance of the corporation. The case at bar falls within the cases hereinbefore cited. It is to be distinguished from the case of the Metropolitan Street Railway Company vs. The New York State Board of Tax Commissioners (199 U.S., 1). In that case it was provided by various acts of the legislature, that the companies therein referred to, should pay annually to the city of New York, a fixed amount or percentage, varying from 2 to 8 per cent of their gross earnings additional taxes was sustained by the court. It was sustained on the ground that the prior legislation did not expressly say that the taxes thus provided for should be in lieu of all other taxes. The court said at page 37: Applying these well-established rules to the several contracts, it will be perceived that there was no express relinquishment of the right of taxation. The plaintiff in error must rely upon some implication, and not upon any direct stipulation. In each contract there was a grant of privileges, but the grant was specifically or privileges in respect to the construction, operation and maintenance of the street railroad. These were all that in terms were granted. As consideration for this grant, the grantees were to pay something, and such payment is nowhere said to be in lieu of, or as an equivalent or substitute of taxes. All that can be extracted from the language used, was a grant of privileges and a payment therefor. Other words must be written into

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the contract before there can be found any relinquishment of the power of taxation. But in the case at bar, there is found not only the provisions for the payment of certain taxes annually, but there is also found the provision contained in article 81, above quoted, which expressly declares that no other taxes shall be imposed upon these mines. The present case is to be distinguished also from that class of cases of which Grands Lodge vs. The City of New Orleans (166 U.S., 143) is a type, and which includes Salt Company vs. East Saginaw (13 Wall., 373) and Welchvs. Cook (97 U.S., 541). In these cases the exemption was a mere bounty and did not form a part of any contract. The fact that this concession was made by the Government of Spain, and not by the Government of the United States, is not important. (Trustees of Dartmouth College vs. Woodward, 4 Wheaton, 518.) Our conclusion is that the concessions granted by the Government of Spain to the plaintiff, constitute contracts between the parties; that section 134 of the Internal Revenue Law impairs the obligation of these contracts, and is therefore void as to them. II. We think that this section is also void because in conflict with section 60 of the act of Congress of July 1, 1902. This section is as follows: That nothing in this Act shall be construed to effect the rights of any person, partnership, or corporation, having a valid, perfected mining concession granted prior to April eleventh, eighteen hundred and ninety-nine, but all such concessions shall be conducted under the provisions of the law in force at the time they were granted, subject at all times to cancellation by reason of illegality in the procedure by which they were obtained, or for failure to comply with the conditions prescribed as requisite to their retention in the laws under which they were granted: Provided, That the owner or owners of every such concession shall cause the corners made by its boundaries to be distinctly marked with permanent monuments within six months after this act has been promulgated in the Philippine Islands, and that any concessions, the boundaries of which are not so marked within this period shall be free 2 and open to explorations and purchase under the provisions of this act. This section seems to indicate that concessions, like those in question, can be canceled only by reason of illegality in the procedure by which they were obtained, or for failure to comply with the conditions prescribed as requisite for their retention in

the laws under which they were granted. There is nothing in the section which indicates that they can be canceled for failure to comply with the conditions prescribed by subsequent legislation. In fact, the real intention of the act seems to be that such concession should be subject to the former legislation and not to any subsequent legislation. There is no claim in this case that there was any illegality in the procedure by which these concessions were obtained, nor is there any claim that the plaintiff has not complied with the conditions prescribed in the said royal decree of 1867. III. In view of the result at which we have arrived, it is not necessary to consider the further claim made by the plaintiff that the taxes imposed by article 134 above quoted, are in violation of the part of section 5 of the act of July 1, 1902, which declares "that the rule of taxation in said Islands shall be uniform." The judgment of the court below is reversed, and judgment is ordered in favor of the plaintiff and against the defendant for P9,600, with interest thereon, at 6 per cent, from the 21st day of February, 1906, and the costs of the Court of First Instance. No costs will be allowed to either party in this court. After the expiration of twenty days let judgment be entered in accordance herewith and ten days thereafter let the case be remanded to the court from whence it came for proper action. So ordered. Arellano, C.J., Torres, Mapa, and Tracey, JJ., concur. Johnson, J., dissents. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 119761 August 29, 1996 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION,respondents.

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VITUG, J.:p The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1 1995, of respondent Court of Appeals affirming the 10th August 1994 decision and 2 the 11th October 1994 resolution of the Court of Tax Appeals ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in her capacity as Commissioner of Internal Revenue." The facts, by and large, are not in dispute. Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of cigarettes. On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January 1987, of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the Presidential Commission on Good Government, "the initial position of the Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand category. Proof was also submitted to the Bureau (of Internal Revenue ['BIR']) that 'Champion' was an original 3 Fortune Tobacco Corporation register and therefore a local brand." Ad 4 Valorem taxes were imposed on these brands, at the following rates: BRAND AD VALOREM TAX RATE E.O. 22 and E.O. 273 RA 6956 06-23-86 07-25-87 06-18-90 07-01-86 01-01-88 07-05-90 Hope Luxury M. 100's Sec. 142, (c), (2) 40% 45% Hope Luxury M. King Sec. 142, (c), (2) 40% 45% More Premium M. 100's Sec. 142, (c), (2) 40% 45% More Premium International Sec. 142, (c), (2) 40% 45% Champion Int'l. M. 100's Sec. 142, (c), (2) 40% 45% Champion M. 100's Sec. 142, (c), (2) 40% 45%

Champion M. King Sec. 142, (c), last par. 15% 20% Champion Lights 5 Sec. 142, (c), last par. 15% 20% A bill, which later became Republic Act ("RA") No. 7654, was enacted, on 10 June 1993, by the legislature and signed into law, on 14 June 1993, by the President of the Philippines. The new law became effective on 03 July 1993. It amended Section 142(c)(1) of the National Internal Revenue Code ("NIRC") to read; as follows: Sec. 142. Cigars and Cigarettes. xxx xxx xxx (c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below based on the constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is higher: (1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five percent (55%) or the exportation of which is not authorized by contract or otherwise, fifty-five (55%) provided that the minimum tax shall not be less than Five Pesos (P5.00) per pack. (2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum tax shall not be less than Three Pesos (P3.00) per pack. xxx xxx xxx When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price whichever is higher of existing brands of cigarettes, including the amounts intended to cover the taxes, of cigarettes packed in twenties does not exceed Four Pesos and eighty centavos (P4.80) per pack, the rate shall be twenty 7 percent (20%). (Emphasis supplied)
6

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About a month after the enactment and two (2) days before the effectivity of RA 7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the full text of which expressed: REPUBLIKA NG PILIPINAS KAGAWARAN NG PANANALAPI KAWANIHAN NG RENTAS INTERNAS

the listing of brands manufactured in foreign countries appearing in the current World Tobacco Directory shall govern. Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is that the locally manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. The brand must be originally owned by a J foreign manufacturer or producer. If ownership of the cigarette u brand is, however, not definitely determinable, ". . . the listing of l brands manufactured in foreign countries appearing in the current y World Tobacco Directory shall govern. . . ." 1 "HOPE" is listed , in the World Tobacco Directory as being manufactured by (a) Japan Tobacco, Japan and (b) Fortune Tobacco, Philippines. 1 "MORE" is listed in the said directory as being manufactured 9 by: (a) Fills de Julia Reig, Andorra; (b) Rothmans, Australia; 9 (c) RJR-Macdonald Canada; (d) Rettig3 Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g) Rothmans, New Zealand; (h) Fortune Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J. Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds, USA. "Champion" is registered in the said directory as being manufactured by (a) Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune Tobacco, Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland. Since there is no showing who among the above-listed manufacturers of the cigarettes bearing the said brands are the real owner/s thereof, then it follows that the same shall be considered foreign brand for purposes of determining the ad valorem tax pursuant to Section 142 of the National Internal Revenue Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where it cannot be established or there is dearth of evidence as to whether a brand is foreign or not, resort to the World Tobacco Directory should be made." In view of the foregoing, the aforesaid brands of cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.

REVENUE MEMORANDUM CIRCULAR NO. 37-93 SUBJECT: Reclassification of Cigarettes Subject to Excise Tax TO: All Internal Revenue Officers and Others Concerned. In view of the issues raised on whether "HOPE," "MORE" and "CHAMPION" cigarettes which are locally manufactured are appropriately considered as locally manufactured cigarettes bearing a foreign brand, this Office is compelled to review the previous rulings on the matter. Section 142 (c)(1) National Internal Revenue Code, as amended by R.A. No. 6956, provides: On locally manufactured cigarettes bearing a foreign brand, fifty-five percent (55%) Provided, That this rate shall apply regardless of whether or not the right to use or title to the foreign brand was sold or transferred by its owner to the local manufacturer. Whenever it has to be determined whether or not a cigarette bears a foreign brand,

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Any ruling inconsistent herewith is revoked or modified accordingly. ( S G D ) L I W A Y W A Y V I N Z O N S C H A T O C o m m i s s i o n e r

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio, Jr., sent via telefax a copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On 15 July 1993, Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93. In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune Tobacco requested for a review, reconsideration and recall of RMC 37-93. The request was denied on 29 July 1993. The following day, or on 30 July 1993, the CIR assessed Fortune Tobacco for ad valorem tax deficiency amounting to P9,598,334.00. On 03 August 1993, Fortune Tobacco filed a petition for review with the 8 CTA. On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged: WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands of cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being manufactured by Fortune Tobacco Corporation as locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes is found to be defective, invalid and unenforceable, such that when R.A. No. 7654 took effect on July 3, 1993, the brands in question were not CURRENTLY CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1) of the Tax Code, as amended by R.A. No. 7654 and were therefore still classified as other locally manufactured cigarettes and taxed at 45% or 20% as the case may be. Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune Tobacco Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is hereby canceled for lack of legal basis. Respondent Commissioner of Internal Revenue is hereby enjoined from collecting the deficiency tax assessment made and issued on petitioner in relation to the implementation of RMC No. 37-93. SO ORDERED.
9

In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion for reconsideration.

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The CIR forthwith filed a petition for review with the Court of Appeals, questioning the CTA's 10th August 1994 decision and 11th October 1994 resolution. On 31 March 1993, the appellate court's Special Thirteenth Division affirmed in all respects the assailed decision and resolution. In the instant petition, the Solicitor General argues: That

In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR which can thus become effective without any prior need for notice and hearing, nor publication, and that its issuance is not discriminatory since it would apply under similar circumstances to all locally manufactured cigarettes. The Court must sustain both the appellate court and the tax court.

I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF INTERNAL REVENUE INTERPRETING THE PROVISIONS OF THE TAX CODE. II. BEING AN INTERPRETATIVE RULING OR OPINION, THE PUBLICATION OF RMC 37-93, FILING OF COPIES THEREOF WITH THE UP LAW CENTER AND PRIOR HEARING ARE NOT NECESSARY TO ITS VALIDITY, EFFECTIVITY AND ENFORCEABILITY. III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR RMC 37-93 ON JULY 2, 1993. IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL LOCALLY MANUFACTURED CIGARETTES SIMILARLY SITUATED AS "HOPE," "MORE" AND "CHAMPION" CIGARETTES. V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM RECLASSIFYING "HOPE," "MORE" AND "CHAMPION" CIGARETTES BEFORE THE EFFECTIVITY OF R.A. NO. 7654. VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS NOT INTO ITS VALIDITY, EFFECTIVITY OR ENFORCEABILITY BUT INTO ITS CORRECTNESS OR PROPRIETY; RMC 37-93 10 IS CORRECT.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the effective implementation of the provisions of the National Internal Revenue Code. Let it be made clear that such authority of the Commissioner is not here doubted. Like any other government agency, however, the CIR may not disregard legal requirements or applicable principles in the exercise of its quasi-legislative powers. Let us first distinguish between two kinds of administrative issuances a legislative rule and aninterpretative rule. In Misamis Oriental Association of Coco Traders, Inc ., vs. Department of 11 Finance Secretary, the Court expressed: . . . a legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof . In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides: Public Participation. If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule. (2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two (2) weeks before the first hearing thereon. (3) In case of opposition, the rules on contested cases shall be observed.

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In addition such rule must be published. On the other hand, interpretative rules are designed to provide guidelines to the 12 law which the administrative agency is in charge of enforcing. It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply intrepreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored. Indeed, the BIR itself, in its RMC 10-86, has observed and provided: RMC NO. 10-86 Effectivity of Internal Revenue Rules and Regulations It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there

is due notice, due compliance therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on "due process of law" and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code). In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said Revenue Tax Issuances: (1) This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and regulations. (2) Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed. Due notice of the said issuances may be fairly presumed only after the following procedures have been taken; xxx xxx xxx (5) Strict compliance with the foregoing procedures is 13 enjoined. Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and comply with the above requirements before giving effect to its questioned circular. Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

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Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and equitable. Uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal 14 footing both in privileges and liabilities. Thus, all taxable articles or kinds of 15 property of the same class must be taxed at the same rate and the tax must operate with the same force and effect in every place where the subject may be found. Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and "Champion" cigarettes and, unless petitioner would be willing to concede to the submission of private respondent that the circular should, as in fact my esteemed colleague Mr. Justice Bellosillo so expresses in his separate opinion, be considered adjudicatory in nature and thus violative of 16 due process following the Ang Tibay doctrine, the measure suffers from lack of uniformity of taxation. In its decision, the CTA has keenly noted that other cigarettes bearing foreign brands have not been similarly included within the scope of the circular, such as 1. Locally manufactured by ALHAMBRA INDUSTRIES, INC. (a) "PALM TREE" is listed as manufactured by office of Monopoly, Korea (Exhibit "R") 2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY (a) "GOLDEN KEY" is listed being manufactured by United Tobacco, Pakistan (Exhibit "S") (b) "CANNON" is listed as being manufactured by Alpha Tobacco, Bangladesh (Exhibit "T") 3. Locally manufactured by LA PERLA INDUSTRIES, INC. (a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia (Exhibit "U") (b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks, Sweden (Exhibit "V-1") 4. Locally manufactured by MIGHTY CORPORATION

(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia (Exhibit "U-1") 5. Locally manufactured by STERLING TOBACCO CORPORATION (a) "UNION" is listed as being manufactured by Sumatra Tobacco, Indonesia and Brown and Williamson, USA (Exhibit "U-3") (b) "WINNER" is listed as being manufactured by Alpha Tobacco, Bangladesh; Nangyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan; Premier Tobacco, Pakistan and 1 Haggar, Sudan (Exhibit "U-4"). 7 The court quoted at length from the transcript of the hearing conducted on 10 August 1993 by the Committee on Ways and Means of the House of Representatives; viz: THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have specific information on other tobacco manufacturers. Now, there are other brands which are similarly situated. They are locally manufactured bearing foreign brands. And may I enumerate to you all these brands, which are also listed in the World Tobacco Directory . . . Why were these brand not reclassified at 55 if your want to give a level playing filed to foreign manufacturers? MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue Memorandum Circular that was supposed to come after RMC No. 37-93 which have really named specifically the list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all these brands that you mentioned at 55 percent except that at that time, when we had to come up with this, we were forced to study the brands of Hope, More and Champion because we were given documents that would indicate the that these brands were actually being claimed or patented in other countries because we went by Revenue Memorandum Circular 1488 and we wanted to give some rationality to how it came about but we couldn't find the rationale there. And we really found based on our own interpretation that the only test that is

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given by that existing law would be registration in the World Tobacco Directory. So we came out with this proposed revenue memorandum circular which we forwarded to the Secretary of Finance except that at that point in time, we went by the Republic Act 7654 in Section 1 which amended Section 142, C-1, it said, that on locally manufactured cigarettes which are currently classified and taxed at 55 percent. So we were saying that when this law took effect in July 3 and if we are going to come up with this revenue circular thereafter, then I think our action would really be subject to question but we feel that . . . Memorandum Circular Number 37-93 would really cover even similarly situated brands. And in fact, it was really because of the study, the short time that we were given to study the matter that we could not include all the rest of the other brands that would have been really classified as foreign brand if we went by the law itself. I am sure that by the reading of the law, you would without that ruling by Commissioner Tan they would really have been included in the definition or in the classification of foregoing brands. These brands that you referred to or just read to us and in fact just for your information, we really came out with a proposed revenue memorandum circular for those brands. (Emphasis supplied) (Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3). xxx xxx xxx MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is why I felt that we . . . I wanted to come up with a more extensive coverage and precisely why I asked that revenue memorandum circular that would cover all those similarly situated would be prepared but because of the lack of time and I came out with a study of RA 7654, it would not have been possible to really come up with the reclassification or the proper classification of all brands that are listed there. . .(emphasis supplied) (Exhibit "FF-2d," page IX-1) xxx xxx xxx HON. DIAZ. But did you not consider that there are similarly situated? MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memorandum Circular No. 37-93, the other brands

came about the would have also clarified RMC 37-93 by I was saying really because of the fact that I was just recently appointed and the lack of time, the period that was allotted to us to come up with the right actions on the matter, we were really caught by the July 3 deadline. But in fact, We have already prepared a revenue memorandum circular clarifying with the other . . . does not yet, would have been a list of locally manufactured cigarettes bearing a foreign brand for excise tax purposes which would include all the other brands that were mentioned by the Honorable Chairman . 18 (Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and effective administrative issuance. WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED. No costs. SO ORDERED. Kapunan, J., concurs.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 124043 October 14, 1998 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.

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PANGANIBAN, J.: Is the income derived from rentals of real property owned by the Young Men's Christian Association of the Philippines, Inc. (YMCA) established as "a welfare, educational and charitable non-profit corporation" subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution? The Case This is the main question raised before us in this petition for review 1 on certiorari challenging two Resolutions issued by the Court of Appeals on 2 3 September 28, 1995 and February 29, 1996 in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latter's income from the lease of its real property. The Facts The facts are undisputed. Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Private respondent formally protested the assessment and, as a supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA. Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA: . . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the [private respondents]. It appears from the testimonies of the witnesses for the [private respondent] particularly Mr. James C. Delote, former
4

accountant of YMCA, that these facilities were leased to members and that they have to service the needs of its members and their guests. The rentals were minimal as for example, the barbershop was only charged P300 per month. He also testified that there was actually no lot devoted for parking space but the parking was done at the sides of the building. The parking was primarily for members with stickers on the windshields of their cars and they charged P.50 for non-members. The rentals and parking fees were just enough to cover the costs of operation and maintenance only. The earning[s] from these rentals and parking charges including those from lodging and other charges for the use of the recreational facilities constitute [the] bulk of its income which [is] channeled to support its many activities and attainment of its objectives. As pointed out earlier, the membership dues are very insufficient to support its program. We find it reasonably necessary therefore for [private respondent] to make [the] most out [of] its existing facilities to earn some income. It would have been different if under the circumstances, [private respondent] will purchase a lot and convert it to a parking lot to cater to the needs of the general public for a fee, or construct a building and lease it out to the highest bidder or at the market rate for commercial purposes, or should it invest its funds in the buy and sell of properties, real or personal. Under these circumstances, we could conclude that the activities are already profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the association and therefore, will fall under the last paragraph of Section 27 of the Tax Code and any income derived therefrom shall be taxable. Considering our findings that [private respondent] was not engaged in the business of operating or contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and [a] contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively. xxx xxx xxx WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack of merit: 1980 Deficiency Fixed Tax P353,15; 1980 Deficiency Contractor's Tax P3,129.23;

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1980 Deficiency Income Tax P372,578.20. While the following assessments are hereby sustained: 1980 Deficiency Expanded Withholding Tax P1,798.93; 1980 Deficiency Withholding Tax on Wages P33,058.82 plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code effective as of 5 1984. Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals 6 (CA). In its Decision of February 16, 1994, the CA initially decided in favor of the CIR and disposed of the appeal in the following manner: Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of petitioner's (herein respondent's) facilities to small shop owners, to restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the petitioners, and the income derived therefrom are tax exempt, must be reversed. WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for: 1980 Deficiency Income Tax P 353.15 1980 Deficiency Contractor's Tax P 3,129.23, & 1980 Deficiency Income Tax P 372,578.20 but the same is AFFIRMED in all other respect.
7

The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantial evidence [are] final and conclusive. II The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on rentals of small shops and parking 8 fees [are] in accord with the applicable law and jurisprudence. Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads: The Court cannot depart from the CTA's findings of fact, as they are supported by evidence beyond what is considered as substantial. xxx xxx xxx The second ground raised is that the respondent CTA did not err in saying that the rental from small shops and parking fees do not result in the loss of the exemption. Not even the petitioner would hazard the suggestion that YMCA is designed for profit. Consequently, the little income from small shops and parking fees help[s] to keep its head above the water, so to speak, and allow it to continue with its laudable work. The Court, therefore, finds the second ground of the motion to be meritorious and in accord with law and jurisprudence. WHEREFORE, the motion for reconsideration is GRANTED; the 9 respondent CTA's decision is AFFIRMED in toto. The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in its second assailed Resolution of February 29, 1996. Hence, 10 this petition for review under Rule 45 of the Rules of Court. The Issues Before us, petitioner imputes to the Court of Appeals the following errors:

Aggrieved, the YMCA asked for reconsideration based on the following grounds: I

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I In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it rendered its Decision dated February 16, 1994; and II In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondent from rentals of small shops 11 and parking fees [is] exempt from taxation. This Court's Ruling The petition is meritorious. First Issue: Factual Findings of the CTA Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the leasing of private respondent's facilities to small shop owners, to restaurant and canteen operators and the operation of parking lots are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the private respondent and that the income derived therefrom are tax 12 exempt." Petitioner insists that what the appellate court reversed was the legal 13 conclusion, not the factual finding, of the CTA. The commissioner has a point. Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial evidence, will be disturbed on appeal unless it is shown that 14 the said court committed gross error in the appreciation of facts. In the present case, this Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not the collection or earnings of rental income from the lease of certain premises and income earned from parking fees shall fall under the last paragraph of Section 27 of the National Internal Revenue 15 Code of 1977, as amended." Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed it was expected to. That it did so in a manner different from that of the CTA did not necessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of alleged 16 facts." In the present case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied the law to the facts. That its interpretation or conclusion is different from that of the CTA is not irregular or abnormal. Second Issue: Is the Rental Income of the YMCA Taxable? We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the outset, we set forth the relevant provision of the NIRC: Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such xxx xxx xxx (g) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; xxx xxx xxx Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457) Petitioner argues that while the income received by the organizations enumerated in Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them as such," the exemption does not apply to income derived ". . . from any of their properties, real or personal, or from any of their

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activities conducted for profit, regardless of the disposition made of such income . . . ." Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income [is] exclusively used for the accomplishment of its 17 objectives." We agree with the commissioner. Because taxes are the lifeblood of the nation, the Court has always applied the 18 doctrine of strict in interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from taxation should be manifest. and unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must 19 expressly be granted in a statute stated in a language too clear to be mistaken." In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the rent 20 income of the YMCA from its real property, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. It is axiomatic that where the language of the law is clear and unambiguous, its 21 express terms must be applied. Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions to 22 "religious, charitable and educational propert[ies] or institutions." The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the income from the properties must arise from activities 'conducted 23 for profit' before it may be considered taxable." This argument is erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes from the property of the organization taxable, regardless of how that income is used whether for profit or for lofty non-profit purposes. Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but unconvincing ground that the said income is not collected for profit but is merely

incidental to its operation. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we. Constitutional Provisions On Taxation Invoking not only the NIRC but also the fundamental law, private respondent submits 24 that Article VI, Section 28 of par. 3 of the 1987 Constitution, exempts "charitable institutions" from the payment not only of property taxes but also of income tax from 25 any source. In support of its novel theory, it compares the use of the words "charitable institutions," "actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of the 1935 26 Constitution, on the other hand. Private respondent enunciates three points. First, the present provision is divisible into two categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries," the incomes of 27 which are, from whatever source, all tax-exempt; and (2) "[a]ll lands, buildings and improvements actually and directly used for religious, charitable or educational 28 purposes," which are exempt only from property taxes. Second, Lladoc v. 29 Commissioner of Internal Revenue, which limited the exemption only to the payment of property taxes, referred to the provision of the 1935 Constitution and not 30 to its counterparts in the 1973 and the 1987 Constitutions. Third, the phrase "actually, directly and exclusively used for religious, charitable or educational purposes" refers not only to "all lands, buildings and improvements," but also to the above-quoted first category which includes charitable institutions like the private 31 respondent. The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the Constitution reveal their intent which, in turn, may have guided 32 the people in ratifying the Charter. Such intent must be effectuated. Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this Court, stressed during the Concom debates that ". . . 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 33 purposes." Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the Concom, adhered to the same view that the exemption created 34 by said provision pertained only to property taxes.

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In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax 35 exemption covers property taxes only." Indeed, the income tax exemption claimed by private respondent finds no basis in Article VI, Section 26, par. 3 of the Constitution. Private respondent also invokes Article XIV, Section 4, par. 3 of the 36 Character, claiming that the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational 37 purposes so it is exempt from taxes on its properties and income." We reiterate that private respondent is exempt from the payment of property tax, but not income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites. Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the Constitution? We rule that it is not. The term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of which the 38 members of the Constitutional Commission are deemed cognizant. Under the 39 Education Act of 1982, such term refers to schools. The school system is 40 synonymous with formal education, which "refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress 41 through the grades or move to the higher levels." The Court has examined the 43 "Amended Articles of Incorporation" and "By-Laws" of the YMCA, but found nothing 44 in them that even hints that it is a school or an educational institution. Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-based and "private auspices such as foundations and civic45 spirited organizations" are ruled out. It is settled that the term "educational institution," when used in laws granting tax exemptions, refers to a ". . . school 46 seminary, college or educational establishment . . . ." Therefore, the private respondent cannot be deemed one of the educational institutions covered by the constitutional provision under consideration. . . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadest and best sense education

embraces all forms and phases of instruction, improvement and development of mind and body, and as well of religious and moral sentiments, yet in the common understanding and application it means a place where systematic instruction in any or all of the useful branches of learning is given by methods common to schools and institutions of learning. That we conceive to be the true intent and scope of the term [educational institutions,] as used in the 47 Constitution. Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also notes that the former did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently insufficient, since the same merely signified that "[t]he net income derived from the rentals of the commercial buildings shall be apportioned to the Federation and Member Associations as the National 48 Board may decide." In sum, we find no basis for granting the YMCA exemption from income tax under the constitutional provision invoked. Cases Cited by Private Respondent Inapplicable The cases relied on by private respondent do not support its cause. YMCA of 50 Manila v. Collector of Internal Revenue and Abra Valley College, Inc. v. 51 Aquino are not applicable, because the controversy in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan de 52 Dios, Inc. v. Pasay City is not in point either, because it involves a claim for exemption from the payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City an issue not at all related to that involved in a claimed exemption from the payment of income taxes imposed on property 53 leases. In Jesus Sacred Heart College v. Com. of Internal Revenue, the party therein, which claimed an exemption from the payment of income tax, was an educational institution which submitted substantial evidence that the income subject of the controversy had been devoted or used solely for educational purposes. On the other hand, the private respondent in the present case has not given any proof that it is an educational institution, or that part of its rent income is actually, directly and exclusively used for educational purposes. Epilogue
49

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In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the nobility of its cause. However, the Court's power and function are limited merely to applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation. We concede that private respondent deserves the help and the encouragement of the government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government. Indeed, some of the members of the Court may even believe in the wisdom and prudence of granting more tax exemptions to private respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the power to change or amend the law. WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by petitioner from rentals of its real property is subject to income tax. No pronouncement as to costs. SO ORDERED. Davide, Jr., Vitug and Quisumbing, JJ., concur. Bellosillo, J., Please see Dissenting Opinion.

Are pawnshops included in the term lending investors for the purpose of imposing the 5% percentage tax under then Section 116 of the National Internal Revenue Code (NIRC) of 1977, as amended by Executive Order No. 273? Petitioner Commissioner of Internal Revenue (CIR) filed the instant petition for review 1 to set aside the decision of 20 November 2001 of the Court of Appeals in CA G.R. SP No. 62463, which affirmed the decision of 13 December 2000 of the Court of Tax Appeals (CTA) in CTA Case No. 5690 cancelling the assessment issued against respondent Michel J. Lhuillier Pawnshop, Inc. (hereafter Lhuillier) in the amount of P3,360,335.11 as deficiency percentage tax for 1994, inclusive of interest and surcharges. The facts are as follows: On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 imposing a 5% lending investors tax on pawnshops; thus: A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is lending money at interest and incidentally accepting a "pawn" of personal property delivered by the pawner to the pawnee as security for the loan.(Sec. 3, Ibid). Clearly, this makes pawnshop business akin to lending investors business activity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investors tax based on their gross income pursuant to Section 116 of the Tax Code, as amended. This RMO was clarified by Revenue Memorandum Circular (RMC) No. 43-91 on 27 May 1991, which reads:

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 150947 July 15, 2003

1. RM[O] 15-91 dated March 11, 1991. This Circular subjects to the 5% lending investors tax the gross income of pawnshops pursuant to Section 116 of the Tax Code, and it thus revokes BIR Ruling No[]. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a uniform cut-off date, avoid unfairness on the part of tax- payers if they are required to pay the tax on past transactions, and so as to give meaning to the express provisions of Section 246 of the Tax Code, pawnshop owners or operators shall become liable to the lending investors tax on their gross income beginning January 1, 1991. Since the deadline for the filing of percentage tax return (BIR Form No. 2529A-0) and the payment of the tax on lending investors covering the first calendar quarter of 1991 has already lapsed, taxpayers are given up to June 30, 1991 within which to pay

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MICHEL J. LHUILLIER PAWNSHOP, INC., respondent. DAVIDE, JR., C.J.:

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the said tax without penalty. If the tax is paid after June 30, 1991, the corresponding penalties shall be assessed and computed from April 21, 1991. Since pawnshops are considered as lending investors effective January 1, 1991, they also become subject to documentary stamp taxes prescribed in Title VII of the Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is hereby revoked. On 11 September 1997, pursuant to these issuances, the Bureau of Internal Revenue (BIR) issued Assessment Notice No. 81-PT-13-94-97-9-118 against Lhuillier demanding payment of deficiency percentage tax in the sum ofP3,360,335.11 for 1994 inclusive of interest and surcharges. On 3 October 1997, Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending that (1) neither the Tax Code nor the VAT Law expressly imposes 5% percentage tax on the gross income of pawnshops; (2) pawnshops are different from lending investors, which are subject to the 5% percentage tax under the specific provision of the Tax Code; (3) RMO No. 15-91 is not implementing any provision of the Internal Revenue laws but is a new and additional tax measure on pawnshops, which only Congress could enact; (4) RMO No. 15-91 impliedly amends the Tax Code and is therefore taxation by implication, which is proscribed by law; and (5) RMO No. 15-91 is a "class legislation" because it singles out pawnshops among other lending and financial operations. On 12 October 1998, Deputy BIR Commissioner Romeo S. Panganiban issued Warrant of Distraint and/or Levy No. 81-043-98 against Lhuilliers property for the enforcement and payment of the assessed percentage tax. Its protest having been unacted upon, Lhuillier, in a letter dated 3 March 1998, elevated the matter to the CIR. Still, the protest was not acted upon by the CIR. Thus, on 11 November 1998, Lhuillier filed a "Notice and Memorandum on Appeal" with the Court of Tax Appeals invoking Section 228 of Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, which provides: Section 228. Protesting of Assessment. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.

The case was docketed as CTA Case No. 5690. On 19 November 1998, the CIR filed with the CTA a motion to dismiss Lhuilliers petition on the ground that it did not state a cause of action, as there was no action yet on the protest. Lhuillier opposed the motion to dismiss and moved for the issuance of a writ of preliminary injunction praying that the BIR be enjoined from enforcing the warrant of distraint and levy. For Lhuilliers failure to appear on the scheduled date of hearing, the CTA denied the motion for the issuance of a writ of preliminary injunction. However, on Lhuilliers motion for reconsideration, said denial was set aside and a hearing on the motion for the issuance of a writ of preliminary injunction was set. On 30 June 1999, after due hearing, the CTA denied the CIRs motion to dismiss and granted Lhuilliers motion for the issuance of a writ of preliminary injunction. On 13 December 2000, the CTA rendered a decision declaring (1) RMO No. 15-91 and RMC No. 43-91 null and void insofar as they classify pawnshops as lending investors subject to 5% percentage tax; and (2) Assessment Notice No. 81-PT-13-94-97-9-118 as cancelled, withdrawn, and with no force 2 and effect. Dissatisfied, the CIR filed a petition for review with the Court of Appeals praying that the aforesaid decision be reversed and set aside and another one be rendered ordering Lhuillier to pay the 5% lending investors tax for 1994 with interests and surcharges. Upon due consideration of the issues presented by the parties in their respective memoranda, the Court of Appeals affirmed the CTA decision on 20 November 2001. The CIR is now before this Court via this petition for review on certiorari, alleging that the Court of Appeals erred in holding that pawnshops are not subject to the 5% lending investors tax. He invokes then Section 116 of the Tax Code, which imposed a 5% percentage tax on lending investors. He argues that the legal definition of lending investors provided in Section 157 (u) of the Tax Code is broad enough to include pawnshop operators. Section 3 of Presidential Decree No. 114 states that the principal business activity of a pawnshop is lending money; thus, a pawnshop easily falls under the legal definition of lending investors. RMO No. 15-91 and RMC No. 4391, which subject pawnshops to the 5% lending investors tax based on their gross

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income, are valid. Being mere interpretations of the NIRC, they need not be published. Lastly, the CIR invokes the case of Commissioner of Internal Revenue vs. 3 Agencia Exquisite of Bohol, Inc., where the Court of Appeals Special Fourteenth 4 Division ruled that a pawnshop is subject to the 5% lending investors tax. Lhuillier, on the other hand, maintains that before and after the amendment of the Tax Code by E.O. No. 273, which took effect on 1 January 1988, pawnshops and lending investors were subjected to different tax treatments. Pawnshops were required to pay an annual fixed tax of only P1,000, while lending investors were subject to a 5% percentage tax on their gross income in addition to their fixed annual taxes. Accordingly, during the period from April 1982 up to December 1990, the CIR consistently ruled that a pawnshop is not a lending investor and should not therefore be required to pay percentage tax on its gross income. Lhuillier likewise asserts that RMO No. 15-91 and RMC No. 43-91 are not implementing rules but are new and additional tax measures, which only Congress is empowered to enact. Besides, they are invalid because they have never been published in the Official Gazette or any newspaper of general circulation. Lhuillier further points out that pawnshops are strictly regulated by the Central Bank pursuant to P.D. No. 114, otherwise known as The Pawnshop Regulation Act. On the other hand, there is no special law governing lending investors. Due to the wide differences between the two, pawnshops had never been considered as lending investors for tax purposes. In fact, in 1994, Congress passed House Bill No. 5 11197, which attempted to amend Section 116 of the NIRC, as amended, to include owners of pawnshops as among those subject to percentage tax. However, the Senate Bill and the subsequent Bicameral Committee version, which eventually became the E-VAT Law, did not incorporate such proposed amendment. Lastly, Lhuillier argues that following the maxim in statutory construction "expressio unius est exclusio alterius," it was not the intention of the Legislature to impose percentage taxes on pawnshops because if it were so, pawnshops would have been included as among the businesses subject to the said tax. Inasmuch as revenue laws impose special burdens upon taxpayers, the enforcement of such laws should not be extended by implication beyond the clear import of the language used. We are therefore called upon to resolve the issue of whether pawnshops are subject to the 5% lending investors tax. Corollary to this issue are the following questions: (1) Are RMO No. 15-91 and RMC No. 43-91 valid? (2) Were they issued to implement Section 116 of the NIRC of 1977, as amended? (3) Are pawnshops considered "lending investors" for the purpose of the imposition of the lending investors tax? (4) Is publication necessary for the validity of RMO No. 15-91 and RMC No. 43-91.

RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power of the CIR to make rulings and opinions in connection with the implementation of internal revenue laws, which was bestowed by then Section 245 of the NIRC of 1977, as 6 amended by E.O. No. 273. Such power of the CIR cannot be controverted. However, the CIR cannot, in the exercise of such power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law 7 they intend to carry out. Only Congress can repeal or amend the law. The CIR argues that both issuances are mere rules and regulations implementing then Section 116 of the NIRC, as amended, which provided: SEC. 116. Percentage tax on dealers in securities; lending investors. Dealers in securities and lending investors shall pay a tax equivalent to six (6) per centum of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. It is clear from the aforequoted provision that pawnshops are not specifically included. Thus, the question is whether pawnshops are considered lending investors for the purpose of imposing percentage tax. We rule in the negative. Incidentally, we observe that both parties, as well as the Court of Tax Appeals and the Court of Appeals, refer to the National Internal Revenue Code as the Tax Code. They did not specify whether the provisions they cited were taken from the NIRC of 1977, as amended, or the NIRC of 1986, as amended. For clarity, it must be pointed out that the NIRC of 1977 as renumbered and rearranged by E.O. No. 273 is a later law than the NIRC of 1986, as amended by P.D. Nos. 1991, 1994, 2006 and 2031. The citation of the specific Code is important for us to determine the intent of the law. Under Section 157(u) of the NIRC of 1986, as amended, the term lending investor includes "all persons who make a practice of lending money for themselves or others at interest." A pawnshop, on the other hand, is defined under Section 3 of P.D. No. 114 as "a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage." While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes for the following reasons:

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First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986, pawnshops and lending investors were subjected to different tax treatments; thus: (3) Other Fixed Taxes. The following fixed taxes shall be collected as follows, the amount stated being for the whole year, when not otherwise specified: . (dd) Lending investors 1. In chartered cities and first class municipalities, one thousand pesos; 2. In second and third class municipalities, five hundred pesos; 3. In fourth and fifth class municipalities and municipal districts, two hundred fifty pesos: Provided, That lending investors who do business as such in more than one province shall pay a tax of one thousand pesos. . (ff) Pawnshops, one thousand pesos (underscoring ours) Second. Congress never intended pawnshops to be treated in the same way as lending investors. Section 116 of the NIRC of 1977, as renumbered and rearranged 8 by E.O. No. 273, was basically lifted from Section 175 of the NIRC of 1986, which treated both tax subjects differently. Section 175 of the latter Code read as follows: Sec. 175. Percentage tax on dealers in securities, lending investors. -Dealers in securities shall pay a tax equivalent to six (6%) percent of their gross income. Lending investors shall pay a tax equivalent to five (5%) percent of their gross income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994). We note that the definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found. However, as emphasized earlier, both the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and lending investors differently. Verily then, it was the intent of Congress to deal with both subjects

differently. Hence, we must likewise interpret the statute to conform with such legislative intent. Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only. There is no mention of pawnshops. Under the maxim expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily 9 and by implication be excluded from its operation and effect. This rule, as a guide to probable legislative intent, is based upon the rules of logic and natural workings of the 10 human mind. Fourth. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273. This was even admitted by the CIR in RMO No. 15-91 itself. Considering that Section 116 of the NIRC of 1977, as amended, was practically lifted from Section 175 of the NIRC of 1986, as amended, and there being no change in the law, the interpretation thereof should not have been altered. It may not be amiss to state that, as pointed out by the respondent, pawnshops was sought to be included as among those subject to 5% percentage tax by House Bill No. 11197 in 1994. Section 13 thereof reads: Section 13. Section 116 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows: "SEC. 116. Percentage tax on dealers in securities; lending investors; OWNERS OF PAWNSHOPS; FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS. Dealers in securities shall pay a tax equivalent to Six (6%) per centum of their gross income. Lending investors, OWNERS OF PAWNSHOPS AND FOREIGN CURRENCY DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%) percent of their gross income." If pawnshops were covered within the term lending investor, there would have been no need to introduce such amendment to include owners of pawnshops. At any rate, such proposed amendment was not adopted. Instead, the approved bill which 11 became R.A. No. 7716 repealed Section 116 of NIRC of 1977, as amended, which was the basis of RMO No. 15-91 and RMC No. 43-91; thus:

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SEC. 20. Repealing Clauses. -- The provisions of any special law relative to the rate of franchise taxes are hereby expressly repealed. Sections 113, 114 and 116 of the National Internal Revenue Code are hereby repealed. Section 21 of the same law provides that the law shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspapers of general circulation whichever comes earlier. R.A. 12 No. 7716 was published in the Official Gazette on 1 August 1994 ; in the Journal and Malaya newspapers, on 12 May 1994; and in the Manila Bulletin, on 5 June 1994. Thus, R.A. No. 7716 is deemed effective on 27 May 1994. Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even granting that pawnshops are included within the term lending investors, the assessment from 27 May 1994 onward would have no leg to stand on. Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of publication. While the rule-making authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers. Let us first distinguish between two kinds of administrative issuances: the legislative rule and the interpretative rule. A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to 13 the law which the administrative agency is in charge of enforcing. In Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance 14 Secretary, this Tribunal ruled: In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be hearing. In this connection, the Administrative Code of 1987 provides: Public Participation. - If not otherwise required by law, an agency shall, as far as practicable, publish or circulate notices of proposed rules and afford interested parties the opportunity to submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have been published in a newspaper of general circulation at least two weeks before the first hearing thereon. (3) In case of opposition, the rules on contested cases shall be observed. In addition, such rule must be published. When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that 15 new issuance is given the force and effect of law. RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or corrective measures revoking in the process the previous rulings of past Commissioners. Specifically, they would have been amendatory provisions applicable to pawnshops. Without these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored. There is no need for us to discuss the ruling in CA-G.R. SP No. 59282 entitled Commissioner of Internal Revenue v. Agencia Exquisite of Bohol Inc., which upheld the validity of RMO No. 15-91 and RMC No. 43-91. Suffice it to say that the judgment in that case cannot be binding upon the Supreme Court because it is only a decision of the Court of Appeals. The Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all 16 other courts should take their bearings. In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared null and void. Consequently, Lhuillier is not liable to pay the 5% lending investors tax. WHEREFORE, the petition is hereby DISMISSED for lack of merit. The decision of the Court of Appeals of 20 November 2001 in CA-G.R. SP No. 62463 is AFFIRMED. SO ORDERED.

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Vitug, Ynarez-Santiago, Carpio, and Azcuna, JJ., concur.

11

Entitled An Act Restructuring the Value-added Tax (VAT) System, Widening Its Tax Base and Enhancing Its Administration, and for These Purposes Amending and Repealing the Relevant Provisions of the National Internal Revenue Code, as amended, and for Other Purposes.
12

Footnotes
1 13

90 O.G. 31, 4489.

Rollo, 18-24. Per Associate Justice Edgardo P. Cruz, with then Presiding Justice (now Supreme Court Associate Justice) Alicia Austria-Martinez and Associate Justice Hilarion L. Aquino concurring.
2

Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, G.R. No. 108524, 10 November 1994, 238 SCRA 63, 69.
14

Supra.

Rollo, 25-33. Per Associate Judge Ramon O. de Veyra, with Presiding Judge Ernesto D. Acosta and Associate Judge Amancio Q. Saga concurring.
3

15

Commissioner of Internal Revenue v. Court of Appeals, 329 Phil. 987, 1007 [1996].
16

CA-G.R. SP No. 59282, 23 March 2001. Rollo, 35-44.

Entitled An Act Restructuring the Value-Added Tax (VAT) System to Widen its Tax Base and Enhance its Administration, Amending for These Purposes Sections 116 of Title V of the National Internal Revenue Code, as Amended.
6

GSIS v. Court of Appeals, 334 Phil. 163, 175 [1997], citing Ang Ping v. RTC of Manila, Br. 40, G.R. No. L-75860, 17 September 1987, 154 SCRA 77 and Tugade v. Court of Appeals, G.R. L-47772, 31 August 1978, 85 SCRA 226.

Now Sections 244 and 245 of R.A. No. 8424, otherwise known as the Tax Reform Act of 1997.
7

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 162015 March 6, 2006

Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108358, 20 January 1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles v. Home Development Mutual Fund, G.R. No. 131082, 19 June 2000; 333 SCRA 777, 786.
8

Formerly Section 209 of the NIRC of 1977, as amended by P.D. No. 1739 of 17 September 1980, which read: Section 209. Percentage tax on dealers in securities, lending investors. Dealers in securities and lending investors shall pay a tax equivalent to five per centum on their gross income.
9

THE CITY GOVERNMENT OF QUEZON CITY, AND THE CITY TREASURER OF QUEZON CITY, DR. VICTOR B. ENRIGA, Petitioners, vs. BAYAN TELECOMMUNICATIONS, INC., Respondent. DECISION GARCIA,J.:

Vera v. Fernandez, L-31364, 30 March 1979; 89 SCRA 199, 203. Republic v. Estenzo, L-35376, 11 September 1980; 99 SCRA 651, 656. Before the Court, on pure questions of law, is this petition for review on certiorari under Rule 45 of the Rules of Court to nullify and set aside the following issuances of

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the Regional Trial Court (RTC) of Quezon City, Branch 227, in its Civil Case No. Q02-47292, to wit: 1) Decision dated June 6, 2003, declaring respondent Bayan Telecommunications, Inc. exempt from real estate taxation on its real properties located in Quezon City; and 2) Order dated December 30, 2003, denying petitioners motion for reconsideration. The facts: Respondent Bayan Telecommunications, Inc. (Bayantel) is a legislative franchise 4 holder under Republic Act (Rep. Act) No. 3259 to establish and operate radio stations for domestic telecommunications, radiophone, broadcasting and telecasting. Of relevance to this controversy is the tax provision of Rep. Act No. 3259, embodied in Section 14 thereof, which reads: SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real estate, buildings and personal property, exclusive of the franchise, as other persons or corporations are now or hereafter may be required by law to pay. (b) The grantee shall further pay to the Treasurer of the Philippines each year, within ten days after the audit and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross receipts from the business transacted under this franchise by the said grantee (Emphasis supplied). On January 1, 1992, Rep. Act No. 7160, otherwise known as the "Local Government Code of 1991" (LGC), took effect. Section 232 of the Code grants local government units within the Metro Manila Area the power to levy tax on real properties, thus: SEC. 232. Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery and other improvements not hereinafter specifically exempted. Complementing the aforequoted provision is the second paragraph of Section 234 of the same Code which withdrew any exemption from realty tax heretofore granted to or enjoyed by all persons, natural or juridical, to wit: SEC. 234 - Exemptions from Real Property Tax. The following are exempted from payment of the real property tax:
3 2 1

xxx xxx xxx Except as provided herein, any exemption from payment of real property tax previously granted to, or enjoyed by, all persons, whether natural or juridical, including government-owned-or-controlled corporations is hereby withdrawn upon effectivity of this Code (Emphasis supplied). On July 20, 1992, barely few months after the LGC took effect, Congress enacted Rep. Act No. 7633, amending Bayantels original franchise. The amendatory law (Rep. Act No. 7633) contained the following tax provision: SEC. 11. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof. Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code . xxx. [Emphasis supplied] It is undisputed that within the territorial boundary of Quezon City, Bayantel owned several real properties on which it maintained various telecommunications facilities. These real properties, as hereunder described, are covered by the following tax declarations: (a) Tax Declaration Nos. D-096-04071, D-096-04074, D-096-04072 and D096-04073 pertaining to Bayantels Head Office and Operations Center in Roosevelt St., San Francisco del Monte, Quezon City allegedly the nerve center of petitioners telecommunications franchise operations, said Operation Center housing mainly petitioners Network Operations Group and switching, transmission and related equipment; (b) Tax Declaration Nos. D-124-01013, D-124-00939, D-124-00920 and D124-00941 covering Bayantels land, building and equipment in Maginhawa St., Barangay East Teachers Village, Quezon City which houses telecommunications facilities; and (c) Tax Declaration Nos. D-011-10809, D-011-10810, D-011-10811, and D011-11540 referring to Bayantels Exchange Center located in Proj. 8, Brgy. Bahay Toro, Tandang Sora, Quezon City which houses the Network

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Operations Group and cover switching, transmission and other related equipment. In 1993, the government of Quezon City, pursuant to the taxing power vested on local government units by Section 5, Article X of the 1987 Constitution, infra, in relation to Section 232 of the LGC, supra, enacted City Ordinance No. SP-91, S-93, otherwise 5 known as the Quezon City Revenue Code (QCRC), imposing, under Section 5 thereof, a real property tax on all real properties in Quezon City, and, reiterating in its Section 6, the withdrawal of exemption from real property tax under Section 234 of the LGC, supra. Furthermore, much like the LGC, the QCRC, under its Section 230, withdrew tax exemption privileges in general, as follows: SEC. 230. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government owned or controlled corporations, except local water districts, cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and educational institutions, business enterprises certified by the Board of Investments (BOI) as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively, are hereby withdrawn effective upon approval of this Code (Emphasis supplied). Conformably with the Citys Revenue Code, new tax declarations for Bayantels real properties in Quezon City were issued by the City Assessor and were received by Bayantel on August 13, 1998, except one (Tax Declaration No. 124-01013) which was received on July 14, 1999. Meanwhile, on March 16, 1995, Rep. Act No. 7925, otherwise known as the "Public Telecommunications Policy Act of the Philippines," envisaged to level the playing field among telecommunications companies, took effect. Section 23 of the Act provides: SEC. 23. Equality of Treatment in the Telecommunications Industry. Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the exclusion of its real properties in the city from the roll of taxable real properties. With its request having been denied, Bayantel interposed an appeal with the Local Board of Assessment Appeals (LBAA). And, evidently on its firm belief of its exempt status,
6

Bayantel did not pay the real property taxes assessed against it by the Quezon City government. On account thereof, the Quezon City Treasurer sent out notices of delinquency for the total amount ofP43,878,208.18, followed by the issuance of several warrants of levy against Bayantels properties preparatory to their sale at a public auction set on July 30, 2002. Threatened with the imminent loss of its properties, Bayantel immediately withdrew its appeal with the LBAA and instead filed with the RTC of Quezon City a petition for prohibition with an urgent application for a temporary restraining order (TRO) and/or writ of preliminary injunction, thereat docketed as Civil Case No. Q-02-47292, which was raffled to Branch 227 of the court. On July 29, 2002, or in the eve of the public auction scheduled the following day, the lower court issued a TRO, followed, after due hearing, by a writ of preliminary injunction via its order of August 20, 2002. And, having heard the parties on the merits, the same court came out with its challenged Decision of June 6, 2003, the dispositive portion of which reads: WHEREFORE, premises considered, pursuant to the enabling franchise under Section 11 of Republic Act No. 7633, the real estate properties and buildings of petitioner [now, respondent Bayantel] which have been admitted to be used in the operation of petitioners franchise described in the following tax declarations are hereby DECLARED exempt from real estate taxation: (1) Tax Declaration No. D-096-04071 (2) Tax Declaration No. D-096-04074 (3) Tax Declaration No. D-124-01013 (4) Tax Declaration No. D-011-10810 (5) Tax Declaration No. D-011-10811 (6) Tax Declaration No. D-011-10809 (7) Tax Declaration No. D-124-00941

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(8) Tax Declaration No. D-124-00940 (9) Tax Declaration No. D-124-00939 (10) Tax Declaration No. D-096-04072 (11) Tax Declaration No. D-096-04073 (12) Tax Declaration No. D-011-11540 The preliminary prohibitory injunction issued in the August 20, 2002 Order of this Court is hereby made permanent. Since this is a resolution of a purely legal issue, there is no pronouncement as to costs. SO ORDERED. Their motion for reconsideration having been denied by the court in its Order dated December 30, 2003, petitioners elevated the case directly to this Court on pure questions of law, ascribing to the lower court the following errors: I. [I]n declaring the real properties of respondent exempt from real property taxes notwithstanding the fact that the tax exemption granted to Bayantel in its original franchise had been withdrawn by the [LGC] and that the said exemption was not restored by the enactment of RA 7633. II. [In] declaring the real properties of respondent exempt from real property taxes notwithstanding the enactment of the [QCRC] which withdrew the tax exemption which may have been granted by RA 7633. III. [In] declaring the real properties of respondent exempt from real property taxes notwithstanding the vague and ambiguous grant of tax exemption provided under Section 11 of RA 7633. IV. [In] declaring the real properties of respondent exempt from real property taxes notwithstanding the fact that [it] had failed to exhaust administrative remedies in its claim for real property tax exemption. (Words in bracket added.) As we see it, the errors assigned may ultimately be reduced to two (2) basic issues, namely:

1. Whether or not Bayantels real properties in Quezon City are exempt from real property taxes under its legislative franchise; and 2. Whether or not Bayantel is required to exhaust administrative remedies before seeking judicial relief with the trial court. We shall first address the second issue, the same being procedural in nature. Petitioners argue that Bayantel had failed to avail itself of the administrative remedies provided for under the LGC, adding that the trial court erred in giving due course to Bayantels petition for prohibition. To petitioners, the appeal mechanics under the LGC constitute Bayantels plain and speedy remedy in this case. The Court does not agree. Petitions for prohibition are governed by the following provision of Rule 65 of the Rules of Court: SEC. 2. Petition for prohibition. When the proceedings of any tribunal, are without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal or any other plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered commanding the respondent to desist from further proceedings in the action or matter specified therein, or otherwise, granting such incidental reliefs as law and justice may require. With the reality that Bayantels real properties were already levied upon o n account of its nonpayment of real estate taxes thereon, the Court agrees with Bayantel that an appeal to the LBAA is not a speedy and adequate remedy within the context of the aforequoted Section 2 of Rule 65. This is not to mention of the auction sale of said properties already scheduled on July 30, 2002. Moreover, one of the recognized exceptions to the exhaustion- of-administrative remedies rule is when, as here, only legal issues are to be resolved. In fact, the Court, cognizant of the nature of the questions presently involved, gave due course to 7 the instant petition. As the Court has said in Ty vs. Trampe: xxx. Although as a rule, administrative remedies must first be exhausted before resort to judicial action can prosper, there is a well-settled exception in cases where the controversy does not involve questions of fact but only of law. xxx.

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Lest it be overlooked, an appeal to the LBAA, to be properly considered, required prior payment under protest of the amount of P43,878,208.18, a figure which, in the light of the then prevailing Asian financial crisis, may have been difficult to raise up. Given this reality, an appeal to the LBAA may not be considered as a plain, speedy and adequate remedy. It is thus understandable why Bayantel opted to withdraw its earlier appeal with the LBAA and, instead, filed its petition for prohibition with urgent application for injunctive relief in Civil Case No. Q-02-47292. The remedy availed of by Bayantel under Section 2, Rule 65 of the Rules of Court must be upheld. This brings the Court to the more weighty question of whether or not Bayantels real properties in Quezon City are, under its franchise, exempt from real property tax. The lower court resolved the issue in the affirmative, basically owing to the phrase "exclusive of this franchise" found in Section 11 of Bayantels amended franchise, Rep. Act No. 7633. To petitioners, however, the language of Section 11 of Rep. Act No. 7633 is neither clear nor unequivocal. The elaborate and extensive discussion devoted by the trial court on the meaning and import of said phrase, they add, suggests as much. It is petitioners thesis that Bayantel was in no time given any express exemption from the payment of real property tax under its amendatory franchise. There seems to be no issue as to Bayantels exemption from real estate taxes by virtue of the term "exclusive of the franchise" qualifying the phrase "same taxes on its real estate, buildings and personal property," found in Section 14, supra, of its franchise, Rep. Act No. 3259, as originally granted. The legislative intent expressed in the phrase "exclusive of this franchise" cannot be construed other than distinguishing between two (2) sets of properties, be they real or personal, owned by the franchisee, namely, (a) those actually, directly and exclusively used in its radio or telecommunications business, and (b) those properties which are not so used. It is worthy to note that the properties subject of the present controversy are only those which are admittedly falling under the first category. To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or delegate to local governments of Congress inherent power to tax the franchisees properties belonging to the second group of properties indicated above, that is, all properties which, "exclusive of this franchise," are not actually and directly used in the pursuit of its franchise. As may be recalled, the taxing power of local governments under both the 1935 and the 1973 Constitutions solely depended upon an enabling law. Absent such enabling law, local government units were without authority to impose and collect taxes on real properties within their respective territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be validly viewed as an implied delegation of power to tax, the delegation under that provision, as couched, is limited to impositions over properties of the franchisee which are not actually, directly

and exclusively used in the pursuit of its franchise. Necessarily, other properties of Bayantel directly used in the pursuit of its business are beyond the pale of the delegated taxing power of local governments. In a very real sense, therefore, real properties of Bayantel, save those exclusive of its franchise, are subject to realty taxes. Ultimately, therefore, the inevitable result was that all realties which are actually, directly and exclusively used in the operation of its franchise are "exempted" from any property tax. Bayantels franchise being national in character, the "exemption" thus granted under Section 14 of Rep. Act No. 3259 applies to all its real or personal properties found anywhere within the Philippine archipelago. However, with the LGCs taking effect on January 1, 1992, Bayantels "exemption" from real estate taxes for properties of whatever kind located within the Metro Manila area was, by force of Section 234 of the Code, supra, expressly withdrawn. But, not long thereafter, however, or on July 20, 1992, Congress passed Rep. Act No. 7633 amending Bayantels original franchise. Worthy of note is that Section 11 of Rep. Act No. 7633 is a virtual reenacment of the tax provision, i.e., Section 14, supra, of Bayantels original franchise under Rep. Act No. 3259. Stated otherwise, Section 14 of Rep. Act No. 3259 which was deemed impliedly repealed by Section 234 of the LGC was expressly revived under Section 14 of Rep. Act No. 7633. In concrete terms, the realty tax exemption heretofore enjoyed by Bayantel under its original franchise, but subsequently withdrawn by force of Section 234 of the LGC, has been restored by Section 14 of Rep. Act No. 7633. The Court has taken stock of the fact that by virtue of Section 5, Article X of the 1987 8 Constitution, local governments are empowered to levy taxes. And pursuant to this 9 constitutional empowerment, juxtaposed with Section 232 of the LGC, the Quezon City government enacted in 1993 its local Revenue Code, imposing real property tax on all real properties found within its territorial jurisdiction. And as earlier stated, the Citys Revenue Code, just like the LGC, expressly withdrew, under Section 230 thereof, supra, all tax exemption privileges in general. This thus raises the question of whether or not the Citys Revenue Code pursuant to which the city treasurer of Quezon City levied real property taxes against Bayantels real properties located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended. Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its franchise."

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Bayantels posture is well-taken. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units 10 to tax is still limited. As we explained in Mactan Cebu International Airport Authority: The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. (at p. 680; Emphasis supplied.) Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, .the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress." This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus: What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be "consistent with the basic policy of local autonomy." The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction 11 of the local unit to pass. (Emphasis supplied). In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local governments delegated power to tax under the aegis of the 1987 Constitution. Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real properties within the citys territory and removed exemptions theretof ore

"previously granted to, or presently enjoyed by all persons, whether natural or juridical 12 .," there can really be no dispute that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly provides that "a province or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted." Under this law, the Legislature highlighted its power to thereafter exempt certain realties from the taxing power of local government units. An interpretation denying Congress such power to exempt would reduce the phrase "not hereinafter specifically exempted" as a pure jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable. For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of 13 Davao, this Court has upheld the power of Congress to grant exemptions over the power of local government units to impose taxes. There, the Court wrote: Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. (Emphasis supplied.) As we see it, then, the issue in this case no longer dwells on whether Congress has the power to exempt Bayantels properties from realty taxes by its enactment of Rep. Act No. 7633 which amended Bayantels original franchise. The more decisive question turns on whether Congress actually did exempt Bayantels properties at all by virtue of Section 11 of Rep. Act No. 7633. Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly aware that the LGC has already withdrawn Bayantels former exemption from realty taxes, Congress opted to pass Rep. Act No. 7633 using, under Section 11 thereof, exactly the same defining phrase "exclusive of this franchise" which was the basis for Bayantels exemption from realty taxes prior to the LGC. In plain language, Section 11 of Rep. Act No. 7633 states that "the grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay." The Court views this subsequent piece of legislation as an express and real intention on the part of Congress to once again remove from the LGCs delegated taxing power, all of the franchisees (Bayantels) properties that are actually, directly and exclusively used in the pursuit of its franchise. WHEREFORE, the petition is DENIED.

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No pronouncement as to costs. SO ORDERED. CANCIO C. GARCIA Associate Justice WE CONCUR:

In its decision of December 19, 1964, it declared the above ordinance as amended, valid and subsisting, and held defendant-appellant liable for the fees therein prescribed as a real estate dealer. Hence, this appeal. Assume the validity of such ordinance, and there would be no question about the liability of defendant-appellant for the above license fee, it being shown in the partial stipulation of facts, that he was "engaged in the rental of his property in Baguio" deriving income therefrom during the period covered by the first quarter of 1958 to the fourth quarter of 1962. The source of authority for the challenged ordinance is supplied by Republic Act No. 2 329, amending the city charter of Baguio empowering it to fix the license fee and regulate "businesses, trades and occupations as may be established or practiced in the City."

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-24756 October 31, 1968

Unless it can be shown then that such a grant of authority is not broad enough to justify the enactment of the ordinance now assailed, the decision appealed from must be affirmed. The task confronting defendant-appellant, therefore, was far from easy. Why he failed is understandable, considering that even a cursory reading of the above amendment readily discloses that the enactment of the ordinance in question finds support in the power thus conferred. Nor is the question raised by him as to the validity thereof novel in character. 3 In Medina v. City of Baguio, the effect of the amendatory section insofar as it would expand the previous power vested by the city charter was clarified in these terms: "Appellants apparently have in mind section 2553, paragraph (c) of the Revised Administrative Code, which empowers the City of Baguio merely to impose a license fee for the purpose of rating the business that may be established in the city. The power as thus conferred is indeed limited, as it does not include the power to levy a tax. But on July 15, 1948, Republic Act No. 329 was enacted amending the charter of said city and adding to its power to license the power to tax and to regulate. And it is precisely having in view this amendment that Ordinance No. 99 was approved in order to increase the revenues of the city. In our opinion, the amendment above adverted to empowers the city council not only to impose a license fee but also to levy a tax for purposes of revenue, more so when in amending section 2553 (b), the phrase 'as provided by law' has been removed by section 2 of Republic Act No. 329. The city council of Baguio, therefore, has now the power to tax, to license and to regulate provided that the subjects affected be one of those included in the charter. In this sense, the ordinance under consideration cannot be considered ultra vires whether its purpose be to levy a tax or impose a license fee. The terminology used is of no consequence." It would be an undue and unwarranted emasculation of the above power thus granted if defendant-appellant were to be sustained in his contention that no such statutory authority for the enactment of the challenged ordinance could be discerned from the language used in the amendatory act. That is about all that needs to be said in

CITY OF BAGUIO, plaintiff-appellee, vs. FORTUNATO DE LEON, defendant-appellant. The City Attorney for plaintiff-appellee. Fortunato de Leon for and in his own behalf as defendant-appellant. FERNANDO, J.: In this appeal, a lower court decision upholding the validity of an ordinance of the City of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the City of Baguio is assailed by defendant-appellant Fortunato de Leon. He was held liable as a real estate dealer with a property therein worth more than P10,000, but not in excess of P50,000, and therefore obligated to pay under such ordinance the P50 annual fee. That is the principal question. In addition, there has been a firm and unyielding insistence by defendant-appellant of the lack of jurisdiction of the City Court of Baguio, where the suit originated, a complaint having been filed against him by the City Attorney of Baguio for his failure to pay the amount of P300 as license fee covering the period from the first quarter of 1958 to the fourth quarter of 1962, allegedly, inspite of repeated demands. Nor was defendant-appellant agreeable to such a suit being instituted by the City Treasurer without the consent of the Mayor, which for him was indispensable. The lower court was of a different mind.
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upholding the lower court, considering that the City of Baguio was not devoid of authority in enacting this particular ordinance. As mentioned at the outset, however, defendant-appellant likewise alleged procedural missteps and asserted that the challenged ordinance suffered from certain constitutional infirmities. To such points raised by him, we shall now turn. 1. Defendant-appellant makes much of the alleged lack of jurisdiction of the City Court of Baguio in the suit for the collection of the real estate dealer's fee from him in the amount of P300. He contended before the lower court, and it is his contention now, that while the amount of P300 sought was within the jurisdiction of the City Court of Baguio where this action originated, since the principal issue was the legality and constitutionality of the challenged ordinance, it is not such City Court but the Court of First Instance that has original jurisdiction. There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction. Only recently, on September 7, 1968 to be exact, we rejected a contention similar in 4 character in Nemenzo v. Sabillano. The plaintiff in that case filed a claim for the payment of his salary before the Justice of the Peace Court of Pagadian, Zamboanga del Sur. The question of jurisdiction was raised; the defendant Mayor asserted that what was in issue was the enforcement of the decision of the Commission of Civil Service; the Justice of the Peace Court was thus without jurisdiction to try the case. The above plea was curtly dismissed by Us, as what was involved was "an ordinary money claim" and therefore "within the original jurisdiction of the Justice of the Peace Court where it was filed, considering the amount involved." Such is likewise the situation here. Moreover, in City of Manila v. Bugsuk Lumber Co., a suit to collect from a defendant this license fee corresponding to the years 1951 and 1952 was filed with the Municipal Court of Manila, in view of the amount involved. The thought that the municipal court lacked jurisdiction apparently was not even in the minds of the parties and did not receive any consideration by this Court. Evidently, the fear is entertained by defendant-appellant that whenever a constitutional question is raised, it is the Court of First Instance that should have original jurisdiction on the matter. It does not admit of doubt, however, that what confers jurisdiction is the amount set forth in the complaint. Here, the sum sought to be recovered was clearly within the jurisdiction of the City Court of Baguio. Nor could it be plausibly maintained that the validity of such ordinance being open to question as a defense against its enforcement from one adversely affected, the matter should be elevated to the Court of First Instance. For the City Court could rely 6 on the presumption of the validity of such ordinance, and the mere fact, however, that in the answer to such a complaint a constitutional question was raised did not suffice to oust the City Court of its jurisdiction. The suit remains one for collection, the
5

lack of validity being only a defense to such an attempt at recovery. Since the City Court is possessed of judicial power and it is likewise axiomatic that the judicial power embraces the ascertainment of facts and the application of the law, the Constitution as the highest law superseding any statute or ordinance in conflict therewith, it cannot be said that a City Court is bereft of competence to proceed on the matter. In the exercise of such delicate power, however, the admonition of Cooley on inferior tribunals is well worth remembering. 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 7 responsibility." While it remains undoubted that such a power to pass on the validity of an ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be exercised with due care and circumspection, considering not only the presumption of validity but also the relatively modest rank of a city court in the judicial hierarchy. 2. To repeat the challenged ordinance cannot be considered ultra vires as there is more than ample statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because of the allegation that it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of uniformity. We do not view the matter thus. As to why double taxation is not violative of due process, Justice Holmes made clear in this language: "The objection to the taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause] no more forbids double taxation than it does doubling the amount of a tax, short of confiscation or 8 proceedings unconstitutional on other grounds." With that decision rendered at a time when American sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To some, it delivered the coup de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as with us, its ghost as noted by an eminent 9 critic, still stalks the juridical state. In a 1947 decision, however, we quoted with 10 approval this excerpt from a leading American decision: "Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though double taxation results." At any rate, it has been expressly affirmed by us that such an "argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city ..., it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political 11 subdivisions thereof."

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The above would clearly indicate how lacking in merit is this argument based on double taxation. Now, as to the claim that there was a violation of the rule of uniformity established by the constitution. According to the challenged ordinance, a real estate dealer who leases property worth P50,000 or above must pay an annual fee of P100. If the property is worth P10,000 but not over P50,000, then he pays P50 and P24 if the value is less than P10,000. On its face, therefore, the above ordinance cannot be assailed as violative of the constitutional requirement of uniformity. In Philippine Trust 12 Company v. Yatco, Justice Laurel, speaking for the Court, stated: "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." There was no occasion in that case to consider the possible effect on such a constitutional requirement where there is a classification. The opportunity came 13 in Eastern Theatrical Co. v. Alfonso. Thus: "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; ..." About two years later, Justice Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. De la 14 Fuente incorporated the above excerpt in his opinion and continued: "Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution." To satisfy this requirement then, all that is needed as held in another case decided 15 two years later, is that the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation." This Court is on record as 16 accepting the view in a leading American case that "inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional 17 limitation." It is thus apparent from the above that in much the same way that the plea of double taxation is unavailing, the allegation that there was a violation of the principle of uniformity is inherently lacking in persuasiveness. There is no need to pass upon the other allegations to assail the validity of the above ordinance, it being maintained that the license fees therein imposed "is excessive, unreasonable and oppressive" and that there is a failure to observe the mandate of equal protection. A reading of the ordinance will readily disclose their inherent lack of plausibility. 3. That would dispose of all the errors assigned, except the last two, which would predicate a grievance on the complaint having been started by the City Treasurer rather than the City Mayor of Baguio. These alleged errors, as was the case with the others assigned, lack merit.

In much the same way that an act of a department head of the national government, performed within the limits of his authority, is presumptively the act of the President 18 unless reprobated or disapproved, similarly the act of the City Treasurer, whose position is roughly analogous, may be assumed to carry the seal of approval of the City Mayor unless repudiated or set aside. This should be the case considering that such city official is called upon to see to it that revenues due the City are collected. When administrative steps are futile and unavailing, given the stubbornness and obduracy of a taxpayer, convinced in good faith that no tax was due, judicial remedy may be resorted to by him. It would be a reflection on the state of the law if such fidelity to duty would be met by condemnation rather than commendation. So, much for the analytical approach. The conclusion thus reached has a reinforcement that comes to it from the functional and pragmatic test. If a city treasurer has to await the nod from the city mayor before a municipal ordinance is enforced, then opportunity exists for favoritism and undue discrimination to come into play. Whatever valid reason may exist as to why one taxpayer is to be accorded a treatment denied another, the suspicion is unavoidable that such a manifestation of official favor could have been induced by unnamed but not unknown consideration. It would not be going too far to assert that even defendant-appellant would find no satisfaction in such a sad state of affairs. The more desirable legal doctrine therefore, on the assumption that a choice exists, is one that would do away with such temptation on the part of both taxpayer and public official alike. WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed. Costs against defendant-appellant. Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Capistrano, JJ., concur. Zaldivar, J., is on leave. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner, vs. THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON.

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COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents. DECISION CORONA, J.: In this original petition for certiorari and mandamus, petitioner Chamber of Real Estate and Builders Associations, Inc. is questioning the constitutionality of Section 2 27 (E) of Republic Act (RA) 8424 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving 3 creditable withholding taxes. Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents. Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets. Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain. Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets. Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.
1

The issues to be resolved are as follows: (1) whether or not this Court should take cognizance of the present case; (2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and (3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional. Overview of the Assailed Provisions Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the 4 normal corporate income tax imposed under Section 27(A). If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424 provides: Section 27 (E). [MCIT] on Domestic Corporations. (1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. (3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations

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that shall define the terms and conditions under which he may suspend the imposition of the [MCIT] in a meritorious case. (4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term gross income shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense. On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 95 98 implementing Section 27(E). The pertinent portions thereof read: Sec. 2.27(E) [MCIT] on Domestic Corporations. (1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter. xxx xxx xxx

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

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424 6 involving the withholding of taxes. Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT: Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon: xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule

Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations. With a selling price of five hundred thousand pesos (P500,000.00) or less. With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos

Exempt

1.5%

3.0%

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(P2,000,000.00). With selling price of more than two million pesos (P2,000,000.00) 5.0%

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

3.0% 5.0%

xxx

xxx

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

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall be used. Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid to the seller. However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment. This provision was amended by RR 6-2001 on July 31, 2001: Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon: xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply: (i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment. (ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first installment. In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the original) Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances have been 7 reported and the taxes thereof have been duly paid: Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and building/improvement thereon arising from sales, barters, or exchanges Exempt subject to the creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully 1.5% paid xxxx.

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following schedule: Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these regulations. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business. With a selling price of Five Hundred Thousand Pesos (P500,000.00)

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On February 11, 2003, RR No. 7-2003 was promulgated, providing for the guidelines in determining whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions thereof state: Section 4. Applicable taxes on sale, exchange or other disposition of real property. Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets; a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines; xxx xxx xxx

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of constitutionality must have been raised at the earliest opportunity and (5) 9 the issue of constitutionality must be the very lis mota of the case. Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because [petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise. Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues. Otherwise, adjudication would be no different from the 10 giving of advisory opinion that does not really settle legal issues. An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial resolution as distinguished from 11 a hypothetical or abstract difference or dispute. On the other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse 12 effect on the individual challenging it. Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-Savers 13 Multi-Purpose Association, Incorporated (DESAMA) v. Gozun : By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is 14 enough to awaken judicial duty. If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.

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

c. In the case of domestic corporations. xxx xxx xxx

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

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Respondents next argue that petitioner has no legal standing to sue: Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer from the enforcement 15 of [the assailed provisions]. Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the governmental 16 17 act being challenged. In Holy Spirit Homeowners Association, Inc. v. Defensor, we held that the association had legal standing because its members stood to be injured by the enforcement of the assailed provisions: Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that they have been disqualified and 18 eliminated from the selection process. In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when 19 paramount public interest is involved. The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of the issues raised and their overreaching significance to 20 society make it proper for us to take cognizance of this petition. Concept and Rationale of the MCIT The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came about as a result of the perceived inadequacy of 21 the self-assessment system in capturing the true income of corporations. It was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector. The congressional deliberations on this are illuminating: Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax

Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience. This will go a long way in ensuring that corpo rations 22 will pay their just share in supporting our public life and our economic advancement. Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to the public expenses. Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over23 deduction of expenses otherwise called tax shelters. Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that corporation has no business to be in business. It is dead. Why continue if you are losing year in and year 24 out? So, we have this provision to avoid this type of tax shelters, Your Honor. The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered. To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law: First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation 25 commenced its operations. This grace period allows a new business to stabilize first 26 and make its ventures viable before it is subjected to the MCIT.

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Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three 27 immediately succeeding years. Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and 28 legitimate business reverses. Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the committee hearings: [Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of gross receipts have this same form of safeguards. In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different countries have different basis for that minimum income tax. The other thing youll notice is the preponderance of Latin American countries that 29 employed this method. Okay, those are additional Latin American countries. At present, the United States of America, Mexico, Argentina, Tunisia, Panama and 30 Hungary have their own versions of the MCIT. MCIT Is Not Violative of Due Process Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into 31 account. Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross income, unlike net income, is 32 not "realized gain." We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote 33 public interest and the common good. Taxation is an inherent attribute of sovereignty. It is a power that is purely 35 legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) 36 and situs (place) of taxation. It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed. As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the 37 tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality. The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison, Jr. v. 38 Ancheta, et al., we held that the due process clause may properly be invoked to 39 invalidate, in appropriate cases, a revenue measure when it amounts to a 40 confiscation of property. But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due 41 process clause) on the mere allegation of arbitrariness by the taxpayer. There must 42 be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such 43 persuasive character. Petitioner is correct in saying that income is distinct from capital. Income means all the wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of 45 wealth during a definite period of time. Income is gain derived and severed from 46 capital. For income to be taxable, the following requisites must exist: (1) there must be gain; (2) the gain must be realized or received and
44 34

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

47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on gross income which is arrived at by deducting the capital 48 spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross income. Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax 49 rate. Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with 50 interstate commerce or violates the requirement as to uniformity of taxation. The United States has a similar alternative minimum tax (AMT) system which is 51 generally characterized by a lower tax rate but a broader tax base. Since our income tax laws are of American origin, interpretations by American courts of our 52 parallel tax laws have persuasive effect on the interpretation of these laws. Although our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are comparable. On the question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit stated 53 in Okin v. Commissioner: In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of taxpayers with large incomes who were yet paying no taxes. xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and therefore is 54 constitutional. The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes was a legitimate 55 governmental end to which the AMT bore a reasonable relation. American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses 56 57 to tax. This is because deductions are a matter of legislative grace. Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable. Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property. In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law as 58 unconstitutional simply because of its yokes. Taxation is necessarily burdensome 59 because, by its nature, it adversely affects property rights. The party alleging the laws unconstitutionality has the burden to demonstrate the supposed violations in 60 understandable terms. RR 9-98 Merely Clarifies Section 27(E) of RA 8424 Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable income: Sec. 2.27(E) [MCIT] on Domestic Corporations. (1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis supplied) RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E). This

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means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable income. We now proceed to the issues involving the CWT. The withholding tax system is a procedure through which taxes (including income 61 taxes) are collected. Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional. Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion 62 amounting to lack of jurisdiction" and "patently in contravention of law" because they ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable 63 period. Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on income from the sale of capital and ordinary assets. Petitioners arguments have no merit. Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as Ordinary Assets The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the rules and

regulations must not override, but must remain consistent and in harmony with, the 64 law they seek to apply and implement. It is well-settled that an administrative 65 agency cannot amend an act of Congress. We have long recognized that the method of withholding tax at source is a procedure 66 of collecting income tax which is sanctioned by our tax laws. The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the governments cash 67 flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes 68 through more complicated means and remedies. Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides: SEC. 57. Withholding of Tax at Source. xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year. Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate Business Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax from net income to GSP or FMV of the property sold. Petitioner is wrong.

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The taxes withheld are in the nature of advance tax payments by a taxpayer in order 69 to extinguish its possible tax obligation. They are installments on the annual tax 70 which may be due at the end of the taxable year. Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the 71 taxable year. Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income: Section 4. Applicable taxes on sale, exchange or other disposition of real property . Gains/Income derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets; xxx xxx xxx

the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied) Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income. The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his duties as a withholding agent. No Blurring of Distinctions Between Ordinary Assets and Capital Assets RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at 72 source. The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines; xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income. xxx c. In the case of domestic corporations. The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, tothe ordinary income tax under Sec. 27(A) of the Code. In lieu of xxx xxx

FWT

CWT

a) The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income.

a) Taxes withheld on certain income pa are intended to equal or at least approx tax due of the payee on said income.

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b)The liability for payment of the tax rests primarily on the payor as a withholding agent.

c) The payee is not required to file an income tax 73 return for the particular income.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may promulgate, upon the recommendation of b) Payee of income is required to report the the [CIR], requiring the filing of income tax return by certain income payees, income and/or pay the difference between the the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), tax withheld and the tax due on the income. The 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), payee also has the right to ask for a refund if the 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), tax withheld is more than the tax due. 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and c) The income recipient is still required to file ansubject to the same conditions as provided in Section 58 of this Code.

income tax return, as prescribed in Sec. 51 and 74 (B) Withholding of Creditable Tax at Source. The [Secretary] may, upon Sec. 52 of the NIRC, as amended. the recommendation of the [CIR], require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate As previously stated, FWT is imposed on the sale of capital assets. On the other of not less than one percent (1%) but not more than thirty-two percent (32%) hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial thereof, which shall be credited against the income tax liability of the differences between FWT and CWT disprove petitioners contention that ordinary taxpayer for the taxable year. (Emphasis supplied) assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424. This line of reasoning is non sequitur. Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the manner and time of filing 75 of the return, payment and assessment of income tax involving ordinary assets. The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax collection. No Rule that Only Passive Incomes Can Be Subject to CWT Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to passive income: SEC. 57. Withholding of Tax at Source. Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income by stating what it is not: if the income is generated in the active pursuit and performance of the corporations 76 primary purposes, the same is not passive income It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn dividends or interest income received from savings. On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so. Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

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To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does not require any particular procedure to be followed by an administrative agency, the agency may 77 adopt any reasonable method to carry out its functions. Similarly, considering that the law uses the general term "income," the Secretary and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the 78 courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields. No Deprivation of Property Without Due Process Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or earned. Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power to 79 80 tax. The CWT does not impose new taxes nor does it increase taxes. It relates entirely to the method and time of payment. Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may even resort to litigation before they 81 are granted a refund. This argument is misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of collecting the tax.1avvphi1 Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages, materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory 82 fees from at least 20 government agencies.

Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints are essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on 83 installment are taxed on a per-installment basis. Petitioners desire to utilize for its operational and capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the government. No Violation of Equal Protection Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate 84 business are house and lot units. Again, we disagree. The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other 85 persons or other classes in the same place and in like circumstances." Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing 86 conditions only and (4) apply equally to all members of the same class. The taxing power has the authority to make reasonable classifications for purposes of 87 taxation. Inequalities which result from a singling out of one particular class for 88 taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its

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frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system. Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital 89 goods yet these are not similarly subjected to the CWT. As already discussed, the 90 Secretary may adopt any reasonable method to carry out its functions. Under Section 57(B), it may choose what to subject to CWT. A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for their transactions 91 with said 5,000 corporations. Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424 Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it: Sec. 58. Returns and Payment of Taxes Withheld at Source. (E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied) Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing 92 in the world to understand is the income tax." When a party questions the constitutionality of an income tax measure, it has to contend not only with Einsteins observation but also with the vast and well-established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is unconstitutional. WHEREFORE, the petition is hereby DISMISSED. Costs against petitioner. SO ORDERED. RENATO C. CORONA Associate Justice WE CONCUR: 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.:

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This appeal puts in issue the constitutionality of Republic Act 1635, as amended by 2 Republic Act 2631, 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

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

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

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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 3 after the filing of the action but before the termination thereof. 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.

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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 4 subjects of taxation and to grant exemptions. This power has aptly been described 5 as "of wide range and flexibility." Indeed, it is said that in the field of taxation, more than in other areas, the legislature possesses the greatest freedom in 6 classification. 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 7 distribution of the tax burden. 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 8 Co.: 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 9 imposing a tax on a well recognized and defined class." 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 10 identities is lifeless logic." 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

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enterprise. 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 12 construed. 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 13 same genus be eradicated or none at all. 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 14 because there are other instances to which it might have been applied." 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 15 common good. 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 16 regardless of the amount involved. 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:

11

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 17 practice of sometimes substituting count for weight ... 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 18 such need not be appropriated by law. 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 19 given. 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.

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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.

Appeals of Quezon City, which held that certain properties of said petitioners are subject to assessment for purposes of real estate tax. The facts and the issue are set forth in the aforementioned decision of the Court of Tax Appeals, from which we quote: On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to establish and operate the "St. Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or about January 3, 1953, the petitioners sent a letter to the Quezon City Assessor requesting exemption from payment of real estate tax on the lot, building and other improvements comprising the hospital stating that the same was established for charitable and humanitarian purposes and not for commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of the premises in question and after a careful study of the case, the exemption from real property taxes was granted effective the years 1953, 1954 and 1955. Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.) the Quezon City Assessor notified the petitioners that the aforesaid properties were re-classified from exempt to "taxable" and thus assessed for real property taxes effective 1956, enclosing therewith copies of Tax Declarations Nos. 19321 to 19322 covering the said properties. The petitioners appealed the assessment to the Quezon City Board of Assessment Appeals, which, in a decision dated March 31, 1956 and received by the former on May 17, 1956, affirmed the decision of the City Assessor. A motion for reconsideration thereof was denied on March 8, 1957. From this decision, the petitioners instituted the instant appeal.1awphl.nt The building involved in this case is principally used as a hospital. It is mainly a surgical and orthopedic hospital with emphasis on obstetrical cases, the latter constituting 90% of the total number of cases registered therein. The hospital has thirty-two (32) beds, of which twenty (20) are for charity-patients and twelve (12) for pay-patients. From the evidence presented by petitioners, it is made to appear that there are two kinds of charity patients (a) those who come for consultation only ("out-charity patients"); and (b) those who remain in the hospital for treatment ("lying-inpatients"). The out-charity patients are given free consultation and prescription, although sometimes they are furnished with free medicines which are not costly like aspirin, sulfatiazole, etc. The charity lying-inpatients are given free medical service and medicine although the food served to the pay-patients is very much better than that given to the former. Although no condition is imposed by the hospital on the admission of charity

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-15270 September 30, 1961

JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners, vs. THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent. Angel A. Sison for petitioners. Jaime Agloro for respondent.

CONCEPCION, J.: Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a decision of the Court of Tax Appeals affirming that of the Board of Assessment

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lying-in-patients, they however, usually give donations to the hospital. On the other hand, the pay-patients are required to pay for hospital services ranging from the minimum charge of P5.00 to the maximum of P40.00 for each day of stay in the hospital. The income realized from pay-patients is spent for the improvement of the charity wards. The hospital personnel is composed of three nurses, two graduate midwives, a resident physician receiving a salary of P170.00 a month and the petitioner, Dr. Ester Ochangco Herrera, as directress. As such directress, the latter does not receive any salary. Petitioners also operate within the premises of the hospital the "St. Catherine's School of Midwifery" which was granted government recognition by the Secretary of Education on February 1, 1955 (Exhibit "F-3", p. 10, BIR rec.) This school has an enrollment of about two hundred students. The students are charged a matriculation fee of P300.00 for 1- years, plus P50.00 a month for board and lodging, which includes transportation to the St. Mary's Hospital. The students practice in the St. Catherine's Hospital, as well as in the St. Mary's Hospital, which is also owned by the petitioners. A separate set of accounting books is maintained by the school for midwifery distinct from that kept by the hospital. The petitioners alleged that the accounts of the school are not included in Exhibits "A", "A-1", "A-2", "B", "B1", "B-2", "C", "C-1" and "C-2" which relate to the hospital only. However, the petitioners have refused to submit a separate statement of accounts of the school. A brief tabulation indicating the amount of income of the hospital for the years 1954, 1955 and 1956, and its operational expenses, is as follows:

(Exhibits "B", "B-1" and "B-2") 1956 Income Charity Ward Pay Ward Expenses P 5,559.89 16,249.04 P21,809.93 (Exhibits "C", "C-1" and "C-2") Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also own lands and coconut plantations in Quezon Province, and other real estate in the City of Manila consisting of apartments for rent. The petitioner, Jose V. Herrera, is an architect, actively engaged in the practice of his profession, with office at Tuason Building, Escolta, Manila. He was formerly Chairman, Board of Examiners for Architects and Chairman, Board of Architects connected with the United Nations. He was also connected with the Allied Technologists which constructed the Veterans Hospital in Quezon City. The only issue raised, is whether or not the lot, building and other improvements occupied by the St. Catherine Hospital are exempt from the real property tax. The resolution of this question boils down to the corollary issue as to whether or not the said properties are used exclusively for charitable or educational purposes. (Petitioners' brief, pp. 24-29). The Court of Tax Appeals decided the issue in the negative, upon the ground that the St. Catherine's Hospital "has a pay ward for ... pay-patients, who are charged for the use of the private rooms, operating room, laboratory room, delivery room, etc., like other hospitals operated for profit" and that "petitioners and their family occupy a portion of the building for their residence." With respect to petitioners' claim for exemption based upon the operation of the school of midwifery, the Court conceded that "the proposition might be proper if the property used for the school of midwifery were separate and distinct from the hospital." It added, however, that, "in the instant case, the portions of the building used for classrooms of the school of midwifery have not been shown to be exclusively for school purposes"; that said portions "rather ... have a dual use, i.e., for classroom and for hospital use, the latter not being a purpose that renders the property tax exempt;" that part of the building and lot in question "is used as a hospital, part as residence of the petitioners, part as garage, part as dormitory and part as school"; and that "the portion dedicated to educational and charitable purposes can not be identified from those destined to other uses; and the building is itself an indivisible unit of property." Deficit P 341.53

P21,467.40

1954 Income Charity Ward Pay Ward Expenses P 5,280.04 P10,803.26 P16,083.30 (Exhibits "A", "A-1" and "A-2") 1955 Income Charity Ward Pay Ward Expenses P 6,859.32 14,038.92 P20,898.24 Deficit Deficit P1,303.80

P14,779.50

P17,433.30

P3,464.94

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It should be noted, however, that, according to the very statement of facts made in the decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that "the income realized from pay-patients is spent for improvement of the charity wards;" and that "petitioners, Dr. Ester Ochangco Herrera, as directress" of said hospital, "does not receive any salary," although its resident physician gets a monthly salary of P170.00. It is well settled, in this connection, that the admission of pay-patients does not detract from the charitable character of a hospital, if all its funds are devoted "exclusively to the maintenance of the institution" as a "public charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In other words, where rendering charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480). Thus, we have held that the U.S.T. Hospital was not established for profitmaking purposes, although it had 140 paying beds maintained only to partly finance the expenses of the free wards, containing 203 beds for charity patients (U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a corporation organized for "charitable educational and religious purposes" can not be considered as engaged in business merely because its pharmacy department charges paying patients the cost of their medicine, plus 10% thereof, to partly offset the cost of medicines supplied free of charge to charity patients (Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25, 1959), and that the amendment of the original articles of incorporation of the University of Visayas to convert it from a non-stock to a stock corporation and the increase of its assets from P9,000 to P50,000, distributed among the members of the original non-stock corporation in terms of shares of stock, as well as the subsequent move of its board of trustees to double the stock dividends of the corporation, in view of a gain of P200,000.00 in property, besides good-will, which was not carried out, does not justify the inference that the corporation has become one for business and profit, none of its profits having inured to the benefit of any stockholder or individual (Collector of Internal Revenue vs. University of Visayas, L13554, February 28, 1961). Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is "not limited to property actually indispensable" therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are "incidental to and reasonably necessary for" the accomplishment of said purposes, such as, in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns and residents" (84 C.J.S., 621), such as "athletic fields," including "a farm used for the inmates of the institution" (Cooley on Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who come only for consultation. Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200 students, who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which, likewise, belongs to petitioners herein, does not, and cannot, affect the exemption to which St. Catherine's Hospital is entitled under our fundamental law. On the contrary, it furnishes another ground for exemption. Seemingly, the Court of Tax Appeals was impressed by the fact that the size of said enrollment and the matriculation fee charged from the students of midwifery, aside from the amount they paid for board and lodging, including transportation to St. Mary's Hospital, warrants the belief that petitioners derive a substantial profit from the operation of the school aforementioned. Such factor is, however, immaterial to the issue in the case at bar, for "all lands, building and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation," pursuant to the Constitution, regardless of whether or not material profits are derived from the operation of the institutions in question. In other words, Congress may, if it deems fit to do so, impose taxes upon such "profits", but said "lands, buildings and improvements" are beyond its taxing power. Similarly, the garage in the building above referred to which was obviously essential to the operation of the school of midwifery, for the students therein enrolled practiced, not only in St. Catherine's Hospital, but, also, in St. Mary's Hospital, and were entitled to transportation thereto for Mrs. Herrera received no compensation as directress of St. Catherine's Hospital were incidental to the operation of the latter and of said school, and, accordingly, did not affect the charitable character of said hospital and the educational nature of said school. WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment Board of Appeals of Quezon City, are hereby reversed and set aside, and another one entered declaring that the lot, building and improvements constituting the St. Catherine's Hospital are exempt from taxation under the provisions of the Constitution, without special pronouncement as to costs. It is so ordered. Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Paredes and De Leon, JJ., concur.

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Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 173176 August 26, 2008

SANTOS for substantial underdeclaration of income, which constitutes as prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC and punishable under Sections 254 and 255 of the Tax Code. In said letter, BIR Commissioner Parayno summarized the findings of the investigating BIR officers that petitioner, in her Annual Income Tax Return for taxable year 2002 filed with the BIR, declared an income of P8,033,332.70 derived from her talent fees solely from ABS-CBN; initial documents gathered from the BIR offices and those given by petitioners accountant and third parties, however, confirmed that petitioner received in 2002 income in the amount of at least P14,796,234.70, not only from ABS-CBN, but also from other sources, such as movies and product endorsements; the estimated tax liability arising from petitioners underdec laration amounted to P1,718,925.52, including incremental penalties; the non-declaration by petitioner of an amount equivalent to at least 84.18% of the income declared in her return was considered a substantial underdeclaration of income, which 6 constituted prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC, as amended; and petitioners failure to account as part of her income the professional fees she received from sources other than ABS-CBN and her underdeclaration of the income she received from ABS-CBN amounted to manifest 7 8 violations of Sections 254 and 255, as well as Section 248(B) of the NIRC, as amended. After an exchange of affidavits and other pleadings by the parties, Prosecution 9 Attorney Olivia Laroza-Torrevillas issued a Resolution dated 21 October 2005 finding probable cause and recommending the filing of a criminal information against petitioner for violation of Section 255 in relation to Sections 254 and 248(B) of the NIRC, as amended. The said Resolution was approved by Chief State Prosecutor Jovencito R. Zuno. Pursuant to the 21 October 2005 DOJ Resolution, an Information for violation of Section 255 in relation to Sections 254 and 248(B) of the NIRC, as amended, was filed with the CTA on 3 November 2005 and docketed as C.T.A. Crim. Case No. 0012. However, the CTA First Division, after noting several discrepancies in the Information filed, required the State Prosecutor to clarify and explain the same, and to submit the original copies of the parties affidavits, memoranda, and all other 11 evidence on record. Consequently, Prosecution Attorney Torrevillas, on behalf of respondent People, submitted on 1 December 2005 a Compliance with Ex Parte Motion to Admit Attached 12 Information. Prosecution Attorney Torrevillas moved that the documents submitted be admitted as part of the record of the case and the first Information be substituted 13 by the attached second Information. The second Information addressed the discrepancies noted by the CTA in the first Information, by now reading thus:
10

JUDY ANNE L. SANTOS, petitioner, vs. PEOPLE OF THE PHILIPPINES and BUREAU OF INTERNAL REVENUE, respondents. DECISION CHICO-NAZARIO, J.: Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court filed by petitioner Judy Anne L. Santos (Santos) seeking the reversal 2 and setting aside of the Resolution, dated 19 June 2006, of the Court of Tax Appeals (CTA) en banc in C.T.A. EB. CRIM. No. 001 which denied petitioners Motion fo r Extension of Time to File Petition for Review. Petitioner intended to file the Petition for 3 Review with the CTA en banc to appeal the Resolutions dated 23 February 2006 and 4 11 May 2006 of the CTA First Division in C.T.A. Crim. Case No. 0-012 denying, respectively, her Motion to Quash the Information filed against her for violation of Section 255, in relation to Sections 254 and 248(B) of the National Internal Revenue Code (NIRC), as amended; and her Motion for Reconsideration. There is no controversy as to the facts that gave rise to the present Petition. On 19 May 2005, then Bureau of Internal Revenue (BIR) Commissioner Guillermo L. Parayno, Jr. wrote to the Department of Justice (DOJ) Secretary Raul M. Gonzales a 5 letter regarding the possible filing of criminal charges against petitioner. BIR Commissioner Parayno began his letter with the following statement: I have the honor to refer to you for preliminary investigation and filing of an information in court if evidence so warrants, the herein attached Joint Affidavit of RODERICK C. ABAD, STIMSON P. CUREG, VILMA V. CARONAN, RHODORA L. DELOS REYES under Group SupervisorTEODORA V. PURINO, of the National Investigation Division, BIR National Office Building, BIR Road, Diliman, Quezon City, recommending the criminal prosecution of MS. JUDY ANNE LUMAGUI
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The undersigned Prosecution Attorney of the Department of Justice hereby accuses JUDY ANNE SANTOS y Lumagui of the offense of violation of Section 255, of Republic Act No. 8424, otherwise known as the "Tax Reform Act of 1997," as amended, committed as follows: "That on or about the 15 day of April, 2003, at Quezon City, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused did then and there, willfully, unlawfully, and feloniously file a false and fraudulent income tax return for taxable year 2002 by indicating therein a gross income of P8,033,332.70 when in truth and in fact her correct income for taxable year 2002 is P16,396,234.70 or a gross underdeclaration/difference ofP8,362,902 resulting to an income tax deficiency of P1,395,116.24 excluding interest and penalties thereon of P1,319,500.94 or a total income tax deficiency of P2,714,617.18 to the damage and prejudice of the government of the same amount.["] In a Resolution dated 8 December 2005, the CTA First Division granted the Peoples Ex Parte Motion and admitted the second Information. The CTA First Division then issued on 9 December 2005 a warrant for the arrest of 15 petitioner. The tax court lifted and recalled the warrant of arrest on 21 December 2005 after petitioner voluntarily appeared and submitted herself to its jurisdiction and 16 filed the required bail bond in the amount of P20,000.00. On 10 January 2006, petitioner filed with the CTA First Division a Motion to 17 Quash the Information filed in C.T.A. Crim. Case No. 0-012 on the following grounds: 1. The facts alleged in the INFORMATION do not constitute an offense; 2. The officer who filed the information had no authority to do so; 3. The Honorable Court of Tax Appeals has no jurisdiction over the subject matter of the case; and 4. The information is void ab initio, being violative of due process, and the equal protection of the laws. In a Resolution dated 23 February 2006, the CTA First Division denied petitioners Motion to Quash and accordingly scheduled her arraignment on 2 March 2006 at 9:00
18 14 th

a.m. Petitioner filed a Motion for Reconsideration and/or Reinvestigation, which was 20 again denied by the CTA First Division in a Resolution dated 11 May 2006. Petitioner received a copy of the 11 May 2006 Resolution of the CTA First Division on 17 May 2006. On 1 June 2006, petitioner filed with the CTA en banc a Motion for Extension of Time to File Petition for Review, docketed as C.T.A. EB. CRIM. No. 001. She filed her Petition for Review with the CTA en bancon 16 June 2006. However, in 21 its Resolution dated 19 June 2006, the CTA en banc denied petitioners Motion for Extension of Time to File Petition for Review, ratiocinating that: In the case before Us, the petitioner is asking for an extension of time to file her Petition for Review to appeal the denial of her motion to quash in C.T.A. Crim. Case No. 0-012. As stated above, a resolution denying a motion to quash is not a proper subject of an appeal to the Court En Bancunder Section 11 of R.A. No. 9282 because a ruling denying a motion to quash is only an interlocutory order, as such, it cannot be made the subject of an appeal pursuant to said law and the Rules of Court. Section 1 of Rule 41 of the Rules of Court provides that "no appeal may be taken from an interlocutory order" and Section 1 (i) of Rule 50 provides for the dismissal of an appeal on the ground that "the order or judgment appealed from is not appealable". Time and again, the Supreme Court had ruled that the remedy of the accused in case of denial of a motion to quash is for the accused to enter a plea, go to trial and after an adverse decision is rendered, to appeal therefrom in the manner authorized by law. Since a denial of a Motion to Quash is not appealable, granting petitioners Motion for Extension of Time to File Petition for Review will only be an exercise in futility considering that the dismissal of the Petition for Review that will be filed by way of appeal is mandated both by law and 22 jurisprudence. Ultimately, the CTA en banc decreed: WHEREFORE, premises considered, petitioners Motion for Extension of Time to File Petition for Review filed on June 1, 2006 is hereby DENIED for 23 lack of merit. Now comes petitioner before this Court raising the sole issue of: WHETHER A RESOLUTION OF A CTA DIVISION DENYING A MOTION TO QUASH IS A PROPER SUBJECT OF AN APPEAL TO THE CTA EN BANC UNDER SECTION 11 OF REPUBLIC ACT NO. 9282, AMENDING 24 SECTION 18 OF REPUBLIC ACT NO. 1125.

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Section 18 of Republic Act No. 1125, 26 9282, provides:

25

as amended by Republic Act No.

SEC. 18. Appeal to the Court of Tax Appeals En Banc. No civil proceedings involving matters arising under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in accordance with the provisions of this Act. A party adversely affected by a resolution of a Division of the CTA on a motion for reconsideration or new trial, may file a petition for review with the CTA en banc. Petitioners primary argument is that a resolution of a CTA Division denying a motion to quash is a proper subject of an appeal to the CTA en banc under Section 18 of Republic Act No. 1125, as amended, because the law does not say that only a resolution that constitutes a final disposition of a case may be appealed to the CTA en banc. If the interpretation of the law by the CTA en banc prevails, a procedural void is created leaving the parties, such as petitioner, without any remedy involving erroneous resolutions of a CTA Division. The Court finds no merit in the petitioners assertion. The petition for review under Section 18 of Republic Act No. 1125, as amended, may be new to the CTA, but it is actually a mode of appeal long available in courts of general jurisdiction. Petitioner is invoking a very narrow and literal reading of Section 18 of Republic Act No. 1125, as amended. Indeed, the filing of a petition for review with the CTA en banc from a decision, resolution, or order of a CTA Division is a remedy newly made available in proceedings before the CTA, necessarily adopted to conform to and address the changes in the CTA. There was no need for such rule under Republic Act No. 1125, prior to its amendment, since the CTA then was composed only of one Presiding Judge and two 27 Associate Judges. Any two Judges constituted a quorum and the concurrence of 28 two Judges was necessary to promulgate any decision thereof.

The amendments introduced by Republic Act No. 9282 to Republic Act No. 1125 elevated the rank of the CTA to a collegiate court, with the same rank as the Court of Appeals, and increased the number of its members to one Presiding Justice and five 29 Associate Justices. The CTA is now allowed to sit en bancor in two Divisions with each Division consisting of three Justices. Four Justices shall constitute a quorum for sessions en banc, and the affirmative votes of four members of the Court en banc are necessary for the rendition of a decision or resolution; while two Justices shall constitute a quorum for sessions of a Division and the affirmative votes of two members of the Division shall be necessary for the rendition of a decision or 30 resolution. In A.M. No. 05-11-07-CTA, the Revised CTA Rules, this Court delineated the 31 32 jurisdiction of the CTA en banc and in Divisions. Section 2, Rule 4 of the Revised CTA Rules recognizes the exclusive appellate jurisdiction of the CTA en banc to review by appeal the following decisions, resolutions, or orders of the CTA Division: SEC. 2. Cases within the jurisdiction of the Court en banc. The Court en banc shall exercise exclusive appellate jurisdiction to review by appeal the following: (a) Decisions or resolutions on motions for reconsideration or new trial of the Court in Divisions in the exercise of its exclusive appellate jurisdiction over: (1) Cases arising from administrative agencies Bureau of Internal Revenue, Bureau of Customs, Department of Finance, Department of Trade and Industry, Department of Agriculture; (2) Local tax cases decided by the Regional Trial Courts in the exercise of their original jurisdiction; and (3) Tax collection cases decided by the Regional Trial Courts in the exercise of their original jurisdiction involving final and executory assessments for taxes, fees, charges and penalties, where the principal amount of taxes and penalties claimed is less than one million pesos; xxxx (f) Decisions, resolutions or orders on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive original jurisdiction over cases involving criminal offenses arising from violations of the National Internal Revenue Code or the Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or Bureau of Customs.

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(g) Decisions, resolutions or order on motions for reconsideration or new trial of the Court in Division in the exercise of its exclusive appellate jurisdiction over criminal offenses mentioned in the preceding subparagraph; x x x. Although the filing of a petition for review with the CTA en banc from a decision, resolution, or order of the CTA Division, was newly made available to the CTA, such mode of appeal has long been available in Philippine courts of general jurisdiction. Hence, the Revised CTA Rules no longer elaborated on it but merely referred to existing rules of procedure on petitions for review and appeals, to wit: RULE 7 PROCEDURE IN THE COURT OF TAX APPEALS SEC. 1. Applicability of the Rules of the Court of Appeals . The procedure in the Court en bancor in Divisions in original and 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. RULE 8 PROCEDURE IN CIVIL CASES xxxx SEC. 4. Where to appeal; mode of appeal. xxxx (b) An appeal from a decision or resolution of the Court in Division on a motion for reconsideration or new trial shall be taken to the Court by petition for review as provided in Rule 43 of the Rules of Court. The Court en banc shall act on the appeal. xxxx RULE 9 PROCEDURE IN CRIMINAL CASES SEC. 1. Review of cases in the Court. The review of criminal cases in the Court en banc or in Division shall be governed by the applicable provisions of Rule 124 of the Rules of Court.

xxxx SEC. 9. Appeal; period to appeal. xxxx (b) An appeal to the Court en banc in criminal cases decided by the Court in Division shall be taken by filing a petition for review as provided in Rule 43 of the Rules of Court within fifteen days from receipt of a copy of the decision or resolution appealed from. The Court may, for good cause, extend the time for filing of the petition for review for an additional period not exceeding fifteen days. (Emphasis ours.) Given the foregoing, the petition for review to be filed with the CTA en banc as the mode for appealing a decision, resolution, or order of the CTA Division, under Section 18 of Republic Act No. 1125, as amended, is not a totally new remedy, unique to the CTA, with a special application or use therein. To the contrary, the CTA merely adopts the procedure for petitions for review and appeals long established and practiced in other Philippine courts. Accordingly, doctrines, principles, rules, and precedents laid down in jurisprudence by this Court as regards petitions for review and appeals in courts of general jurisdiction should likewise bind the CTA, and it cannot depart therefrom. General rule: The denial of a motion to quash is an interlocutory order which is not the proper subject of an appeal or a petition for certiorari. According to Section 1, Rule 41 of the Revised Rules of Court, governing appeals from the Regional Trial Courts (RTCs) to the Court of Appeals, an appeal may be taken only from a judgment or final order that completely disposes of the case or of a matter therein when declared by the Rules to be appealable. Said provision, thus, 33 explicitly states that no appeal may be taken from an interlocutory order. The Court distinguishes final judgments and orders from interlocutory orders in this wise: Section 2, Rule 41 of the Revised Rules of Court provides that "(o)nly final judgments or orders shall be subject to appeal." Interlocutory or incidental judgments or orders do not stay the progress of an action nor are they subject of appeal "until final judgment or order is rendered for one party or the other." The test to determine whether an order or judgment is interlocutory or final is this: "Does it leave something to be done in the trial court with respect to the merits of the case? If it does, it is interlocutory; if it does not, it is final". A court order is final in character if it puts an end to the

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particular matter resolved or settles definitely the matter therein disposed of, such that no further questions can come before the court except the execution of the order. The term "final" judgment or order signifies a judgment or an order which disposes of the cause as to all the parties, reserving no further questions or directions for future determination. The order or judgment may validly refer to the entire controversy or to some definite and separate branch thereof. "In the absence of a statutory definition, a final judgment, order or decree has been held to be x x x one that finally disposes of, adjudicates, or determines the rights, or some right or rights of the parties, either on the entire controversy or on some definite and separate branch thereof, and which concludes them until it is reversed or set aside." The central point to consider is, therefore, the effects of the order on the rights of the parties. A court order, on the other hand, is merely interlocutory in character if it is provisional and leaves substantial proceeding to be had in connection with its subject. The word "interlocutory" refers to "something intervening between the commencement and the end of a suit which decides some point or matter but is not a final decision of the whole 34 controversy." In other words, after a final order or judgment, the court should have nothing more to do in respect of the relative rights of the parties to the case. Conversely, "an order that does not finally dispose of the case and does not end the Court's task of adjudicating the parties' contentions in determining their rights and liabilities as regards each other, but obviously indicates that other things remain to be done by the 35 Court, is interlocutory." The rationale for barring the appeal of an interlocutory order was extensively 36 discussed in Matute v. Court of Appeals, thus: It is settled that an "interlocutory order or decree made in the progress of a case is always under the control of the court until the final decision of the suit, and may be modified or rescinded upon sufficient grounds shown at any time before final judgment . . ." Of similar import is the ruling of this Court declaring that "it is rudimentary that such (interlocutory) orders are subject to change in the discretion of the court." Moreover, one of the inherent powers of the court is "To amend and control its process and orders so as to make them conformable to law and justice. In the language of Chief Justice Moran, paraphrasing the ruling in Veluz vs. Justice of the Peace of Sariaya, "since judges are human, susceptible to mistakes, and are bound to administer justice in accordance with law, they are given the inherent power of amending their orders or judgments so as to make them conformable to law and justice, and they can do so before they lose their jurisdiction of the case, that is before the time to appeal has expired and no appeal has been perfected." And in the abovecited Veluz case, this Court held that "If the trial court should discover or be convinced that it had committed an error in its

judgment, or had done an injustice, before the same has become final, it may, upon its own motion or upon a motion of the parties, correct such error in order to do justice between the parties. . . . It would seem to be the very height of absurdity to prohibit a trial judge from correcting an error, mistake, or injustice which is called to his attention before he has lost control of his judgment." Corollarily, it has also been held "that a judge of first instance is not legally prevented from revoking the interlocutory order of another judge in the very litigation subsequently assigned to him for judicial action." Another recognized reason of the law in permitting appeal only from a final order or judgment, and not from an interlocutory or incidental one, is to avoid multiplicity of appeals in a single action, which must necessarily suspend the hearing and decision on the merits of the case during the pendency of the appeal. If such appeal were allowed, the trial on the merits of the case would necessarily be delayed for a considerable length of time, and compel the adverse party to incur unnecessary expenses, for one of the parties may interpose as many appeals as incidental questions may be raised by him, and interlocutory orders rendered or issued by the 37 lower court. There is no dispute that a court order denying a motion to quash is interlocutory. The denial of the motion to quash means that the criminal information remains pending with the court, which must proceed with the trial to determine whether the accused is guilty of the crime charged therein. Equally settled is the rule that an order denying a 38 motion to quash, being interlocutory, is not immediately appealable, nor can it be the subject of a petition for certiorari. Such order may only be reviewed in the ordinary 39 course of law by an appeal from the judgment after trial. The Court cannot agree in petitioners contention that there would exist a procedural void following the denial of her Motion to Quash by the CTA First Division in its Resolutions dated 23 February 2006 and 11 May 2006, leaving her helpless. The remedy of an accused from the denial of his or her motion to quash has already been clearly laid down as follows: An order denying a Motion to Acquit (like an order denying a motion to quash) is interlocutory and not a final order. It is, therefore, not appealable. Neither can it be the subject of a petition forcertiorari. Such order of denial may only be reviewed, in the ordinary course of law, by an appeal from the judgment, after trial. As stated in Collins vs. Wolfe, and reiterated in Mill vs. Yatco, the accused, after the denial of his motion to quash, should have proceeded with the trial of the case in the court below, and if final judgment is rendered against him, he could then appeal, and, upon such appeal, present the questions which he sought to be decided by the appellate court in a petition forcertiorari.

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In Acharon vs. Purisima, the procedure was well defined, thus: "Moreover, when the motion to quash filed by Acharon to nullify the criminal cases filed against him was denied by the Municipal Court of General Santos his remedy was not to file a petition for certiorari but to go to trial without prejudice on his part to reiterate the special defenses he had invoked in his motion and, if, after trial on the merits, an adverse decision is rendered, to appeal therefrom in the manner authorized by law. This is the procedure that he should have followed as authorized by law and precedents. Instead, he took the usual step of filing a writ of certiorari before the Court of First Instance which in our opinion is unwarranted it being 40 contrary to the usual course of law." Hence, the CTA en banc herein did not err in denying petitioners Motion for Extension of Time to File Petition for Review, when such Petition for Review is the wrong remedy to assail an interlocutory order denying her Motion to Quash. While the general rule proscribes the appeal of an interlocutory order, there are also recognized exceptions to the same. The general rule is not absolute. Where special circumstances clearly demonstrate the inadequacy of an appeal, then the special civil 41 action of certiorari or prohibition may exceptionally be allowed. This Court recognizes that under certain situations, recourse to extraordinary legal remedies, such as a petition for certiorari, is considered proper to question the denial of a motion to quash (or any other interlocutory order) in the interest of a "more 42 enlightened and substantial justice"; or to promote public welfare and public 43 policy; or when the cases "have attracted nationwide attention, making it essential 44 to proceed with dispatch in the consideration thereof"; or when the order was 45 rendered with grave abuse of discretion. Certiorari is an appropriate remedy to assail an interlocutory order (1) when the tribunal issued such order without or in excess of jurisdiction or with grave abuse of discretion; and (2) when the assailed interlocutory order is patently erroneous, and the remedy of appeal would not afford 46 adequate and expeditious relief. Recourse to a petition for certiorari to assail an interlocutory order is now expressly recognized in the ultimate paragraph of Section 1, Rule 41 of the Revised Rules of Court on the subject of appeal, which states: In all the above instances where the judgment or final order is not appealable, the aggrieved party may file an appropriate special civil action under Rule 65.

As to whether the CTA en banc, under its expanded jurisdiction in Republic Act No. 9282, has been granted jurisdiction over special civil actions for certiorari is not raised as an issue in the Petition at bar, thus, precluding the Court from making a definitive pronouncement thereon. However, even if such an issue is answered in the negative, it would not substantially affect the ruling of this Court herein, for a party whose motion to quash had been denied may still seek recourse, under exceptional and meritorious circumstances, via a special civil action for certiorari with this Court, refuting petitioners assertion of a procedural void. The CTA First Division did not commit grave abuse of discretion in denying petitioners Motion to Quash. Assuming that the CTA en banc, as an exception to the general rule, allowed and treated petitioners Petition for Review in C.T.A. EB. CRIM. No. 001 as a special civil 47 action for certiorari, it would still be dismissible for lack of merit. An act of a court or tribunal may only be considered as committed in grave abuse of discretion when the same was performed in a capricious or whimsical exercise of judgment, which is equivalent to lack of jurisdiction. The abuse of discretion must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform a duty enjoined by law or to act at all in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion or personal hostility. In this connection, it is only upon showing that the court acted without or in excess of jurisdiction or with grave abuse of discretion that an interlocutory order such as that involved in this case may be impugned. Be that as it may, it must be emphasized that this practice is applied only under certain exceptional circumstances to prevent unnecessary delay in the administration of 48 justice and so as not to unduly burden the courts. Certiorari is not available to correct errors of procedure or mistakes in the judges findings and conclusions of law and fact. It is only in the presence of extraordinary circumstances evincing a patent disregard of justice and fair play where resort to a petition for certiorari is proper. A party must not be allowed to delay litigation by the sheer expediency of filing a petition for certiorari under Rule 65 of the Revised Rules 49 of Court based on scant allegations of grave abuse. A writ of certiorari is not intended to correct every controversial interlocutory ruling: it is resorted to only to correct a grave abuse of discretion or a whimsical exercise of judgment equivalent to lack of jurisdiction. Its function is limited to keeping an inferior court within its jurisdiction and to relieve persons from arbitrary acts acts which courts or judges have no power or authority in law to perform. It is not designed to 50 correct erroneous findings and conclusions made by the courts.

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The Petition for Review which petitioner intended to file before the CTA en banc relied on two grounds: (1) the lack of authority of Prosecuting Attorney Torrevillas to file the Information; and (2) the filing of the said Information in violation of petitioners constitutional rights to due process and equal protection of the laws. Anent the first ground, petitioner argues that the Information was filed without the approval of the BIR Commissioner in violation of Section 220 of NIRC, as amended, which provides: SEC. 220. Form and Mode of Proceeding in Actions Arising under this Code. - Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in court without the approval of the Commissioner. Petitioners argument must fail in light of BIR Commissioner Paraynos letter dated 19 May 2005 to DOJ Secretary Gonzales referring "for preliminary investigation and filing of an information in court if evidence so warrants," the findings of the BIR officers recommending the criminal prosecution of petitioner. In said letter, BIR Commissioner Parayno already gave his prior approval to the filing of an information in court should the DOJ, based on the evidence submitted, find probable cause against petitioner during the preliminary investigation. Section 220 of the NIRC, as amended, simply requires that the BIR Commissioner approve the institution of civil or criminal action against a tax law violator, but it does not describe in what form such approval must be given. In this case, BIR Commissioner Paraynos letter of 19 May 2005 already states his express approval of the filing of an information against petitioner and his signature need not appear on the Resolution of the State Prosecutor or the Information itself. Still on the purported lack of authority of Prosecution Attorney Torrevillas to file the Information, petitioner asserts that it is the City Prosecutor under the Quezon City Charter, who has the authority to investigate and prosecute offenses allegedly committed within the jurisdiction of Quezon City, such as petitioners case. The Court is not persuaded. Under Republic Act No. 537, the Revised Charter of Quezon City, the City Prosecutor shall have the following duties relating to the investigation and prosecution of criminal offenses: SEC. 28. The City Attorney - His assistants - His duties.

xxxx (g) He shall also have charge of the prosecution of all crimes, misdemeanors, and violations of city ordinances, in the Court of First Instance and the municipal courts of the city, and shall discharge all the duties in respect to the criminal prosecutions enjoined by law upon provincial fiscals. (h) He shall cause to be investigated all charges of crimes, misdemeanors, and violations of ordinances and have the necessary information or complaints prepared or made against the persons accused. He or any of his assistants may conduct such investigations by taking oral evidence of reputable witnesses, and for this purpose may issue subpoena, summon witnesses to appear and testify under oath before him, and the attendance or evidence of an absent or recalcitrant witness may be enforced by application to the municipal court or the Court of First Instance. No witness summoned to testify under this section shall be under obligation to give any testimony which tend to incriminate himself. Evident from the foregoing is that the City Prosecutor has the power to investigate crimes, misdemeanors, and violations of ordinances committed within the territorial jurisdiction of the city, and which can be prosecuted before the trial courts of the said city. The charge against petitioner, however, is already within the exclusive original 51 jurisdiction of the CTA, as the Information states that her gross underdeclaration resulted in an income tax deficiency of P1,395,116.24, excluding interest and penalties. The City Prosecutor does not have the authority to appear before the CTA, which is now of the same rank as the Court of Appeals. In contrast, the DOJ is the principal law agency of the Philippine government which 52 shall be both its legal counsel and prosecution arm. It has the power to investigate the commission of crimes, prosecute offenders and administer the probation and 53 correction system. Under the DOJ is the Office of the State Prosecutor whose functions are described as follows: Sec. 8. Office of the Chief State Prosecutor. - The Office of the Chief State Prosecutor shall have the following functions: (1) Assist the Secretary in the performance of powers and functions of the Department relative to its role as the prosecution arm of the government; (2) Implement the provisions of laws, executive orders and rules, and carry out the policies, plans, programs and projects of the Department relative to the investigation and prosecution of criminal cases;

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(3) Assist the Secretary in exercising supervision and control over the National Prosecution Service as constituted under P.D. No. 1275 and/or otherwise hereinafter provided; and (4) Perform such other functions as may be provided by law or assigned by 54 the Secretary. As explained by CTA First Division in its Resolution dated 11 May 2006: [T]he power or authority of the Chief State Prosecutor Jovencito Zuo, Jr. and his deputies in the Department of Justice to prosecute cases is national in scope; and the Special Prosecutors authority to sign and file informations in court proceeds from the exercise of said persons authority to conduct 55 preliminary investigations. Moreover, there is nothing in the Revised Quezon City Charter which would suggest that the power of the City Prosecutor to investigate and prosecute crimes, misdemeanors, and violations of ordinances committed within the territorial jurisdiction of the city is to the exclusion of the State Prosecutors. In fact, the Office of the State Prosecutor exercises control and supervision over City Prosecutors under Executive Order No. 292, otherwise known as the Administrative Code of 1987. As regards petitioners second ground in her intended Petition for Review with the CTA en banc, she asserts that she has been denied due process and equal protection of the laws when similar charges for violation of the NIRC, as amended, against Regina Encarnacion A. Velasquez (Velasquez) were dismissed by the DOJ in its Resolution dated 10 August 2005 in I.S. No. 2005-330 for the reason that Velasquezs tax liability was not yet fully determined when the charges were filed. The Court is unconvinced. First, a motion to quash should be based on a defect in the information which is 56 evident on its face. The same cannot be said herein. The Information against petitioner appears valid on its face; and that it was filed in violation of her constitutional rights to due process and equal protection of the laws is not evident on the face thereof. As pointed out by the CTA First Division in its 11 May 2006 Resolution, the more appropriate recourse petitioner should have taken, given the dismissal of similar charges against Velasquez, was to appeal the Resolution dated 21 October 2005 of the Office of the State Prosecutor recommending the filing of an 57 information against her with the DOJ Secretary. Second, petitioner cannot claim denial of due process when she was given the opportunity to file her affidavits and other pleadings and submit evidence before the

DOJ during the preliminary investigation of her case and before the Information was filed against her. Due process is merely an opportunity to be heard. In addition, preliminary investigation conducted by the DOJ is merely inquisitorial. It is not a trial of the case on the merits. Its sole purpose is to determine whether a crime has been committed and whether the respondent therein is probably guilty of the crime. It is not the occasion for the full and exhaustive display of the parties evidence. Hence, if the investigating prosecutor is already satisfied that he can reasonably determine the existence of probable cause based on the parties evidence thus presented, he may 58 terminate the proceedings and resolve the case. Third, petitioner cannot likewise aver that she has been denied equal protection of the laws. The equal protection clause exists to prevent undue favor or privilege. It is intended to eliminate discrimination and oppression based on inequality. Recognizing the existence of real differences among men, the equal protection clause does not demand absolute equality. It merely requires that all persons shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and 59 liabilities enforced. Petitioner was not able to duly establish to the satisfaction of this Court that she and Velasquez were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense - yet, they were treated differently. Furthermore, that the Prosecution Attorney dismissed what were supposedly similar charges against Velasquez did not compel Prosecution Attorney Torrevillas to rule the 60 same way on the charges against petitioner. In People v. Dela Piedra, this Court explained that: The prosecution of one guilty person while others equally guilty are not prosecuted, however, is not, by itself, a denial of the equal protection of the laws. Where the official action purports to be in conformity to the statutory classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute, is not without more a denial of the equal protection of the laws. The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. This may appear on the face of the action taken with respect to a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. But a discriminatory purpose is not presumed, there must be a

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showing of "clear and intentional discrimination." Appellant has failed to show that, in charging appellant in court, that there was a "clear and intentional discrimination" on the part of the prosecuting officials. The discretion of who to prosecute depends on the prosecutions sound assessment whether the evidence before it can justify a reasonable belief that a person has committed an offense. The presumption is that the prosecuting officers regularly performed their duties, and this presumption can be overcome only by proof to the contrary, not by mere speculation.Indeed, appellant has not presented any evidence to overcome this presumption. The mere allegation that appellant, a Cebuana, was charged with the commission of a crime, while a Zamboanguea, the guilty party in appellants eyes, was not, is insufficient to support a conclusion that the prosecution officers denied appellant equal protection of the laws. There is also common sense practicality in sustaining appellants prosecution. While all persons accused of crime are to be treated on a basis of equality before the law, it does not follow that they are to be protected in the commission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because others have murdered with impunity. The remedy for unequal enforcement of the law in such instances does not lie in the exoneration of the guilty at the expense of society x x x. Protection of the law will be extended to all persons equally in the pursuit of their lawful occupations, but no person has the right to demand protection of the law in the commission of a crime. Likewise, [i]f the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. (Emphasis ours.) In the case at bar, no evidence of a clear and intentional discrimination against petitioner was shown, whether by Prosecution Attorney Torrevillas in recommending the filing of Information against petitioner or by the CTA First Division in denying petitioners Motion to Quash. The only basis for petitioners claim of denial of equal protection of the laws was the dismissal of the charges against Velasquez while those against her were not.

And lastly, the Resolutions of the CTA First Division dated 23 February 2006 and 11 May 2006 directly addressed the arguments raised by petitioner in her Motion to Quash and Motion for Reconsideration, respectively, and explained the reasons for the denial of both Motions. There is nothing to sustain a finding that these Resolutions were rendered capriciously, whimsically, or arbitrarily, as to constitute grave abuse of discretion amounting to lack or excess of jurisdiction. In sum, the CTA en banc did not err in denying petitioners Motion for Extension of Time to File Petition for Review. Petitioner cannot file a Petition for Review with the CTA en banc to appeal the Resolution of the CTA First Division denying her Motion to Quash. The Resolution is interlocutory and, thus, unappealable. Even if her Petition for Review is to be treated as a petition for certiorari, it is dismissible for lack of merit. WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED. Costs against petitioner. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 81311 June 30, 1988 KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners, vs. HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent. G.R. No. 81820 June 30, 1988 KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and alliances,petitioners, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE, and SECRETARY OF BUDGET, respondents.

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G.R. No. 81921 June 30, 1988 INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners, vs. The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent. G.R. No. 82152 June 30, 1988 RICARDO C. VALMONTE, petitioner, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF BUDGET, respondent. Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311. Jaime C. Opinion for individual petitioners in G.R. No. 81311. Banzuela, Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No 81820. Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820. Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

(1) the existence of an appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to the Solicitor General, only the third requisite that the constitutional question should be raised at the earliest opportunity has been complied with. He also questions the legal standing of the petitioners who, he contends, are merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution. Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court's duty, under the 1987 Constitution, to determine wether or not the other branches of government have kept themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions. But, before resolving the issues raised, a brief look into the tax law in question is in order. The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross receipts realized from the sale of services. The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it is principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more equitable, to enable the country to attain economic recovery. The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and was imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers. Subsequent sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second sale, but on every subsequent sale,

PADILLA, J.: These four (4) petitions, which have been consolidated because of the similarity of the main issues involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short), for being unconstitutional in that its enactment is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection clauses and other provisions of the 1987 Constitution. The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show justification for the exercise of its judicial powers, viz.

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as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or exempt. Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no authority to issue EO 273 on 25 July 1987. The contention is without merit. It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states: Sec. 1. Until a legislature is elected and convened under a new Constitution, the President shall continue to exercise legislative powers. On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides: Sec. 6. The incumbent President shall continue to exercise legislative powers until the first Congress is convened. It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with legislative powers until a legislature under a new Constitution is convened. The first Congress, created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was within the President's constitutional power and authority to legislate. Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987). He contends that the word "convene" is synonymous with "the date when the elected members of Congress assumed office." The contention is without merit. The word "convene" which has been interpreted to 1 mean "to call together, cause to assemble, or convoke," is clearly different from assumption of office by the individual members of Congress or their taking the oath of office. As an example, we call to mind the interim National Assembly created under the 1973 Constitution, which had not been "convened" but some members of the body, more particularly the delegates to the 1971 Constitutional Convention who had

opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their oath of office. To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress to convene once every year on the fourth Monday of July for its regular session would be a contrariety, since Congress would already be deemed to be in session after the individual members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law calling for a special election to elect a President and Vice-President in case a vacancy occurs in said offices, would also be a surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to decide a conflict between the President and the Cabinet as to whether or not the President and the Cabinet as to whether or not the President can re-assume the powers and duties of his office, would also be redundant. The same is true with the portion of Art. VII, sec. 18, which requires Congress to convene within twenty-four (24) hours following the declaration of martial law or the suspension of the privilage of the writ of habeas corpus. The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the framers of said Constitution had intended to terminate the exercise of legislative powers by the President at the beginning of the term of office of the members of Congress, they should have so stated (but did not) in clear and unequivocal terms. The Court has not power to re-write the Constitution and give it a meaning different from that intended. The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been defined, as follows: Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz. 834), or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation 2 of law. (Tavera-Luna, Inc. vs. Nable, 38 Off. Gaz. 62). Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or despotic manner by reason of passion or personal hostility. It appears that a comprehensive study of the VAT had been extensively discussed by

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this framers and other government agencies involved in its implementation, even under the past administration. As the Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in the exercise of her legislative powers. The legislative process started long before the signing when the data were gathered, proposals were weighed and the final wordings of the measure were drafted, revised and finalized. Certainly, it cannot be said that the President made a jump, so to 3 speak, on the Congress, two days before it convened." Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states: Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To justify the nullification of a law. there must be a clear and unequivocal breach of the 4 Constitution, not a doubtful and argumentative implication. As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. 5 The court, in City of Baguio vs. De Leon, said: ... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court, stated: "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." There was no occasion in that case to consider the possible effect on such a constitutional requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus: "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; . . ." About two years later, Justice Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in his opinion and continued; "Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice

and equity and is not discriminatory within the meaning of the Constitution." To satisfy this requirement then, all that is needed as held in another case decided two years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation." This Court is on record as accepting the view in a leading American case (Carmichael v. Southern Coal and Coke Co., 301 US 495) 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). 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 engage 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, spared as they are from the incidence of the VAT, are expected to be relatively lower 6 and within the reach of the general public. The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue Code, unduly discriminates against customs brokers. The contested provision states: Sec. 103. Exempt transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (r) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax under the Local Tax Code, and professional services performed by registered general professional partnerships; The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to

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the payment of an occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102 read: Sec. 102. Value-added tax on sale of services. There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase sale of services" means the performance of all kinds of services 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 personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof call for the exercise or use of the physical or mental faculties: ... With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted. At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers then, the Court sees no reason why it should protest now. The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities and services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact that nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be more imagined than real. It would seem that the VAT is not as bad as we are made to believe. In any event, if petitioners seriously believe that the adoption and continued application of the VAT are prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse and relief from the political branches of the government. The Court, following the time-honored doctrine of separation of powers, cannot substitute its judgment for that of the President as to the

wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as law, in the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to impede its application or continued implementation. WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs. SO ORDERED. Yap, C.J., Fernan, Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes and Grio-Aquino, JJ., concur. Gutierrez, Jr. and Medialdea, JJ., are on leave.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-19201 June 16, 1965

REV. FR. CASIMIRO LLADOC, petitioner, vs. The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX APPEALS, respondents. Hilado and Hilado for petitioner. Office of the Solicitor General for respondents. PAREDES, J.: Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner, for the construction of a new Catholic Church in the locality. The total amount was actually spent for the purpose intended.

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On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late filing of the return. Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he was not the parish priest in Victorias; that there is no legal entity or juridical person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also asserted that the assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would be a clear violation of the provisions of the Constitution. After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below: ... . Parish priests of the Roman Catholic Church under canon laws are similarly situated as its Archbishops and Bishops with respect to the properties of the church within their parish. They are the guardians, superintendents or administrators of these properties, with the right of succession and may sue and be sued. xxx xxx xxx

We saw no legal basis then as we see none now, to include within the Constitutional exemption, taxes which partake of the nature of an excise upon the use made of the properties or upon the exercise of the privilege of receiving the properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.) It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored by law, and the party claiming exemption must justify his claim by a clear, positive, or express grant of such privilege by law. (Collector vs. Manila Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.) The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the Constitution of the Philippines, should not be interpreted to mean exemption from all kinds of taxes. Statutes exempting charitable and religious property from taxation should be construed fairly though strictly and in such manner as to give effect to the main intent of the lawmakers. (Roman Catholic Church vs. Hastrings 5 Phil. 701.) xxx xxx xxx

The petitioner impugns the, fairness of the assessment with the argument that he should not be held liable for gift taxes on donation which he did not receive personally since he was not yet the parish priest of Victorias in the year 1957 when said donation was given. It is intimated that if someone has to pay at all, it should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the donation in behalf of the Catholic parish of Victorias or the Roman Catholic Church. Following petitioner's line of thinking, we should be equally unfair to hold that the assessment now in question should have been addressed to, and collected from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his present parish where ever it may be. It does not seem right to indirectly burden the present parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to which they were not benefited. xxx xxx xxx

WHEREFORE, in view of the foregoing considerations, the decision of the respondent Commissioner of Internal Revenue appealed from, is hereby affirmed except with regard to the imposition of the compromise penalty in the amount of P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L11274, Nov. 28, 1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby ordered to pay to the respondent the amount of P900.00 as donee's gift tax, plus the surcharge of five per centum (5%) as ad valorem penalty under Section 119 (c) of the Tax Code, and one per centum (1%) monthly interest from May 15, 1958 to the date of actual payment. The surcharge of 25% provided in Section 120 for failure to file a return may not be imposed as the failure to file a return was not due to willful neglect.( ... ) No costs. The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly committed by the Tax Court, all of which converge on the singular issue of whether or not petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of the Victorias Parish Church. Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contra distinguished from excise taxes. In the

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present case, what the Collector assessed was a donee's gift tax; the assessment was not on the properties themselves. It did not rest upon general ownership; it was an excise upon the use made of the properties, upon the exercise of the privilege of receiving the properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must be denied. The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a tax liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he should not be liable, because at the time of the donation he was not the priest of Victorias. We note the merit of the above claim, and in order to put things in their proper light, this Court, in its Resolution of March 15, 1965, ordered the parties to show cause why the Head of the Diocese to which the parish of Victorias pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the Head of such Diocese is the real party in interest. The Solicitor General, in representation of the Commissioner of Internal Revenue, interposed no objection to such a substitution. Counsel for the petitioner did not also offer objection thereto. On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod, manifested that it was submitting itself to the jurisdiction and orders of this Court and that it was presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all purposes. In view here of and considering that as heretofore stated, the assessment at bar had been properly made and the imposition of the tax is not a violation of the constitutional provision exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese, to which the parish Victorias Pertains, is liable for the payment thereof. The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned; it is modified, in the sense that petitioner herein is not personally liable for the said gift tax, and that the Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered to pay, the said gift tax, without special, pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur. Barrera, J., took no part.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 127316 October 12, 2000

LIGHT RAIL TRANSIT AUTHORITY, petitioner, vs. CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF MANILA and the CITY ASSESSOR OF MANILA, respondents. DECISION PANGANIBAN, J.: The Light Rail Transit Authority and the Metro Transit Organization function as service-oriented business entities, which provide valuable transportation facilities to the paying public. In the absence, however, of any express grant of exemption in their favor, they are subject to the payment of real property taxes. The Case In the Petition for Review before us, the Light Rail Transit Authority (LRTA) 1 challenges the November 15, 1996 Decision of the Court of Appeals (CA) in CA-GR SP No. 38137, which disposed as follows: "WHEREFORE, premises considered, the appealed decision (dated October 15, 1994) of the Central Board of Assessment Appeals is hereby AFFIRMED, with costs 2 against the petitioner." The affirmed ruling of the Central Board of Assessment Appeals (CBAA) upheld the June 26, 1992 Resolution of the Board of Assessment Appeals of Manila, which had

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declared petitioner's carriageways and passenger terminals as improvements subject to real property taxes. The Facts The undisputed facts are quoted by the Court of Appeals (CA) from the CBAA ruling, 3 as follows: "1. The LRTA is a government-owned and controlled corporation created and organized under Executive Order No. 603, dated July 12, 1980 'x x x primarily responsible for the construction, operation, maintenance and/or lease of light rail transit system in the Philippines, giving due regard to the [reasonable requirements] of the public transportation of the country' (LRTA vs. The Hon. Commission on Audit, GR No. No. 88365); "2. x x x [B]y reason of x x x Executive Order 603, LRTA acquired real properties x x x constructed structural improvements, such as buildings, carriageways, passenger terminal stations, and installed various kinds of machinery and equipment and facilities for the purpose of its operations; "3. x x x [F]or x x x an effective maintenance, operation and management, it entered into a Contract of Management with the Meralco Transit Organization (METRO) in which the latter undertook to manage, operate and maintain the Light Rail Transit System owned by the LRTA subject to the specific stipulations contained in said agreement, including payments of a management fee and real property taxes (Add'l Exhibit "I", Records) "4. That it commenced its operations in 1984, and that sometime that year, Respondent-Appellee City Assessor of Manila assessed the real properties of [petitioner], consisting of lands, buildings, carriageways and passenger terminal stations, machinery and equipment which he considered real propert[y] under the Real Property Tax Code, to commence with the year 1985; "5. That [petitioner] paid its real property taxes on all its real property holdings, except the carriageways and passenger terminal stations including the land where it is constructed on the ground that the same are not real properties under the Real Property Tax Code, and if the same are real propert[y], these x x x are for public use/purpose, therefore, exempt from realty taxation, which claim was denied by the Respondent-Appellee City Assessor of Manila; and

"6. x x x [Petitioner], aggrieved by the action of the Respondent-Appellee City Assessor, filed an appeal with the Local Board of Assessment Appeals of Manila x x x. Appellee, herein, after due hearing, in its resolution dated June 26, 1992, denied [petitioner's] appeal, and declared that carriageways and passenger terminal stations are improvements, therefore, are real propert[y] under the Code, and not exempt from the payment of real property tax. "A motion for reconsideration filed by [petitioner] was likewise denied." The CA Ruling The Court of Appeals held that petitioner's carriageways and passenger terminal stations constituted real property or improvements thereon and, as such, were taxable under the Real Property Tax Code. The appellate court emphasized that such pieces of property did not fall under any of the exemptions listed in Section 40 of the aforementioned law. The reason was that they were not owned by the government or any government-owned corporation which, as such, was exempt from the payment of real property taxes. True, the government owned the real property upon which the carriageways and terminal stations were built. However, they were still taxable, because beneficial use had been transferred to petitioner, a taxable entity. The CA debunked the argument of petitioner that carriageways and terminals were intended for public use. The former agreed, instead, with the CBAA. The CBAA had concluded that since petitioner was not engaged in purely governmental or public service, the latter's endeavors were proprietary. Indeed, petitioner was deemed as a profit-oriented endeavor, serving as it did, only the paying public. Hence, this Petition.
4

The Issues In its Memorandum, petitioner urges the Court to resolve the following matters: "I The Honorable Court of Appeals erred in not holding that the carriageways and terminal stations of petitioner are not improvements for purposes of the Real Property Tax Code. "II
5

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The Honorable Court of Appeals erred in not holding that being attached to national roads owned by the national government, subject carriageways and terminal stations should be considered property of the national government. "III The Honorable Court of Appeals erred in not holding that payment of charges or fares in the operation of the light rail transit system does not alter the nature of the subject carriageways and terminal stations as devoted for public use. "IV The Honorable Court of Appeals erred in failing to consider the view advanced by the Department of Finance, which takes charge of the overall collection of taxes, that subject carriageways and terminal stations are not subject to realty taxes. "V The Honorable Court of Appeals erred in failing to consider that payment of the realty taxes assessed is not warranted and should the legality of the questioned assessment be upheld, the amount of the realty taxes assessed would far exceed the annual earnings of petitioner, a government corporation." The foregoing all point to one main issue: whether petitioner's carriageways and passenger terminal stations are subject to real property taxes. The Court's Ruling The Petition has no merit. Main Issue: May Real Property Taxes be Assessed and Collected? The Real Property Tax Code, the law in force at the time of the assailed assessment in 1984, mandated that "there shall be levied, assessed and collected in all provinces, cities and municipalities an annual ad valorem taxon real property such as lands, buildings, machinery and other improvements affixed or attached to real property not 7 hereinafter specifically exempted."
6

Petitioner does not dispute that its subject carriageways and stations may be considered real property under Article 415 of the Civil Code. However, it resolutely argues that the same are improvements, not of its properties, but of the governmentowned national roads to which they are immovably attached. They are thus not taxable as improvements under the Real Property Tax Code. In essence, it contends that to impose a tax on the carriageways and terminal stations would be to impose taxes on public roads. The argument does not persuade. We quote with approval the solicitor general's astute comment on this matter: "There is no point in clarifying the concept of industrial accession to determine the nature of the property when what is fundamentally important for purposes of tax classification is to determine the character of the property subject [to] tax. The character of tax as a property tax must be determined by its incidents, and form the natural and legal effect thereof. It is irrelevant to associate the carriageways and/or the passenger terminals as accessory improvements when the view of taxability is focused on the character of the property. The latter situation is not a novel issue as it has already been resolved by this Honorable Court in the case of City of Manila vs. IAC (GR No. 71159, November 15, 1989) wherein it was held: 'The New Civil Code divides the properties into property for public and patrimonial property (Art. 423), and further enumerates the property for public use as provincial road, city streets, municipal streets, squares, fountains, public waters, public works for public service paid for by said [provinces], cities or municipalities; all other property is patrimonial without prejudice to provisions of special laws. (Art. 424, Province of Zamboanga v. City of Zamboanga, 22 SCRA 1334 [1968]) xxx '...while the following are corporate or proprietary property in character, viz: 'municipal water works, slaughter houses, markets, stables, bathing establishments, wharves, ferries and fisheries.' Maintenance of parks, golf courses, cemeteries and airports, among others, are also recognized as municipal or city activities of a proprietary character (Dept. of Treasury v. City of Evansville; 60 NE 2nd 952)' "The foregoing enumeration in law does not specify or include carriageway or passenger terminals as inclusive of properties strictly for public use to exempt petitioner's properties from taxes. Precisely, the properties of petitioner are not exclusively considered as public roads being improvements placed upon the public road, and this separability nature of the structure in itself physically distinguishes it from a public road. Considering further that carriageways or passenger terminals are elevated structures which are not freely accessible to the public, viz-a-viz roads which

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are public improvements openly utilized by the public, the former are entirely different from the latter. "The character of petitioner's property, be it an improvements as otherwise distinguished by petitioner, needs no further classification when the law already classified it as patrimonial property that can be subject to tax. This is in line with the old ruling that if the public works is not for such free public service, it is not within the 8 purview of the first paragraph of Art. 424 if the New Civil Code." Though the creation of the LRTA was impelled by public service -- to provide mass transportation to alleviate the traffic and transportation situation in Metro Manila -- its operation undeniably partakes of ordinary business. Petitioner is clothed with corporate status and corporate powers in the furtherance of its proprietary 9 objectives. Indeed, it operates much like any private corporation engaged in the mass transport industry. Given that it is engaged in a service-oriented commercial endeavor, its carriageways and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a government-owned or controlled corporation. True, petitioner's carriageways and terminal stations are anchored, at certain points, on public roads. However, it must be emphasized that these structures do not form part of such roads, since the former have been constructedover the latter in such a way that the flow of vehicular traffic would not be impeded. These carriageways and terminal stations serve a function different from that of the public roads. The former are part and parcel of the light rail transit (LRT) system which, unlike the latter, are not open to use by the general public. The carriageways are accessible only to the LRT trains, while the terminal stations have been built for the convenience of LRTA itself and its customers who pay the required fare. Basis of Assessment Is Actual Use of Real Property Under the Real Property Tax Code, real property is classified for assessment 10 purposes on the basis of actual use, which is defined as "the purpose for which the property is principally or predominantly utilized by the person in possession of the 11 property." Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of the carriageways and terminal stations are the commuting public. It adds that the public-use character of the LRT is not negated by the fact that revenue is obtained from the latter's operations. We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible only to those who pay the required fare. It is thus apparent that petitioner does not exist solely for public service, and that the LRT carriageways and terminal

stations are not exclusively for public use. Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those carriageways and terminal stations in its public utility business and earns money therefrom. Petitioner Not Exempt from Payment of Real Property Taxes In any event, there is another legal justification for upholding the assailed CA Decision.1wphi1 Under the Real Property Tax Code, real property "owned by the Republic of the Philippines or any of its political subdivisions and any governmentowned or controlled corporation so exempt by its charter, provided, however, that this exemption shall not apply to real property of the abovenamed entities the beneficial 12 use of which has been granted, for consideration or otherwise, to a taxable person." Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax exemption in its favor. Its exemption is limited to direct and indirect taxes, duties or fees in connection with the importation of equipment not locally available, as the following provision shows: "ARTICLE 4 TAX AND DUTY EXEMPTIONS Sec. 8. Equipment, Machineries, Spare Parts and Other Accessories and Materials . The importation of equipment, machineries, spare parts, accessories and other materials, including supplies and services, used directly in the operations of the Light Rails Transit System, not obtainable locally on favorable terms, out of any funds of the authority including, as stated in Section 7 above, proceeds from foreign loans credits or indebtedness, shall likewise be exempted from all direct and indirect taxes, customs duties, fees, imposts, tariff duties, compensating taxes, wharfage fees and other charges and restrictions, the provisions of existing laws to the contrary notwithstanding." Even granting that the national government indeed owns the carriageways and terminal stations, the exemption would not apply because their beneficial use has been granted to petitioner, a taxable entity. Taxation is the rule and exemption is the exception. Any claim for tax exemption is 13 strictly construed against the claimant. LRTA has not shown its eligibility for exemption; hence, it is subject to the tax. WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court of Appeals AFFIRMED. Costs against the petitioner.

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SO ORDERED. Melo, (Chairman), Vitug, and Purisima, JJ., concur. Gonzaga-Reyes, J., no part.

annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted."
8

Comment of the Office of the Solicitor General, pp. 8-10; rollo, pp. 70-72.

See Section 4 of Executive Order No. 603, the LRTA charter, which provides: Footnotes
1

Penned by Justice Ramon Mabutas Jr., with the concurrence of Justices Minerva P. Gonzaga-Reyes (Division chairperson and now a member of this Court) and Salvador J. Valdez (member).
2

"ARTICLE 2 CORPORATE POWERS "Sec. 4. General Powers. - The Authority, through the Board of Directors, may undertake such action as are expedient for or conducive to the attainment of the purposes and objectives of the Authority, or of any purpose reasonably incidental to or consequential upon any of these purposes. As such, the Authority shall have the following general powers: (1) To have continuous succession under its corporate name, until otherwise provided by law; (2) To prescribe, amend, and/or repeal its by-laws; (3) To adopt and use a seal and alter it at its pleasure; (4) To sue and be sued; (5) To contract any obligation or enter into, assign or accept the assignment of, and vary or rescind any agreement, contract of obligation necessary or incidental to the proper management of the Authority; (6) To borrow funds from any source, private or public, foreign or domestic, and to issue bonds and other evidence of indebtedness, the payment of which shall be guaranteed by the National Government, subject to pertinent borrowing law; (7) To acquire, receive, take, and hold by bequest, devise, gift, purchase or lease, either absolutely or in trust for any of its purposes, from foreign and domestic sources, any

Rollo, p. 43. CA Decision, pp. 2-3; rollo, pp. 29-30.

This Petition was deemed submitted for decision on October 13, 1999, upon receipt by the Court of the Explanation filed by Attys. Melchor R. Monsod and Jose A. Perello Jr. of the Office of the City Legal Officer of Manila, who clarified that they were adopting as memorandum their February 28, 1998 Comment. Received by the Court on November 3, 1998 was Petitioner LRTA's Memorandum signed by Government Corporate Counsel Jun Valerio, Assistant Government Corporate Counsel Antonio M. Brillantes, and Government Corporate Attorney IV Isabelo G. Gumaru. On September 30, 1998, the Office of the Solicitor General filed a "Manifestation and Motion for Leave to Adopt Comment as Memorandum for the Central Board of Assessment Appeals." The OSG's May 2, 1997 Comment was signed by Assistant Solicitor General Mariano M. Martinez and Solicitors Luis F. Simon and Brigido Artemon M. Luna.
5

Rollo, pp. 151-152; original written entirely in upper case.

Presidential Decree No. 464. See also the Local Government Code of 1991 or Republic Act No. 7160, which took effect on January 1, 1992.
7

Ibid., 38. This is identical to 232 of the Local Government Code (LGC), which reads: "Section 232. Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area may levy an

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asset, grant or property, real or personal, subject to such limitations as are provided in existing laws; to convey or dispose of such assets, grants, or properties, movable and immovable; and invest and/or reinvest such proceeds and deal with and expand its assets and income in such a manner as will best promote its objectives; (8) To improve, develop or alter any property held by it; (9) To carry on any business, either alone or in partnership with any other person or persons; (10) To employ an agent or contractor or perform such things as the Authority may perform; (11) To exercise the right of eminent domain, whenever the Authority deems it necessary for the attainment of its objectives; (12) To prescribe rules and regulations in the conduct of its general business as well as to fix and implement the terms and conditions of its related activities; (13) To determine the fares payable by persons traveling on the light rail system, in consultation with the Board of Transportation; (14) To establish, operate, and maintain branches or field offices when required by the exigencies of its business; (15) To determine its organizational structure and the number, positions and salaries of its personnel, subject to pertinent organization and compensation law; and (16) To exercise such powers and perform such duties as may be necessary to carry out the business and purposes for which the Authority was established or which, from time to time may be declared by the Board of Directors to be necessary, useful, incidental or auxiliary to accomplish such purposes; and generally, to exercise all powers of an Authority under the Corporation Law that are not inconsistent with the provisions of this Order, or with

orders pertaining to government corporate budgeting, organization, borrowing, or compensation."

10

19 of the Real Property Tax Code reads: "Real property shall be classified for assessment on the basis of its actual use, regardless of where located and whoever uses it." See also 198 (b) of the LGC, an identical proviso which reads: "Real property shall be classified for assessment purposes on the basis of its actual use."
11

See 3 (a) of the Real Property Tax Code and 199 (b) of the LGC.

12

Section 40 (a) of the Real Property Code and Section 234 (a) of the Local Government Code. Thus, petitioner will not find solace under the Local Government Code either, for the reasons discussed above.
13

Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667, September 11, 1996.

Republic of the Philippines SUPREME COURT Manila 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 1 amended, of the Decision dated July 17, 2000 of the Court of Appeals in CA-G.R. SP

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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 2 established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B1, 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 3 Quezon City. Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-02101231 (15-2518-A) were issued for the land and the hospital building, 4 5 respectively. On August 25, 1993, the petitioner filed a Claim for Exemption 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 (QCLBAA, 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 6 property taxes. The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of 7 Assessment Appeals of Quezon City (CBAA, for brevity) 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 8 CBAA. 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 9 real property. The petitioner cited our ruling in Herrera v. QC-BAA 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

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contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month, when the monthly rental should beP357,000 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 10 charitable? 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 bylaws, 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 11 and occupation of the properties. 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 12 government. It may be applied to almost anything that tend to promote the welldoing and well-being of social man. It embraces the improvement and promotion of 13 the happiness of man. The word "charitable" is not restricted to relief of the poor or 14 sick. 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;lavvph!l.net 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

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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 15 of a Lung Center for the welfare and benefit of the Filipino people. 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;lavvphil.net

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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 16 therewith. 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 17 or be injured or wounded and become a subject of charity. 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 18 benefit of the persons managing or operating the institution. In Congregational 19 Sunday School, etc. v. Board of Review, 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 20 the state to care for and advance the interests of its citizens. As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital 21 Association of South Dakota v. Baker: [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 22 which the institution is intended to further. The money received by the petitioner becomes a part of the trust fund and must be 23 devoted to public trust purposes and cannot be diverted to private profit or benefit. 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 24 County: 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 Careand 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 25 support such an exemption, as they do here. 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

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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 26 27 mistaken. As held in Salvation Army v. Hoehn: 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 28 exemption from taxation . 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, nonstock 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 29 made by, or for the Lung Center. 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 the 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 30 terms to those expressly mentioned. 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 31 would be intended beyond what was meant. 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 32 religious, charitable or educational purposes shall be exempt from taxation. The tax exemption under this constitutional provision covers property taxes only. 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, 34 directly and exclusively used for religious, charitable or educational purposes." 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: ...
33

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(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, andexclusively used for religious, charitable or educational 35 purposes. We note that under the 1935 Constitution, "... all lands, buildings, and improvements used exclusively for charitable purposes shall be exempt from 36 taxation." 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 37 that such property be used "actually" and "directly" for such purposes. 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 38 39 effect. As this Court held in Province of Abra v. Hernando: 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; 40 as enjoying a privilege exclusively." If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is 41 subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the 42 43 Constitutions and the law. Solely is synonymous with exclusively.

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 44 tax-exempt purposes. 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 45 taxes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes. 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. SO ORDERED. Davide, Jr., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, SandovalGutierrez, Carpio, Austria-Martinez, Corona, Carpio Morales, Azcuna, and Tinga, JJ., concur. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

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G.R. No. 120082 September 11, 1996 MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.

transportation and communication in the country; and b) upgrade the services and facilities of the airports and to formulate internationally acceptable standards of airport accommodation and service. Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. Sec. 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 . . . On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-inCharge, Office of the Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79. Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also asserted that it is an instrumentality of the government performing governmental functions, citing section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of local government units: 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 barangay shall not extend to the levy of the following: a) . . .

DAVIDE, JR., J.: For review under Rule 45 of the Rules of Court on a pure question of law are 1 the decision of 22 March 1995 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International Airport Authority vs. City 2 of Cebu", and its order of 4, May 1995 denying the motion to reconsider the decision. We resolved to give due course to this petition for its raises issues dwelling on the scope of the taxing power of local government-owned and controlled corporations. The uncontradicted factual antecedents are summarized in the instant petition as follows: Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act No. 6958, mandated to "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, . . . and such other Airports as may be established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated to: a) 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

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xxx xxx xxx o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. (Emphasis supplied) Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA is a government-controlled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code that took effect on January 1, 1992: Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons whether natural or juridical,including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock, and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code . (Emphasis supplied) xxx xxx xxx Sec. 234. Exemptions from Real Property taxes. . . . (a) . . . xxx xxx xxx (c) . . . Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations are hereby withdrawn upon the effectivity of this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter was compelled to pay its tax account "under protest" and thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing powers of local government units do not extend to the levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national government by the very nature of its powers and functions. Respondent City, however, asserted that MACIAA is not an instrumentality of the government but merely a government-owned corporation performing proprietary functions As such, all exemptions previously granted to it were deemed withdrawn by operation of law, as provided under Sections 193 and 234 of the 3 Local Government Code when it took effect on January 1, 1992. The petition for declaratory relief was docketed as Civil Case No. CEB16900. In its decision of 22 March 1995, the trial court dismissed the petition in light of its findings, to wit: A close reading of the New Local Government Code of 1991 or RA 7160 provides the express cancellation and withdrawal of exemption of taxes by government owned and controlled corporation per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and 234] Petitioners claimed that its real properties assessed by respondent City Government of Cebu are exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the same (citing Section 14 of RA 6958). However, RA 7160 expressly provides that "All general and special laws, acts, city charters, decress [sic], executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this
4

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Code are hereby repealed or modified accordingly." ([f], Section 534, RA 7160). With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local Government Code of 1991. So that petitioner in this case has to pay the assessed realty tax of its properties effective after January 1, 1992 until the present. This Court's ruling finds expression to give impetus and meaning to the overall objectives of the New Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that the territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them more effective partners in the attainment of national goals. Towards this end, the State shall provide for a more responsive and accountable local government structure instituted through a system of decentralization whereby local government units shall be given more powers, authority, responsibilities, and resources. The process of decentralization shall proceed from the national 5 government to the local government units. . . . Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the instant petition based on the following assignment of errors: I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT. II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU. Anent the first assigned error, the petitioner asserts that although it is a government-owned or controlled corporation it is mandated to perform functions in the same category as an instrumentality of Government. An

instrumentality of Government is one created to perform governmental functions primarily to promote certain aspects of the economic life of the 6 people. Considering its task "not merely to efficiently operate and manage the Mactan-Cebu International Airport, but more importantly, to carry out the Government policies of promoting and developing the Central Visayas and Mindanao regions as centers of international trade and tourism, and accelerating the development of the means of transportation and 7 communication in the country," and that it is an attached agency of the 8 Department of Transportation and Communication (DOTC), the petitioner "may stand in [sic] the same footing as an agency or instrumentality of the national government." Hence, its tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage of the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing powers of local government units shall not extend to the levy of taxes of fees or charges of any kind on the national government its agencies and instrumentalities." As to the second assigned error, the petitioner contends that being an instrumentality of the National Government, respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine 9 Amusement and Gaming Corporation; Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original character, PD 1869. All its shares of stock are owned by the National Government. . . . PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is governmental, which places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local government. The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation of constitutional laws enacted by Congress to carry into execution the powers vested in the federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579). This doctrine emanates from the "supremacy" of the National Government over local government.

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Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau Modern Constitutional Law, Vol. 2, p. 140) Otherwise mere creature of the State can defeat National policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it. (Emphasis supplied) It then concludes that the respondent Judge "cannot therefore correctly say that the questioned provisions of the Code do not contain any distinction between a governmental function as against one performing merely proprietary ones such that the exemption privilege withdrawn under the said Code would apply to allgovernment corporations." For it is clear from Section 133, in relation to Section 234, of the LGC that the legislature meant to exclude instrumentalities of the national government from the taxing power of the local government units. In its comment respondent City of Cebu alleges that as local a government unit and a political subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such power is guaranteed by the 10 Constitution and enhanced further by the LGC. While it may be true that under its Charter the petitioner was exempt from the payment of realty 11 taxes, this exemption was withdrawn by Section 234 of the LGC. In response to the petitioner's claim that such exemption was not repealed because being an instrumentality of the National Government, Section 133 of the LGC prohibits local government units from imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the petitioner is likewise a government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish between government-owned or controlled corporations performing governmental and purely proprietary functions. Respondent city of Cebu urges this the Manila 12 International Airport Authority is a governmental-owned corporation, and

to reject the application of Basco because it was "promulgated . . . before the enactment and the singing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the framers of the said law. As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people 13 through their Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform and equitable and Congress shall evolve 14 a progressive system of taxation. So potent indeed is the power that it was 15 once opined that "the power to tax involves the power to destroy." Verily, taxation is a destructive power which interferes with the personal and property for the support of the government. Accordingly, tax statutes must be construed strictly against the government and liberally in favor of the 16 17 taxpayer. But since taxes are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against 18 the taxpayers and liberally in favor of the taxing authority. A claim of exemption from tax payment must be clearly shown and based on language 19 in the law too plain to be mistaken. Elsewise stated, taxation is the rule, 20 exemption therefrom is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the 21 government in the course of its operations. The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority 22 conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of

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a mutual nature, which then becomes contractual and is thus covered by the 23 non-impairment clause of the Constitution. 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 exemption from taxation. Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units as follows: Sec. 133. Common Limitations on the Taxing Power 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: (a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein (d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all other kinds of customs fees charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned: (e) Taxes, fees and charges and other imposition upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise or charges for wharfages, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise; (f) Taxes fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

(g) Taxes on business enterprise certified to be the Board of Investment as pioneer or nonpioneer for a period of six (6) and four (4) years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; (i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (j) Taxes on the gross receipts of transportation contractor and person engage in the transportation of passengers of freight by hire and common carriers by air, land, or water, except as provided in this code; (k) Taxes on premiums paid by ways reinsurance or retrocession; (l) Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving of thereof, except, tricycles; (m) Taxes, fees, or other charges on Philippine product actually exported, except as otherwise provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and Cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty nine hundred thirtyeight (R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines; and (o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND

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LOCAL GOVERNMENT UNITS. (emphasis supplied) Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred to are "of any kind", hence they include all of these, unless otherwise provided by the LGC. The term "taxes" is well understood so as to need no further elaboration, especially in the light of the above enumeration. The term "fees" means charges fixed by law or Ordinance for 24 the regulation or inspection of business activity, while "charges" are 25 pecuniary liabilities such as rents or fees against person or property. Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232. It reads as follows: Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area may levy on an annual ad valorem tax on real property such as land, building, machinery and other improvements not hereafter specifically exempted. Section 234 of LGC provides for the exemptions from payment of real property taxes and withdraws previous exemptions therefrom granted to natural and juridical persons, including government owned and controlled corporations, except as provided therein. It provides: Sec. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof had been granted, for reconsideration or otherwise, to a taxable person; (b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques nonprofits or religious cemeteries and all lands, building and improvements actually, directly, and exclusively used for religious charitable or educational purposes; (c) All machineries and equipment that are actually, directly and exclusively used by local

water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and; (e) Machinery and equipment used for pollution control and environmental protection. Except as provided herein, any exemptions from payment of real property tax previously granted to or presently enjoyed by, all persons whether natural or juridical, including all government owned or controlled corporations are hereby withdrawn upon the effectivity of his Code. These exemptions are based on the ownership, character, and use of the property. Thus; (a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives. (b) Character Exemptions. Exempted from real property taxes on the basis of their character are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) non profit or religious cemeteries. (c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to which they are devoted are: (i) all lands buildings and improvements which are actually, directed and exclusively used for religious, charitable or educational purpose; (ii) all machineries and equipment actually, directly and exclusively used or by local water districts or

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by government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; and (iii) all machinery and equipment used for pollution control and environmental protection. To help provide a healthy environment in the midst of the modernization of the country, all machinery and equipment for pollution control and environmental protection may not be taxed by local governments. 2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical persons including government-owned or controlled corporations are withdrawn upon the 26 effectivity of the Code. Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides: Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including government-owned, or controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non stock and non profit hospitals and educational constitutions, are hereby withdrawn upon the effectivity of this Code. On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus, Section 192 thereof provides: Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto. The use of exceptions of provisos in these section, as shown by the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of Section 133; (2) "Unless otherwise provided in this Code" in section 193; (3) "not hereafter specifically exempted" in Section 232; and (4) "Except as provided herein" in the last paragraph of Section 234 initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided herein," with the "herein" to mean, of course, the section, it should have used the clause "unless otherwise provided in this Code." The former results in absurdity since the section itself enumerates what are beyond the taxing powers of local government units and, where exceptions were intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which excepts the income taxes "when livied on banks and other financial institutions", item (d) which excepts "wharfage on wharves constructed and maintained by the local government until concerned"; and item (1) which excepts taxes, fees, and charges for the registration and issuance of license or permits for the driving of "tricycles". It may also be observed that within the body itself of the section, there are exceptions which can be found only in other parts of the LGC, but the section interchangeably uses therein the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in item (j). These clauses would be obviously unnecessary or mere surplus-ages if the opening clause of the section were" "Unless otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event, even if the latter is used, since under Section 232 local government units have the power to levy real property tax, except those exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section 133. Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in Section 133 the taxing powers of local government units cannot extend to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalties, and local government units"; however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned by

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the Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted, for consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph of Section 234. As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has been granted to taxable person for consideration or otherwise. Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from 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. Any claim to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is qualified by Section 232 and 234. In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of the local government units cannot extend to the levy of: (o) taxes, fees, or charges of any kind on the National Government, its agencies, or instrumentalities, and local government units. I must show that the parcels of land in question, which are real property, are any one of those enumerated in Section 234, either by virtue of ownership,

character, or use of the property. Most likely, it could only be the first, but not under any explicit provision of the said section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the Government", it could only be within be first item of the first paragraph of the section by expanding the scope of the terms Republic of the Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote: (a) real property owned by the Republic of the Philippines, or any of the Philippines, or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of the Government is based on Section 133(o), which expressly mentions the word "instrumentalities"; and in the second place it fails to consider the fact that the legislature used the phrase "National Government, its agencies and instrumentalities" "in Section 133(o),but only the phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a). The terms "Republic of the Philippines" and "National Government" are not interchangeable. The former is boarder and synonymous with "Government of the Republic of the Philippines" which the Administrative Code of the 1987 defines as the "corporate governmental entity though which the functions of the government are exercised through at the Philippines, including, saves as the contrary appears from the context, the various arms through which political authority is made effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city, municipal or barangay 27 subdivision or other forms of local government." These autonomous regions, provincial, city, municipal or barangay subdivisions" are the political 28 subdivision. On the other hand, "National Government" refers "to the entire machinery of the central government, as distinguished from the different forms of local 29 Governments." The National Government then is composed of the three 30 great departments the executive, the legislative and the judicial. An "agency" of the Government refers to "any of the various units of the Government, including a department, bureau, office instrumentality, or government-owned or controlled corporation, or a local government or a 31 distinct unit therein;" while an "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

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all corporate powers, administering special funds, and enjoying operational autonomy; usually through a charter. This term includes regulatory agencies, 32 chartered institutions and government-owned and controlled corporations". If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from payment of real property taxes under the last sentence of the said section to the agencies and instrumentalities of the National Government mentioned in Section 133(o), then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress did not wish to expand the scope of the exemption in Section 234(a) to include real property owned by other instrumentalities or agencies of the government including government-owned and controlled corporations is further borne out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code, which reads: Sec 40. Exemption from Real Property Tax. The exemption shall be as follows: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned or controlled corporations so exempt by is charter: Provided, however, that this exemption shall not apply to real property of the above mentioned entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person. Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled corporation so exempt by its charter" was excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to limit further tax exemption privileges, specially in light of the general provision on withdrawal of exemption from payment of real property taxes in the last paragraph of property taxes in the last paragraph of Section 234. These policy considerations are consistent with the State policy 33 to ensure autonomy to local governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them 34 effective partners in the attainment of national goals. The power to tax is

the most effective instrument to raise needed revenues to finance and support myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for this entities to share in the requirements of the development, fiscal or otherwise, by paying the 35 taxes and other charges due from them. The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the petitioner is a "taxable person". Section 15 of the petitioner's Charter provides: Sec. 15. Transfer of Existing Facilities and Intangible Assets . All existing public airport facilities, runways, lands, buildings and other properties, movable or immovable, belonging to or presently administered by the airports, and all assets, powers, rights, interests and privileges relating on airport works, or air operations, including all equipment which are necessary for the operations of air navigation, acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to the Authority: Provided however, that the operations control of all equipment necessary for the operation of radio aids to air navigation, airways communication, the approach control office, and the area control center shall be retained by the Air Transportation Office. No equipment, however, shall be removed by the Air Transportation Office from Mactan without the concurrence of the authority. The authority may assist in the maintenance of the Air Transportation Office equipment. The "airports" referred to are the "Lahug Air Port" in Cebu City and the 36 "Mactan International AirPort in the Province of Cebu", which belonged to the Republic of the Philippines, then under the Air Transportation Office 37 (ATO). It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by the Lahug Air Port and includes the parcels of land the respondent City of Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among other things, to the

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petitioner and not just the transfer of the beneficial use thereof, with the ownership being retained by the Republic of the Philippines. This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's authorized capital stock consists of, inter alia "the value of such real estate owned and/or administered by the 38 airports." Hence, the petitioner is now the owner of the land in question and the exception in Section 234(c) of the LGC is inapplicable. Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax. Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be an "agency" or "instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the petitioner. Accordingly, the position taken by the petitioner is untenable. Reliance 39 on Basco vs. Philippine Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the LGC. 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. WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB16900 are AFFIRMED. No pronouncement as to costs. SO ORDERED. Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 131359 May 5, 1999 MANILA ELECTRIC COMPANY, petitioner, vs. PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial Treasurer of Laguna,respondents.

VITUG, J.: On various dates, certain municipalities of the Province of Laguna, including, Bian, Sta. Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutions through their respective municipal councils granting franchise in favor of petitioner Manila Electric Company ("MERALCO") for the supply of electric light, heat and power within their concerned areas. On 19 January 1983, MERALCO was likewise granted a franchise by the National Electrification Administration to operate an electric light and power service in the Municipality of Calamba, Laguna. On 12 September 1991, Republic Act No. 7160, otherwise known as the "Local Government Code of 1991," was enacted to take effect on 01 January 1992 enjoining local government units to create their own sources of revenue and to levy taxes, fees and charges, subject to the limitations expressed therein, consistent with the basic policy of local autonomy. Pursuant to the provisions of the Code, respondent province enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, providing, in part, as follows: Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash sales and sales on account realized during the preceding calendar year within this province, including the territorial limits on any city located in the province.

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On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then amounted to P19,520.628.42, under protest. A formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and continued to pay to the National Government pursuant to P.D. 551 already included the franchise tax imposed by the Provincial Tax Ordinance. MERALCO, contended that the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned MERALCO, contravened the provisions of Section 1 of P.D. 551 which read: Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all grantees of franchises to generate, distribute and sell electric current for light, heat and power shall be two per cent (2%) of their gross receipts received from the sale of electric current and from transactions incident to the generation, distribution and sale of electric current. Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized representative on or before the twentieth day of the month following the end of each calendar quarter or month, as may be provided in the respective franchise or pertinent municipal regulation and shall, any provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any national or local authority on earnings, receipts, income and privilege of generation, distribution and sale of electric current. On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor Jose D. Lina relied on a more recent law, i.e. Republic Act No. 7160 or the Local Government Code of 1991, than the old decree invoked by petitioner. On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta. Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order, against the Province of Laguna and also Benito R. Balazo in his capacity as the Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO had priorly made a formal request for refund, petitioner thereafter likewise made additional payments under protest on various dates totaling P27,669,566.91. The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is hereby rendered in favor of the defendants and against the plaintiff, by: 1. Ordering the dismissal of the Complaint; and 2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, 2 binding, reasonable and enforceable. In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz: 1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and Section 1 of Presidential Decree No. 551. 2. Whether Republic Act No. 7160, otherwise known Local Government Code of 1991, has repealed, amended or modified Presidential Decree No. 551. 3. Whether the doctrine of administrative remedies is applicable in 3 this case. The petition lacks merit. Prefatorily, it might be well to recall that local governments do not have the inherent 4 power to tax except to the extent that such power might be delegated to them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government units. Thus: Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions, and duties of local officials, and all other matters relating to the organization and operation of the local units.

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xxx xxx xxx Sec. 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a similar delegation of revenue making powers to 5 local governments. Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and local government units instead derived their tax powers under a limited statutory authority. Whereas, then, the delegation of tax powers granted at that time by statute to local governments was confined and defined (outside of which the power was deemed withheld), the present constitutional rule (starting with the 1973 Constitution), however, would broadly confer such tax powers subject only to specific exceptions that the law might prescribe. Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened 6 and made more autonomous, the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just. The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions of the now repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by Presidential Decree 7 No. 231 pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991 Code explicitly authorizes provincial governments, notwithstanding "any exemption granted by any law or other special law, . . . (to) impose a tax on businesses enjoying a franchise." Section 137 thereof provides:

Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein. (Underscoring supplied for emphasis) Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has effectively withdrawn under Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law states: Sec. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code . (Underscoring supplied for emphasis) The Code, in addition, contains a general repealing clause in its Section 534; thus: Sec. 534. Repealing Clause. . . . (f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed or modified 8 accordingly. (Underscoring supplied for emphasis) To exemplify, in Mactan Cebu International Airport Authority vs. Marcos, the Court upheld the withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport Authority. The Court ratiocinated: . . . These policy considerations are consistent with the State policy to ensure autonomy to local governments and the objective of the
9

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LGC 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. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities if local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarity situated enterprises, and there was a need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due from 10 them. Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of Misamis Oriental vs. Cagayan Electric Power and Light 11 Company, Inc.; thus: In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or collected by any authority" found in the franchise of the Visayan Electric Company was held to exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385) Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224). The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91 Phil. 35). Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant Company from the payment of the tax

imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231). So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4]. 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of the 2 franchise and the rendition of public service by the grantee. In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. 13 Bienvenido V. Reyes, et al., the Court has held that the phrase in lieu of all taxes "have to give way to the peremptory language of the Local Government Code specifically providing for the withdrawal of such exemptions, privileges," and that "upon the effectivity of the Local Government Code all exemptions except only as provided therein can no longer be invoked by MERALCO to disclaim liability for the local tax." In fine, the Court has viewed its previous rulings as laying stress more on the legislative intent of the amendatory law whether the tax exemption privilege is to be withdrawn or not rather than on whether the law can withdraw, without violating the Constitution, the tax exemption or not. While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without 14 impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment 15 clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires. WHEREFORE, the instant petition is hereby DISMISSED. No costs.1wphi1.nt SO ORDERED.

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