Commissioner of Internal Revenue vs. Algue Inc.

GR No. L-28896 | Feb. 17, 1988

Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and other
allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its
delinquency income taxes from 1958-1959, amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its
counsel, Atty. Guevara, who refused to receive it on the ground of the pending
protest
Since the protest was not found on the records, a file copy from the corp was
produced and given to BIR Agent Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was 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
On April 23, Algue filed a petition for review of the decision of the CIR with the
Court of Tax Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not
an ordinary reasonable or necessary business expense
- payments are fictitious because most of the payees are members of the same
family in control of Algue and that there is not enough substantiation of such
payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered 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.

Issue: W/N the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by Algue as legitimate business expenses in its
income tax returns

Ruling:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance, made in accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the decision
or ruling challenged
During the intervening period, the warrant was premature and could therefore
not be served.
Originally, CIR claimed that the 75K promotional fees to be personal holding
company income, but later on conformed to the decision of CTA
There is no dispute that the payees duly reported their respective shares of the
fees in their income tax returns and paid the corresponding taxes thereon. CTA
also found, after examining the evidence, that no distribution of dividends was
involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by
involving an imaginary deduction
Algue Inc. was a family corporation where strict business procedures were not
applied and immediate issuance of receipts was not required. at the end of the
year, when the books were to be closed, each payee made an accounting of all
of the fees received by him or her, to make up the total of P75,000.00. This
arrangement was understandable in view of the close relationship among the
persons in the family corporation
The amount of the promotional fees was not excessive. The total commission paid
by the Philippine Sugar Estate Development Co. to Algue Inc. was P125K. 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.
Sec. 30 of the Tax Code: allowed deductions in the net income Expenses - All
the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries
or other compensation for personal services actually rendered xxx
the burden is on the taxpayer to prove the validity of the claimed deduction
In this case, Algue Inc. 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.
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
Taxation must 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

Algue Inc.s appeal from the decision of the CIR was filed on time with the CTA in
accordance with Rep. Act No. 1125. And we also find that the claimed deduction by Algue
Inc. was permitted under the Internal Revenue Code and should therefore not have been
disallowed by the CIR

PAL VS. EDU, 164 SCRA 320 (1988)
Facts of the case:
The disputed registration fees were imposed by the commissioner Elevate
pursuant to Section 8, RA 4136, the Land Transportation and Traffic Code.
PAL as a corporation is engaged in the air transportation business under the
legislative franchise. Under its franchise, PAL is exempt from the payment of
taxes.
In 1971 however, appellee Commissioner elevate issued a regulation requiring all tax
exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PALs protest, appellee refused to register the appellants motor
vehicles unless the amounts imposed were paid. PAL thus paid, under protest,
P19,529.75 as registration fees of its motor vehicles.
After paying under protest, PAL wrote to Commissioner Edu demanding a refund
of the amounts paid, invoking Calalang vs. Lorenzo 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.
Edu denied request for refund based on Republic v. Phil. Rabbit Bus, that motor
vehicle registration fees are regulatory and not revenue measures and,
therefore, do not come within the exemption granted to PAL under its franchise.
PAL filed the complaint against LTC Commissioner EDu and National Treasurer
Carbonell.
ISSUE: What is the nature of motor vehicle registration fees? Are they taxes or
regulatory fees?
RULING ON TAX VS. LICENSE AND REGULATORY FEE
SC ruled that motor vehicles registration fees are TAXES. Fees may be regarded
as taxes even though they also serve as instruments of regulation because
taxation may be made as an implementation of the States police power. But if
the purpose is primarily REVENUE, or if revenue is atleast, one of the real and
substantial purposes, then the exaction is properly called a TAX.
RULING ON PURPOSES OF TAX, OBJECTIVE OF TAXATION: GENERAL, FISCAL REVENUE
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.
It is possible for an exaction to be both a tax and a regulation. License fees are
charges, looked to as a source of revenue as well as a means of regulation. The
fees may be properly regarded as taxes eventhough they also serve as an
instrument of regulation. If the purpose is primarily revenue, or if revenue is
atleast one of the real and substantial purposes, then the exaction is properly
called a TAX.
RULING ON NON-DELEGABILITY OF THE POWER TO TAX
It is clear from the provisions of section 73 of Commonwealth Act 123 and
section 61 of the Land Transportation and Traffic Code that the legislative intent
and purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of
highways and to a much lesser degree, pay for the operating expenses of the
administering agency.
There is a valid delegation to the Land Transportation Office. Simply put, if the
exaction under RA 4136 were merely a regulatory fee, the imposition on RA 5448
need not be an additional tax. RA4136 also speaks of other fees such as the
special permit fees for certain types of motor vehicles (sec.10) and additional
fees for change of registration (sec.11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus they are not
mentioned by Sec. 59 (b) of the Code as taxes like the motor vehicle registration
fee and chauffers license fee. Such fees are to go into the expenditures of the
Land Transportation Commission as provided for in the last proviso of Sec. 61.
Motor vehicle registration fees are 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.

ESSO STANDARD EASTERN, INC v. COMMISSIONER OF INTERNAL REVENUE
G.R. Nos. L-28508-9, July 7, 1989
FACTS:
In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted from its gross
income for 1959, as part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its petroleum concessions.
This claim was disallowed by the Commissioner of Internal Revenue (CIR) on the
ground that the expenses should be capitalized and might be written off as a loss
only when a "dry hole" should result. Esso then filed an amended return where it
asked for the refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses in the
same return was the amount of P340,822.04, representing margin fees it had
paid to the Central Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the
claimed deduction for the margin fees paid on the ground that the margin fees
paid to the Central Bank could not be considered taxes or allowed as deductible
business expenses.
Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin fees it
had earlier paid contending that the margin fees were deductible from gross
income either as a tax or as an ordinary and necessary business expense.
However, Essos appeal was denied.

ISSUE:
(1) Whether or not the margin fees are taxes.
(2) Whether or not the margin fees are necessary and ordinary business expenses.

RULING:
(1) No. A tax is levied to provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our country's international
reserves. The margin fee was imposed by the State in the exercise of its police
power and not the power of taxation.
(2) No. Ordinarily, an expense will be considered 'necessary' where the expenditure is
appropriate and helpful in the development of the taxpayer's business. It is
'ordinary' when it connotes a payment which is normal in relation to the business
of the taxpayer and the surrounding circumstances. Since the margin fees in
question were incurred for the remittance of funds to Esso's Head Office in New
York, which is a separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said therefore that the
margin fees were appropriate and helpful in the development of Esso's business
in the Philippines exclusively or were incurred for purposes proper to the
conduct of the affairs of Esso's branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in the Philippines exclusively.
IN THE MATTER OF A PETITION FOR DECLARATORY JUDGMENT REGARDING THE
VALIDITY OF MUNICIPAL ORDINANCE NO. 3659 OF THE CITY OF MANILA. PHYSICAL
THERAPY ORGANIZATION OF THE PHILIPPINES, INC., petitioner-appellant,
vs.
THE MUNICIPAL BOARD OF THE CITY OF MANILA and ARSENIO H. LACSON, as Mayor of
the City of Manila, respondents-appellees.

Mariano M. de Joya for appellant.
City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellees.

MONTEMAYOR, J.:

The petitioner-appellant, an association of registered massagists and licensed
operators of massage clinics in the City of Manila and other parts of the country,
filed an action in the Court of First Instance of Manila for declaratory judgment
regarding the validity of Municipal Ordinance No. 3659, promulgated by the
Municipal Board and approved by the City Mayor. To stop the City from enforcing
said ordinance, the petitioner secured an injunction upon filing of a bond in the
sum of P1,000.00. A hearing was held, but the parties without introducing any
evidence submitted the case for decision on the pleadings, although they
submitted written memoranda. Thereafter, the trial court dismissed the petition
and later dissolved the writ of injunction previously issued.

The petitioner appealed said order of dismissal directly to this Court. In support of its
appeal, petitioner-appellant contends among other things that the trial court
erred in holding that the Ordinance in question has not restricted the practice of
massotherapy in massage clinics to hygienic and aesthetic massage, that the
Ordinance is valid as it does not regulate the practice of massage, that the
Municipal Board of Manila has the power to enact the Ordinance in question by
virtue of Section 18, Subsection (kk), Republic Act 409, and that permit fee of
P100.00 is moderate and not unreasonable. Inasmuch as the appellant assails and
discuss certain provisions regarding the ordinance in question, and it is necessary
to pass upon the same, for purposes of ready reference, we are reproducing said
ordinance in toto.

ORDINANCE No. 3659

AN ORDINANCE REGULATING THE OPERATION OF MASSAGE CLINICS IN THE CITY OF
MANILA AND PROVIDING PENALTIES FOR VIOLATIONS THEREOF.

Be it ordained by the Municipal Board of the City of Manila, that:

Section 1. Definition. For the purpose of this Ordinance the following words and
phrases shall be taken in the sense hereinbelow indicated:

(a) Massage clinic shall include any place or establishment used in the practice of
hygienic and aesthetic massage;

(b) Hygienic and aesthetic massage shall include any system of manipulation of
treatment of the superficial parts of the human body of hygienic and aesthetic
purposes by rubbing, stroking, kneading, or tapping with the hand or an
instrument;

(c) Massagist shall include any person who shall have passed the required examination
and shall have been issued a massagist certificate by the Committee of
Examiners of Massagist, or by the Director of Health or his authorized
representative;

(d) Attendant or helper shall include any person employed by a duly qualified
massagist in any message clinic to assist the latter in the practice of hygienic
and aesthethic massage;

(e) Operator shall include the owner, manager, administrator, or any person who
operates or is responsible for the operation of a message clinic.

SEC. 2. Permit Fees. No person shall engage in the operation of a massage clinic or
in the occupation of attendant or helper therein without first having obtained a
permit therefor from the Mayor. For every permit granted under the provisions
of this Ordinance, there shall be paid to the City Treasurer the following annual
fees:

(a) Operator of a massage P100.00

(b) Attendant or helper 5.00

Said permit, which shall be renewed every year, may be revoked by the Mayor at any
time for the violation of this Ordinance.

SEC. 3. Building requirement. (a) In each massage clinic, there shall be separate
rooms for the male and female customers. Rooms where massage operations are
performed shall be provided with sliding curtains only instead of swinging doors.
The clinic shall be properly ventilated, well lighted and maintained under
sanitary conditions at all times while the establishment is open for business and
shall be provided with the necessary toilet and washing facilities.

(b) In every clinic there shall be no private rooms or separated compartment except
those assigned for toilet, lavatories, dressing room, office or kitchen.

(c) Every massage clinic shall "provided with only one entrance and it shall have no
direct or indirect communication whatsoever with any dwelling place, house or
building.

SEC. 4. Regulations for the operation of massage clinics. (a) It shall be unlawful for
any operator massagist, attendant or helper to use, or allow the use of, a
massage clinic as a place of assignation or permit the commission therein of any
incident or immoral act. Massage clinics shall be used only for hygienic and
aesthetic massage.

(b) Massage clinics shall open at eight o'clock a.m. and shall close at eleven o'clock
p.m.

(c) While engaged in the actual performance of their duties, massagists, attendants
and helpers in a massage clinic shall be as properly and sufficiently clad as to
avoid suspicion of intent to commit an indecent or immoral act;

(d) Attendants or helpers may render service to any individual customer only for
hygienic and aesthetic purposes under the order, direction, supervision, control
and responsibility of a qualified massagist.

SEC. 5. Qualifications No person who has previously been convicted by final
judgment of competent court of any violation of the provisions of paragraphs 3
and 5 of Art. 202 and Arts. 335, 336, 340 and 342 of the Revised Penal Code, or
Secs. 819 of the City of Manila, or who is suffering from any venereal or
communicable disease shall engage in the occupation of massagist, attendant or
helper in any massage clinic. Applicants for Mayor's permit shall attach to their
application a police clearance and health certificate duly issued by the City
Health Officers as well as a massagist certificate duly issued by the Committee
or Examiners for Massagists or by the Director of Health or his authorized
representatives, in case of massagists.

SEC. 6. Duty of operator of massage clinic. No operator of massage clinic shall allow
such clinic to operate without a duly qualified massagist nor allow, any man or
woman to act as massagist, attendant or helper therein without the Mayor's
permit provided for in the preceding sections. He shall submit whenever
required by the Mayor or his authorized representative the persons acting as
massagists, attendants or helpers in his clinic. He shall place the massage clinic
open to inspection at all times by the police, health officers, and other law
enforcement agencies of the government, shall be held liable for anything which
may happen with the premises of the massage clinic.

SEC. 7. Penalty. Any person violating any of the provisions of this Ordinance shall
upon conviction, be punished by a fine of not less than fifty pesos nor more than
two hundred pesos or by imprisonment for not less than six days nor more than
six months, or both such fine and imprisonment, at the discretion of the court.

SEC. 8. Repealing Clause. All ordinances or parts of ordinances, which are
inconsistent herewith, are hereby repealed.

SEC. 9. Effectivity. This Ordinance shall take effect upon its approval.

Enacted, August 27, 1954.

Approved, September 7, 1954.

The main contention of the appellant in its appeal and the principal ground of its
petition for declaratory judgment is that the City of Manila is without authority
to regulate the operation of massagists and the operation of massage clinics
within its jurisdiction; that whereas under the Old City Charter, particularly,
Section 2444 (e) of the Revised Administrative Code, the Municipal Board was
expressly granted the power to regulate and fix the license fee for the
occupation of massagists, under the New Charter of Manila, Republic Act 409,
said power has been withdrawn or omitted and that now the Director of Health,
pursuant to authority conferred by Section 938 of the Revised Administrative
Code and Executive Order No. 317, series of 1941, as amended by Executive
Order No. 392, series, 1951, is the one who exercises supervision over the
practice of massage and over massage clinics in the Philippines; that the Director
of Health has issued Administrative Order No. 10, dated May 5, 1953, prescribing
"rules and regulations governing the examination for admission to the practice of
massage, and the operation of massage clinics, offices, or establishments in the
Philippines", which order was approved by the Secretary of Health and duly
published in the Official Gazette; that Section 1 (a) of Ordinance No. 3659 has
restricted the practice of massage to only hygienic and aesthetic massage
prohibits or does not allow qualified massagists to practice therapeutic massage
in their massage clinics. Appellant also contends that the license fee of P100.00
for operator in Section 2 of the Ordinance is unreasonable, nay, unconscionable.

If we can ascertain the intention of the Manila Municipal Board in promulgating the
Ordinance in question, much of the objection of appellant to its legality may be
solved. It would appear to us that the purpose of the Ordinance is not to
regulate the practice of massage, much less to restrict the practice of licensed
and qualified massagists of therapeutic massage in the Philippines. The end
sought to be attained in the Ordinance is to prevent the commission of
immorality and the practice of prostitution in an establishment masquerading as
a massage clinic where the operators thereof offer to massage or manipulate
superficial parts of the bodies of customers for hygienic and aesthetic purposes.
This intention can readily be understood by the building requirements in Section
3 of the Ordinance, requiring that there be separate rooms for male and female
customers; that instead of said rooms being separated by permanent partitions
and swinging doors, there should only be sliding curtains between them; that
there should be "no private rooms or separated compartments, except those
assigned for toilet, lavatories, dressing room, office or kitchen"; that every
massage clinic should be provided with only one entrance and shall have no
direct or indirect communication whatsoever with any dwelling place, house or
building; and that no operator, massagists, attendant or helper will be allowed
"to use or allow the use of a massage clinic as a place of assignation or permit
the commission therein of any immoral or incident act", and in fixing the
operating hours of such clinic between 8:00 a.m. and 11:00 p.m. This intention
of the Ordinance was correctly ascertained by Judge Hermogenes Concepcion,
presiding in the trial court, in his order of dismissal where he said: "What the
Ordinance tries to avoid is that the massage clinic run by an operator who may
not be a masseur or massagista may be used as cover for the running or
maintaining a house of prostitution."

Ordinance No. 3659, particularly, Sections 1 to 4, should be considered as limited to
massage clinics used in the practice of hygienic and aesthetic massage. We do
not believe that Municipal Board of the City of Manila and the Mayor wanted or
intended to regulate the practice of massage in general or restrict the same to
hygienic and aesthetic only.

As to the authority of the City Board to enact the Ordinance in question, the City
Fiscal, in representation of the appellees, calls our attention to Section 18 of the
New Charter of the City of Manila, Act No. 409, which gives legislative powers to
the Municipal Board to enact all ordinances it may deem necessary and proper
for the promotion of the morality, peace, good order, comfort, convenience and
general welfare of the City and its inhabitants. This is generally referred to as
the General Welfare Clause, a delegation in statutory form of the police power,
under which municipal corporations, are authorized to enact ordinances to
provide for the health and safety, and promote the morality, peace and general
welfare of its inhabitants. We agree with the City Fiscal.

As regards the permit fee of P100.00, it will be seen that said fee is made payable not
by the masseur or massagist, but by the operator of a massage clinic who may
not be a massagist himself. Compared to permit fees required in other
operations, P100.00 may appear to be too large and rather unreasonable.
However, much discretion is given to municipal corporations in determining the
amount of said fee without considering it as a tax for revenue purposes:

The amount of the fee or charge is properly considered in determining whether it is a
tax or an exercise of the police power. The amount may be so large as to itself
show that the purpose was to raise revenue and not to regulate, but in regard to
this matter there is a marked distinction between license fees imposed upon
useful and beneficial occupations which the sovereign wishes to regulate but not
restrict, and those which are inimical and dangerous to public health, morals or
safety. In the latter case the fee may be very large without necessarily being a
tax. (Cooley on Taxation, Vol. IV, pp. 3516-17; underlining supplied.)

Evidently, the Manila Municipal Board considered the practice of hygienic and
aesthetic massage not as a useful and beneficial occupation which will promote
and is conducive to public morals, and consequently, imposed the said permit
fee for its regulation.

In conclusion, we find and hold that the Ordinance in question as we interpret it and
as intended by the appellees is valid. We deem it unnecessary to discuss and
pass upon the other points raised in the appeal. The order appealed from is
hereby affirmed. No cost
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.
Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100)
ordering it to pay to plaintiff Republic of the Philippines the sum of P4,802.37
with 6% interest thereon from the date of the filing of the complaint until fully
paid, plus costs, defendant Mambulao Lumber Company interposed the present
appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a)
under the first cause of action, for forest charges covering the period from
September 10, 1952 to May 24, 1953, defendants admitted that they have a
liability of P587.37, which liability is covered by a bond executed by defendant
General Insurance & Surety Corporation for Mambulao Lumber Company, jointly
and severally in character, on July 29, 1953, in favor of herein plaintiff; (b)
under the second cause of action, both defendants admitted a joint and several
liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated
November 27, 1953; and (c) under the third cause of action, both defendants
admitted a joint and several liability in favor of plaintiff for P3,928.30, also
covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount
already mentioned is admitted, then what is the defense interposed by the
defendants? The defense presented by the defendants is quite unusual in more
ways than one. It appears from Exh. 3 that from July 31, 1948 to December 29,
1956, defendant Mambulao Lumber Company paid to the Republic of the
Philippines P8,200.52 for 'reforestation charges' and for the period commencing
from April 30, 1947 to June 24, 1948, said defendant paid P927.08 to the
Republic of the Philippines for 'reforestation charges'. These reforestation were
paid to the plaintiff in pursuance of Section 1 of Republic Act 115 which provides
that there shall be collected, in addition to the regular forest charges provided
under Section 264 of Commonwealth Act 466 known as the National Internal
Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out
and removed from any public forest for commercial purposes. The amount
collected shall be expended by the director of forestry, with the approval of the
secretary of agriculture and commerce, for reforestation and afforestation of
watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total
amount of the reforestation charges paid by Mambulao Lumber Company is
P9,127.50, and it is the contention of the defendant Mambulao Lumber Company
that since the Republic of the Philippines has not made use of those
reforestation charges collected from it for reforesting the denuded area of the
land covered by its license, the Republic of the Philippines should refund said
amount, or, if it cannot be refunded, at least it should be compensated with
what Mambulao Lumber Company owed the Republic of the Philippines for
reforestation charges. In line with this thought, defendant Mambulao Lumber
Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in
paragraph 4 of which said defendant requested "that our account with your
bureau be credited with all the reforestation charges that you have imposed on
us from July 1, 1947 to June 14, 1956, amounting to around P2,988.62 ...". This
letter of defendant Mambulao Lumber Company was answered by the director of
forestry on March 12, 1957, marked Exh. 2, in which the director of forestry
quoted an opinion of the secretary of justice, to the effect that he has no
discretion to extend the time for paying the reforestation charges and also
explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by
defendant-appellant company to plaintiff-appellee as reforestation charges from
1947 to 1956 may be set off or applied to the payment of the sum of P4,802.37
as forest charges due and owing from appellant to appellee. It is appellant's
contention that said sum of P9,127.50, not having been used in the reforestation
of the area covered by its license, the same is refundable to it or may be applied
in compensation of said sum of P4,802.37 due from it as forest
charges.1wph1.t

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115,
provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided
for under Section two hundred and sixty-four of Commonwealth Act Numbered
Four Hundred Sixty-six, known as the National Internal Revenue Code, the
amount of fifty centavos on each cubic meter of timber for the first and second
groups and forty centavos for the third and fourth groups cut out and removed
from any public forest for commercial purposes. The amount collected shall be
expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources (commerce), for reforestation and
afforestation of watersheds, denuded areas and cogon and open lands within
forest reserves, communal forest, national parks, timber lands, sand dunes, and
other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the
growing of economic trees for timber, tanning, oils, gums, and other minor
forest products or medicinal plants, or for watersheds protection, or for
prevention of erosion and floods and preparation of necessary plans and
estimate of costs and for reconnaisance survey of public forest lands and for
such other expenses as may be deemed necessary for the proper carrying out of
the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived
from plantations as herein provided shall constitute a fund to be known as
Reforestation Fund, to be expended exclusively in carrying out the purposes
provided for under this Act. All provincial or city treasurers and their deputies
shall act as agents of the Director of Forestry for the collection of the revenues
or incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation
charges from a timber licenses or concessionaire shall constitute a fund to be
known as the Reforestation Fund, and that the same shall be expended by the
Director of Forestry, with the approval of the Secretary of Agriculture and
Natural Resources for the reforestation or afforestation, among others, of
denuded areas which, upon investigation, are found to be needing reforestation
or afforestation. Note that there is nothing in the law which requires that the
amount collected as reforestation charges should be used exclusively for the
reforestation of the area covered by the license of a licensee or concessionaire,
and that if not so used, the same should be refunded to him. Observe too, that
the licensee's area may or may not be reforested at all, depending on whether
the investigation thereof by the Director of Forestry shows that said area needs
reforestation. The conclusion seems to be that the amount paid by a licensee as
reforestation charges is in the nature of a tax which forms a part of the
Reforestation Fund, payable by him irrespective of whether the area covered by
his license is reforested or not. Said fund, as the law expressly provides, shall be
expended in carrying out the purposes provided for thereunder, namely, the
reforestation or afforestation, among others, of denuded areas needing
reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new
Civil Code2 is applicable, such that the sum of P9,127.50 paid by it as
reforestation charges may compensate its indebtedness to appellee in the sum of
P4,802.37 as forest charges. But in the view we take of this case, appellant and
appellee are not mutually creditors and debtors of each other. Consequently,
the law on compensation is inapplicable. On this point, the trial court correctly
observed: .

Under Article 1278, NCC, compensation should take place when two persons in their
own right are creditors and debtors of each other. With respect to the forest
charges which the defendant Mambulao Lumber Company has paid to the
government, they are in the coffers of the government as taxes collected, and
the government does not owe anything, crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the
forest charges in question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light
of public policy, to exclude the remedy in an action or any indebtedness of the
state or municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in
the nature of contracts between the party and party but grow out of a duty to,
and are the positive acts of the government, to the making and enforcing of
which, the personal consent of individual taxpayers is not required. ... If the
taxpayer can properly refuse to pay his tax when called upon by the Collector,
because he has a claim against the governmental body which is not included in
the tax levy, it is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer's claim is disputed, the collection of the tax must
await and abide the result of a lawsuit, and meanwhile the financial affairs of
the government will be thrown into great confusion. (47 Am. Jur. 766-767.)

REPUBLIC OF THE PHILIPPINES vs. MAMBULAO LUMBER COMPANY, ET AL.
G.R. No. L-17725, February 28, 1962


FACTS:
There are three causes of action in this case in which the defendants admitted all
these three liabilities with an aggregate amount of P4, 802.37. Though such
liabilities are admitted it interposed the defense though exhibits that from July
31, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid to
the Republic of the Philippines P8,200.52 for 'reforestation charges' and for the
period commencing from April 30, 1947 to June 24, 1948, said defendant paid
P927.08 to the Republic of the Philippines for 'reforestation charges'. These
reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act
115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the
National Internal Revenue Code, the amount of P0.50 on each cubic meter of
timber... cut out and removed from any public forest for commercial purposes.
The total amount of the reforestation charges paid by Mambulao Lumber
Company is P9,127.50, and it is the contention of the defendant that since the
Republic of the Philippines has not made use of those reforestation charges
collected from it for reforesting the denuded area of the land covered by its
license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao
Lumber Company owed the Republic of the Philippines for reforestation charges.

ISSUE:
Whether or not the sum of P9,127.50 paid by defendant company to plaintiff as
reforestation charges from 1947 to 1956 may be set off or applied to the
payment of the sum of P4,802.37 as forest charges due and owing from
defendant to plaintiff.

RULING:
The court find defendants claim devoid of any merit. Note that there is nothing in the
law which requires that the amount collected as reforestation charges should be
used exclusively for the reforestation of the area covered by the license of a
licensee or concessionaire, and that if not so used, the same should be refunded
to him. The general rule, based on grounds of public policy is well-settled that
no set-off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow
out of a duty to, and are the positive acts of the government, to the making and
enforcing of which, the personal consent of individual taxpayers is not required.

ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT
G.R. No. L-67649, June 28, 1988


FACTS:
Engracio Francia is the registered owner of a residential lot and a two-story house
located in Pasay City. On October 15, 1977, a 125 square meter portion of
Francia's property was expropriated by the Republic for the sum of P4,116.00.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus,
on December 5, 1977, his property was sold at public auction pursuant the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho
Fernandez was the highest bidder for the property. Francia was not present
during the auction sale since he was in Iligan City at that time helping his uncle
ship bananas. On March 3, 1979, Francia received a notice of hearing In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the
cancellation of TCT and the issuance in his name of a new certificate of title.
Upon verification through his lawyer, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City Treasurer on December 11,
1978. The auction sale and the final bill of sale were both annotated at the back
of TCT No. 4739 (37795) by the Register of Deeds. On March 20, 1979, Francia
filed a complaint to annul the auction sale. Thelower court rendered a decision
against his favor. The Intermediate Appellate Court affirmed the decision of the
lower court in toto. Hence, this petition for review.

ISSUE:
Whether or not the contention of Francia that his tax delinquency of P2,400.00 has
been extinguished by legal compensation is correct claiming that the
government owed him P4,116.00 when a portion of his land was expropriated on
October 15, 1977.

RULING:
This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the
tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government. A claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off under the statutes of set-off, which are
construed uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to
the state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued on.

MELECIO R. DOMINGO vs. HON. LORENZO C. GARLITOS
G.R. No. L-18994, June 29, 1963

FACTS:
This is a petition for certiorari and mandamus against respondent judge seeking to
annul certain orders of the court and for an order in this Court to direct
respondent to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes. It appears that in
Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30,
1960, this Court declared as final and executory the order for the payment by
the estate of the estate and inheritance taxes, charges and penalties, amounting
to P40,058.55, issued by the Court of First Instance of Leyte in, special
proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late
Walter Scott Price." In order to enforce the claims against the estate the fiscal
presented a petition dated June 21, 1961, to the court below for the execution
of the judgment. The petition was, however, denied by the court which held
that the execution is not justifiable

ISSUE:
Whether or not the petitioner has the clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price.

RULING:
The petition to set aside the above orders of the court below and for the execution of
the claim of the Government against the estate must be denied for lack of
merit. The ordinary procedure by which to settle claims of indebtedness against
the estate of a deceased person, as an inheritance tax, is for the claimant to
present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. Another ground for denying the
petition is the fact that the court having jurisdiction of the estate had found
that the claim of the estate against the Government has been recognized and an
amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the
claim of the Government for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and demandable is well as fully
liquidated. Compensation, therefore, takes place by operation of law, in
accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and
both debts are extinguished to the concurrent amount. It is clear, therefore,
that the petitioner has no clear right to execute the judgment for taxes against
the estate of the deceased Walter Scott Price.

Davao Gulf Lumber Corporation vs. CIR
G.R. No. 117359. July 23, 1998.

FACTS:
From July 1, 1980 to January 31, 1982 petitioner purchased, from various oil
companies, refined and manufactured mineral oils as well as motor and diesel
fuels. Said oil companies paid the specific taxes imposed on the sale of said
products. Being included in the purchase price of the oil products, the specific
taxes paid by the oil companies were eventually passed on to the petitioner in
this case.
Petitioner filed before Respondent CIR a claim for refund in the amount of
P120,825.11, representing 25% of the specific taxes actually paid on the
above-mentioned fuels and oils that were used by petitioner in its operations as
forest concessionaire.
On January 20, 1983, petitioner filed at the CTA a petition for review. The CTA
rendered its decision finding petitioner entitled to a partial refund of specific
taxes in the reduced amount of P2,923.15. In regard to the other purchases, the
CTA granted the claim, but it computed the refund based on rates deemed paid
under RA 1435, and not on the higher rates actually paid by petitioner under the
NIRC.
Insisting that the basis for computing the refund should be the increased rates
prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter
to the Court of Appeals. The Court of Appeals affirmed the CTA Decision.
Hence, this petition for review.

ISSUE:
Whether or not petitioner is entitled to the refund of 25% of the amount of
specific taxes it actually paid on various refined and manufactured mineral oils.

RULING:
At the outset, it must be stressed that petitioner is entitled to a partial refund
under Section 5 of RA 1435, which was enacted to provide means for increasing
the Highway Special Fund.
A tax cannot be imposed unless it is supported by the clear and express language
of a statute; on the other hand, once the tax is unquestionably imposed, [a]
claim of exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. Since the partial refund
authorized under Section 5, RA 1435, is in the nature of a tax exemption, it must
be construed strictissimi juris against the grantee. Hence, petitioners claim of
refund on the basis of the specific taxes it actually paid must expressly be
granted in a statute stated in a language too clear to be mistaken.

Caltex Philippines, Inc. v. Commission on Audit
G.R. No. 92585 May 8, 1992


FACTS:
Respondent Commission on Audit (COA) directed petitioner Caltex Philippines,
Inc. (CPI) to remit to the Oil Price Stabilization Fund (OPSF) its collection of the
additional tax on petroleum products pursuant to P.D. 1956, as well as
unremitted collections of the above tax covering the years 1986, 1987 and 1988,
with interests and surcharges, and advising it that all its claims for
reimbursements from the OPSF shall be held in abeyance pending such
remittance. COA further directed petitioner oil company to desist from further
offsetting the taxes collected against outstanding claims for 1989 and
subsequent periods.
Its motion for reconsideration of the eventual decision of the COA on the matter
having been denied, CPI imputes that respondent commission erred in preventing
the former from exercising the right to offset its remittances against the
reimbursement vis--vis the OPSF.

ISSUE:
Whether or not the amounts due to the OPSF from petitioner may be offset
against the latters outstanding claims from said fund?

RULING:
No. It is settled that a taxpayer may not offset taxes due from claims that he
may have against the Government. Taxes cannot be the subject of compensation
because the Government and the taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set off.
The Court further ruled that taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of the Government. Taxes may
be levied for a regulatory purpose such as to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with
public interest, a concern which is within the police power of the State to
address.

Commissioner of Internal Revenue v. Court of Appeals and YMCA
G.R.No.L-124043 October 14, 1998


FACTS:
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:

ISSUE:
Whether or not the YMCA is exempted from rental income derived from the lease of
its properties

RULING
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 "xxx 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 xxx" We agree with the commissioner.
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.

WENCESLAO PASCUAL vs. THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS,
ET AL.
G.R. No. L-10405 December 29, 1960


FACTS:
On August 31, 1954, petitioner Wenceslao Pascual instituted this action for declaratory
relief, with injunction, upon the ground that Republic Act No. 920, entitled "An
Act Appropriating Funds for Public Works", approved on June 20, 1953,
contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the
construction, reconstruction, repair, extension and improvement" of Pasig feeder
road terminals; that, at the time of the passage and approval of said Act, the
aforementioned feeder roads were "nothing but projected and planned
subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . .
situated at . . . Pasig, Rizal" which projected feeder roads "do not connect any
government property or any important premises to the main highway";
Respondents moved to dismiss the petition upon the ground that petitioner had "no
legal capacity to sue", and that the petition did "not state a cause of action".

ISSUE:
Should appropriation using public funds be made for public purposes only?

RULING:
The right of the legislature to appropriate funds is correlative with its right to tax,
and, under constitutional provisions against taxation except for public purposes
and prohibiting the collection of a tax for one purpose and the devotion thereof
to another purpose, no appropriation of state funds can be made for other than
for a public purpose.
The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interest, as opposed to
the furtherance of the advantage of individuals, although each advantage to
individuals might incidentally serve the public.

MACTAN CEBU INTERNATIONAL AIRPORT VS. MARCOS
G.R. No. 120082. September 11, 1996


FACTS:
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, x x x and such other airports as may be established in the Province of
Cebu x x x (Sec. 3, RA 6958).
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
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the
Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner.
Petitioner objected to such demand for payment as baseless and unjustified, claiming
in its favor the aforecited Section 14 of RA 6958 which exempts 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.

ISSUE:
Can the City of Cebu demand payment of realty taxes on several parcels of land
belonging to the petitioner?

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

SET 2

ABAKADA Guro Party List vs. Ermita
G.R. No. 168056 September 1, 2005


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

ISSUES:
1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.
2. Whether or not there is undue delegation of legislative power in violation of
Article VI Sec 28(2) of the Constitution.
3. Whether or not there is a violation of the due process and equal protection
under Article III Sec. 1 of the Constitution.

RULING:
1. 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, and excise and
franchise taxes.

2. There is no undue delegation of legislative power but only of the discretion as to
the execution of 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 frequently the only way in which the legislative process can go
forward.

3. The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the
subject of taxation, the kind of property, the rates to be levied, or the amounts
to be raised, the methods of assessment, valuation and collection, the States
power is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.
EASTERN THEATRICAL CO., INC., ET AL. vs. VICTOR, ALFONSO
G.R. No. L-1104 May 31, 1949


FACTS:
Twelve corporation engaged in motion picture business filed a
complaint to impugn the validity of Ordinance No. 2958 of the City of Manila- AN
ORDINANCE IMPOSING A FEE ON THE PRICE OF EVERY ADMISSION TICKET SOLD BY
CINEMATOGRAPHS, THEATERS VAUDEVILLE COMPANIES THEATRICAL SHOWS AND
BOXING EXHIBITION.

Plaintiffs, operator of theaters in Manila And distributor of local or imported films
impugns Sections 1, 2 and 4 of said ordinance as null and void upon the following
grounds: (a) For violation the Constitution more particular the provision
regarding the uniformity and equality of taxation and the equal protection of the
laws; (b) because it contravenes, violates and is inconsistent with, existing
national legislation more particularly revenue and tax laws and (c) because it is
unfair, unjust, arbitrary capricious unreasonable oppressive and is contrary to
and violation our basic and recognizes principles of taxation and licensing laws.

ISSUE:
Whether or not Ordinance No. 2958 violated the principle of equality and uniformity of
taxation enjoined by the Constitution.

RULING:
No, the said Ordinance does not violate the principle of equality and uniformity of
taxation. The fact that some places of amusement are not taxed while others,
such as cinematographs, theaters, vaudeville companies, theatrical shows, and
boxing exhibitions and other kinds of amusements or places of amusement are
taxed, is no argument at all against the equality and uniformity of the tax
imposition. Equality and uniformity of the tax imposition. 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; and the
appellants cannot point out what places of amusement taxed by the ordinance
do not constitute a class by themselves and which can be confused with those
not included in the ordinance.

EXECUTIVE SECRETARY v. SOUTHWING HEAVY INDUSTRY
The instant consolidated petitions seek to annul and set aside the Decisions of the
Regional Trial Court of Olongapo City, Branch 72, in Civil Case No. 20-0-04 and
Civil Case No. 22-0-04, both dated May 24, 2004; and the February 14, 2005
Decision of the Court of Appeals in CA-G.R. SP. No. 83284, which declared
Article 2, Section 3.1 of Executive Order No. 156 (EO 156) unconstitutional. Said
executive issuance prohibits the importation into the country, inclusive of the
Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or Freeport),
of used motor vehicles, subject to a few exceptions.

The undisputed facts show that on December 12, 2002, President Gloria Macapagal-
Arroyo, through Executive Secretary Alberto G. Romulo, issued EO 156, entitled
PROVIDING FOR A COMPREHENSIVE INDUSTRIAL POLICY AND DIRECTIONS FOR
THE MOTOR VEHICLE DEVELOPMENT PROGRAM AND ITS IMPLEMENTING
GUIDELINES. The challenged provision states:

3.1 The importation into the country, inclusive of the Freeport, of all types of
used motor vehicles is prohibited, except for the following:

3.1.1 A vehicle that is owned and for the personal use of a returning resident or
immigrant and covered by an authority to import issued under the No-dollar
Importation Program. Such vehicles cannot be resold for at least three (3) years;

3.1.2 A vehicle for the use of an official of the Diplomatic Corps and authorized to
be imported by the Department of Foreign Affairs;

3.1.3 Trucks excluding pickup trucks;
1. with GVW of 2.5-6.0 tons covered by an authority to import issued by the DTI.
2. With GVW above 6.0 tons.

3.1.4 Buses:
1. with GVW of 6-12 tons covered by an authority to import issued by DTI;
2. with GVW above 12 tons.

3.1.5 Special purpose vehicles:
1. fire trucks
2. ambulances
3. funeral hearse/coaches
4. crane lorries
5. tractor heads and truck tractors
6. boom trucks
7. tanker trucks
8. tank lorries with high pressure spray gun
9. reefers or refrigerated trucks
10. mobile drilling derricks
11. transit/concrete mixers
12. mobile radiological units
13. wreckers or tow trucks
14. concrete pump trucks
15. aerial/bucket flat-form trucks
16. street sweepers
17. vacuum trucks
18. garbage compactors
19. self loader trucks
20. man lift trucks
21. lighting trucks
22. trucks mounted with special purpose equipment
23. all other types of vehicle designed for a specific use.

The issuance of EO 156 spawned three separate actions for declaratory relief
before Branch 72 of the Regional Trial Court of Olongapo City, all seeking the
declaration of the unconstitutionality of Article 2, Section 3.1 of said executive
order. The cases were filed by herein respondent entities, who or whose
members, are classified as Subic Bay Freeport Enterprises and engaged in the
business of, among others, importing and/or trading used motor vehicles.

G.R. No. 164171:

On January 16, 2004, respondents Southwing Heavy Industries, Inc., (SOUTHWING)
United Auctioneers, Inc. (UNITED AUCTIONEERS), and Microvan, Inc.
(MICROVAN), instituted a declaratory relief case docketed as Civil Case No. 20-0-
04,[1] against the Executive Secretary, Secretary of Transportation and
Communication, Commissioner of Customs, Assistant Secretary and Head of the
Land Transportation Office, Subic Bay Metropolitan Authority (SBMA), Collector
of Customs for the Port at Subic Bay Freeport Zone, and the Chief of the Land
Transportation Office at Subic Bay Freeport Zone.

SOUTHWING, UNITED AUCTIONEERS and MICROVAN prayed that judgment be rendered
(1) declaring Article 2, Section 3.1 of EO 156 unconstitutional and illegal; (2)
directing the Secretary of Finance, Commissioner of Customs, Collector of
Customs and the Chairman of the SBMA to allow the importation of used motor
vehicles; (2) ordering the Land Transportation Office and its subordinates inside
the Subic Special Economic Zone to process the registration of the imported used
motor vehicles; and (3) in general, to allow the unimpeded entry and
importation of used motor vehicles subject only to the payment of the required
customs duties.

Upon filing of petitioners answer/comment, respondents SOUTHWING and MICROVAN
filed a motion for summary judgment which was granted by the trial court. On
May 24, 2004, a summary judgment was rendered declaring that Article 2,
Section 3.1 of EO 156 constitutes an unlawful usurpation of legislative power
vested by the Constitution with Congress. The trial court further held that the
proviso is contrary to the mandate of Republic Act No. 7227 (RA 7227) or the
Bases Conversion and Development Act of 1992 which allows the free flow of
goods and capital within the Freeport. The dispositive portion of the said
decision reads:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive
Order 156 [Article 2, Section] 3.1 for being unconstitutional and illegal; directing
respondents Collector of Customs based at SBMA to allow the importation and
entry of used motor vehicles pursuant to the mandate of RA 7227; directing
respondent Chief of the Land Transportation Office and its subordinates inside
the Subic Special Economic Zone or SBMA to process the registration of imported
used motor vehicle; and in general, to allow unimpeded entry and importation of
used motor vehicles to the Philippines subject only to the payment of the
required customs duties.

SO ORDERED.[2]

From the foregoing decision, petitioners sought relief before this Court via a petition
for review on certiorari, docketed as G.R. No. 164171.

G.R. No. 164172:

On January 20, 2004, respondent Subic Integrated Macro Ventures Corporation
(MACRO VENTURES) filed with the same trial court, a similar action for
declaratory relief docketed as Civil Case No. 22-0-04,[3] with the same prayer
and against the same parties[4] as those in Civil Case No. 20-0-04.

In this case, the trial court likewise rendered a summary judgment on May 24, 2004,
holding that Article 2, Section 3.1 of EO 156, is repugnant to the constitution.[5]
Elevated to this Court via a petition for review on certiorari, Civil Case No. 22-0-
04 was docketed as G.R. No. 164172.

G.R. No. 168741

On January 22, 2003, respondent Motor Vehicle Importers Association of Subic Bay
Freeport, Inc. (ASSOCIATION), filed another action for declaratory relief with
essentially the same prayer as those in Civil Case No. 22-0-04 and Civil Case No.
20-0-04, against the Executive Secretary, Secretary of Finance, Chief of the Land
Transportation Office, Commissioner of Customs, Collector of Customs at SBMA
and the Chairman of SBMA. This was docketed as Civil Case No. 30-0-2003,[6]
before the same trial court.

In a decision dated March 10, 2004, the court a quo granted the ASSOCIATIONs prayer
and declared the assailed proviso as contrary to the Constitution, to wit:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive
Order 156 [Article 2, Section] 3.1 for being unconstitutional and illegal; directing
respondents Collector of Customs based at SBMA to allow the importation and
entry of used motor vehicles pursuant to the mandate of RA 7227; directing
respondent Chief of the Land Transportation Office and its subordinates inside
the Subic Special Economic Zone or SBMA to process the registration of imported
used motor vehicles; directing the respondent Chairman of the SBMA to allow
the entry into the Subic Special Economic Zone or SBMA imported used motor
vehicle; and in general, to allow unimpeded entry and importation of used motor
vehicles to the Philippines subject only to the payment of the required customs
duties.

SO ORDERED.[7]

Aggrieved, the petitioners in Civil Case No. 30-0-2003, filed a petition for certiorari[8]
with the Court of Appeals (CA-G.R. SP. No. 83284) which denied the petition on
February 14, 2005 and sustained the finding of the trial court that Article 2,
Section 3.1 of EO 156, is void for being repugnant to the constitution. The
dispositive portion thereof, reads:

WHEREFORE, the instant petition for certiorari is hereby DENIED. The assailed
decision of the Regional Trial Court, Third Judicial Region, Branch 72, Olongapo
City, in Civil Case No. 30-0-2003, accordingly, STANDS.

SO ORDERED.[9]

The aforequoted decision of the Court of Appeals was elevated to this Court and
docketed as G.R. No. 168741. In a Resolution dated October 4, 2005,[10] said
case was consolidated with G.R. No. 164171 and G.R. No. 164172.

Petitioners are now before this Court contending that Article 2, Section 3.1 of EO 156
is valid and applicable to the entire country, including the Freeeport. In support
of their arguments, they raise procedural and substantive issues bearing on the
constitutionality of the assailed proviso. The procedural issues are: the lack of
respondents locus standi to question the validity of EO 156, the propriety of
challenging EO 156 in a declaratory relief proceeding and the applicability of a
judgment on the pleadings in this case.

Petitioners argue that respondents will not be affected by the importation ban
considering that their certificate of registration and tax exemption do not
authorize them to engage in the importation and/or trading of used cars. They
also aver that the actions filed by respondents do not qualify as declaratory
relief cases. Section 1, Rule 63 of the Rules of Court provides that a petition for
declaratory relief may be filed before there is a breach or violation of rights.
Petitioners claim that there was already a breach of respondents supposed right
because the cases were filed more than a year after the issuance of EO 156. In
fact, in Civil Case No. 30-0-2003, numerous warrants of seizure and detention
were issued against imported used motor vehicles belonging to respondent
ASSOCIATIONs members.

Petitioners arguments lack merit.

The established rule that the constitutionality of a law or administrative issuance can
be challenged by one who will sustain a direct injury as a result of its
enforcement[11] has been satisfied in the instant case. The broad subject of
the prohibited importation is all types of used motor vehicles. Respondents
would definitely suffer a direct injury from the implementation of EO 156
because their certificate of registration and tax exemption authorize them to
trade and/or import new and used motor vehicles and spare parts, except used
cars.[12] Other types of motor vehicles imported and/or traded by respondents
and not falling within the category of used cars would thus be subjected to the
ban to the prejudice of their business. Undoubtedly, respondents have the legal
standing to assail the validity of EO 156.

As to the propriety of declaratory relief as a vehicle for assailing the executive
issuance, suffice it to state that any breach of the rights of respondents will not
affect the case. In Commission on Audit of the Province of Cebu v. Province of
Cebu,[13] the Court entertained a suit for declaratory relief to finally settle the
doubt as to the proper interpretation of the conflicting laws involved,
notwithstanding a violation of the right of the party affected. We find no reason
to deviate from said ruling mindful of the significance of the present case to the
national economy.

So also, summary judgments were properly rendered by the trial court because the
issues involved in the instant case were pure questions of law. A motion for
summary judgment is premised on the assumption that the issues presented
need not be tried either because these are patently devoid of substance or that
there is no genuine issue as to any pertinent fact. It is a method sanctioned by
the Rules of Court for the prompt disposition of a civil action in which the
pleadings raise only a legal issue, not a genuine issue as to any material fact.[14]

At any rate, even assuming the procedural flaws raised by petitioners truly exist, the
Court is not precluded from brushing aside these technicalities and taking
cognizance of the action filed by respondents considering its importance to the
public and in keeping with the duty to determine whether the other branches of
the government have kept themselves within the limits of the Constitution.[15]

We now come to the substantive issues, which are: (1) whether there is statutory basis
for the issuance of EO 156; and (2) if the answer is in the affirmative, whether
the application of Article 2, Section 3.1 of EO 156, reasonable and within the
scope provided by law.

The main thrust of the petition is that EO 156 is constitutional because it was issued
pursuant to EO 226, the Omnibus Investment Code of the Philippines and that its
application should be extended to the Freeport because the guarantee of RA
7227 on the free flow of goods into the said zone is merely an exemption from
customs duties and taxes on items brought into the Freeport and not an open
floodgate for all kinds of goods and materials without restriction.

In G.R. No. 168741, the Court of Appeals invalidated Article 2, Section 3.1 of EO 156,
on the ground of lack of any statutory basis for the President to issue the same.
It held that the prohibition on the importation of used motor vehicles is an
exercise of police power vested on the legislature and absent any enabling law,
the exercise thereof by the President through an executive issuance, is void.

Police power is inherent in a government to enact laws, within constitutional limits, to
promote the order, safety, health, morals, and general welfare of society. It is
lodged primarily with the legislature. By virtue of a valid delegation of
legislative power, it may also be exercised by the President and administrative
boards, as well as the lawmaking bodies on all municipal levels, including the
barangay.[16] Such delegation confers upon the President quasi-legislative
power which may be defined as the authority delegated by the law-making body
to the administrative body to adopt rules and regulations intended to carry out
the provisions of the law and implement legislative policy.[17] To be valid, an
administrative issuance, such as an executive order, must comply with the
following requisites:

(1) Its promulgation must be authorized by the legislature;
(2) It must be promulgated in accordance with the prescribed procedure;
(3) It must be within the scope of the authority given by the legislature; and
(4) It must be reasonable.[18]

Contrary to the conclusion of the Court of Appeals, EO 156 actually satisfied the first
requisite of a valid administrative order. It has both constitutional and statutory
bases.

Delegation of legislative powers to the President is permitted in Section 28(2) of
Article VI of the Constitution. It provides:

(2) The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it 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.[19] (Emphasis supplied)


The relevant statutes to execute this provision are:

1) The Tariff and Customs Code which authorizes the President, in the interest of
national economy, general welfare and/or national security, to, inter alia,
prohibit the importation of any commodity. Section 401 thereof, reads:

Sec. 401. Flexible Clause.

a. In the interest of national economy, general welfare and/or national security,
and subject to the limitations herein prescribed, the President, upon
recommendation of the National Economic and Development Authority
(hereinafter referred to as NEDA), is hereby empowered: x x x (2) to establish
import quota or to ban imports of any commodity, as may be necessary; x x x
Provided, That upon periodic investigations by the Tariff Commission and
recommendation of the NEDA, the President may cause a gradual reduction of
protection levels granted in Section One hundred and four of this Code, including
those subsequently granted pursuant to this section. (Emphasis supplied)

2) Executive Order No. 226, the Omnibus Investment Code of the Philippines which
was issued on July 16, 1987, by then President Corazon C. Aquino, in the
exercise of legislative power under the Provisional Freedom Constitution,[20]
empowers the President to approve or reject the prohibition on the importation
of any equipment or raw materials or finished products. Pertinent provisions
thereof, read:

ART. 4. Composition of the board. The Board of Investments shall be composed of
seven (7) governors: The Secretary of Trade and Industry, three (3)
Undersecretaries of Trade and Industry to be chosen by the President; and three
(3) representatives from the government agencies and the private sector x x x.

ART. 7. Powers and duties of the Board.

x x x x

(12) Formulate and implement rationalization programs for certain industries
whose operation may result in dislocation, overcrowding or inefficient use of
resources, thus impeding economic growth. For this purpose, the Board may
formulate guidelines for progressive manufacturing programs, local content
programs, mandatory sourcing requirements and dispersal of industries. In
appropriate cases and upon approval of the President, the Board may restrict,
either totally or partially, the importation of any equipment or raw materials or
finished products involved in the rationalization program; (Emphasis supplied)

3) Republic Act No. 8800, otherwise known as the Safeguard Measures Act
(SMA), and entitled An Act Protecting Local Industries By Providing Safeguard
Measures To Be Undertaken In Response To Increased Imports And Providing
Penalties For Violation Thereof,[21] designated the Secretaries[22] of the
Department of Trade and Industry (DTI) and the Department of Agriculture, in
their capacity as alter egos of the President, as the implementing authorities of
the safeguard measures, which include, inter alia, modification or imposition of
any quantitative restriction on the importation of a product into the Philippines.
The purpose of the SMA is stated in the declaration of policy, thus:

SEC. 2. Declaration of Policy. The State shall promote competitiveness of domestic
industries and producers based on sound industrial and agricultural development
policies, and efficient use of human, natural and technical resources. In pursuit
of this goal and in the public interest, the State shall provide safeguard
measures to protect domestic industries and producers from increased imports
which cause or threaten to cause serious injury to those domestic industries and
producers.

There are thus explicit constitutional and statutory permission authorizing the
President to ban or regulate importation of articles and commodities into the
country.

Anent the second requisite, that is, that the order must be issued or promulgated in
accordance with the prescribed procedure, it is necessary that the nature of the
administrative issuance is properly determined. As in the enactment of laws,
the general rule is that, the promulgation of administrative issuances requires
previous notice and hearing, the only exception being where the legislature
itself requires it and mandates that the regulation shall be based on certain
facts as determined at an appropriate investigation.[23] This exception pertains
to the issuance of legislative rules as distinguished from interpretative rules
which give no real consequence more than what the law itself has already
prescribed;[24] and are designed merely to provide guidelines to the law which
the administrative agency is in charge of enforcing.[25] A legislative rule, on
the other hand, is in the nature of subordinate legislation, crafted to implement
a primary legislation.

In Commissioner of Internal Revenue v. Court of Appeals,[26] and Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,[27] the Court enunciated
the doctrine that when an administrative rule goes beyond merely providing for
the means that can facilitate or render less cumbersome the implementation of
the law and 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 the issuance is given the force and
effect of law.

In the instant case, EO 156 is obviously a legislative rule as it seeks to implement or
execute primary legislative enactments intended to protect the domestic
industry by imposing a ban on the importation of a specified product not
previously subject to such prohibition. The due process requirements in the
issuance thereof are embodied in Section 401[28] of the Tariff and Customs Code
and Sections 5 and 9 of the SMA[29] which essentially mandate the conduct of
investigation and public hearings before the regulatory measure or importation
ban may be issued.

In the present case, respondents neither questioned before this Court nor with the
courts below the procedure that paved the way for the issuance of EO 156.
What they challenged in their petitions before the trial court was the absence of
substantive due process in the issuance of the EO.[30] Their main contention
before the court a quo is that the importation ban is illogical and unfair because
it unreasonably drives them out of business to the prejudice of the national
economy.

Considering the settled principle that in the absence of strong evidence to the
contrary, acts of the other branches of the government are presumed to be
valid,[31] and there being no objection from the respondents as to the
procedure in the promulgation of EO 156, the presumption is that said executive
issuance duly complied with the procedures and limitations imposed by law.

To determine whether EO 156 has complied with the third and fourth requisites of a
valid administrative issuance, to wit, that it was issued within the scope of
authority given by the legislature and that it is reasonable, an examination of
the nature of a Freeport under RA 7227 and the primordial purpose of the
importation ban under the questioned EO is necessary.

RA 7227 was enacted providing for, among other things, the sound and balanced
conversion of the Clark and Subic military reservations and their extensions into
alternative productive uses in the form of Special Economic and Freeport Zone,
or the Subic Bay Freeport, in order to promote the economic and social
development of Central Luzon in particular and the country in general.

The Rules and Regulations Implementing RA 7227 specifically defines the territory
comprising the Subic Bay Freeport, referred to as the Special Economic and
Freeport Zone in Section 12 of RA 7227 as "a separate customs territory
consisting of the City of Olongapo and the Municipality of Subic, Province of
Zambales, the lands occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered and defined by the 1947 Philippine-U.S.
Military Base Agreement as amended and within the territorial jurisdiction of
Morong and Hermosa, Province of Bataan, the metes and bounds of which shall
be delineated by the President of the Philippines; provided further that pending
establishment of secure perimeters around the entire SBF, the SBF shall refer to
the area demarcated by the SBMA pursuant to Section 13[32] hereof."

Among the salient provisions of RA 7227 are as follows:

SECTION 12. Subic Special Economic Zone.

x x x x

The abovementioned zone shall be subject to the following policies:

x x x x

(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the
Subic Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment
opportunities in and around the zone and to attract and promote productive
foreign investments;

(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within,
into and exported out of the Subic Special Economic Zone, as well as provide
incentives such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the
Subic Special Economic Zone to the other parts of the Philippine territory shall
be subject to customs duties and taxes under the Customs and Tariff Code and
other relevant tax laws of the Philippines;

The Freeport was designed to ensure free flow or movement of goods and capital
within a portion of the Philippine territory in order to attract investors to invest
their capital in a business climate with the least governmental intervention. The
concept of this zone was explained by Senator Guingona in this wise:

Senator Guingona. Mr. President, the special economic zone is successful in many
places, particularly Hong Kong, which is a free port. The difference between a
special economic zone and an industrial estate is simply expansive in the sense
that the commercial activities, including the establishment of banks, services,
financial institutions, agro-industrial activities, maybe agriculture to a certain
extent.

This delineates the activities that would have the least of government intervention,
and the running of the affairs of the special economic zone would be run
principally by the investors themselves, similar to a housing subdivision, where
the subdivision owners elect their representatives to run the affairs of the
subdivision, to set the policies, to set the guidelines.

We would like to see Subic area converted into a little Hong Kong, Mr. President,
where there is a hub of free port and free entry, free duties and activities to a
maximum spur generation of investment and jobs.

While the investor is reluctant to come in the Philippines, as a rule, because of red
tape and perceived delays, we envision this special economic zone to be an area
where there will be minimum government interference.

The initial outlay may not only come from the Government or the Authority as
envisioned here, but from them themselves, because they would be encouraged
to invest not only for the land but also for the buildings and factories. As long as
they are convinced that in such an area they can do business and reap
reasonable profits, then many from other parts, both local and foreign, would
invest, Mr. President.[33] (Emphasis, added)

With minimum interference from the government, investors can, in general, engage in
any kind of business as well as import and export any article into and out of the
Freeport. These are among the rights accorded to Subic Bay Freeport
Enterprises under Section 39 of the Rules and Regulations Implementing RA 7227,
thus

SEC. 39. Rights and Obligations.- SBF Enterprises shall have the following rights and
obligations:

a. To freely engage in any business, trade, manufacturing, financial or service
activity, and to import and export freely all types of goods into and out of the
SBF, subject to the provisions of the Act, these Rules and other regulations that
may be promulgated by the SBMA;

Citing, inter alia, the interpellations of Senator Enrile, petitioners claim that the free
flow or movement of goods and capital only means that goods and material
brought within the Freeport shall not be subject to customs duties and other
taxes and should not be construed as an open floodgate for entry of all kinds of
goods. They thus surmise that the importation ban on motor vehicles is
applicable within the Freeport. Pertinent interpellations of Senator Enrile on
the concept of Freeport is as follows:

Senator Enrile: Mr. President, I think we are talking here of sovereign concepts, not
territorial concepts. The concept that we are supposed to craft here is to carve
out a portion of our terrestrial domain as well as our adjacent waters and say to
the world: Well, you can set up your factories in this area that we are
circumscribing, and bringing your equipment and bringing your goods, you are
not subject to any taxes and duties because you are not within the customs
jurisdiction of the Republic of the Philippines, whether you store the goods or
only for purposes of transshipment or whether you make them into finished
products again to be reexported to other lands.

x x x x

My understanding of a free port is, we are in effect carving out a part of our
territory and make it as if it were foreign territory for purposes of our customs
laws, and that people can come, bring their goods, store them there and bring
them out again, as long as they do not come into the domestic commerce of the
Republic.

We do not really care whether these goods are stored here. The only thing that we
care is for our people to have an employment because of the entry of these
goods that are being discharged, warehoused and reloaded into the ships so that
they can be exported. That will generate employment for us. For as long as
that is done, we are saying, in effect, that we have the least contact with our
tariff and customs laws and our tax laws. Therefore, we consider these goods as
outside of the customs jurisdiction of the Republic of the Philippines as yet, until
we draw them from this territory and bring them inside our domestic commerce.
In which case, they have to pass through our customs gate. I thought we are
carving out this entire area and convert it into this kind of concept.[34]

However, contrary to the claim of petitioners, there is nothing in the foregoing
excerpts which absolutely limits the incentive to Freeport investors only to
exemption from customs duties and taxes. Mindful of the legislative intent to
attract investors, enhance investment and boost the economy, the legislature
could not have limited the enticement only to exemption from taxes. The
minimum interference policy of the government on the Freeport extends to the
kind of business that investors may embark on and the articles which they may
import or export into and out of the zone. A contrary interpretation would
defeat the very purpose of the Freeport and drive away investors.

It does not mean, however, that the right of Freeport enterprises to import all types
of goods and article is absolute. Such right is of course subject to the limitation
that articles absolutely prohibited by law cannot be imported into the
Freeport.[35] Nevertheless, in determining whether the prohibition would
apply to the Freeport, resort to the purpose of the prohibition is necessary.

In issuing EO 156, particularly the prohibition on importation under Article 2, Section
3.1, the President envisioned to rationalize the importation of used motor
vehicles and to enhance the capabilities of the Philippine motor manufacturing
firms to be globally competitive producers of completely build-up units and their
parts and components for the local and export markets.[36] In justifying the
issuance of EO 156, petitioners alleged that there has been a decline in the sales
of new vehicles and a remarkable growth of the sales of imported used motor
vehicles. To address the same, the President issued the questioned EO to
prevent further erosion of the already depressed market base of the local motor
vehicle industry and to curtail the harmful effects of the increase in the
importation of used motor vehicles.[37]

Taking our bearings from the foregoing discussions, we hold that the importation ban
runs afoul the third requisite for a valid administrative order. To be valid, an
administrative issuance must not be ultra vires or beyond the limits of the
authority conferred. It must not supplant or modify the Constitution, its enabling
statute and other existing laws, for such is the sole function of the legislature
which the other branches of the government cannot usurp. As held in United BF
Homeowners Association v. BF Homes, Inc.:[38]

The rule-making power of a public administrative body is a delegated legislative
power, which it may not use either to abridge the authority given it by Congress
or the Constitution or to enlarge its power beyond the scope intended.
Constitutional and statutory provisions control what rules and regulations may be
promulgated by such a body, as well as with respect to what fields are subject to
regulation by it. It may not make rules and regulations which are inconsistent
with the provisions of the Constitution or a statute, particularly the statute it is
administering or which created it, or which are in derogation of, or defeat, the
purpose of a statute.


In the instant case, the subject matter of the laws authorizing the President to
regulate or forbid importation of used motor vehicles, is the domestic industry.
EO 156, however, exceeded the scope of its application by extending the
prohibition on the importation of used cars to the Freeport, which RA 7227,
considers to some extent, a foreign territory. The domestic industry which the
EO seeks to protect is actually the customs territory which is defined under
the Rules and Regulations Implementing RA 7227, as follows:

the portion of the Philippines outside the Subic Bay Freeport where the Tariff and
Customs Code of the Philippines and other national tariff and customs laws are
in force and effect.[39]

The proscription in the importation of used motor vehicles should be operative only
outside the Freeport and the inclusion of said zone within the ambit of the
prohibition is an invalid modification of RA 7227. Indeed, when the application
of an administrative issuance modifies existing laws or exceeds the intended
scope, as in the instant case, the issuance becomes void, not only for being ultra
vires, but also for being unreasonable.

This brings us to the fourth requisite. It is an axiom in administrative law that
administrative authorities should not act arbitrarily and capriciously in the
issuance of rules and regulations. To be valid, such rules and regulations must
be reasonable and fairly adapted to secure the end in view. If shown to bear no
reasonable relation to the purposes for which they were authorized to be issued,
then they must be held to be invalid.[40]

There is no doubt that the issuance of the ban to protect the domestic industry is a
reasonable exercise of police power. The deterioration of the local motor
manufacturing firms due to the influx of imported used motor vehicles is an
urgent national concern that needs to be swiftly addressed by the President. In
the exercise of delegated police power, the executive can therefore validly
proscribe the importation of these vehicles. Thus, in Taxicab Operators of Metro
Manila, Inc. v. Board of Transportation,[41] the Court held that a regulation
phasing out taxi cabs more than six years old is a valid exercise of police power.
The regulation was sustained as reasonable holding that the purpose thereof was
to promote the convenience and comfort and protect the safety of the
passengers.

The problem, however, lies with respect to the application of the importation ban to
the Freeport. The Court finds no logic in the all encompassing application of the
assailed provision to the Freeport which is outside the customs territory. As long
as the used motor vehicles do not enter the customs territory, the injury or harm
sought to be prevented or remedied will not arise. The application of the law
should be consistent with the purpose of and reason for the law. Ratione cessat
lex, et cessat lex. When the reason for the law ceases, the law ceases. It is not
the letter alone but the spirit of the law also that gives it life.[42] To apply the
proscription to the Freeport would not serve the purpose of the EO. Instead of
improving the general economy of the country, the application of the
importation ban in the Freeport would subvert the avowed purpose of RA 7227
which is to create a market that would draw investors and ultimately boost the
national economy.

In similar cases, we also declared void the administrative issuance or ordinances
concerned for being unreasonable. To illustrate, in De la Cruz v. Paras,[43] the
Court held as unreasonable and unconstitutional an ordinance characterized by
overbreadth. In that case, the Municipality of Bocaue, Bulacan, prohibited the
operation of all night clubs, cabarets and dance halls within its jurisdiction for
the protection of public morals. As explained by the Court:

x x x It cannot be said that such a sweeping exercise of a lawmaking power by Bocaue
could qualify under the term reasonable. The objective of fostering public
morals, a worthy and desirable end can be attained by a measure that does not
encompass too wide a field. Certainly the ordinance on its face is characterized
by overbreadth. The purpose sought to be achieved could have been attained by
reasonable restrictions rather than by an absolute prohibition. The admonition
in Salaveria should be heeded: The Judiciary should not lightly set aside
legislative action when there is not a clear invasion of personal or property
rights under the guise of police regulation. It is clear that in the guise of a
police regulation, there was in this instance a clear invasion of personal or
property rights, personal in the case of those individuals desirous of patronizing
those night clubs and property in terms of the investments made and salaries to
be earned by those therein employed.


Lupangco v. Court of Appeals,[44] is a case involving a resolution issued by the
Professional Regulation Commission which prohibited examinees from attending
review classes and receiving handout materials, tips, and the like three days
before the date of examination in order to preserve the integrity and purity of
the licensure examinations in accountancy. Besides being unreasonable on its
face and violative of academic freedom, the measure was found to be more
sweeping than what was necessary, viz:

Needless to say, the enforcement of Resolution No. 105 is not a guarantee that the
alleged leakages in the licensure examinations will be eradicated or at least
minimized. Making the examinees suffer by depriving them of legitimate means
of review or preparation on those last three precious days when they should
be refreshing themselves with all that they have learned in the review classes
and preparing their mental and psychological make-up for the examination day
itself would be like uprooting the tree to get rid of a rotten branch. What is
needed to be done by the respondent is to find out the source of such leakages
and stop it right there. If corrupt officials or personnel should be terminated
from their loss, then so be it. Fixers or swindlers should be flushed out. Strict
guidelines to be observed by examiners should be set up and if violations are
committed, then licenses should be suspended or revoked. x x x

In Lucena Grand Central Terminal, Inc. v. JAC Liner, Inc.,[45] the Court likewise
struck down as unreasonable and overbreadth a city ordinance granting an
exclusive franchise for 25 years, renewable for another 25 years, to one entity
for the construction and operation of one common bus and jeepney terminal
facility in Lucena City. While professedly aimed towards alleviating the traffic
congestion alleged to have been caused by the existence of various bus and
jeepney terminals within the city, the ordinance was held to be beyond what is
reasonably necessary to solve the traffic problem in the city.

By parity of reasoning, the importation ban in this case should also be declared void
for its too sweeping and unnecessary application to the Freeport which has no
bearing on the objective of the prohibition. If the aim of the EO is to prevent
the entry of used motor vehicles from the Freeport to the customs territory, the
solution is not to forbid entry of these vehicles into the Freeport, but to
intensify governmental campaign and measures to thwart illegal ingress of used
motor vehicles into the customs territory.

At this juncture, it must be mentioned that on June 19, 1993, President Fidel V.
Ramos issued Executive Order No. 97-A, Further Clarifying The Tax And Duty-
Free Privilege Within The Subic Special Economic And Free Port Zone, Section 1
of which provides:


SECTION 1. The following guidelines shall govern the tax and duty-free privilege
within the Secured Area of the Subic Special Economic and Free Port Zone:

1.1. The Secured Area consisting of the presently fenced-in former Subic Naval
Base shall be the only completely tax and duty-free area in the SSEFPZ. Business
enterprises and individuals (Filipinos and foreigners) residing within the Secured
Area are free to import raw materials, capital goods, equipment, and consumer
items tax and dutry-free. Consumption items, however, must be consumed
within the Secured Area. Removal of raw materials, capital goods, equipment
and consumer items out of the Secured Area for sale to non-SSEFPZ registered
enterprises shall be subject to the usual taxes and duties, except as may be
provided herein.

In Tiu v. Court of Appeals[46] as reiterated in Coconut Oil Refiners Association, Inc. v.
Torres,[47] this provision limiting the special privileges on tax and duty-free
importation in the presently fenced-in former Subic Naval Base has been
declared valid and constitutional and in accordance with RA 7227. Consistent
with these rulings and for easier management and monitoring of activities and to
prevent fraudulent importation of merchandise and smuggling, the free flow and
importation of used motor vehicles shall be operative only within the secured
area.

In sum, the Court finds that Article 2, Section 3.1 of EO 156 is void insofar as it is
made applicable to the presently secured fenced-in former Subic Naval Base
area as stated in Section 1.1 of EO 97-A. Pursuant to the separability
clause[48] of EO 156, Section 3.1 is declared valid insofar as it applies to the
customs territory or the Philippine territory outside the presently secured
fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-A.
Hence, used motor vehicles that come into the Philippine territory via the
secured fenced-in former Subic Naval Base area may be stored, used or traded
therein, or exported out of the Philippine territory, but they cannot be imported
into the Philippine territory outside of the secured fenced-in former Subic Naval
Base area.

WHEREFORE, the petitions are PARTIALLY GRANTED and the May 24, 2004
Decisions of Branch 72, Regional Trial Court of Olongapo City, in Civil Case No.
20-0-04 and Civil Case No. 22-0-04; and the February 14, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 63284, are MODIFIED insofar as they declared
Article 2, Section 3.1 of Executive Order No. 156, void in its entirety.

Said provision is declared VALID insofar as it applies to the Philippine territory
outside the presently fenced-in former Subic Naval Base area and VOID with
respect to its application to the secured fenced-in former Subic Naval Base area.

JOHN PEOPLES ALTERNATIVE COALITION vs. BCDA
GR. No. 119775 October 24, 2003


FACTS:
Republic Act No. 7227 set out the policy of the government to accelerate the sound
and balanced conversion into alternative productive uses of the former military
bases. It created Bases Conversion and Development Authority. It also created
the Subic Special Economic and Free Port Zone. It granted the Subic SEZ
incentives. It expressly gave authority to the President to create through
executive proclamation, subject to the concurrence of the local government
units directly affected, other Special Economic Zones in the areas covered. BCDA
entered into a Memorandum of Agreement and Escrow Agreement with Tuntex
and Asiaworld. BCDA, Tuntex and Asiaworld executed a Joint Venture
Agreement. The Sangguniang Panlungsod of Baguio City asked BCDA to exclude
all the barangays partly or totally located within Camp John Hay from the reach
or coverage of any plan or program for its development. The sanggunian adopted
and submitted a 15-point concept for the development of Camp John Hay. BCDA,
Tuntex and AsiaWorld agreed to some, but rejected or modified the other
proposals. They stressed the need to declare Camp John Hay a SEZ as a condition
precedent in accordance R.A. No. 7227. The sanggunian requested the Mayor to
order the determination of realty taxes which may be collected from real
properties of Camp John Hay. It was intended to intelligently guide the
sanggunian in determining its position on whether Camp John Hay be declared a
SEZ, it being of the view that such declaration would exempt the camps
property and the economic activity therein from local or national taxation. The
sanggunian passed a resolution seeking the issuance by President Ramos of a
presidential proclamation declaring an area of 288.1 hectares of the camp as a
SEZ. President Ramos issued Proclamation No. 420 which established a SEZ on a
portion of Camp John Hay.

ISSUE:
Whether Proclamation No. 420 is constitutional

RULING:
While the grant of economic incentives may be essential to the creation and
success of SEZs, free trade zones and the like, the grant thereof to the John Hay
SEZ cannot be sustained. The incentives under R.A. No. 7227 are exclusive only
to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no
support therein. Neither does the same grant of privileges to the John Hay SEZ
find support in the other laws specified under Section 3 of Proclamation No. 420,
which laws were already extant before the issuance of the proclamation or the
enactment of R.A. No. 7227. More importantly, the nature of most of the
assailed privileges is one of tax exemption. It is the legislature, unless limited
by a provision of the state constitution, that has full power to exempt any
person or corporation or class of property from taxation, its power to exempt
being as broad as its power to tax. The challenged grant of tax exemption would
circumvent the Constitutions imposition that a law granting any tax exemption
must have the concurrence of a majority of all the members of Congress.
Delpher Trades Corporation vs. IAC
G.R. No. L-69259. January 26, 1988.


FACTS:
Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169
square meters of real estate in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila). The said co-owners leased to
Construction Components International Inc. the same property and providing
that during the existence or after the term of this lease the lessor should he
decide to sell the property leased shall first offer the same to the lessee and the
letter has the priority to buy under similar conditions. On August 3, 1974, lessee
Construction Components International, Inc. assigned its rights and obligations
under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco. On
January 3, 1976, a deed of exchange was executed between lessors Delfin and
Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former
conveyed to the latter the leased property together with another parcel of land
for 2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00.
On the ground that it was not given the first option to buy the property, respondent
Hydro Pipes Philippines, Inc., a complaint for reconveyance of Lot. No. 1095 in
its favor. The Court of First Instance of Bulacan ruled in favor of the plaintiff.
The lower court's decision was affirmed on appeal by the Intermediate Appellate
Court.


ISSUE:
Whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale.

RULING:
We rule for the petitioners. In the case at bar, in exchange for their properties,
the Pachecos acquired 2,500 original unissued no par value shares of stocks of
the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription. "The essence of the stock
subscription is an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed."
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What
they really did was to invest their properties and change the nature of their
ownership from unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at the same time save
on inheritance taxes.
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to
decrease the amount of what otherwise could be his taxes or altogether avoid
them, by means which the law permits, cannot be doubted."