Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

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

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

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

CASTRO, J.:

This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act
2631,2 which provides as follows:

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

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

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

Such semi-postal stamps could not be made available during the period from August 19 to
September 30, 1957, for lack of time. However, two denominations of such stamps, one at "5
+ 5" centavos and another at "10 + 5" centavos, will soon be released for use by the public on
their mails to be posted during the same period starting with the year 1958.

xxx xxx xxx

 During the period from August 19 to September 30 each year starting in 1958, no mail
matter of whatever class, and whether domestic or foreign, posted at any Philippine Post
Office and addressed for delivery in this country or abroad, shall be accepted for
mailing unless it bears at least one such semi-postal stamp showing the additional value
of five centavos intended for the Philippine Tuberculosis Society.

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

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

Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:

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

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

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

3. Metered mail. For each piece of mail matter impressed by postage meter under metered
mail permit issued by this Bureau, the extra charge of five centavos for said society shall be
collected in cash and an official receipt issued for the total sum thus received, in the manner
indicated in subparagraph 1.
 4. Business reply cards and envelopes. Upon delivery of business reply cards and
envelopes to holders of business reply permits, the five-centavo charge intended for said
society shall be collected in cash on each reply card or envelope delivered, in addition to the
required postage which may also be paid in cash. An official receipt shall be issued for the
total postage and total extra charge received, in the manner shown in subparagraph 1.

5. Mails entitled to franking privilege. Government agencies, officials, and other persons
entitled to the franking privilege under existing laws may pay in cash such extra charge
intended for said society, instead of affixing the semi-postal stamps to their mails, provided
that such mails are presented at the post-office window, where the five-centavo extra charge
for said society shall be collected on each piece of such mail matter. In such case, an official
receipt shall be issued for the total sum thus collected, in the manner stated in subparagraph 1.

Mail under permits, metered mails and franked mails not presented at the post-office window
shall be affixed with the necessary semi-postal stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as herein provided for other mails.

Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and
Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as
amended, exempts "copies of periodical publications received for mailing under any class of mail
matter, including newspapers and magazines admitted as second-class mail."

The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post
office in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014
Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp required by the statute, it
was returned to the petitioner.

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

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

I.

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

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

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

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

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

II.

We now consider the constitutional objections raised against the statute and the implementing orders.

1. It is said that the statute is violative of the equal protection clause of the Constitution. More
specifically the claim is made that it constitutes mail users into a class for the purpose of the tax while
leaving untaxed the rest of the population and that even among postal patrons the statute
discriminatorily grants exemption to newspapers while Administrative Order 9 of the respondent
Postmaster General grants a similar exemption to offices performing governmental functions. .

The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise
tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As such the
objections levelled against it must be viewed in the light of applicable principles of taxation.

To begin with, it is settled that the legislature has the inherent power to select the subjects of taxation
and to grant exemptions.4 This power has aptly been described as "of wide range and
flexibility."5 Indeed, it is said that in the field of taxation, more than in other areas, the legislature
possesses the greatest freedom in classification.6 The reason for this is that traditionally, classification
has been a device for fitting tax programs to local needs and usages in order to achieve an equitable
distribution of the tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the petitioner
asserts is that statutory classification of mail users must bear some reasonable relationship to the end
sought to be attained, and that absent such relationship the selection of mail users is constitutionally
impermissible. This is altogether a different proposition. As explained in Commonwealth v. Life
Assurance Co.:8

While the principle that there must be a reasonable relationship between classification made
by the legislation and its purpose is undoubtedly true in some contexts, it has no application to
a measure whose sole purpose is to raise revenue ... So long as the classification imposed is
based upon some standard capable of reasonable comprehension, be that standard based upon
ability to produce revenue or some other legitimate distinction, equal protection of the law has
been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at
441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580
(1910).

We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution forbids. The
remedy for unwise legislation must be sought in the legislature. Now, the classification of mail users
is not without any reason. It is based on ability to pay, let alone the enjoyment of a privilege,
and on administrative convinience. In the allocation of the tax burden, Congress must have
concluded that the contribution to the anti-TB fund can be assured by those whose who can afford the
use of the mails.

The classification is likewise based on considerations of administrative convenience. For it is now a

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

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

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

It is thus erroneous for the trial court to hold that because certain mail users are exempted from the
levy the law and administrative officials have sanctioned an invidious discrimination offensive to the
Constitution. The application of the lower courts theory would require all mail users to be taxed, a
conclusion that is hardly tenable in the light of differences in status of mail users. The Constitution
does not require this kind of equality.

As the United States Supreme Court has said, the legislature may withhold the burden of the tax in
order to foster what it conceives to be a beneficent enterprise.11 This is the case of newspapers which,
under the amendment introduced by Republic Act 2631, are exempt from the payment of the
additional stamp.

As for the Government and its instrumentalities, their exemption rests on the State's sovereign
immunity from taxation. The State cannot be taxed without its consent and such consent, being in
derogation of its sovereignty, is to be strictly construed.12 Administrative Order 9 of the respondent
Postmaster General, which lists the various offices and instrumentalities of the Government exempt
from the payment of the anti-TB stamp, is but a restatement of this well-known principle of
constitutional law.

The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the
exclusion of other diseases which, it is said, are equally a menace to public health. But it is never a
requirement of equal protection that all evils of the same genus be eradicated or none at all.13 As this
Court has had occasion to say, "if the law presumably hits the evil where it is most felt, it is not to be
overthrown because there are other instances to which it might have been applied."14

2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a
public purpose as no special benefits accrue to mail users as taxpayers, and second, because it violates
the rule of uniformity in taxation.

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

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather
than a graduated tax. A tax need not be measured by the weight of the mail or the extent of the service
rendered. We have said that considerations of administrative convenience and cost afford an
adequate ground for classification. The same considerations may induce the legislature to impose a
flat tax which in effect is a charge for the transaction, operating equally on all persons within the class
regardless of the amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp
act which imposed a flat rate of two cents on every $100 face value of stock transferred:

One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again
equality in this sense has to yield to practical considerations and usage. There must be a fixed
and indisputable mode of ascertaining a stamp tax. In another sense, moreover, there is
equality. When the taxes on two sales are equal, the same number of shares is sold in each
case; that is to say, the same privilege is used to the same extent. Valuation is not the only
thing to be considered. As was pointed out by the court of appeals, the familiar stamp tax of 2
 cents on checks, irrespective of income or earning capacity, and many others, illustrate the
necessity and practice of sometimes substituting count for weight ...17

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

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

Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain
classes of mail matters (such as mail permits, metered mails, business reply cards, etc.), the five-
centavo charge may be paid in cash instead of the purchase of the anti-TB stamp. It further states that
mails deposited during the period August 19 to September 30 of each year in mail boxes without the
stamp should be returned to the sender, if known, otherwise they should be treated as nonmailable.

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

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

It is likewise true that the statute does not provide for the disposition of mails which do not bear the
anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in the mails unless it
bears such semi-postal stamp" is a declaration that such mail matter is nonmailable within the
meaning of section 1952 of the Administrative Code. Administrative Order 7 of the Postmaster
General is but a restatement of the law for the guidance of postal officials and employees. As for
Administrative Order 9, we have already said that in listing the offices and entities of the Government
exempt from the payment of the stamp, the respondent Postmaster General merely observed an
established principle, namely, that the Government is exempt from taxation.

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano, JJ., concur.
Zaldivar, J., is on leave.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a re-
examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a
case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund
of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the
payment of taxes. The pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the National Government during the life of this franchise a tax of two per
cent of the gross revenue or gross earning derived by the grantee from its operations
under this franchise. Such tax shall be due and payable quarterly and shall be in lieu
of all taxes of any kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the audit of the
accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is
shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in
conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since
1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation

requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the
amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the
amount of P19,529.75 as registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner
Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil.
212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine
Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration
fees are regulatory exceptional. and not revenue measures and, therefore, do not come within the
exemption granted to PAL? under its franchise. Hence,

PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and National
Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it was
docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity
as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action.
In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees
imposed as an incident of the exercise of the police power of the state. They contended that while Act
4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or earnings,
it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees.
The resolution of the motion to dismiss was deferred by the Court until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint
"moved by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine
Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which
certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL
and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at
bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8
of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks
of "registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts
 with a categorical statement "No fees shall be charged." (lbid., Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It
is not held liable for a tax but for a registration fee. It therefore cannot make use of a
backpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be
dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition
of additional tax on privately-owned passenger automobiles, motorcycles and
scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30,
1969.) A special science fund was thereby created and its title expressly sets forth that
a tax on privately-owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which clearly specifies
the" Philippine tax."(Cooley to be paid as distinguished from the registration fee
under the Motor Vehicle Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier legislation could by
subdivision the point be susceptible of the interpretation that a tax rather than a fee
was levied. What is thus most apparent is that where the legislative body relies on its
authority to tax it expressly so states, and where it is enacting a regulatory measure, it
is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand,
held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of
motor vehicles are in section 8 of that law called "fees". But the appellation is no
impediment to their being considered taxes if taxes they really are. For not the name
but the object of the charge determines whether it is a tax or a fee. Geveia speaking,
taxes are for revenue, whereas fees are exceptional for purposes of regulation and
inspection and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by statute for
the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or officers
collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p.
110.)

From the data submitted in the court below, it appears that the expenditures of the
Motor Vehicle Office are but a small portionabout 5 per centumof the total
collections from motor vehicle registration fees. And as proof that the money
collected is not intended for the expenditures of that office, the law itself provides
that all such money shall accrue to the funds for the construction and maintenance of
public roads, streets and bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their express
object is to provide revenue with which the Government is to discharge one of its
 principal functionsthe construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act
shall be imposed," thus implying that the charges therein imposedthough called
feesare of the category of taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of Republic Act 587, which
reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other
competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their
respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use
of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any toll
fee." be charged or collected until and unless the approved schedule
of tolls shall have been posted levied, in a conspicuous place at such
toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law
(Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation
Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg.
43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.Twenty per centum of the money

collected under the provisions of this Act shall accrue to the road and bridge funds of
the different provinces and chartered cities in proportion to the centum shall during
the next previous year and the remaining eighty per centum shall be deposited in the
Philippine Treasury to create a special fund for the construction and maintenance of
national and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and Communications
for projects recommended by the Director of Public Works in the different provinces
and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

 Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of
this Act shall be deposited in a special trust account in the National Treasury to
constitute the Highway Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total collection during one year,
shall be set aside for the purpose. (As amended by RA 64-67, approved August 6,
1971).

It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. On the other hand, the Philippine Rabbit case mentions a presumption arising
from the use of the term "fees," which appears to have been favored by the legislature to distinguish
fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.No original registration of motor

vehicles subject to payment of taxes, customs s duties or other charges shall be
accepted unless proof of payment of the taxes due thereon has been presented to the
Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor
vehicle (Sec. 59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As
stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of
taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation (Sonzinky
v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. Isabela
such case, the fees may properly be regarded as taxes even though they also serve as
an instrument of regulation. If the purpose is primarily revenue, or if revenue is at
least one of the real and substantial purposes, then the exaction is properly called a
tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592,
593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These
exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801,
4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on
tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-
13, citing Cooley on Taxation, 2nd Edition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration
fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in
the Calalang case. The same provision appears as Section 591-593). in the Land Transportation code.
It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the
imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." Though
nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-
593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor
vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more
apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the
law could have referred to an original tax and not one in addition to the tax already imposed on the
registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not
be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11).
These are not to be understood as taxes because such fees are very minimal to be revenue-raising.
Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle
registration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for
rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular
traffic exploded in number and motor vehicles became absolute necessities without which modem life
as we know it would stand still, Congress found the registration of vehicles a very convenient way of
raising much needed revenues. Without changing the earlier deputy. of registration payments as
"fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to
the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of
government even if one fifth or less of the amount collected is set aside for the operating expenses of
the agency administering the program.

May the respondent administrative agency be required to refund the amounts stated in the complaint
of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448
dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July
11, 1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act
No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%)
of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature,
or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is hereby expressly
 exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was repealed
by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary

notwithstanding, all corporate taxpayers not specifically exempt
under Sections 24 (c) (1) of this Code shall pay the rates provided in
this section. All corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government Service
Insurance System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their taxable
net income as are imposed by this section upon associations or
corporations engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law
intended all corporate taxpayers to pay income tax as provided by the statute. There
can be no doubt as to the power of Congress to repeal the earlier exemption it
granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5
of the Constitution as amended in 1973 expressly provide that no franchise shall be
granted to any individual, firm, or corporation except under the condition that it shall
be subject to amendment, alteration, or repeal by the legislature when the public
interest so requires. There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is clear and unambiguous.
There is a listing of entities entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court Resolved to DENY the petition
for lack of merit. The decision of the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to
the Philippine Government during the lifetime of this franchise whichever of
subsections (a) and (b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the
Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues.
derived by the grantees from all specific. without distinction as to
transport or nontransport corporations; provided that with respect to
international airtransport service, only the gross passengers, mail, and
freight revenues. from its outgoing flights shall be subject to this law.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any
 kind, nature or description imposed, levied, established, assessed, or collected by any
municipal, city, provincial, or national authority or government, agency, now or in the
future, including but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and
transfer of airtransport equipment, motor vehicles, and all other personal or real
property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and licensing
of motor vehicles. Such payments are already included in the basic tax or franchise tax provided in
Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of
registration fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory
Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration
and licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree
No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes, Grio Aquino and Medialdea, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional

Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental,
Branch V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D.
TONGOY respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the
Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of P3,254.80,
inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second, dated
October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3,
1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The
claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency
income taxes in the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-
50-29-1-11061-21-63 and 11-50-291-1 10875-64, to which motion was attached Proof of Claim
(Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground
that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to Motion
for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent
Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein petitioner,
Regional Director of the Bureau of Internal Revenue, in an order dated July 29, 1969 (Annex D,
Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of the order of
July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against
the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule
86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was
already barred under Section 5, Rule 86 of the Rules of Court.
which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New
Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for money against the
decedent, must be filed within the time limited in they notice; otherwise they are
barred forever, except that they may be set forth as counter claims in any action that
the executor or administrator may bring against the claimants. Where the executor or
administrator commence an action, or prosecutes an action already commenced by
the deceased in his lifetime, the debtor may set forth may answer the claims he has
against the decedents, instead of presenting them independently to the court has
herein provided, and mutual claims may be set off against each other in such action;
and in final judgment is rendered in favored of the decedent, the amount to
determined shall be considered the true balance against the estate, as though the claim
has been presented directly before the court in the administration proceedings. Claims
not yet due, or contingent may be approved at their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary
obligation of the decedent created by law, such as taxes which is entirely of different character from
the claims expressly enumerated therein, such as: "all claims for money against the decedent arising
from contract, express or implied, whether the same be due, not due or contingent, all claim for
funeral expenses and expenses for the last sickness of the decedent and judgment for money against
the decedent." Under the familiar rule of statutory construction of expressio unius est exclusio
alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a
statute enumerates the things upon which it is to operate, everything else must necessarily, and by
implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-
335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-
23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well
as the matter of prescription thereof are governed by the provisions of the National Internal revenue
Code, particularly Sections 331 and 332 thereof, and not by other provisions of law. (See also Lim
Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-
10681, March 29, 1958). Even without being specifically mentioned, the provisions of Section 2 of
Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of the Court
as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes
assessed against the estate of a deceased person ... need not be submitted to the committee on claims
in the ordinary course of administration. In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing that the taxes have been assessed against
the estate." The abolition of the Committee on Claims does not alter the basic ruling laid down giving
exception to the claim for taxes from being filed as the other claims mentioned in the Rule should be
filed before the Court. Claims for taxes may be collected even after the distribution of the decedent's
estate among his heirs who shall be liable therefor in proportion of their share in the inheritance.
(Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of
exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood
of the Government and their prompt and certain availability are imperious need. (Commissioner of
Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation
depends the Government ability to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the collection of
taxes should not be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the presumption being
that they take good care of their personal affairs. This should not hold true to government officials
with respect to matters not of their own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the operation of the principle of estoppel. (Republic
vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent and
Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162;
Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda vs.
Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110;
Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance
Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals,
L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L-
23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected even after the
distribution of the estate of the decedent among his heirs (Government of the Philippines vs.
Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner of
Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph
of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the Government of
the Philippines from the time the assessment was made by the Commissioner of Internal Revenue
until paid with interests, penalties, etc. By virtue of such lien, this court held that the property of the
estate already in the hands of an heir or transferee may be subject to the payment of the tax due the
estate. A fortiori before the inheritance has passed to the heirs, the unpaid taxes due the decedent may
be collected, even without its having been presented under Section 2 of Rule 86 of the Rules of Court.
It may truly be said that until the property of the estate of the decedent has vested in the heirs, the
decedent, represented by his estate, continues as if he were still alive, subject to the payment of such
taxes as would be collectible from the estate even after his death. Thus in the case above cited, the
income taxes sought to be collected were due from the estate, for the three years 1946, 1947 and 1948
following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2,
Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the time
originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited which
reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the
preceding section, the court shall state the time for the filing of claims against the
estate, which shall not be more than twelve (12) nor less than six (6) months after the
 date of the first publication of the notice. However, at any time before an order of
distribution is entered, on application of a creditor who has failed to file his claim
within the time previously limited the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within a time not exceeding one (1)
month. (Emphasis supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order
of Payment of Taxes) which, though filed after the expiration of the time previously limited but before
an order of the distribution is entered, should have been granted by the respondent court, in the
absence of any valid ground, as none was shown, justifying denial of the motion, specially
considering that it was for allowance Of claim for taxes due from the estate, which in effect represents
a claim of the people at large, the only reason given for the denial that the claim was filed out of the
previously limited period, sustaining thereby private respondents' contention, erroneously as has been
demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the
total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code
is a final one and the respondent estate's sole defense of prescription has been herein overruled, the
Motion for Allowance of Claim is herein granted and respondent estate is ordered to pay and
discharge the same, subject only to the limitation of the interest collectible thereon as provided by the
Tax Code. No pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Guerrero, and Melencio-Herrera, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-22734 September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO
PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15
children, the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in
the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was
appointed administratrix. The estate was divided among and awarded to the heirs and the
proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about
P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that
the corresponding income tax returns were not filed. Thereupon, the representative of the
Collector of Internal Revenue filed said returns for the estate on the basis of information and
data obtained from the aforesaid estate proceedings and issued an assessment for the
following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest
from November 30,
1953 to April 15,
1957 720.77
Compromise for late
filing 80.00
Compromise for late
payment 40.00
Total amount due
 P2,707.44
===========
Additional residence tax P14.50
2.
for 1945 ===========
3. Real Estate dealer's tax for
the fourth quarter of 1946 P207.50
and the whole year of 1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he
appealed to the Court of Tax Appeals alleging that he was appealing "only that
proportionate part or portion pertaining to him as one of the heirs."

After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision
of the Commissioner on the ground that his right to assess and collect the tax has
prescribed. The Commissioner appealed and this Court affirmed the findings of the Tax
Court in respect to the assessment for income tax for the year 1947 but held that the right to
assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the
returns were filed on August 24, 1953; assessments for both taxable years were made within
five years therefrom or on October 19, 1953; and the action to collect the tax was filed within
five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return
was filed on March 1, 1948; the assessment was made on October 19, 1953, more than five
years from the date the return was filed; hence, the right to assess income tax for 1947 had
prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate
proceedings.1

In the Tax Court, the parties submitted the case for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B.
Pineda liable for the payment corresponding to his share of the following taxes:

Deficiency income tax

P135.8
1945
3
1946 436.95
Real estate dealer's
fixed tax 4th quarter
of 1946 and whole
year of 1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel
B. Pineda liable for the payment of all the taxes found by the Tax Court to be due from
the estate in the total amount of P760.28 instead of only for the amount of taxes
corresponding to his share in the estate.1awphl.nt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of and in proportion to any share he received.
He relies on Government of the Philippine Islands v. Pamintuan2 where We held that "after
the partition of an estate, heirs and distributees are liable individually for the payment of all
lawful outstanding claims against the estate in proportion to the amount or value of the
property they have respectively received from the estate."

RULING---We hold that the Government can require Manuel B. Pineda to pay the
full amount of the taxes assessed.

Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging
to the estate/taxpayer. As an heir he is individually answerable for the part of the tax
proportionate to the share he received from the inheritance.3 His liability, however,
cannot exceed the amount of his share.4

As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of
the property in his possession. The reason is that the Government has a lien on the P2,500.00
received by him from the estate as his share in the inheritance, for unpaid income taxes4a for
which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code,
which we quote hereunder:

If any person, corporation, partnership, joint-account (cuenta en participacion),

association, or insurance company liable to pay the income tax, neglects or refuses to
pay the same after demand, the amount shall be a lien in favor of the Government
of the Philippines from the time when the assessment was made by the
Commissioner of Internal Revenue until paid with interest, penalties, and costs
that may accrue in addition thereto upon all property and rights to property
belonging to the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28.
After such payment, Pineda will have a right of contribution from his co-heirs,5 to achieve an
adjustment of the proper share of each heir in the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by going after
all the heirs and collecting from each one of them the amount of the tax proportionate to the
inheritance received. This remedy was adopted in Government of the Philippine Islands v.
Pamintuan, supra. In said case, the Government filed an action against all the heirs for the
collection of the tax. This action rests on the concept that hereditary property consists only of
that part which remains after the settlement of all lawful claims against the estate, for the
settlement of which the entire estate is first liable.6 The reason why in case suit is filed
against all the heirs the tax due from the estate is levied proportionately against them is to
achieve thereby two results: first, payment of the tax; and second, adjustment of the
shares of each heir in the distributed estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all
property and rights to property belonging to the taxpayer for unpaid income tax, is by
subjecting said property of the estate which is in the hands of an heir or transferee to the
payment of the tax due, the estate. This second remedy is the very avenue the Government
took in this case to collect the tax. The Bureau of Internal Revenue should be given, in
instances like the case at bar, the necessary discretion to avail itself of the most expeditious
way to collect the tax as may be envisioned in the particular provision of the Tax Code above
quoted, because taxes are the lifeblood of government and their prompt and certain
availability is an imperious need.7 And as afore-stated in this case the suit seeks to achieve
only one objective: payment of the tax. The adjustment of the respective shares due to the
heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by
the heir from whom the Government recovered said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered
to pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax
for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the
whole year 1947, without prejudice to his right of contribution for his co-heirs. No costs. So
ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

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

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

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

The antecedent facts are as follows:

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

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

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to
Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a
tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the

amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer

Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739
(37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of

P1,000.00 as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

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

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF

LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND

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

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS

ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO
SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his
property was sold at public auction without notice to him and that the price paid for the property was
shockingly inadequate, amounting to fraud and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the
facts militate against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation.
He claims that the government owed him P4,116.00 when a portion of his land was expropriated on
October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15,
1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their
own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:

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

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

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

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

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

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he
has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer are
not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for
taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."

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

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

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

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by

proof and the general rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular
Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings
are presumed to be regular.

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

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

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

Q. My question to you is this letter marked as Exhibit I for Ho

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

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

Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

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

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to court
assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy
of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de
Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not
material when the law gives the owner the right to redeem as when a sale is made at public auction,
upon the theory that the lesser the price, the easier it is for the owner to effect redemption."
In Velasquez v. Coronel (5 SCRA 985), this Court held:

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

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):

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

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

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

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

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

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

SO ORDERED.

Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18994 June 29, 1963

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

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

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

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

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30,
1960, this Court declared as final and executory the order for the payment by the estate of the estate
and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First
Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the
Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a
petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was,
however, denied by the court which held that the execution is not justifiable as the Government is
indebted to the estate under administration in the amount of P262,200. The orders of the court
below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo
Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary
Public Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon
dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director
Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the
administratrix Simeona K. Price, as directed in the above note of the President. Considering
these facts, the Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5,
1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R.
No. L-14674, be deducted from the amount of P262,200.00 due and payable to the
 Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government
to her without further delay. (Order of August 20, 1960)

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

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

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of real property of the deceased and
all debts or expenses of administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2.
And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90,
section 7, should be complied with.1wph1.t

Execution may issue only where the devisees, legatees or heirs have entered into
possession of their respective portions in the estate prior to settlement and payment of
the debts and expenses of administration and it is later ascertained that there are such debts Commented [A1]: In CIR v Pineda, probate proceedings were
already closed. na divide-divide na sa mga ate girls and kuya boys
and expenses to be paid, in which case "the court having jurisdiction of the estate may, by and inheritence
order for that purpose, after hearing, settle the amount of their several liabilities, and order
how much and in what manner each person shall contribute, and may issue execution if
circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the
estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the
court and such jurisdiction continues until said properties have been distributed among the heirs
entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the
proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but
to ask the court for an order to require the administrator to pay the amount due from the estate and
required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable as well as fully liquidated. Compensation, therefore, takes place by Commented [A2]:
1.Debts already due and demandable.
operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and 2.There was a contract
both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough
the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the
estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is
not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.
Bengzon, C.J., took no part.
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, COURT OF APPEALS, and THE COURT
OF TAX APPEALS, respondents.

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975[1] affirming the Court of Tax
Appeals decision in CTA Case No. 4872 dated March 16, 1995 [2] ordering it to pay
the amount of P110,677,668.52 as excise tax liability for the period from the
2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August
6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to
settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the
1st and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as
follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL

EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

------------------- ----------------- ----------------- ---------------------

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

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

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

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

========== ========== =========== ===========[3]

In a letter dated August 20, 1992,[4] Philex protested the demand for payment of
the tax liabilities stating that it has pending claims for VAT input credit/refund for the
taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus
interest. Therefore, these claims for tax credit/refund should be applied against the
tax liabilities, citing our ruling in Commissioner of Internal Revenue v. Itogon-Suyoc
Mines, Inc.[5]
In reply, the BIR, in a letter dated September 7, 1992,[6] found no merit in Philexs
position. Since these pending claims have not yet been established or determined
with certainty, it follows that no legal compensation can take place. Hence, he BIR
reiterated its demand that Philex settle the amount plus interest within 30 days from
the receipt of the letter.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue to the Court
of Tax Appeals on November 6, 1992.[7] In the course of the proceedings, the BIR
issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which,
applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the
latters tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition,
p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this Court (C.T.A. Case No.
4707). A fortiori, the liquidated debt of the Petitioner to the government cannot,
therefore, be set-off against the unliquidated claim which Petitioner conceived to
exist in its favor (see Compaia General de Tabacos vs. French and Unson, No.
14027, November 8, 1918, 39 Phil. 34).[8]

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

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

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

WHEREFORE, the appeal by way of petition for review is hereby

DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a

Resolution dated July 11, 1996.[13]
 However, a few days after the denial of its motion for reconsideration, Philex was
able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991
but also for 1992 and 1994, computed as follows:[14]
Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit

1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

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

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the
same should, ipso jure, off-set its excise tax liabilities[15] since both had already
become due and demandable, as well as fully liquidated;[16] hence, legal
compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors of each
other.[17] There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity.[18] We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we
categorically held that taxes cannot be subject to set-off or compensation, thus:

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 tax cannot await the results of a lawsuit against
the government.

The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. v. Commission on Audit,[20] which reiterated that:

x x x a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

Further, Philexs reliance on our holding in Commissioner of Internal Revenue v.

Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off
against an existing tax liability even though the refund has not yet been approved by
the Commissioner,[21] is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case
was anchored on Section 51(d) of the National Revenue Code of 1939. However,
when the National Internal Revenue Code of 1977 was enacted, the same
provision upon which the Itogon-Suyoc pronouncement was based was
omitted.[22] Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by
Philex.
Despite the foregoing rulings clearly adverse to Philexs position, it asserts that
the imposition of surcharge and interest for the non-payment of the excise taxes
within the time prescribed was unjustified. Philex posits the theory that it had no
obligation to pay the excise liabilities within the prescribed period since, after all, it
still has pending claims for VAT input credit/refund with BIR.[23]
We fail to see the logic of Philexs claim for this is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.[24] Evidently, to countenance
Philexs whimsical reason would render ineffective our tax collection system. Too
simplistic, it finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on
the ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a
tax is that it is compulsory rather than a matter of bargain.[25] Hence, a tax does not
depend upon the consent of the taxpayer.[26] If any payer can defer the payment of
taxes by raising the defense that it still has a pending claim for refund or credit, this
would adversely affect the government revenue system. A taxpayer cannot refuse to
pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the lawsuit it
filed against the government.[27] Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise to
confusion and abuse, depriving the government of authority over the manner by
which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund
with the government is immaterial for the imposition of charges and penalties
prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the
surcharge is mandatory and the BIR is not vested with any authority to waive the
collection thereof.[28] The same cannot be condoned for flimsy reasons, [29] similar to
the one advanced by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National
Internal Revenue Code of 1977, which requires the refund of input taxes within 60
days,[31] when it took five years for the latter to grant its tax claim for VAT input
credit/refund.[32]
 In this regard, we agree with Philex. While there is no dispute that a claimant
has the burden of proof to establish the factual basis of his or her claim for tax credit
or refund,[33] however, once the claimant has submitted all the required documents, it
is the function of the BIR to assess these documents with purposeful dispatch. After
all, since taxpayers owe honesty to government it is but just that government render
fair service to the taxpayers.[34]
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the
refund of these erroneously paid taxes was only granted in 1996. Obviously, had the
BIR been more diligent and judicious with their duty, it could have granted the refund
earlier. We need not remind the BIR that simple justice requires the speedy refund of
wrongly-held taxes.[35] Fair dealing and nothing less, is expected by the taxpayer from
the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax
Appeals:[36]

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

Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collectot kill the 'hen that lays the golden egg.' And, in
the order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously."

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

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

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997
states:
"xxx xxx xxx
(c) wilfully neglecting to give receipts, as by law required for any sum
collected in the performance of duty or wilfully neglecting to perform, any
other duties enjoined by law."

Simply put, both provisions abhor official inaction, willful neglect and unreasonable
delay in the performance of official duties.[39] In no uncertain terms must we stress
that every public employee or servant must strive to render service to the people with
utmost diligence and efficiency. Insolence and delay have no place in government
service. The BIR, being the government collecting arm, must and should do no less.
It simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take
judicial notice of the taxpayer's generally negative perception towards the BIR;
hence, it is up to the latter to prove its detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in

performing its duties, still, the same cannot justify Philex's non-payment of its tax
liabilities. The adage "no one should take the law into his own hands" should have
guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is
hereby AFFIRMED.
SO ORDERED.
CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS
and COMMISSIONER OF CUSTOMS, respondents.

DECISION
ROMERO, J.:

Caltex, a corporation engaged in the oil industry, imported on various dates in

1982 light/medium mix special oil and heavy crude oil for which it was assessed
the following ad valorem duties by the Collector of Customs:

1. P 97,697.143 - for the importation which arrived on April 10, 1982

2. P119,572.319 - for the importation which arrived on June 7, 1982

3. P 60,769.00 - for the importation which arrived on July 19, 1982

The basis of the assessments was a memorandum dated January 26, 1971,
issued by then Acting Commissioner of Customs which provided that the duties
and taxes in the importation of crude oil shall be based on the gross actual
receipt without deducting the basic sediment and water (BSW). The full text of
the memorandum reads as follows:
[1]

The Collector of Customs

Port of Manila

Port of Batangas

Subport of Limay, Bataan

Effective February 1, 1971, Customs duties and taxes on importation of crude oil
shall be based on the gross actual receipts without deducting the BSW as has been
previously done.

In determining the freight, the amount indicated in the bill of lading or as certified
by the ship agent shall be used as basis. However, if it is found by the examiner
that the actual receipt is more than the manifested weight, the freight shall be
adjusted accordingly.

Please see to it that all the personnel concerned in your respective ports are
informed of these instructions.

(SGD.) ROLANDO A. GEOTINA

Acting Commissioner of Customs

 The assessments were timely protested by Caltex before the Collector of
Customs on June 9, 1982, July 21, 1982 and September 8, 1982, respectively, on
[2]

the ground that the BSW contents should have been deducted before imposing
the assessable ad valorem duties. The protests were, however, disregarded in a
decision dated December 19, 1983.
Caltex then elevated the case to the Commissioner of Customs, who affirmed
the Collectors finding in a decision dated October 23, 1984, disposing as follows:

WHEREFORE, finding no cogent reason to disturb the decision of the Collector of

Customs, Port of Batangas, the same is hereby affirmed.

SO ORDERED.

Undaunted, Caltex filed a petition for review with the Court of Tax Appeals
(CTA) raising the same argument. On August 9, 1991, the CTA ruled in favor of
[3]

Caltex and reversed the decisions of both the Collector of Customs and
Commissioner of Customs, the dispositive portion of the decision reads:

WHEREFORE, the petition is GRANTED. Respondent [Commissioner of

Customs] should and is hereby ordered to refund or credit to petitioner the
following amounts: P212,959.00 under Entry No. 163/82; P759,385.00 under
Entry No. 204/82; P532,732.00 under Entry No. 293/82. [4]

Disagreeing with the CTA decision, the Commissioner of Customs filed a

petition for review with the Court of Appeals questioning the decision. On
February 12, 1992, the appellate court set aside the CTAs decision and reinstated
the ruling of the Commissioner of Customs. In reversing the CTAs decision, the
[5]

Court of Appeals justified its ruling in this wise:

The ad valorem duties should thus be based on the price paid by the importer as
shown in the sales invoice. In this case, apparently the sale invoices do not indicate
a distinct and separate price or value for the crude oil alone without the basic
sediment and water contents or BSW. This is so because, as already stated, the
BSW naturally occur in crude oil. In the case at bar, the BSW was only formed and
produced during transit which should be considered an accession. Therefore, it
should be included in the delivery of crude oil as part of what was actually
purchased by the importer. (Civil Code, Art. 1166).

In computing the ad valorem duties on the basis of the sales invoice, (it becomes
irrelevant whether the volume of crude oil increased while in transit by reason of
BSW and other impurities, because the law mandates that the tax should be based
on the home consumption value which is the price indicated in the sales invoice or
the value of the importation. (Commissioner of Customs v. Proctor & Gamble, 169
SCRA 693 [1989]; Commissioner of Customs v. Court of Tax Appeals, 162 SCRA
730 [1988]; Commissioner of Customs v. Court of Tax Appeals, supra). Even if
BSW contents are deducted from the actual gross barrels received by respondent
Caltex, the price in the sales invoice would remain unaltered.

The decretal portion of the decision reads: [6]

WHEREFORE, the decision appealed from is REVERSED and the decision of the
Collector of Customs as affirmed by the Commissioner of Customs is
REINSTATED.

Dismayed by the sudden turn of events, Caltex filed a motion for

reconsideration which was, however, denied by the Court of Appeals in a
resolution dated March 19, 1992. Hence, this petition.
[7]

The basic issue for resolution is whether the Basic Sediment and Water, as
impurities, should have been deducted from the gross actual receipts to determine
the proper imposable ad valorem duties.
Before discussing the crux of the petition, a preliminary matter to be threshed
out is Caltexs assertion that the Collector of Customs should have published the
memorandum which increases the imposable duties for importation of oil, for in
the absence of publication, the same would be violative of due process and Section
3502 of the Tariff and Customs Code. At this juncture, it is important to note that
[8] [9]

the non-publication of the memorandum was not denied by the Commissioner of

Customs. [10]

There is no doubt that issuances by an administrative agency have the force

and effect of law. Corollarily, when the issuances are of general applicability,
[11]

publication is necessary as a requirement of due process. In this regard,

[12]

Commonwealth Act No. 638, mandates that besides legislations and resolutions
[13]

of public nature of the Congress of the Philippines, executive and administrative

orders and proclamations which have general applicability must also be published.
It cannot be disputed that the questioned memorandum increases the imposable
duties for the importation of oil, a departure from the previous practice. To be sure,
the increase invariably interferes with the property rights of oil importers. Hence,
the statutory norm of publication is necessary, not only for effectivity, but also to
apprise those affected. Since the assailed memorandum was never published, it
follows the same cannot be upheld. [14]

We, however, are not unmindful of the possible effect of this ruling upon our
countrys tax revenue, in light of the fact that the genesis of instant petition took
place some 16 years ago.Likewise, we cannot close our eyes to the fact that the
collections were done in reliance on the validity of the memorandum. Thus, we are
constrained to adopt a practical and realistic solution for after all, custom duties are
taxes on import and export of goods, hence, it is the lifeblood of the
nation. Undoubtedly, to accept Caltexs belated protestations will necessarily
[15]

prejudice the public interest.

 In Fernandez v. Cuerva, which explained the effect of a declaration of
[16]

invalidity of an assailed legislative or executive act, we declared:

The growing awareness of the role of the judiciary as the governmental organ
which has the final say on whether or not a legislative or executive measure is
valid leads to a more appreciative attitude of the emerging concept that a
declaration of nullity may have legal consequences which the more orthodox view
would deny. That for a period of time such a statute, treaty, executive order, or
ordinance was in actual existence appears to be indisputable. What is more
appropriate and logical then than to consider it as an operative fact.

In addition to the preceding discussion, a more glaring act which must be

emphasized is that the importations occurred in 1982 or eleven (11) years after said
memorandum was issued, hence, Caltex cannot feign ignorance as to the existence
of such memorandum. Certainly, it is safe to assume that Caltex, as a regular
importer of crude oil, had knowledge that, from 1971 the procedure for
determining the ad valorem duties on crude oil importation was that the BSW
content were to be included in imposing the duties due. However, from 1971 to
1982, Caltex made no move to question the validity of the memorandum nor did it
assail the duties being charged on its shipment before the proper forum. In fact, it
would not be unwarranted to conclude that during this period, Caltex continued
importing crude oil under the procedures laid down by the Memorandum. To
compound matters, Caltex offered no plausible explanation nor justifiable reason
for its delay or omission in taking timely action against the memorandum which
was already in existence for a period of nine years prior to the importations in
question.The time-honored rule anchored on public policy is that relief will be
denied to a litigant whose claim or demand has become stale, or who has
acquiesced in the prevailing situation for an unreasonable length of time, or who
has not been vigilant or who has slept on his rights either by negligence, folly or
inattention. Caltex has no one to blame but itself.
[17]

With respect to the decisive issue posed by the instant petition, the axiomatic
rule is that the dutiable value of an imported article subject to ad valorem is
based on its home consumption value or price as freely offered for sale in
wholesale quantities in the ordinary course of trade in the principal market of
the country from where exported on the date of exportation to the
Philippines. The home consumption value is the price declared in the consular,
commercial, trade or sales invoice. Thus, in the leading case of Commissioner of
Customs v. Court of Tax Appeal, we held:
[18]

(t)he law is clear and mandatory. The dutiable value of an imported article subject
to an ad valorem rate of duty is based on its home consumption value or price as
freely offered for sale in wholesale quantities in the ordinary course of trade in the
principal markets of the country from where exported on the date of exportation to
the Philippines. That home consumption value or price is the value or price
declared in the consular, commercial, trade or sales invoice.

The above doctrine has consistently been applied by this Court in subsequent
cases.
[19]

Consequently, Caltex, in an effort to prove that the BSW contents should have
been omitted in the purchase price, submitted the sales invoices provided by its
seller in Saudi Arabia indicating a net barrel computation, that is, crude oil
[20]

without BSW. Paradoxically, the Import Entry permit declaration it submitted

[21]

before the Collector of Customs showed otherwise, that is the BSW contents were
not deducted in the purchase price. [22]

Obviously, there is a discrepancy between the sales invoice and the Import
Entry permit submitted by Caltex. Faced with this fact, we must uphold the latter
as more conclusive. In the early case of Murphy, Morris & Co. v. Collector of
Customs, we held that in the absence of any compelling reason, sworn statements
[23]

made before customs officials concerning an importation would render said

declarations conclusive upon the party. Furthermore, under the Tariff and Customs
Code, declarations and statements contained in the Import Entry Permit are
presumed to be true and correct under the penalties of falsification and
perjury. Moreover, descriptions in entries and other documents are admissions
[24]

against interest and presumptively correct. [25]

Our conclusion is premised on the fact that sales, commercial or consular

invoices are not conclusive on the government. Our customs laws should not be at
the mercy of importers who may avail of schemes and other arrangements to lower
and reduce the face value of the articles covered by such invoices. Noteworthy is
[26]

the fact that: If the customs authorities were bound by the invoice value, it is
evident that they would be, to a considerable extent, at the mercy of foreign
merchants and importers. The purpose of Congress in providing for an appraiser
was to prevent fraud upon the customs, and thus protect the revenues of the
Government. [27]

Conformably with the above discussion, a scrutiny of Caltexs Import Entry

declaration covering the importation dated April 10, 1982, stated that it had paid a
total purchase price of $53,055,905, broken down as follows:

TOTAL BARRELS PRICE/BARREL TOTAL PRICE

(Including BSW)

Arabian Light/Medium 1,411,310 $32.964 $46,522,733

Arabian Heavy 210,537 $31.030 $ 6,533,131

$53,055,905
 It is important to note that in arriving at the total purchase price, the barrels
representing the BSW were included in the computation. In other words, the 1,765
barrels of BSW of Arabian light/medium mix crude oil, as well as the 1,852 barrels
of BSW for Arabian heavy, were declared by Caltex as part of the total purchase
price.
If Caltex wanted to prove that, at the outset, the BSW contents were to be
excluded from the original purchase price, then it should have declared in the
Import Entry permit that it had only paid for the Arabian Light/Medium crude oil
the amount of $46,464,241, computed as follows:

Gross Barrels : 1,411,310

Less : 1,765 (BSW content)

Net Barrels : 1,409,545

Multiplied by : $ 32.964 per barrel

TOTAL : $ 46,464,241

On the other hand, with respect to the Arabian heavy crude oil, Caltex should
have paid the amount of $6,475,624, computed as follows:

Gross Barrels : 210,537

Less : 1,852 (BSW content)

Net Barrel : 208,685

Multiplied by : $ 31.030 per barrel

TOTAL : $ 6,475,624

The importation dated June 7, 1982, as reflected in the Import Entry permit,
would reveal that Caltex paid $55,554,053 for Arabian light/medium crude oil and
$8,835,300 for Arabian light crude oil. The respective BSW contents of both
importations were included for the purpose of determining the total purchase
price. Likewise, for the importation dated July 19, 1982, the basis of the purchase
[28]

price paid by petitioner was without any deductions representing the BSW
contents. [29]

Considering the foregoing, the Collector of Customs did not err in imposing a
20% ad valorem duty on Caltexs importations on the basis of the purchase price in
the Import Entry permit instead of the sales invoices.
 Caltex, however, insists that BSW contents, being impurities, are not subject
to ad valorem taxes. To support its contention, Caltex argues that:
[30]

x x x, the BSW is destined to be thrown away as they are in fact thrown away
(TSN, April 14, 1986, pp. 21 and 22 at the CTA). To petitioner, the thing of value
is the crude oil while BSW has no value whatsoever. Thus, when it is considered
that the rate of duty is based according to value (ad valorem as contrasted to
specific which is imposed as a fixed sum on each article of a class without regard
to value (Blacks Law Dictionary, Fifth Edition), such a duty cannot attach to BSW,
BSW having no value at all.

It is important to emphasize that Caltex in contending that the BSW, as

impurities, should be deducted from the purchase price, has the burden of proof to
establish the validity of the claimed deduction. A party challenging an appraisers
[31]

finding of value is required to prove not only that the appraised value is erroneous
but also what the proper value is.[32]

Evidently, the issue to be resolved is whether BSW contents are impurities

usually found in crude oil. The resolution of this query is important since under
customs law no deductions are permitted for impurities except those not usually
found in or upon such similar merchandice. [33]

Caltex asserts that these impurities are not an integral part of crude oil. This
position was sustained by the Court of Tax Appeals, thus:

It is clarified under Rule 3(b) that the application of Section 203 is premised on the
condition that before articles can be classified as forming part of the essential
article, the other article should be a compositepart or component of the essential
article. This is clear from the phrase Mixture and composite articles which consist
of different materials or are made of different components. It appears that basic
sediment and water are not components or composites of crude oil. [34]

In reversing the above finding, the Court of Appeals ruled that BSW naturally
occurs in crude oil, especially during transit, hence:

Thus, even the value of coverings and packing materials, which when destroyed
upon opening after arrival of the shipment has no value except perhaps as scrap, is
included in determining the home consumption value. There is no reason then why
the BSW elements, which naturally occur in oil, should be deducted from the gross
receipt.
[35]

We sustain the observation of the Court of Appeals.

The principal physical composition of oil are carbon and hydrogen. However,
[36]

this is not to detract from the fact that other fundamental substances are properties
of crude oil. One of this substance is water. As one authority observes:
The presence of water in the rocks is a controlling factor in the accumulation of oil
and gas. Its effect in driving these substances from the finer to the coarser pores in
the rock has been noticed. [37]

Another substance is sand.

Although most of the oil produced in the Salt Creek field, Wyo., comes from
sands, some oil has been produced in commercial quantities from crevices in the
shale strata that lie above the First Wall Creek sand. Oil is also produced from
fissured shale in a few fields in California, at Florence, Colo., and in several small
fields in Pennsylvania.[38]

As can be gleaned from the foregoing, there seems to be no dispute that BSW,
as impurities, are part of crude oil. In fact, we agree with the observation of the
Court of Appeals that these impurities could have been formed during the trip from
Saudi Arabia to the Philippines.
Because of the paucity of local precedents squarely in point, we find occasion
here to state the rule as enunciated by the United States Customs Court that [39]

prohibited the deduction for dirt or impurities other than those not usually found in
or upon the goods, thus:

Appellant conceded that no application for allowance was made under customs
regulations. Such application must be made within 10 days after the return of the
weight by customs officials, and compliance is mandatory as a condition precedent
to recovery. The judgment of the Customs Court sustaining Collectors rejection of
the protest claim was properly rendered in accordance with established
law. Appellant failed to establish that the dirt and other impurities in the feathers
were of an unusual quantity deemed to be excessive in crude imported feathers.

Consequently, the Court of Appeals did not err in concluding BSW as an

integral part of crude oil, which must be included in the computation of the
assessable duties.
Finally, Caltex avers that it failed to receive a copy of the Commissioner of
Customs petition within the 15-day period to file a petition for review. Hence, the
Court of Appeals erred in not dismissing the petition outright as provided for in
Circular No. 1-91 in relation to Circular No. 28-91.
Circular No. 1-91 issued on February 27, 1991 and pertinently provides:
xxxxxxxxx

5. HOW APPEAL TAKEN. - Appeal shall be taken by filing a verified petition for
review in six (6) legible copies, with the Court of Appeals, a copy of which shall
be served on the adverse party and on the court or agency a quo. Proof of service
of the petition on the adverse party and on the court of agency a quo shall be
attached to the petition.

While Circular 28-91 reads as follows:

A petition filed under Rule 45, or under Rule 65, or a motion for extension may be
denied outright if it is not clearly legible, or there is no proof of service on the
lower court, tribunal, or office concerned and on the adverse party in accordance
with Section 3, 5 and 10 of Rule 13, attached to the petition or motion for
extension when filed. (Underscoring supplied)

Reviewing the records of the case, while it seems that the petition
for certiorari was indeed not served upon Caltex within the 15-day reglementary
period, the same was, however, furnished the very next day. Hence, the proximity
of the service of petition for review to Caltex may be pleaded as substantial
compliance therewith. Our pronouncement is not without any precedent. In
Gabionza v. Court of Appeals, we explicitly stated:
[40]

It is scarcely necessary to add that Circular No. 28-91 must be so interpreted and
applied as to achieve the purposes projected by the Supreme Court when it
promulgated that Circular. Circular No. 28-91 was designed to serve as an
instrument to promote and facilitate an orderly administration of justice and should
not be interpreted with such absolute literalness as to subvert its own ultimate and
legitimate objective or the goal of all rules of procedure - which is to achieve
substantial justice as expeditiously as possible.

The fact that the Circular requires that it be strictly complied with merely
underscored its mandatory nature in that it cannot be dispensed with or its
requirements altogether disregarded, but it does not thereby interdict substantial
compliance with its provisions under justifiable circumstances.

WHEREFORE, in view of the foregoing, the instant petition is DISMISSED

and the appealed decision of the Court of Appeals dated February 12, 1992, is
AFFIRMED. No costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional

Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental,
Branch V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D.
TONGOY respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the
Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of P3,254.80,
inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second, dated
October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3,
1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The
claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency
income taxes in the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-
50-29-1-11061-21-63 and 11-50-291-1 10875-64, to which motion was attached Proof of Claim
(Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground
that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to Motion
for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent
Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein petitioner,
Regional Director of the Bureau of Internal Revenue, in an order dated July 29, 1969 (Annex D,
Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of the order of
July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against
the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule
86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was
already barred under Section 5, Rule 86 of the Rules of Court.
which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New
Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for money against the
decedent, must be filed within the time limited in they notice; otherwise they are
barred forever, except that they may be set forth as counter claims in any action that
the executor or administrator may bring against the claimants. Where the executor or
administrator commence an action, or prosecutes an action already commenced by
the deceased in his lifetime, the debtor may set forth may answer the claims he has
against the decedents, instead of presenting them independently to the court has
herein provided, and mutual claims may be set off against each other in such action;
and in final judgment is rendered in favored of the decedent, the amount to
determined shall be considered the true balance against the estate, as though the claim
has been presented directly before the court in the administration proceedings. Claims
not yet due, or contingent may be approved at their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary
obligation of the decedent created by law, such as taxes which is entirely of different character from
the claims expressly enumerated therein, such as: "all claims for money against the decedent arising
from contract, express or implied, whether the same be due, not due or contingent, all claim for
funeral expenses and expenses for the last sickness of the decedent and judgment for money against
the decedent." Under the familiar rule of statutory construction of expressio unius est exclusio
alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a
statute enumerates the things upon which it is to operate, everything else must necessarily, and by
implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-
335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-
23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well
as the matter of prescription thereof are governed by the provisions of the National Internal revenue
Code, particularly Sections 331 and 332 thereof, and not by other provisions of law. (See also Lim
Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-
10681, March 29, 1958). Even without being specifically mentioned, the provisions of Section 2 of
Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of the Court
as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes
assessed against the estate of a deceased person ... need not be submitted to the committee on claims
in the ordinary course of administration. In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing that the taxes have been assessed against
the estate." The abolition of the Committee on Claims does not alter the basic ruling laid down giving
exception to the claim for taxes from being filed as the other claims mentioned in the Rule should be
filed before the Court. Claims for taxes may be collected even after the distribution of the decedent's
estate among his heirs who shall be liable therefor in proportion of their share in the inheritance.
(Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of
exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood
of the Government and their prompt and certain availability are imperious need. (Commissioner of
Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation
depends the Government ability to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the collection of
taxes should not be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the presumption being
that they take good care of their personal affairs. This should not hold true to government officials
with respect to matters not of their own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the operation of the principle of estoppel. (Republic
vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent and
Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162;
Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda vs.
Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110;
Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance
Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals,
L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L-
23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected even after the
distribution of the estate of the decedent among his heirs (Government of the Philippines vs.
Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner of
Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph
of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the Government of
the Philippines from the time the assessment was made by the Commissioner of Internal Revenue
until paid with interests, penalties, etc. By virtue of such lien, this court held that the property of the
estate already in the hands of an heir or transferee may be subject to the payment of the tax due the
estate. A fortiori before the inheritance has passed to the heirs, the unpaid taxes due the decedent may
be collected, even without its having been presented under Section 2 of Rule 86 of the Rules of Court.
It may truly be said that until the property of the estate of the decedent has vested in the heirs, the
decedent, represented by his estate, continues as if he were still alive, subject to the payment of such
taxes as would be collectible from the estate even after his death. Thus in the case above cited, the
income taxes sought to be collected were due from the estate, for the three years 1946, 1947 and 1948
following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2,
Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the time
originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited which
reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the
preceding section, the court shall state the time for the filing of claims against the
estate, which shall not be more than twelve (12) nor less than six (6) months after the
 date of the first publication of the notice. However, at any time before an order of
distribution is entered, on application of a creditor who has failed to file his claim
within the time previously limited the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within a time not exceeding one (1)
month. (Emphasis supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order
of Payment of Taxes) which, though filed after the expiration of the time previously limited but before
an order of the distribution is entered, should have been granted by the respondent court, in the
absence of any valid ground, as none was shown, justifying denial of the motion, specially
considering that it was for allowance Of claim for taxes due from the estate, which in effect represents
a claim of the people at large, the only reason given for the denial that the claim was filed out of the
previously limited period, sustaining thereby private respondents' contention, erroneously as has been
demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the
total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code
is a final one and the respondent estate's sole defense of prescription has been herein overruled, the
Motion for Allowance of Claim is herein granted and respondent estate is ordered to pay and
discharge the same, subject only to the limitation of the interest collectible thereon as provided by the
Tax Code. No pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Guerrero, and Melencio-Herrera, JJ., concur.

 FIRST DIVISION

[G.R. No. L-7859. December 22, 1955.]

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma, Plaintiff-Appellant, v. J. ANTONIO ARANETA, as the Collector of Internal
Revenue, Defendant-Appellee.

Ernesto J. Gonzaga for Appellant.

Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and
Solicitor Felicisimo R. Rosete for Appellee.

SYLLABUS

1. CONSTITUTIONAL LAW; TAXATION; POWER OF STATE TO LEVY TAX IN AND

SUPPORT OF SUGAR INDUSTRY. As the protection and promotion of the sugar industry is a
matter of public concern the Legislature may determine within reasonable bounds what is necessary
for its protection and expedient for its promotion. Here, the legislative must be allowed full play,
subject only to the test of reasonableness; and it is not contended that the means provided in section 6
of Commonwealth Act No. 567 bear no relation to the objective pursued or are oppressive in
character. If objective an methods are alike constitutionally valid, no reason is seen why the state may
not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the
implement. Taxation may be made the implement of the states police power (Great Atl. & Pac. Tea
Co. v. Grosjean, 301 U.S. 412, 81 L. Ed. 1193; U.S. v. Butler, 297 U.S. 1, 80 L. Ed. 477; MCulloch
v. Maryland, 4 Wheat, 316, 4 L. Ed. 579).

2. ID.; ID.; POWER OF STATE TO SELECT SUBJECT OF TAXATION. It is inherent in the

power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation or exemption infringe
no constitutional limitation (Carmicheal v. Southern Coal & Coke Co., 301 U.S. 495, 81 L. Ed. 1245,
citing numerous authorities, at 1251).

DECISION

REYES, J. B. L., J.:

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

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to
the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the
Tydings-McDuffie Act, and the "eventual loss of its preferential position in the United States market"
; wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from
the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to
prepare it for the eventuality of the loss of its preferential position in the United States market and the
imposition of the export taxes."cralaw virtua1aw library

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture
of sugar, on a graduated basis, on each picul of sugar manufactures; while section 3 levies on owners
or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a
consideration, on lease or otherwise

"a tax equivalent to the difference between the money value of the rental or consideration collected
and the amount representing 12 per centum of the assessed value of such land."cralaw virtua1aw
library

According to section 6 of the law

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

First, to place the sugar industry in a position to maintain itself despite the gradual loss of the
preferential position of the Philippine sugar in the United States market, and ultimately to insure its
continued existence notwithstanding the loss of that market and the consequent necessity of meeting
competition in the free markets of the world;

Second, to readjust the benefits derived from the sugar industry by all of the component elements
thereof the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in
the field so that all might continue profitably to engage therein;

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

Fourth, to afford labor employed in the industry a living wage and to improve their living and
working conditions: Provided, That the President of the Philippines may, until the adjournment of the
next regular session of the National Assembly, make the necessary disbursements from the fund
herein created (1) for the establishment and operation of sugar experiment station or stations and the
undertaking of researchers (a)to increase the recoveries of the centrifugal sugar factories with the
view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of sugar
cane more adaptable to different distinct conditions in the Philippines, (c) to lower the costs of raising
sugar cane, (d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e)
to determine the possibility of utilizing the other by-products of the industry, (f) to determine what
crop or crops are suitable for rotation and for the utilization of excess cane lands, and (g) on other
problems the solution of which would help rehabilitated and stabilize the industry, and (2) for the
improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to
organize the necessary agency or agencies to take charge of the expenditure and allocation of said
funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement
from the fund herein created of the necessary amount of amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses or said agency or agencies."cralaw
virtua1aw library

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid
by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950;
alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar
industry exclusively, which in plaintiffs opinion is not a public purpose for which a tax may be
constitutionally levied. The action having been dismissed by the Court of First Instance, the plaintiffs
appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiffs position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory
purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In
other words, the act is primarily an exercise of the police power.

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

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

"The protection of a large industry constituting one of the great sources of the states wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the State
is affected to such an extent by public interests as to be within the police power of the sovereign."
(128 So. 857)

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of
public concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion must be
allowed full play, subject only to the test of reasonableness; and it is not contended that the means
provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are
oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen
why the state may not be levy taxes to raise funds for their prosecution and attainment. Taxation may
be made the implement of the states police power (Great Atl. & Pac. Tea Co. v. Grosjean, 301 U. S.
412, 81 L. Ed. 1193; U. S. v. Butler, 297 U. S. 1, 80 L. Ed. 477; MCulloch v. Maryland, 4 Wheat.
318, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to
tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael v. Southern Coal & Coke Co., 301 U. S. 495, 81 L.
Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the Sugar
Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is
that very enterprise that is being protected. It may be that other industries are also in need of similar
protection; but the legislature is not required by the Constitution to adhere to a policy of "all or none."
As ruled in Minnesota ex rel. Pearson v. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law
presumably hits the evil where it is most felt, it is not to be overthrown because there are other
instances to which it might have been applied;" and that the legislative authority, exerted within its
proper field, need not embrace all the evils within its reach" (N. L. R. B. v. Jones & Laughlin Steel
Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in sugar production, utilization of by-
products and solution of allied problems, as well as to the improvement of living and working
conditions in sugar mills or plantations, without any part of such money being channeled directly to
private persons, constitutes expenditure of tax money for private purposes, (compare Everson v.
Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

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

Paras, C.J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador and Concepcion, JJ.,
concur.
 Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.

THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER

BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ,
respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority
of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil
Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its
claims for recovery of financing charges from the Fund and reimbursement of underrecovery arising
from sales to the National Power Corporation, Atlas Consolidated Mining and Development
Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER), preventing it from
exercising the right to offset its remittances against its reimbursement vis-a-vis the OPSF and
disallowing its claims which are still pending resolution before the Office of Energy Affairs (OEA)
and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3
may be brought to this Court on certiorari by the aggrieved party within thirty (30) days from receipt
of a copy thereof. The certiorari referred to is the special civil action for certiorari under Rule 65 of
the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:

(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings
and rulings of the administrator of the fund itself and in disallowing a claim which is still pending
resolution at the OEA level, and (b) "grave abuse of discretion and completely without jurisdiction" 5
in declaring that petitioner cannot avail of the right to offset any amount that it may be required under
the law to remit to the OPSF against any amount that it may receive by way of reimbursement
therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court, and, considering
further the importance of the issues raised, the error in the designation of the remedy pursued will, in
this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No.
1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to
be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price
changes brought about by exchange rate adjustments and/or changes in world market prices of crude
oil and imported petroleum products. The Oil Price Stabilization Fund may be sourced from any of
the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum
products subject to tax under this Decree arising from exchange rate adjustment, as may be
determined by the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of government
corporations, as may be determined by the Minister of Finance in consultation with the Board of
Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of the
Fund through an appropriate Order that may be issued by the Board of Energy requiring payment by
persons or companies engaged in the business of importing, manufacturing and/or marketing
petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the
importation of crude oil and petroleum products is less than the peso costs computed using the
reference foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall
be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the
price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not
disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the
years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid
Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and
informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be
held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with
the OEA showed that the grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

1986 P233,190,916.00

1987 335,065,650.00

1988 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt
of the letter; advising it that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected
against outstanding claims in 1989 and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to
March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of
government transactions of national government agencies and government-owned or controlled
corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the
reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward
payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the
reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the
payment of the collections and the recovery of claims, since the outright payment of the sum of
P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF will
cause a very serious impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and
reimbursements will be administered by the ERB/Finance Dept./OEA, as agencies designated by law
to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF,
similarly OEA will deliver to Caltex the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to preclude further
accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances and
reimbursements for the current and ensuing years. 11 Decision No. 921 reads:
This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation,
and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for
reconsideration of this Commission's adverse action embodied in its letters dated February 2, 1989
and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization Fund of
collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the
latter reiterating the same directive but further advising the firms to desist from offsetting collections
against their claims with the notice that "this Commission will hold in abeyance the audit of all . . .
claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization Fund
against their outstanding claims from the said Fund for the calendar years 1987 and 1988, pending
with the then Ministry of Energy, the government entity charged with administering the OPSF. This
Commission, however, expressing serious doubts as to the propriety of the offsetting of all types of
reimbursements from the OPSF against all categories of remittances, advised these oil companies that
such offsetting was bereft of legal basis. Aggrieved thereby, these companies now seek
reconsideration and in support thereof clearly manifest their intent to make arrangements for the
remittance to the Office of Energy Affairs of the amount of collections equivalent to what has been
previously offset, provided that this Commission authorizes the Office of Energy Affairs to prepare
the corresponding checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to the OPSF and
the reimbursement of claims from the Fund shall be made within a period of not more than one week
from each other, will benefit the Fund and not unduly jeopardize the continuing daily cash
requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no
further objectionable feature in the proposed arrangement, provided that 15% of whatever amount is
due from the Fund is retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be noted in the course of audit and
surcharges for late remittances without prejudice to similar future retentions to answer for any
deficiency in such surcharges, and provided further that no offsetting of remittances and
reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial
verification of documents submitted to us by your Office in support of Caltex (Philippines), Inc.
offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the Oil Price
Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex
(Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906, representing
remittances to the OPSF which were offset against its claims reimbursements (net of unsubmitted
claims). In addition, the Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to
cause payment of P1,959,182,612 to Caltex, representing claims initially allowed in audit, the details
of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535, which included
P130,420,235 representing those claims disallowed by OEA, details of which is (sic) shown in
Schedule 1 as summarized as follows:

Disallowance of COA

Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b

Inventory losses

Borrow loan arrangement 14,034,786 /c

Sales to Atlas/Marcopper 32,097,083 /d

Sales to NPC 558

P257,263,300

Disallowances of OEA 130,420,235

Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of
financing charges by oil companies is not among the items for which the OPSF may be utilized.
Therefore, it is our view that recovery of financing charges has no legal basis. The mechanism for
such claims is provided in DOF Circular 1-87.

b. Product Sales Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095
indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay OPSF
impost on export sales of petroleum products. Effective February 7, 1987 sales to international
vessels/airlines should not be included as part of its domestic sales. Changing the effectivity date of
the resolution from February 7, 1987 to October 20, 1987 as covered by subsequent ERB Resolution
No. 88-12 dated November 18, 1988 has allowed Caltex to include in their domestic sales volumes to
international vessels/airlines and claim the corresponding reimbursements from OPSF during the
period. It is our opinion that the effectivity of the said resolution should be February 7, 1987.

c. Inventory losses Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA
agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed that oil
companies immediately settle ad valorem taxes for BLA transaction (sic). Loan balances therefore are
not tax paid inventories of Caltex subject to reimbursements but those of the borrower. Hence, we
recommend reduction of the claim for July, August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of payment
of all taxes, duties, fees, imposts and other charges whether direct or indirect due and payable by the
copper mining companies in distress to the national and local governments." It is our opinion that LOI
1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no
legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein
authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable
auditing rules and regulations. With regard to the disallowances, it is further informed that the
aggrieved party has 30 days within which to appeal the decision of the Commission in accordance
with law.
On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision
based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES,

ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND
THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF

EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY
BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED
NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED

BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for
recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while
allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171 reads
as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to
recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-87,
dated February 18, 1987, which allowed oil companies to "recover cost of financing working capital
associated with crude oil shipments," and provided a schedule of reimbursement in terms of peso per
barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the President of the
Philippines explaining the nature of these financing charges and justifying their reimbursement as
follows:

As part of your program to promote economic recovery, . . . oil companies (were authorized) to
refinance their imports of crude oil and petroleum products from the normal trade credit of 30 days up
to 360 days from date of loading . . . Conformably . . ., the oil companies deferred their foreign
exchange remittances for purchases by refinancing their import bills from the normal 30-day payment
term up to the desired 360 days. This refinancing of importations carried additional costs (financing
charges) which then became, due to government mandate, an inherent part of the cost of the purchases
of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil costs
and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support alleged increase
(sic) were not validated in our independent inquiry. As manifested in Exhibit 2, using the same
formula which the DOF used in arriving at the reimbursement rate but using comparable percentages
instead of pesos, the ineluctable conclusion is that the oil companies are actually gaining rather than
losing from the extension of credit because such extension enables them to invest the collections in
marketable securities which have much higher rates than those they incur due to the extension. The
Data we used were obtained from CPI (CALTEX) Management and can easily be verified from our
records.

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is
believed that export sales (product sales) are entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of
this Commission that the OPSF is not liable to refund such surtax on inventory losses because these
are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim
recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining
companies did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has
no authority to claim reimbursement for this uncollected OPSF impost because LOI 1416 dated July
17, 1984, which exempts distressed mining companies from "all taxes, duties, import fees and other
charges" was issued when OPSF was not yet in existence and could not have contemplated OPSF
imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING

CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO

NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT

ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL

RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE
OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL

PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition
within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the
Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file
their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment
filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added
a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall
be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the
price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now Department) of
Finance may include financing charges for "in essence, financing charges constitute unrecovered cost
of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989
Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the tax
on interest income increases. The relationship is such that the presence of underrecovery or
overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on
the basis of Department of Finance Circular No.

1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude oil
shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund pertaining to
the payment of the foregoing (sic) exchange risk premium and recovery of financing charges will be
implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the
first (6) months and 1/32 of one percent per month thereafter up to a maximum period of one year, to
be applied on crude oil' shipments from January 1, 1987. Shipments with outstanding financing as of
January 1, 1987 shall be charged on the basis of the fee applicable to the remaining period of
financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to
recover financing charges directly from the OPSF per barrel of crude oil based on the following
schedule:

Financing Period Reimbursement Rate

Pesos per Barrel

Less than 180 days None

180 days to 239 days 1.90

241 (sic) days to 299 4.02

300 days to 369 (sic) days 6.16

360 days or more 8.28

The above rates shall be subject to review every sixty

days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the
Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary

For Energy Affairs

Office of the President

Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and
subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to
reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such
a reduction would allow the industry to recover partly associated financing charges on crude oil
imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat charge of 1% for
the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of one year,
effective January 1, 1987. In addition, since the prevailing company take would still leave
unrecovered financing charges, reimbursement may be secured from the OPSF in accordance with the
provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges
from the OPSF, to wit:

B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both
crude and product shipments loaded after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate

(PBbl.)

Less than 180 days None

180 days to 239 days 1.90

240 days to 229 (sic) days 4.02

300 days to 359 days 6.16

360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further
guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18,
1987 which allowed the recovery of financing charges directly from the Oil Price Stabilization Fund.
(OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost
differential for a particular shipment and duly certified supporting documents provided for under
Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued

by the Office of Energy Affairs. The said certificate may be used to offset against amounts payable to
the OPSF. The oil companies may also redeem said certificates in cash if not utilized, subject to
availability of funds. 25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017.
26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the
light of the determination of executive agencies. The determination by the Department of Finance and
the OEA that financing charges are recoverable from the OPSF is entitled to great weight and
consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing
certain expenditures, is limited to the promulgation of accounting and auditing rules for, among
others, the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's
claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and
not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the COA
acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the
OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose
of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or
analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise
allow reimbursement of financing

charges. 29
We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory
of petitioner that such does not extend to the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or use of government funds and properties, but only to
the promulgation of accounting and auditing rules for, among others, such disallowance to be
untenable in the light of the provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations
with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices
that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit to such audit as a
condition of subsidy or equity. However, where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as
are necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of the
Government and, for such period as may be provided by law, preserve the vouchers and other
supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required therefor,
and promulgate accounting and auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable expenditures, or
uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are broader
and more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission
was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the
revenues, and receipts of, and expenditures or uses of funds and property, owned or held in trust by,
or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities including
government-owned or controlled corporations, keep the general accounts of the Government and, for
such period as may be provided by law, preserve the vouchers pertaining thereto; and promulgate
accounting and auditing rules and regulations including those for the prevention of irregular,
unnecessary, excessive, or extravagant expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor,
the General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section
2 of Article XI thereof provided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues
and receipts from whatever source, including trust funds derived from bond issues; and audit, in
accordance with law and administrative regulations, all expenditures of funds or property pertaining
to or held in trust by the Government or the provinces or municipalities thereof. He shall keep the
general accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the
duty of the Auditor General to bring to the attention of the proper administrative officer expenditures
of funds or property which, in his opinion, are irregular, unnecessary, excessive, or extravagant. He
shall also perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or

uses of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and
regulations to prevent the same. His was merely to bring that matter to the attention of the proper
administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32
and Ramos vs. Aquino, 33 are no longer controlling as the two (2) were decided in the light of the
1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935
Constitution and the Commission on Audit under the 1973 Constitution authorized them to disallow
illegal expenditures of funds or uses of funds and property. Our present Constitution retains that same
power and authority, further strengthened by the definition of the COA's general jurisdiction in
Section 26 of the Government Auditing Code of the Philippines 34 and Administrative Code of 1987.
35 Pursuant to its power to promulgate accounting and auditing rules and regulations for the
prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of funds, 36 the
COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible for the
enforcement of the rules and regulations, it goes without saying that failure to comply with them is a
ground for disapproving the payment of the proposed expenditure. As observed by one of the
Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the
Auditor General could not correct "irregular, unnecessary, excessive or extravagant" expenditures of
public funds but could only "bring [the matter] to the attention of the proper administrative officer,"
under the 1987 Constitution, as also under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or
uses of government funds and properties." Hence, since the Commission on Audit must ultimately be
responsible for the enforcement of these rules and regulations, the failure to comply with these
regulations can be a ground for disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role
and invested it with broader and more extensive powers, they did not intend merely to make the COA
a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the
Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No.
1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued
pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other
factors" which may result in cost underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are
not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other
factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what
"cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the
price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
These "other factors" can include only those which are of the same class or nature as the two
specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are
in the nature of government mandated price reductions. Hence, any other factor which seeks to be a
part of the enumeration, or which could qualify as a cost underrecovery, must be of the same class or
nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad
and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be construed in
their widest extent, but are held to be as applying only to persons or things of the same kind or class
as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they
do not have a common characteristic. The first relates to price reduction as directed by the Board of
Energy while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii)
cannot be limited by the enumeration in these subparagraphs. What should be considered for purposes
of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of the
Section which explicitly allows cost underrecovery only if such were incurred as a result of the
reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the
sense that such were incurred as a result of the inability to fully offset financing expenses from yields
in money market placements, they do not, however, fall under the foregoing provision of P.D. No.
1956, as amended, because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended by
Congress, this Court can do nothing. The duty of this Court is not to legislate, but to apply or interpret
the law. Be that as it may, this Court wishes to emphasize that as the facts in this case have shown, it
was at the behest of the Government that petitioner refinanced its oil import payments from the
normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that
owing to the extended period for payment, the financial institution which refinanced said payments
charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It would
appear then that equity considerations dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because it accommodated the request of the
Government. Although under Section 29 of the National Internal Revenue Code such losses may be
deducted from gross income, the effect of that loss would be merely to reduce its taxable income, but
not to actually wipe out such losses. The Government then may consider some positive measures to
help petitioner and others similarly situated to obtain substantial relief. An amendment, as aforestated,
may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the
Department of Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any standard for the
exercise of the authority. It is a fundamental rule that delegation of legislative power may be sustained
only upon the ground that some standard for its exercise is provided and that the legislature, in
making the delegation, has prescribed the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by
reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove
COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently
show that it incurred a loss. Such being the case, how can petitioner claim for reimbursement? It
cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the
petitioner. The respondents themselves admit in their Comment that underrecovery arising from sales
to NPC are reimbursable because NPC was granted full exemption from the payment of taxes; to
prove this, respondents trace the laws providing for such exemption. 40 The last law cited is the Fiscal
Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the
tax and duty exemption privileges of the National Power Corporation, including those pertaining to its
domestic purchases of petroleum and petroleum products . . . are restored effective March 10, 1987."
In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption was
confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the
NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price
Standby Fund to support the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952
provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported
crude oil and finished petroleum products resulting from foreign exchange rate adjustments and/or
increases in world market prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil
sales to the National Power Corporation (NPC); and (c) other cost underrecoveries incurred as may be
finally decided by the Supreme

Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power
Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner
relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by
the copper mining companies in distress to the national government. Pursuant to this LOI, then
Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising
the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation
are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August
1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts as effected by OEA has no legal
basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to
claim reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was
issued when OPSF was not yet in existence and could not have contemplated OPSF imposts at the
time of its formulation." 43 It is further stated that: "Moreover, it is evident that OPSF was not created
to aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil
prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to
exempt said distressed mining companies from the payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the
OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on
February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was
issued for the purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether
direct or indirect, due and payable by the copper mining companies in distress to the Notional and
Local Governments . . ." On the other hand, OPSF dues are not payable by (sic) distressed copper
companies but by oil companies. It is to be noted that the copper mining companies do not pay OPSF
dues. Rather, such imposts are built in or already incorporated in the prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay OPSF
dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent
that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of the Civil
Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in the Official
Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all unpublished
presidential issuances which are of general application, and unless so published they shall have no
binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated
on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be
published as a condition for their effectivity, which shall begin fifteen days after publication unless a
different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in the
exercise of legislative powers whenever the same are validly delegated by the legislature or, at
present, directly conferred by the Constitution. Administrative rules and regulations must also be
published if their purpose is to enforce or implement existing laws pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their
approval, or as soon thereafter as possible, be published in full in the Official Gazette, to become
effective only after fifteen days from their publication, or on another date specified by the legislature,
in accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette
after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18
June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in the
Official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise
provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to
Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still
fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor
of the taxing authority. 48 The burden of proof rests upon the party claiming exemption to prove that
it is in fact covered by the exemption so claimed. The party claiming exemption must therefore be
expressly mentioned in the exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS
and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may
suspend the payment of taxes by copper mining companies, it does not give petitioner the same
privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction. 49
Respondents, on the other hand, contend that said amount was already disallowed by the OEA for
failure to substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the
abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its
contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of respondents that said amount has already
been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said claim must be
upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from
petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends
that it should be allowed to offset its claims from the OPSF against its contributions to the fund as this
has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides
for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner also mentions
communications from the Board of Energy and the Department of Finance that supposedly authorize
compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be
no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do
not arise from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents
also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative
Code, is misplaced because "while this provision empowers the COA to withhold payment of a
government indebtedness to a person who is also indebted to the government and apply the
government indebtedness to the satisfaction of the obligation of the person to the government, like
authority or right to make compensation is not given to the private person." 54 The reason for this, as
stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government,
either in the form of taxes or other dues, is its lifeblood and should be collected without hindrance.
Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative
Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a
result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead
established a special fund . . .," 56 and that the OPSF contributions do not go to the general fund of
the state and are not used for public purpose, i.e., not for the support of the government, the
administration of law, or the payment of public expenses. This alleged lack of a public purpose behind
OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the
OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company
which has an outstanding obligation to the Government without said obligation being offset first,
subject to the requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose
because they go to a special fund of the government. Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of the government; taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the state. 57 There can be no
doubt that the oil industry is greatly imbued with public interest as it vitally affects the general
welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others,
demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization
then of oil prices is of prime concern which the state, via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58 Taxes cannot be the subject of compensation because the government and taxpayer
are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies
merely act as agents for the Government in the latter's collection since the taxes are, in reality, passed
unto the end-users the consuming public. In that capacity, the petitioner, as one of such companies,
has the primary obligation to account for and remit the taxes collected to the administrator of the
OPSF. This duty stems from the fiduciary relationship between the two; petitioner certainly cannot be
considered merely as a debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its claims
for reimbursement, no compensation is likewise legally feasible. Firstly, the Government and the
petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is no
proof that petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in
order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no
legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their
OPSF contributions. Instead, it prohibits the government from paying any amount from the Petroleum
Price Standby Fund to oil companies which have outstanding obligations with the government,
without said obligation being offset first subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged
decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for
reimbursement of underrecovery arising from sales to the National Power Corporation, which is
hereby allowed.

With costs against petitioner.

SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Grio-Aquino,
Medialdea, Regalado, Romero and Nocon, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-

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

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

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

CONCEPCION, J.:

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

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An
Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a)
thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and
improvement" of Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen.
Capinpin Gen. Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads were "nothing but projected and
planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision (as well as the lands on which said feeder
roads were to be construed) were private properties of respondent Jose C. Zulueta, who, at the time of
the passage and approval of said Act, was a member of the Senate of the Philippines; that on May,
1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to
donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the offer
was accepted by the council, subject to the condition "that the donor would submit a plan of the said
roads and agree to change the names of two of them"; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote
another letter to said council, calling attention to the approval of Republic Act. No. 920, and the sum
of P85,000.00 appropriated therein for the construction of the projected feeder roads in question; that
the municipal council of Pasig endorsed said letter of respondent Zulueta to the District Engineer of
Rizal, who, up to the present "has not made any endorsement thereon" that inasmuch as the projected
feeder roads in question were private property at the time of the passage and approval of Republic Act
No. 920, the appropriation of P85,000.00 therein made, for the construction, reconstruction, repair,
extension and improvement of said projected feeder roads, was illegal and, therefore, void ab initio";
that said appropriation of P85,000.00 was made by Congress because its members were made to
believe that the projected feeder roads in question were "public roads and not private streets of a
private subdivision"'; that, "in order to give a semblance of legality, when there is absolutely none, to
the aforementioned appropriation", respondents Zulueta executed on December 12, 1953, while he
was a member of the Senate of the Philippines, an alleged deed of donation copy of which is
annexed to the petition of the four (4) parcels of land constituting said projected feeder roads, in
favor of the Government of the Republic of the Philippines; that said alleged deed of donation was, on
the same date, accepted by the then Executive Secretary; that being subject to an onerous condition,
said donation partook of the nature of a contract; that, such, said donation violated the provision of
our fundamental law prohibiting members of Congress from being directly or indirectly financially
interested in any contract with the Government, and, hence, is unconstitutional, as well as null and
void ab initio, for the construction of the projected feeder roads in question with public funds would
greatly enhance or increase the value of the aforementioned subdivision of respondent Zulueta, "aside
from relieving him from the burden of constructing his subdivision streets or roads at his own
expense"; that the construction of said projected feeder roads was then being undertaken by the
Bureau of Public Highways; and that, unless restrained by the court, the respondents would continue
to execute, comply with, follow and implement the aforementioned illegal provision of law, "to the
irreparable damage, detriment and prejudice not only to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared unconstitutional
and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta from
ordering or allowing the continuance of the above-mentioned feeder roads project, and from making
and securing any new and further releases on the aforementioned item of Republic Act No. 920, and
the disbursing officers of the Department of Public Works and Highways from making any further
payments out of said funds provided for in Republic Act No. 920; and that pending final hearing on
the merits, a writ of preliminary injunction be issued enjoining the aforementioned parties respondent
from making and securing any new and further releases on the aforesaid item of Republic Act No. 920
and from making any further payments out of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to
sue", and that the petition did "not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the
Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent
is " not aware of any law which makes illegal the appropriation of public funds for the improvements
of . . . private property"; and that, the constitutional provision invoked by petitioner is inapplicable to
the donation in question, the same being a pure act of liberality, not a contract. The other respondents,
in turn, maintained that petitioner could not assail the appropriation in question because "there is no
actual bona fide case . . . in which the validity of Republic Act No. 920 is necessarily involved" and
petitioner "has not shown that he has a personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor
of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite personalities"
to question the constitutionality of the disputed item of Republic Act No. 920; that "the legislature is
without power appropriate public revenues for anything but a public purpose", that the instructions
and improvement of the feeder roads in question, if such roads where private property, would not be a
public purpose; that, being subject to the following condition:

The within donation is hereby made upon the condition that the Government of the Republic
of the Philippines will use the parcels of land hereby donated for street purposes only and for
no other purposes whatsoever; it being expressly understood that should the Government of
the Republic of the Philippines violate the condition hereby imposed upon it, the title to the
land hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA. (Emphasis supplied.)

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

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

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However, respondent
Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of any law
which makes illegal the appropriation of public funds for the improvement of what we, in the
meantime, may assume as private property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of the
Government established under the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:

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

The rule is set forth in Corpus Juris Secundum in the following language:

In accordance with the rule that the taxing power must be exercised for public purposes only,
discussed supra sec. 14, money raised by taxation can be expended only for public purposes
and not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public funds may be
used only for public purpose. The right of the legislature to appropriate funds is correlative
with its right to tax, and, under constitutional provisions against taxation except for public
purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to
another purpose, no appropriation of state funds can be made for other than for a public
purpose.

xxx xxx xxx

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

Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional
law.lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon
the ground that petitioner may not contest the legality of the donation above referred to because the
same does not affect him directly. This conclusion is, presumably, based upon the following premises,
namely: (1) that, if valid, said donation cured the constitutional infirmity of the aforementioned
appropriation; (2) that the latter may not be annulled without a previous declaration of
unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421 of the Civil
Code is absolute, and admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or approval,
not upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an
amendment of the organic law, removing, with retrospective operation, the constitutional limitation
infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in
question, the legality thereof depended upon whether said roads were public or private property when
the bill, which, latter on, became Republic Act 920, was passed by Congress, or, when said bill was
approved by the President and the disbursement of said sum became effective, or on June 20, 1953
(see section 13 of said Act). Inasmuch as the land on which the projected feeder roads were to be
constructed belonged then to respondent Zulueta, the result is that said appropriation sought a private
purpose, and hence, was null and void. 4 The donation to the Government, over five (5) months after
the approval and effectivity of said Act, made, according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the appropriation in question, did not cure its aforementioned
basic defect. Consequently, a judicial nullification of said donation need not precede the declaration
of unconstitutionality of said appropriation.

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

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a
direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the
instance of taxpayers, laws providing for the disbursement of public funds, 5upon the theory that "the
expenditure of public funds by an officer of the State for the purpose of administering
an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as follows:

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

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

The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that the
authority of the Republic of the Philippines over the people of the Philippines is more fully direct than
that of the states of the Union, insofar as the simple and unitary type of our national government is not
subject to limitations analogous to those imposed by the Federal Constitution upon the states of the
Union, and those imposed upon the Federal Government in the interest of the Union. For this reason,
the rule recognizing the right of taxpayers to assail the constitutionality of a legislation appropriating
local or state public funds which has been upheld by the Federal Supreme Court
(Crampton vs. Zabriskie, 101 U.S. 601) has greater application in the Philippines than that adopted
with respect to acts of Congress of the United States appropriating federal funds.

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

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should not
have been dismissed by the lower court; and that the writ of preliminary injunction should have been
maintained.

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

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez David,
Paredes, and Dizon, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to municipalities under the Local
Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy
Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos.
23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17, 1963,
the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the
Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies
and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo
for every bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly
report, of the total number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and
collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of
the total number of gallons produced or manufactured during the month. 5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint
and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos.
23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said
Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory

and oppressive?

2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose

percentage or specific taxes?

3. Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of
right to every independent government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of separation
of powers. The exception, however, lies in the case of municipal corporations, to which, said theory
does not apply. Legislative powers may be delegated to local governments in respect of matters of
local concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the legislative
power to create political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax. 9 Under the New Constitution, local
governments are granted the autonomous authority to create their own sources of revenue and to levy
taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its
sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal,
it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the
constitutional injunction against deprivation of property without due process of law may be passed
over under the guise of the taxing power, except when the taking of the property is in the lawful
exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of
taxation is observed; (3) either the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice
and opportunity for hearing are provided. 11 Due process is usually violated where the tax imposed is
for a private as distinguished from a public purpose; a tax is imposed on property outside the State,
i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting
taxes. But, a tax does not violate the due process clause, as applied to a particular taxpayer, although
the purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process does
not require that the property subject to the tax or the amount of tax to be raised should be determined
by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it
shall be apportioned are generally not necessary to due process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on
the theory of double taxation. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised. 13 The reason is
that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in
general, is not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and some states of
the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not
in a case where one tax is imposed by the State and the other by the city or municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is not
so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and still pay the
same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity.
The difference between the two ordinances clearly lies in the tax rate of the soft drinks produced: in
Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the
Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to
that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that the
Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant
of the provisions of said Ordinance No. 27, series of 1962. The aforementioned admission shows that
only Ordinance No. 27, series of 1962 is being enforced by defendants-appellees. Even the Provincial
Fiscal, counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27, series
of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are inconsistent with the
provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a
specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are
mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is
not within the exceptions and limitations in the law, the same comes within the ambit of the general
rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes on
articles subject to specific tax except gasoline, under the provisions of the National Internal Revenue
Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null
and void for being outside the power of the municipality to enact. 20But, the imposition of "a tax of
one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks
produced or manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax
on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or
not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is
considered solely for purposes of determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel
oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft
drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks,
produced or manufactured, or an equivalent of 1- centavos per case, 23 cannot be considered unjust
and unfair. 24 an increase in the tax alone would not support the claim that the tax is oppressive,
unjust and confiscatory. Municipal corporations are allowed much discretion in determining the reates
of imposable taxes. 25 This is in line with the constutional policy of according the widest possible
autonomy to local governments in matters of local taxation, an aspect that is given expression in the
Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not
deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further
strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54, series
of 1964, as amended by Ordinance No. 41, series of 1968, of defendant Municipality, 29 appears not to
affect the resolution of the validity of Ordinance No. 27. Municipalities are empowered to impose, not
only municipal license taxes upon persons engaged in any business or occupation but also to levy for
public purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes within
the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as
the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma, Aquino and
Concepcion, Jr., JJ., concur.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal taxation, I
am only in agreement. If I limit myself to concurrence in the result, it is primarily because with the
article on Local Autonomy found in the present Constitution, I feel a sense of reluctance in restating
doctrines that arose from a different basic premise as to the scope of such power in accordance with
the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully
what for me are the nuances and implications that could arise from the approach taken by my
brethren. Likewise as to the constitutional aspect of the thorny question of double taxation, I would
limit myself to what has been set forth in City of Baguio v. De Leon. 1

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided by
law. 2 That was not the case under the 1935 Charter. The only limitation then on the authority, plenary
in character of the national government, was that while the President of the Philippines was vested
with the power of control over all executive departments, bureaus, or offices, he could only . It
exercise general supervision over all local governments as may be provided by law ... 3 As far as
legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope of
the municipal taxing power. 4 Thereafter, in 1959 such competence was further expanded in the Local
Autonomy Act. 5 Nevertheless, as late as December of 1964, five years after its enactment of the
Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan, 6reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is an
attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt either as
to weakness of a claim "based merely by inferences, implications and deductions, [as they have no
place in the interpretation of the power to tax of a municipal corporation." 10 As the conclusion
reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is
not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause) no
more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted with
approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation results. 12

So I would view the issues in this suit and accordingly concur in the result.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal taxation, I
am only in agreement. If I limit myself to concurrence in the result, it is primarily because with the
article on Local Autonomy found in the present Constitution, I feel a sense of reluctance in restating
doctrines that arose from a different basic premise as to the scope of such power in accordance with
the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully
what for me are the nuances and implications that could arise from the approach taken by my
brethren. Likewise as to the constitutional aspect of the thorny question of double taxation, I would
limit myself to what has been set forth in City of Baguio v. De Leon. 1

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided by
law. 2 That was not the case under the 1935 Charter. The only limitation then on the authority, plenary
in character of the national government, was that while the President of the Philippines was vested
with the power of control over all executive departments, bureaus, or offices, he could only . It
exercise general supervision over all local governments as may be provided by law ... 3 As far as
legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope of
the municipal taxing power. 4 Thereafter, in 1959 such competence was further expanded in the Local
Autonomy Act. 5 Nevertheless, as late as December of 1964, five years after its enactment of the
Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan, 6reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
arising from the terms of the grant to be resolved against the municipality." 7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is an
attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt either as
to weakness of a claim "based merely by inferences, implications and deductions, [as they have no
place in the interpretation of the power to tax of a municipal corporation." 10 As the conclusion
reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is
not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause) no
more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted with
approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though double taxation results. 12

So I would view the issues in this suit and accordingly concur in the result.
 Republic of the Philippines
SUPREME COURT

EN BANC

G.R. No. 168056 October 18, 2005

Agenda for Item No. 45

G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et al. vs. The Hon.
Executive Secretary Eduardo R. Ermita); G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et
al. vs. Executive Secretary Eduardo R. Ermita, et al.); G.R. No. 168461 (Association of Pilipinas
Shell Dealers, Inc., et al. vs. Cesar V. Purisima, et al.); G.R. No. 168463 (Francis Joseph G.
Escudero vs. Cesar V. Purisima, et al); and G.R. No. 168730 (Bataan Governor Enrique T.
Garcia, Jr. vs. Hon. Eduardo R. Ermita, et al.)

RESOLUTION

For resolution are the following motions for reconsideration of the Courts Decision dated September
1, 2005 upholding the constitutionality of Republic Act No. 9337 or the VAT Reform Act1:

1) Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et al., on the
following grounds:

A. THE DELETION OF THE "NO PASS ON PROVISIONS" FOR THE SALE OF PETROLEUM
PRODUCTS AND POWER GENERATION SERVICES CONSTITUTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION ON THE PART OF
THE BICAMERAL CONFERENCE COMMITTEE.

B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL IMPERATIVE

ON EXCLUSIVE ORIGINATION OF REVENUE BILLS UNDER 24, ARTICLE VI, 1987
PHILIPPINE CONSTITUTION.

C. REPUBLIC ACT NO. 9337S STAND-BY AUTHORITY TO THE EXECUTIVE TO

INCREASE THE VAT RATE, ESPECIALLY ON ACCOUNT OF THE EFFECTIVE
RECOMMENDATORY POWER GRANTED TO THE SECRETARY OF FINANCE,
CONSTITUTES UNDUE DELEGATION OF LEGISLATIVE AUTHORITY.

2) Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor Enrique T. Garcia,
Jr., with the argument that burdening the consumers with significantly higher prices under a VAT
regime vis--vis a 3% gross tax renders the law unconstitutional for being arbitrary, oppressive and
inequitable.

and

3) Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers, Inc. in G.R. No.
168461, on the grounds that:
I. This Honorable Court erred in upholding the constitutionality of Section 110(A)(2) and Section
110(B) of the NIRC, as amended by the EVAT Law, imposing limitations on the amount of input
VAT that may be claimed as a credit against output VAT, as well as Section 114(C) of the NIRC, as
amended by the EVAT Law, requiring the government or any of its instrumentalities to withhold a 5%
final withholding VAT on their gross payments on purchases of goods and services, and finding that
the questioned provisions:

A. are not arbitrary, oppressive and consfiscatory as to amount to a deprivation of property without
due process of law in violation of Article III, Section 1 of the 1987 Philippine Constitution;

B. do not violate the equal protection clause prescribed under Article III, Section 1 of the 1987
Philippine Constitution; and

C. apply uniformly to all those belonging to the same class and do not violate Article VI, Section
28(1) of the 1987 Philippine Constitution.

II. This Honorable Court erred in upholding the constitutionality of Section 110(B) of the NIRC, as
amended by the EVAT Law, imposing a limitation on the amount of input VAT that may be claimed
as a credit against output VAT notwithstanding the finding that the tax is not progressive as exhorted
by Article VI, Section 28(1) of the 1987 Philippine Constitution.

Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.

Petitioners Escudero, et al., insist that the bicameral conference committee should not even have acted
on the no pass-on provisions since there is no disagreement between House Bill Nos. 3705 and 3555
on the one hand, and Senate Bill No. 1950 on the other, with regard to the no pass-on provision for
the sale of service for power generation because both the Senate and the House were in agreement that
the VAT burden for the sale of such service shall not be passed on to the end-consumer. As to the no
pass-on provision for sale of petroleum products, petitioners argue that the fact that the presence of
such a no pass-on provision in the House version and the absence thereof in the Senate Bill means
there is no conflict because "a House provision cannot be in conflict with something that does not
exist."

Such argument is flawed. Note that the rules of both houses of Congress provide that a conference
committee shall settle the "differences" in the respective bills of each house. Verily, the fact that a no
pass-on provision is present in one version but absent in the other, and one version intends two
industries, i.e., power generation companies and petroleum sellers, to bear the burden of the tax, while
the other version intended only the industry of power generation, transmission and distribution to be
saddled with such burden, clearly shows that there are indeed differences between the bills coming
from each house, which differences should be acted upon by the bicameral conference committee. It is
incorrect to conclude that there is no clash between two opposing forces with regard to the no pass-
on provision for VAT on the sale of petroleum products merely because such provision exists in the
House version while it is absent in the Senate version. It is precisely the absence of such provision in
the Senate bill and the presence thereof in the House bills that causes the conflict. The absence of the
provision in the Senate bill shows the Senates disagreement to the intention of the House of
Representatives make the sellers of petroleum bear the burden of the VAT. Thus, there are indeed two
opposing forces: on one side, the House of Representatives which wants petroleum dealers to be
saddled with the burden of paying VAT and on the other, the Senate which does not see it proper to
make that particular industry bear said burden. Clearly, such conflicts and differences between the no
pass-on provisions in the Senate and House bills had to be acted upon by the bicameral conference
committee as mandated by the rules of both houses of Congress.

Moreover, the deletion of the no pass-on provision made the present VAT law more in consonance
with the very nature of VAT which, as stated in the Decision promulgated on September 1, 2005, is a
tax on spending or consumption, thus, the burden thereof is ultimately borne by the end-consumer.

Escudero, et al., then claim that there had been changes introduced in the Rules of the House of
Representatives regarding the conduct of the House panel in a bicameral conference committee, since
the time of Tolentino vs. Secretary of Finance 2 to act as safeguards against possible abuse of authority
by the House members of the bicameral conference committee. Even assuming that the rule requiring
the House panel to report back to the House if there are substantial differences in the House and
Senate bills had indeed been introduced after Tolentino, the Court stands by its ruling that the issue of
whether or not the House panel in the bicameral conference committee complied with said internal
rule cannot be inquired into by the Court. To reiterate, "mere failure to conform to parliamentary
usage will not invalidate the action (taken by a deliberative body) when the requisite number of
members have agreed to a particular measure."3

Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional
imperative on exclusive origination of revenue bills under Section 24 of Article VI of the Constitution
when the Senate introduced amendments not connected with VAT.

The Court is not persuaded.

Article VI, Section 24 of the Constitution provides:

Sec. 24 All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.

Section 24 speaks of origination of certain bills from the House of Representatives which has been
interpreted in the Tolentino case as follows:

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

Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.

...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills,
bills authorizing an increase of the public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local needs and problems. On the
other hand, the senators, who are elected at large, are expected to approach the same problems from
the national perspective. Both views are thereby made to bear on the enactment of such laws.4

Clearly, after the House bills as approved on third reading are duly transmitted to the Senate, the
Constitution states that the latter can propose or concur with amendments. The Court finds that the
subject provisions found in the Senate bill are within the purview of such constitutional provision as
declared in the Tolentino case.

The intent of the House of Representatives in initiating House Bill Nos. 3555 and 3705 was to solve
the countrys serious financial problems. It was stated in the respective explanatory notes that there is
a need for the government to make significant expenditure savings and a credible package of revenue
measures. These measures include improvement of tax administration and control and leakages in
revenues from income taxes and value added tax. It is also stated that one opportunity that could be
beneficial to the overall status of our economy is to review existing tax rates, evaluating the relevance
given our present conditions. Thus, with these purposes in mind and to accomplish these purposes for
which the house bills were filed, i.e., to raise revenues for the government, the Senate introduced
amendments on income taxes, which as admitted by Senator Ralph Recto, would yield about P10.5
billion a year.

Moreover, since the objective of these house bills is to raise revenues, the increase in corporate
income taxes would be a great help and would also soften the impact of VAT measure on the
consumers by distributing the burden across all sectors instead of putting it entirely on the shoulders
of the consumers.

As to the other National Internal Revenue Code (NIRC) provisions found in Senate Bill No. 1950, i.e.,
percentage taxes, franchise taxes, amusement and excise taxes, these provisions are needed so as to
cushion the effects of VAT on consumers. As we said in our decision, certain goods and services
which were subject to percentage tax and excise tax would no longer be VAT exempt, thus, the
consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus,
there is a need to amend these sections to soften the impact of VAT. The Court finds no reason to
reverse the earlier ruling that the Senate introduced amendments that are germane to the subject
matter and purposes of the house bills.

Petitioners Escudero, et al., also reiterate that R.A. No. 9337s stand- by authority to the Executive to
increase the VAT rate, especially on account of the recommendatory power granted to the Secretary
of Finance, constitutes undue delegation of legislative power. They submit that the recommendatory
power given to the Secretary of Finance in regard to the occurrence of either of two events using the
Gross Domestic Product (GDP) as a benchmark necessarily and inherently required extended analysis
and evaluation, as well as policy making.

There is no merit in this contention. The Court reiterates that in making his recommendation to the
President on the existence of either of the two conditions, the Secretary of Finance is not acting as the
alter ego of the President or even her subordinate. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is to take effect. The
Secretary of Finance becomes the means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to gather data and information and has a
much broader perspective to properly evaluate them. His function is to gather and collate statistical
data and other pertinent information and verify if any of the two conditions laid out by Congress is
present. Congress granted the Secretary of Finance the authority to ascertain the existence of a fact,
namely, whether by December 31, 2005, the value-added tax collection as a percentage of GDP of the
previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1%). If either of these
two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be imposed by the President effective
January 1, 2006. 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.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 did not delegate the power to tax but the mere implementation
of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of
the President is to simply execute the legislative policy. That Congress chose to use the GDP as a
benchmark to determine economic growth is not within the province of the Court to inquire into, its
task being to interpret the law.

With regard to petitioner Garcias arguments, the Court also finds the same to be without merit. As
stated in the assailed Decision, the Court recognizes the burden that the consumers will be bearing
with the passage of R.A. No. 9337. But as was also stated by the Court, it cannot strike down the law
as unconstitutional simply because of its yokes. The legislature has spoken and the only role that the
Court plays in the picture is to determine whether the law was passed with due regard to the mandates
of the Constitution. Inasmuch as the Court finds that there are no constitutional infirmities with its
passage, the validity of the law must therefore be upheld.

Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their arguments in the
petition, citing this time, the dissertation of Associate Justice Dante O. Tinga in his Dissenting
Opinion.

The glitch in petitioners arguments is that it presents figures based on an event that is yet to happen.
Their illustration of the possible effects of the 70% limitation, while seemingly concrete, still remains
theoretical. Theories have no place in this case as the Court must only deal with an existing case or
controversy that is appropriate or ripe for judicial determination, not one that is conjectural or
merely anticipatory.5 The Court will not intervene absent an actual and substantial controversy
admitting of specific relief through a decree conclusive in nature, as distinguished from an opinion
advising what the law would be upon a hypothetical state of facts.6

The impact of the 70% limitation on the creditable input tax will ultimately depend on how one
manages and operates its business. Market forces, strategy and acumen will dictate their moves. With
or without these VAT provisions, an entrepreneur who does not have the ken to adapt to economic
variables will surely perish in the competition. The arguments posed are within the realm of business,
and the solution lies also in business.
Petitioners also reiterate their argument that the input tax is a property or a property right. In the same
breath, the Court reiterates its finding that it is not a property or a property right, and a VAT-
registered persons entitlement to the creditable input tax is a mere statutory privilege.

Petitioners also contend that even if the right to credit the input VAT is merely a statutory privilege, it
has already evolved into a vested right that the State cannot remove.

As the Court stated in its Decision, the right to credit the input tax is a mere creation of law. Prior to
the enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are not
recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing a 10%
multi-stage tax on all sales, it was only then that the crediting of the input tax paid on purchase or
importation of goods and services by VAT-registered persons against the output tax was established.
This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997
(R.A. No. 8424). The right to credit input tax as against the output tax is clearly a privilege created by
law, a privilege that also the law can limit. It should be stressed that a person has no vested right in
statutory privileges.7

The concept of "vested right" is a consequence of the constitutional guaranty of due process that
expresses a present fixed interest which in right reason and natural justice is protected against
arbitrary state action; it includes not only legal or equitable title to the enforcement of a demand but
also exemptions from new obligations created after the right has become vested. Rights are considered
vested when the right to enjoyment is a present interest, absolute, unconditional, and perfect or fixed
and irrefutable.8 As adeptly stated by Associate Justice Minita V. Chico-Nazario in her Concurring
Opinion, which the Court adopts, petitioners right to the input VAT credits has not yet vested, thus

It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers input VAT credits
were inexistent they were unrecognized and disallowed by law. The petroleum dealers had no such
property called input VAT credits. It is only rational, therefore, that they cannot acquire vested rights
to the use of such input VAT credits when they were never entitled to such credits in the first place, at
least, not until Rep. Act No. 9337.

My view, at this point, when Rep. Act No. 9337 has not yet even been implemented, is that petroleum
dealers right to use their input VAT as credit against their output VAT unlimitedly has not vested,
being a mere expectancy of a future benefit and being contingent on the continuance of Section 110 of
the National Internal Revenue Code of 1997, prior to its amendment by Rep. Act No. 9337.

The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of note, to wit:

Moreover, there is no vested right in generally accepted accounting principles. These refer to
accounting concepts, measurement techniques, and standards of presentation in a companys financial
statements, and are not rooted in laws of nature, as are the laws of physical science, for these are
merely developed and continually modified by local and international regulatory accounting bodies.
To state otherwise and recognize such asset account as a vested right is to limit the taxing power of
the State. Unlimited, plenary, comprehensive and supreme, this power cannot be unduly restricted by
mere creations of the State.

More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy and
wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the means through
which such end shall be accomplished is for the legislature to choose so long as it is within
constitutional bounds. As stated in Carmichael vs. Southern Coal & Coke Co.:

If the question were ours to decide, we could not say that the legislature, in adopting the present
scheme rather than another, had no basis for its choice, or was arbitrary or unreasonable in its action.
But, as the state is free to distribute the burden of a tax without regard to the particular purpose for
which it is to be used, there is no warrant in the Constitution for setting the tax aside because a court
thinks that it could have distributed the burden more wisely. Those are functions reserved for the
legislature.9

WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH FINALITY. The
temporary restraining order issued by the Court is LIFTED.

SO ORDERED.

(The Justices who filed their respective concurring and dissenting opinions maintain their respective
positions. Justice Dante O. Tinga filed a dissenting opinion to the present Resolution; while Justice
Consuelo Ynares- Santiago joins him in his dissenting opinion.)
 GR No. 168056 - (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO v. THE HON. EXECUTIVE SECRETARY EDUARDO
ERMITA, ET AL.)

GR No. 168207 (AQUILINO Q. PIMENTEL, JR., ET. AL. v. EXECUTIVE SECRETARY

EDUARDO R. ERMITA, ET. AL.)

GR No. 168461 ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its

President, ROSARIO ANTONIO, ET AL. v. CESAR V. PURISIMA, in his capacity as Secretary of the
Department of Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of
Internal Revenue.

GR No. 168463 FRANCIS JOSEPH G. ESCUDERO, ET AL. v. CESAR V. PURISIMA, in his

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

GR. No. 168730 BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. v. HON. EDUARDO R.
ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity as
Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the
Bureau of Customs.

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

DISSENTING OPINION

Tinga, J.:

Once again, the majority has refused to engage and refute in any meaningful fashion the arguments
raised by the petitioners in G.R. No. 168461. The de minimis appreciation exhibited by the majority of
the issues of 70% cap, the 60-month amortization period, and 5% withholding VAT on transactions
made with the national government is regrettable, with ruinous consequences for the nation. I see no
reason to turn back from any of the views expressed in my Dissenting Opinion, and I accordingly
dissent from the denial of the Motion for Reconsideration filed by the petitioners in G.R. No.
168461.1

The reasons for my vote have been comprehensively discussed in my previous Dissenting Opinion,
and I do not see the need to replicate them herein. However, I wish to stress a few points.

Tax Statutes May Be Invalidated

If They Pose a Clear and Present Danger

To the Deprivation of Life, Liberty and

Property Without Due Process of Law

The majority again dismisses the arguments of the petitioners as "theoretical", "conjectural" or merely
"anticipatory," notwithstanding that the injury to the taxpayers resulting from Section 8 and 12 of the
E-VAT Law is ascertainable with mathematical certainty. In support of this view, the majority cites
the Courts Resolution dated 15 June 2005 in Information Technology Foundation v. COMELEC,2 one
of the rulings issued in that case subsequent to the main Decision rendered on 13 January 2004. The
reference is grievously ironic, considering that in the 13 January 2004 Decision, the Court, over
vigorous dissents, chose anyway to intervene and grant the petition despite the fact that the petitioners
therein did not allege any violation of any constitutional provision or letter of statute. 3 In this case, the
petitioners have squarely invoked the violation of the Bill of Rights of the Constitution, and yet the
majority is suddenly timid, unlike in Infotech.

Still, the formulation of the majority unfortunately leaves the impression that any statute, taxing or
otherwise, is beyond judicial attack prior to its implementation. If the tax measure in question
provided that the taxpayer shall remit all income earned to the government beginning 1 January 2008,
would this mean that the Court can take cognizance of the legal challenge only starting 2 January
2008?

I do not share the majoritys penchant for awaiting the blood spurts before taking action even when
the knifes edge already dangles. As I maintained in my Dissenting Opinion, a tax measure may be
validly challenged and stricken down even before its implementation if it poses a clear and present
danger to the deprivation of life, liberty or property of the taxpayer without due process of law. This is
the expectation of every citizen who wishes to maintain trust in all the branches of government. In the
enforcement of the constitutional rights of all persons, the commonsense expectation is that the Court,
as guardian of these rights, is empowered to step in even before the prospective violation takes place.
Hence, the evolution of the "clear and present danger" doctrine and other analogous principles,
without which, the Court would be seen as inutile in the face of constitutional violation.

Of course, not every anticipatory threat to constitutional liberties can be assailed prior to
implementation, hence the employment of the "clear and present danger" standard to separate the
wheat from the chaff. Still, the Court should not be so readily dismissive of the petitioners posture
herein merely because it is anticipatory. There should have been a meaningful engagement by the
majority of the facts and formulae presented by the petitioners before the reasonable conclusion could
have been reached on the maturity of the claim. That the majority has not bothered to do so is
ultimately of tragic consequence.

70% Input VAT Credit

An Impaired Asset

The ponencia, joined by Justices Panganiban and Chico-Nazario, express the belief that no property
rights attach to the input VAT paid by the taxpayer. This is a bizarre view that assumes that all
income earned by private persons preternaturally belongs to the government, and whatever is retained
by the person after taxes is acquired as a matter of privilege. This is the sort of thinking that has
fermented revolutions throughout history, such as the American Revolution of 1776.

I pointed out in my Dissenting Opinion that under current accepted international accounting
standards, the 30% prepaid input VAT would be recorded as a loss in the accounting books, since the
possibility of its recovery is improbable, considering that the E-VAT Law allows its recovery only
after the business has ceased to exist. Even the Bureau of Internal Revenue itself has long recognized
the unutilized input VAT as an asset.
The majority fails to realize that even under the new E-VAT Law, the State recognizes that the
persons who pre-pay that input VAT, usually the dealers or retailers, are not the persons who are
liable to pay for the tax. The VAT system, as implemented through the previous VAT law and the
new E-VAT Law, squarely holds the end consumer as the taxpayer liable to shoulder the input VAT.
Nonetheless, under the mechanism foisted in the new E-VAT Law, the dealer or retailer who pre-pays
the input VAT is virtually precluded from recovering the pre-paid input VAT, since the law only
allows such recovery upon the cessation of the business. Indeed, the only way said class of taxpayers
can recover this pre-paid input VAT was if it were to cease operations at the end of every quarter.

The illusion that blinds the majority to this state of affairs is the claim that the pre-paid input VAT
may anyway be carried over into the succeeding quarter, a chimera enhanced by the grossly
misleading presentation of the Office of the Solicitor General. What this deception fosters, and what
the majority fails to realize, is that since the taxpayer is perpetually obliged to remit the 30% input
VAT every quarter, there would be a continuous accumulation of excess input VAT. It is not true then
that the input VAT prepaid for the first quarter can be recovered in the second, third or fourth quarter
of that year, or at any time in the next year for that matter since the amount of prepaid input VAT
accumulates with every succeeding prepayment of input VAT. Moreover, the accumulation of the
prepaid input VAT diminishes the actual value of the refundable amounts, considering the established
principle of "time-value of money", as explained in my Dissenting Opinion.

Thus, the pre-paid input VAT, for which the petitioners and other similarly situated taxpayers are not
even ultimately liable in the first place, represents in tangible terms an actual loss. To put it more
succinctly, when the taxpayer prepays the 30% input VAT, there is no chance for its recovery except
until after the taxpayer ceases to be such. This point is crucial, as it goes in the heart of the
constitutional challenge raised by the petitioners. A recognition that the input VAT is a property asset
places it squarely in the ambit of the due process clause.

The majority now stresses that prior to Executive Order No. 273 sales taxes paid by the retailer or
dealers were not recoverable. The nature of a sales tax precisely is that it is shouldered by the seller,
not the consumer. In that case, the clear legislative intent is to encumber the retailer with the end tax.
Under the VAT system, as enshrined under Rep. Act No. 9337, the new E-VAT Law, there is
precisely a legislative recognition that it is the end user, not the seller, who shoulders the E-VAT. The
problem with the new E-VAT law is that it correspondingly imposes a defeatist mechanism that
obviates this entitlement of the seller by forcibly withholding in perpetua this pre-paid input VAT.

The majority cites with approval Justice Chico-Nazarios argument, as expressed in her concurring
opinion, that prior to the new E-VAT Law, the petroleum dealers in particular had no input VAT
credits to speak of, and therefore, could not assert any property rights to the input VAT credits under
the new law. Of course the petroleum dealers had no input VAT credits prior to the E-VAT Law
because precisely they were not covered by the VAT system in the first place. What would now be
classified as "input VAT credits" was, in real terms, profit obtainable by the petroleum dealers prior to
the new E-VAT Law. The E-VAT Law stands to diminish such profit, not by outright taking perhaps,
but by ad infinitum confiscation with the illusory promise of eventual return. Obviously, there is a
deprivation of property in such case; yet is it seriously contended that such deprivation is ipso
facto sheltered if it is not classified as a taking, but instead reclassified as a "credit"?

It is highly distressful that the Court, in its haste to decree petitioners as bereft of any vested property
rights, rejects the notion that a person has a vested right to the earnings and profits incurred in
business. Before, no legal basis could be found to prop up such a palpably outlandish claim; but
the Decision, as affirmed by the majoritys Resolution, now enshrines a temerarious proposition with
doctrinal status.

In the Decision, and also in Justice Panganibans Separate Opinion therein, the case of United
Paracale Mining Co. v. De la Rosa4 was cited in support of the proposition that there is no vested
right to the input VAT credit. Justice Panganiban went as far as to cite that case to support the
contention that "[t]here is no vested right in a deferred input tax account; it is a mere statutory
privilege." Reliance on the case is quite misplaced. First, as pointed out in my Dissenting Opinion, it
does not even pertain to tax credits involving as it does, questions on the jurisdiction of the Bureau of
Mines.5 Second, the putative vested rights therein pertained to mining claims, yet all mineral
resources indisputably belong to the State. Herein, the rights pertain to profit incurred by private
enterprise, and certainly the majority cannot contend that such profits actually belong to the State.

As stated in my Dissenting Opinion, the Constitution itself recognizes a right to income and profit
when it recognizes "the right of enterprises to reasonable returns on investments, and to expansion and
growth."6 Section 20, Article II of the Constitution further mandates that the State recognize the
indispensable role of the private sector, the encouragement of private enterprise, and the provision of
incentives to needed investments.7 Indeed, there is a fundamental recognition in any form of
democratic government that recognizes a capitalist economy that the enterprise has a right to its
profits. Today, the Court instead affirms that there is no such right. Should capital flight ensue, the
phenomenom should not be blamed on investors in view of our judicial systems rejection of
capitalisms fundamental precept.

Mainstream Denunciation of 70% Cap

The fact that petitioners are dealers of petroleum products may have left the impression that the 70%
cap singularly affects the petroleum industry; or that other classes of dealers or retailers do not pose
the same objections to these "innovations" in the E-VAT law. This is far from the truth.

In fact, the clamor against the 70% cap has been widespread among the players and components in the
financial mainstream. Denunciations have been registered by the Philippine Chamber of Commerce
and Industry8, the Joint Foreign Chambers of the Philippines (comprising of the American Chamber
of Commerce in the Philippines, the Australian-New Zealand Chamber Commerce of the Philippines,
Inc., the Canadian Chamber of Commerce of the Philippines, Inc., the European Chamber of
Commerce of the Philippines, Inc., the Japanese Chamber of Commerce of the Philippines, Inc., the
Korean Chamber of Commerce and Industry of the Philippines, and the Philippine Association of
Multinational Companies Regional Headquarters, Inc.),9 the Filipino-Chinese Chamber of Commerce
and Industry,10 the Federation of Philippine Industries,11 the Consumer and Oil Price Watch,12 the
Association of Certified Public Accountants in Public Practice,13 the Philippine Tobacco
Institute,14 and the auditing firm of PricewaterhouseCooper.15

Even newly installed Finance Secretary Margarito Teves has expressed concern that the 70% input
VAT "may not work across all industries because of varying profit margins". 16 Other experts who
have voiced concerns on the 70% input VAT are former NEDA Directors Cielito Habito17 and Solita
Monsod,18 Peter Wallace of the Wallace Business Forum,19 and Paul R. Cooper, director of
PricewaterhouseCooper.
In fact, Mr. Cooper published in the Philippine Daily Inquirer a lengthy disquisition on the problems
surrounding the 70% cap, portions of which I replicate below:

Policy concerns on the cap

When the idea of putting a cap was originally introduced on the floor of the Senate. The idea was to
address to some extent the under-reporting of output VAT by non-complaint taxpayers. The original
suggestion was a 90 percent cap, or effectively a 1-percent minimum VAT. At that level, the rule
should not impact adversely on complaint taxpayers, but would result in non-complaint taxpayers
having to account for closer to their true tax liability.

As a general policy consideration, one should question why our legislators are penalizing complaint
taxpayers when the fundamental issue is at the apparent inability of the Bureau of Internal Revenue
(BIR) to implement tax law effectively.

At a 90-percent cap, the measure might still have been defensible as a rough proxy for VAT.
However, somewhere in the bicameral process, the rule has become even more punitive with a 70-
percent cap. As with most amendments introduced at the bicameral stage, there is no public indication
about what lawmakers were thinking when they put the travesty in place.

xxx

One of the arguments in Senate debates for taxing the power and petroleum sectors was that if it was
good enough for mom-and-pop stores to have to account for the VAT, it was good enough for the
biggest companies in the country to do the same. A similar argument here is that if small businesses
have to pay a minimum 3-percent tax, why should larger VAT-registered persons get away with
paying less?

The problem with this thinking is threefold:

The percentage tax applies to small businesses in the hard-to-tax sector and a few believe the BIR
collects close to what it should from this. Nor should we be overly concerned if this is the casethe
revenues are small, and the BIRs efforts would be a lot better focused on larger taxpayers where
more significant revenues will be at issue.

VAT-registered persons incur compliance costs. The 3-percent tax might be better conceived as a
slightly more expensive option to allow taxpayers to opt out of the VAT, rather than a punitive rule
for small businesses. (If the percentage tax is considered unduly punitive, why is it not just repealed?)

Ironically, one of the new measures in the Senate bill was to allow taxpayers with turnovers below,
the registration threshold to register voluntarily for VAT if they believe the 3-percent tax imposition
to be excessive. Without the minimum VAT, smaller taxpayers might have been encouraged to enter
the more formalized VAT sector.

Potential consequences of the cap

The minimum VAT will distort the way taxpayers conduct business. A 3-percent minimum VAT is
more likely to impact on sellers of goods than on sellers of services, as their proportion of taxable
inputs are lower (there is no VAT paid when using labor, but there is VAT on the purchase of goods).
Consequently, there will be a bias toward consuming services over goods. Businesses may have an
incentive to obtain goods from the informal (and potentially tax-evading) sector as there will be no
input tax paid for the purchasein other words, the bill may actively encourage less tax complaint
behavior. Business structures may change; expect buy-sell distributors to convent into commission
agents, as this reduces the risk that they will need to pay more than should be paid under a VAT
system to cover the 3-percent minimum VAT.20

These objections are voiced by members of the sensible center, and not those reflexively against VAT
or any tax imposition of the current administration. These objections are raised by the people who
stand to be directly affected on a daily punitive basis by the imposition of the 70% cap, the 60-month
amortization period and the 5% withholding VAT. Indeed, Justice Chico-Nazario has expressed her
disbelief over, or at least has asserted as unproven, the claimed impact of the input VAT on the
petroleum dealers.21 Of course there can be no tangible gauge as of yet on the impact of these changes
in the VAT law, since they have yet to be implemented. However, the prevalent adverse reaction
within the business sector should be sufficiently expressive of the actual fears of the people who
should know better. It is sad that the majority, by maintaining a blithely nave view of the input VAT,
perpetuates the disconnect between the Court and the business sector, unnecessarily considering that
in this instance, the concerns of the financial community can be translated into a viable constitutional
challenge.

Reliance on Legislative Amendments

An Abdication of the Courts Constitutional Duty

Justice Panganiban has already expressed the view that the remedy to the inequities caused by the new
input VAT system would be amending the law, and not an outright declaration of unconstitutionality.
I can only hazard a guess on how many members of the Court or the legal community are similarly
reliant on that remedy as a means of assuaging their fears on the impact of the input VAT innovations.

As I stated in my Dissenting Opinion, it is this Court, and not the legislature, which has the duty to
strike down unconstitutional laws. Congress may amend unconstitutional laws to remedy such legal
infirmities, but it is under no constitutional or legal obligation to do so. The same does not hold true
with this Court. The essence of judicial review mandates that the Court strike down unconstitutional
laws.

Another corollary prospect has also arisen, that the Executive Department itself will mitigate the
implementation of the 70% cap by not fully implementing the law.

This prospect of course is speculative, the sort of speculation that is wholly dependent on the whim of
the officials of the executive branch and one that cannot be quantified by mathematical formula. This
cannot be the basis for any judicial action or vote. Moreover, such resort may actually be illegal.

For one, Article 239 of the Revised Penal Code imposes the penalty of prision correccional on public
officers "who shall encroach upon the powers of the legislative branch of the Government, either by
making general rules or regulations beyond the scope of his authority, or by attempting to repeal a law
or suspending the execution thereof." Certainly, the remedy to the inequities of the E-VAT Law
cannot be left to administrative pussy-footing, considering that these officials may be jailed for
refusing to implement the law, or obfuscating the legislative will.

Second, it is a cardinal rule that an administrative agency such as the Bureau of Internal Revenue or
even the Department of Finance cannot amend an act of Congress. Whatever administrative
regulations they may adopt under legislative authority must be in harmony with the provisions of the
law they are intended to carry into effect. They cannot widen or diminish its scope.22

Finally, it must be remembered that one of the central doctrines enforced in the disposition of the joint
petitions is that the power to tax belongs solely to the legislative branch of government. If the
legislative will were to be frustrated by haphazard implementation by the executive branch, all our
disquisitions on this matter, as well as the key constitutional principle on the inherent, non-delegable
nature of the legislative power of taxation, will be for naught.

Indeed, I truly fear the scenario when, after the deluge, the executive branch of government suspends
the implementation of the 70% cap, or increases the cap to a higher amount such as 90%. Any
taxpayer will have standing to attack such remedial measure, considering that the net effect would be
to diminish the governments collection of cash at hand. Following the law, the proper judicial action
would be to uphold the clear legislative intent over the reengineering of the taxing provisions by the
executive branch of government. Yet if the courts instead uphold the power of the executive branch of
government to reinvent the tax statute, then the end concession would be that the power to enact tax
laws ultimately belongs to the executive branch of government.

I hesitate to say this, but there will be confusion, instability, and multiple fatalities within the business
sector with the enforcement of the amendments of Section 8 and 12 of the E-VAT Law. It could have
been stopped through the allowance of the petition in G.R. No. 168461, but regrettably the Court did
not act.

I respectfully dissent.

DANTE O. TINGA

Associate Justice
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-41631 December 17, 1976

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

as Secretary to the Mayor; THE MARKET ADMINISTRATOR; and THE MUNICIPAL
BOARD OF MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as Presiding Judge of the Court of First Instance
of Manila, Branch XXX and the FEDERATION OF MANILA MARKET VENDORS,
INC., respondents.

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

Antonio H. Abad, Jr. for private respondent.

Federico A. Blay for petitioner for intervention.

MARTIN, J.:

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

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

On February 17, 1975, respondent Federation of Manila Market Vendors, Inc. commenced Civil Case
96787 before the Court of First Instance of Manila presided over by respondent Judge, seeking the
declaration of nullity of Ordinance No. 7522 for the reason that (a) the publication requirement under
the Revised Charter of the City of Manila has not been complied with; (b) the Market Committee was
not given any participation in the enactment of the ordinance, as envisioned by Republic Act 6039; (c)
Section 3 (e) of the Anti-Graft and Corrupt Practices Act has been violated; and (d) the ordinance
would violate Presidential Decree No. 7 of September 30, 1972 prescribing the collection of fees and
charges on livestock and animal products.
Resolving the accompanying prayer for the issuance of a writ of preliminary injunction, respondent
Judge issued an order on March 11, 1975, denying the plea for failure of the respondent Federation of
Manila Market Vendors, Inc. to exhaust the administrative remedies outlined in the Local Tax Code.

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

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

Petitioners moved for reconsideration of the adverse decision, stressing that (a) only a post-
publication is required by the Local Tax Code; and (b) private respondent failed to exhaust all
administrative remedies before instituting an action in court.

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

Forthwith, petitioners brought the matter to Us through the present petition for review on certiorari.

We find the petition impressed with merits.

1. The nexus of the present controversy is the apparent conflict between the Revised Charter of the
City of Manila and the Local Tax Code on the manner of publishing a tax ordinance enacted by the
Municipal Board of Manila. For, while Section 17 of the Revised Charter provides:

Each proposed ordinance shall be published in two daily newspapers of general

circulation in the city, and shall not be discussed or enacted by the Board until after
the third day following such publication. * * * Each approved ordinance * * * shall
be published in two daily newspapers of general circulation in the city, within ten
days after its approval; and shall take effect and be in force on and after the twentieth
day following its publication, if no date is fixed in the ordinance.

Section 43 of the Local Tax Code directs:

Within ten days after their approval, certified true copies of all provincial, city,
municipal and barrio ordinances levying or imposing taxes, fees or other
charges shall be published for three consecutive days in a newspaper or publication
widely circulated within the jurisdiction of the local government, or posted in the
local legislative hall or premises and in two other conspicuous places within the
territorial jurisdiction of the local government. In either case, copies of all provincial,
city, municipal and barrio ordinances shall be furnished the treasurers of the
respective component and mother units of a local government for dissemination.
In other words, while the Revised Charter of the City of Manila requires publication before the
enactment of the ordinance and after the approval thereof in two daily newspapers of general
circulation in the city, the Local Tax Code only prescribes for publication after the approval of
"ordinances levying or imposing taxes, fees or other charges" either in a newspaper or publication
widely circulated within the jurisdiction of the local government or by posting the ordinance in the
local legislative hall or premises and in two other conspicuous places within the territorial jurisdiction
of the local government. Petitioners' compliance with the Local Tax Code rather than with the
Revised Charter of the City spawned this litigation.

There is no question that the Revised Charter of the City of Manila is a special act since it relates only
to the City of Manila, whereas the Local Tax Code is a general law because it applies universally to
all local governments. Blackstone defines general law as a universal rule affecting the entire
community and special law as one relating to particular persons or things of a class. 1 And the rule
commonly said is that a prior special law is not ordinarily repealed by a subsequent general law. The
fact that one is special and the other general creates a presumption that the special is to be considered
as remaining an exception of the general, one as a general law of the land, the other as the law of a
particular case. 2 However, the rule readily yields to a situation where the special statute refers to a
subject in general, which the general statute treats in particular. The exactly is the circumstance
obtaining in the case at bar. Section 17 of the Revised Charter of the City of Manila speaks of
"ordinance" in general, i.e., irrespective of the nature and scope thereof, whereas, Section 43 of the
Local Tax Code relates to "ordinances levying or imposing taxes, fees or other charges" in particular.
In regard, therefore, to ordinances in general, the Revised Charter of the City of Manila is doubtless
dominant, but, that dominant force loses its continuity when it approaches the realm of "ordinances
levying or imposing taxes, fees or other charges" in particular. There, the Local Tax Code controls.
Here, as always, a general provision must give way to a particular provision. 3 Special provision
governs. 4 This is especially true where the law containing the particular provision was enacted later
than the one containing the general provision. The City Charter of Manila was promulgated on June
18, 1949 as against the Local Tax Code which was decreed on June 1, 1973. The law-making power
cannot be said to have intended the establishment of conflicting and hostile systems upon the same
subject, or to leave in force provisions of a prior law by which the new will of the legislating power
may be thwarted and overthrown. Such a result would render legislation a useless and Idle ceremony,
and subject the law to the reproach of uncertainty and unintelligibility. 5

The case of City of Manila v. Teotico 6 is opposite. In that case, Teotico sued the City of Manila for
damages arising from the injuries he suffered when he fell inside an uncovered and unlighted
catchbasin or manhole on P. Burgos Avenue. The City of Manila denied liability on the basis of the
City Charter (R.A. 409) exempting the City of Manila from any liability for damages or injury to
persons or property arising from the failure of the city officers to enforce the provisions of the charter
or any other law or ordinance, or from negligence of the City Mayor, Municipal Board, or other
officers while enforcing or attempting to enforce the provisions of the charter or of any other law or
ordinance. Upon the other hand, Article 2189 of the Civil Code makes cities liable for damages for the
death of, or injury suffered by any persons by reason of the defective condition of roads, streets,
bridges, public buildings, and other public works under their control or supervision. On review, the
Court held the Civil Code controlling. It is true that, insofar as its territorial application is concerned,
the Revised City Charter is a special law and the subject matter of the two laws, the Revised City
Charter establishes a general rule of liability arising from negligence in general, regardless of the
object thereof, whereas the Civil Code constitutes a particular prescription for liability due to
defective streets in particular. In the same manner, the Revised Charter of the City prescribes a rule
for the publication of "ordinance" in general, while the Local Tax Code establishes a rule for the
publication of "ordinance levying or imposing taxes fees or other charges in particular.

In fact, there is no rule which prohibits the repeal even by implication of a special or specific act by a
general or broad one. 7 A charter provision may be impliedly modified or superseded by a later
statute, and where a statute is controlling, it must be read into the charter notwithstanding any
particular charter provision. 8 A subsequent general law similarly applicable to all cities prevails over
any conflicting charter provision, for the reason that a charter must not be inconsistent with the
general laws and public policy of the state. 9 A chartered city is not an independent sovereignty. The
state remains supreme in all matters not purely local. Otherwise stated, a charter must yield to the
constitution and general laws of the state, it is to have read into it that general law which governs the
municipal corporation and which the corporation cannot set aside but to which it must yield. When a
city adopts a charter, it in effect adopts as part of its charter general law of such character. 10

2. The principle of exhaustion of administrative remedies is strongly asserted by petitioners as having

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

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

It is a feeble attempt to argue that the ordinance violates Presidential Decree No. 7, dated September
30, 1972, insofar as it affects livestock and animal products, because the said decree prescribes the
collection of other fees and charges thereon "with the exception of ante-mortem and post-mortem
inspection fees, as well as the delivery, stockyard and slaughter fees as may be authorized by the
Secretary of Agriculture and Natural Resources." 16Clearly, even the exception clause of the decree
itself permits the collection of the proper fees for livestock. And the Local Tax Code (P.D. 231, July
1, 1973) authorizes in its Section 31: "Local governments may collect fees for the slaughter of
animals and the use of corrals * * * "

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

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

Nor can the ordinance be stricken down as violative of Section 3(e) of the Anti-Graft and Corrupt
Practices Act because the increased rates of market stall fees as levied by the ordinance will
necessarily inure to the unwarranted benefit and advantage of the corporation. 19 We are concerned
only with the issue whether the ordinance in question is intra vires. Once determined in the
affirmative, the measure may not be invalidated because of consequences that may arise from its
enforcement. 20

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

SO ORDERED.

Castro, C.J., Barredo, Makasiar, Antonio, Muoz Palma, Aquino and Concepcion, Jr., JJ., concur.
Teehankee, J., reserves his vote.

Separate Opinions

FERNANDO, J., concurring:

But qualifies his assent as to an ordinance intra vires not being open to question "because of
consequences that may arise from its enforcement."

Separate Opinions

FERNANDO, J., concurring:

But qualifies his assent as to an ordinance intra vires not being open to question "because of
consequences that may arise from its enforcement."
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. Nos. 141104 & 148763 June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner
Atlas Consolidated Mining and Development Corporation (petitioner corporation) for the
refund/credit of the input Value Added Tax (VAT) on its purchases of capital goods and on its zero-
rated sales in the taxable quarters of the years 1990 and 1992, the denial of which by the Court of Tax
Appeals (CTA), was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and sale of various mineral
products, such as gold, pyrite, and copper concentrates. It is a VAT-registered taxpayer. It was
initially issued VAT Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register
anew with the appropriate revenue district office (RDO) of the Bureau of Internal Revenue (BIR)
when it moved its principal place of business, and it was re-issued VAT Registration No. 32-0-
004622, dated 15 August 1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992.2 It alleged that it
likewise filed with the BIR the corresponding application for the refund/credit of its input VAT on its
purchases of capital goods and on its zero-rated sales in the amount of P26,030,460.00.3 When its
application for refund/credit remained unresolved by the BIR, petitioner corporation filed on 20 April
1994 its Petition for Review with the CTA, docketed as CTA Case No. 5102. Asserting that it was a
"zero-rated VAT person," it prayed that the CTA order herein respondent Commissioner of Internal
Revenue (respondent Commissioner) to refund/credit petitioner corporation with the amount
of P26,030,460.00, representing the input VAT it had paid for the first quarter of 1992. The
respondent Commissioner opposed and sought the dismissal of the petition for review of petitioner
corporation for failure to state a cause of action. After due trial, the CTA promulgated its Decision4 on
24 November 1997 with the following disposition

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on
the ground of prescription, insufficiency of evidence and failure to comply with Section 230
of the Tax Code, as amended. Accordingly, the petition at bar is hereby DISMISSED for lack
of merit.
The CTA denied the motion for reconsideration of petitioner corporation in a Resolution5 dated 15
April 1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court, in
its Decision,6 dated 6 July 1999, dismissed the appeal of petitioner corporation, finding no reversible
error in the CTA Decision, dated 24 November 1997. The subsequent motion for reconsideration of
petitioner corporation was also denied by the Court of Appeals in its Resolution,7 dated 14 December
1999.

Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under
Rule 45 of the Revised Rules of Court, assigning the following errors committed by the Court of
Appeals

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF

REVENUE REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF THE
[BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF
EXPORTS FOR ZERO-RATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO

SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF
VAT INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS
FILED BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS
FILED WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-
OPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL EVIDENCE.8

G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above, except
that it relates to the claims of petitioner corporation for refund/credit of input VAT on its purchases of
capital goods and on its zero-rated sales made in the last three taxable quarters of 1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of
1990, on 20 July 1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate
applications to the BIR for the refund/credit of the input VAT paid on its purchases of capital goods
and on its zero-rated sales, the details of which are presented as follows
 Date of Application Period Covered Amount Applied For

21 August 1990 2nd Quarter, 1990 P 54,014,722.04

21 November 1990 3rd Quarter, 1990 75,304,774.77

19 February 1991 4th Quarter, 1990 43,829,766.10

When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the
CTA the following petitions for review

Date Filed Period Covered CTA Case No.

20 July 1992 2nd Quarter, 1990 4831

9 October 1992 3rd Quarter, 1990 4859

14 January 1993 4th Quarter, 1990 4944

which were eventually consolidated. The respondent Commissioner contested the foregoing Petitions
and prayed for the dismissal thereof. The CTA ruled in favor of respondent Commissioner and in its
Decision,9 dated 30 October 1997, dismissed the Petitions mainly on the ground that the prescriptive
periods for filing the same had expired. In a Resolution,10 dated 15 January 1998, the CTA denied the
motion for reconsideration of petitioner corporation since the latter presented no new matter not
already discussed in the court's prior Decision. In the same Resolution, the CTA also denied the
alternative prayer of petitioner corporation for a new trial since it did not fall under any of the grounds
cited under Section 1, Rule 37 of the Revised Rules of Court, and it was not supported by affidavits of
merits required by Section 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R.
SP No. 46718. On 15 September 2000, the Court of Appeals rendered its Decision, 11 finding that
although petitioner corporation timely filed its Petitions for Review with the CTA, it still failed to
substantiate its claims for the refund/credit of its input VAT for the last three quarters of 1990. In its
Resolution,12 dated 27 June 2001, the appellate court denied the motion for reconsideration of
petitioner corporation, finding no cogent reason to reverse its previous Decision.

Aggrieved, petitioner corporation filed with this Court another Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court, docketed as G.R. No. 148763, raising the
following issues

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88
AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR ZERO-
RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR
THE INSTANT CLAIM.
 B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS

NO BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were
consolidated pursuant to a Resolution, dated 4 September 2006, issued by this Court. The ruling of
this Court in these cases hinges on how it will resolve the following key issues: (1) prescription of the
claims of petitioner corporation for input VAT refund/credit; (2) validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the VAT zero-rating
of its sales, the burden of proving that the buyer companies were not just BOI-registered but also
exporting 70% of their total annual production; (3) sufficiency of evidence presented by petitioner
corporation to establish that it is indeed entitled to input VAT refund/credit; and (4) legal ground for
granting the motion of petitioner corporation for re-opening of its cases or holding of new trial before
the CTA so it could be given the opportunity to present the required evidence.

Prescription

The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales
made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, as
amended, which provided that

SEC. 106. Refunds or tax credits of input tax. x x x.

(b) Zero-rated or effectively zero-rated sales. Any person, except those covered by
paragraph (a) above, whose sales are zero-rated may, within two years after the close of the
quarter when such sales were made, apply for the issuance of a tax credit certificate or refund
of the input taxes attributable to such sales to the extent that such input tax has not been
applied against output tax.

xxxx

(e) Period within which refund of input taxes may be made by the Commissioner. The
Commissioner shall refund input taxes within 60 days from the date the application for refund
was filed with him or his duly authorized representative. No refund of input taxes shall be
allowed unless the VAT-registered person files an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for filing the
application for refund/credit of input VAT on zero-rated sales shall be determined from the close of
the quarter when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period should be counted, not from
the close of the quarter when the zero-rated sales were made, but from the date of filing of the
quarterly VAT return and payment of the tax due 20 days thereafter, in accordance with Section
110(b) of the Tax Code of 1977, as amended, quoted as follows

SEC. 110. Return and payment of value-added tax. x x x.

 (b) Time for filing of return and payment of tax. The return shall be filed and the tax paid
within 20 days following the end of each quarter specifically prescribed for a VAT-registered
person under regulations to be promulgated by the Secretary of Finance: Provided,
however, That any person whose registration is cancelled in accordance with paragraph (e) of
Section 107 shall file a return within 20 days from the cancellation of such registration.

It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for
recovery of corporate income tax erroneously or illegally paid under Section 230 13 of the Tax Code of
1977, as amended, was to be counted from the filing of the final adjustment return. This Court already
set out in ACCRA Investments Corporation v. Court of Appeals,14 the rationale for such a rule, thus

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch
as the respondent Commissioner by his own rules and regulations mandates that the corporate
taxpayer opting to ask for a refund must show in its final adjustment return the income it
received from all sources and the amount of withholding taxes remitted by its withholding
agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment
return for its 1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in
the case of Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G.R. No.
85956), we ruled that the two-year prescriptive period within which to claim a refund
commences to run, at the earliest, on the date of the filing of the adjusted final tax return.
Hence, the petitioner corporation had until April 15, 1984 within which to file its claim for
refund.

Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the
respondent Commissioner who failed to take any action thereon and considering further that
the non-resolution of its claim for refund with the said Commissioner prompted ACCRAIN to
reiterate its claim before the Court of Tax Appeals through a petition for review on April 13,
1984, the respondent appellate court manifestly committed a reversible error in affirming the
holding of the tax court that ACCRAIN's claim for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period
with respect to the petitioner corporation's claim for refund from the time it filed its final
adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it
made profits or incurred losses in its business operations. The "date of payment", therefore, in
ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final
adjustment return on April 15, 1982.

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further expounded
on the same matter

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is
warranted under the circumstances to lay down a categorical pronouncement on the question
as to when the two-year prescriptive period in cases of quarterly corporate income tax
commences to run. A full-blown decision in this regard is rendered more imperative in the
light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in
the Pacific Procon case.
Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted
in relation to the other provisions of the Tax Code in order to give effect the legislative intent
and to avoid an application of the law which may lead to inconvenience and absurdity. In the
case of People vs. Rivera (59 Phil. 236 [1933]), this Court stated that statutes should receive a
sensible construction, such as will give effect to the legislative intention and so as to avoid an
unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA
EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where there is ambiguity, such
interpretation as will avoid inconvenience and absurdity is to be adopted. Furthermore, courts
must give effect to the general legislative intent that can be discovered from or is unraveled
by the four corners of the statute, and in order to discover said intent, the whole statute, and
not only a particular provision thereof, should be considered. (Manila Lodge No. 761, et al.
vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause of the
statute must be expounded by reference to each other in order to arrive at the effect
contemplated by the legislature. The intention of the legislator must be ascertained from the
whole text of the law and every part of the act is to be taken into view. (Chartered Bank vs.
Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz
Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now
Section 230) of the National Internal Revenue Code but also the other provisions of the Tax
Code, particularly Sections 84, 85 (now both incorporated as Section 68), Section 86 (now
Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment
and Section 321 (now Section 232) on keeping of books of accounts. All these provisions of
the Tax Code should be harmonized with each other.

xxxx

Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68)
and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be
considered mere installments of the annual tax due. These quarterly tax payments which are
computed based on the cumulative figures of gross receipts and deductions in order to arrive
at a net taxable income, should be treated as advances or portions of the annual income tax
due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87
(now Section 69) which provides for the filing of adjustment returns and final payment of
income tax. Consequently, the two-year prescriptive period provided in Section 292 (now
Section 230) of the Tax Code should be computed from the time of filing the Adjustment
Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this
Court held that when a tax is paid in installments, the prescriptive period of two years
provided in Section 306 (Section 292) of the National Internal Revenue Code should be
counted from the date of the final payment. This ruling is reiterated in Commissioner of
Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that
where the tax account was paid on installment, the computation of the two-year prescriptive
period under Section 306 (Section 292) of the Tax Code, should be from the date of the last
installment.
 In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the
two-year prescriptive period should be counted from the filing of the Adjustment Return on
April 15,1982, TMX Sales, Inc. is not yet barred by prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period
for claims for refund of illegally or erroneously collected income tax may also apply to the Petitions at
bar involving the same prescriptive period for claims for refund/credit of input VAT on zero-rated
sales.

It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but
is eventually subjected to a final adjustment at the end of the taxable year, VAT is computed and paid
on a purely quarterly basis without need for a final adjustment at the end of the taxable year.
However, it is also equally true that until and unless the VAT-registered taxpayer prepares and
submits to the BIR its quarterly VAT return, there is no way of knowing with certainty just how much
input VAT16 the taxpayer may apply against its output VAT;17how much output VAT it is due to pay
for the quarter or how much excess input VAT it may carry-over to the following quarter; or how
much of its input VAT it may claim as refund/credit. It should be recalled that not only may a VAT-
registered taxpayer directly apply against his output VAT due the input VAT it had paid on its
importation or local purchases of goods and services during the quarter; the taxpayer is also given the
option to either (1) carry over any excess input VAT to the succeeding quarters for application against
its future output VAT liabilities, or (2) file an application for refund or issuance of a tax credit
certificate covering the amount of such input VAT.18 Hence, even in the absence of a final adjustment
return, the determination of any output VAT payable necessarily requires that the VAT-registered
taxpayer make adjustments in its VAT return every quarter, taking into consideration the input VAT
which are creditable for the present quarter or had been carried over from the previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it
does have refundable or creditable input VAT, and the same has not been applied against its output
VAT liabilities information which are supposed to be reflected in the taxpayer's VAT returns. Thus,
an application for refund/credit must be accompanied by copies of the taxpayer's VAT return/s for the
taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally
or erroneously collected, its refund/credit is a privilege extended to qualified and registered taxpayers
by the very VAT system adopted by the Legislature. Such input VAT, the same as any illegally or
erroneously collected national internal revenue tax, consists of monetary amounts which are currently
in the hands of the government but must rightfully be returned to the taxpayer. Therefore, whether
claiming refund/credit of illegally or erroneously collected national internal revenue tax, or input
VAT, the taxpayer must be given equal opportunity for filing and pursuing its claim.

For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period
for filing a claim for refund/credit of input VAT on zero-rated sales from the date of filing of the
return and payment of the tax due which, according to the law then existing, should be made within
20 days from the end of each quarter. Having established thus, the relevant dates in the instant cases
are summarized and reproduced below

Period Covered Date of Date of Date of Filing (Case

 Filing (Return w/ Filing (Application w/ w/ CTA)
BIR) BIR)

2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992

3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992

4th Quarter, 1990 20 January 1991 19 February 1991 14 January 1993

1st Quarter, 1992 20 April 1992 -- 20 April 1994

The above table readily shows that the administrative and judicial claims of petitioner corporation for
refund of its input VAT on its zero-rated sales for the last three quarters of 1990 were all filed within
the prescriptive period.

However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT
on its zero-rated sales for the first quarter of 1992. Even though it may seem that petitioner
corporation filed in time its judicial claim with the CTA, there is no showing that it had previously
filed an administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended,
explicitly provided that no refund of input VAT shall be allowed unless the VAT-registered taxpayer
filed an application for refund with respondent Commissioner within the two-year prescriptive period.
The application of petitioner corporation for refund/credit of its input VAT for the first quarter of
1992 was not only unsigned by its supposed authorized representative, Ma. Paz R. Semilla, Manager-
Finance and Treasury, but it was not dated, stamped, and initialed by the BIR official who purportedly
received the same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No. 5102,
made the following observations

This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of
VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally offered in evidence by the petitioner
on account of the fact that it does not bear the BIR stamp showing the date when such
application was filed together with the signature or initial of the receiving officer of
respondent's Bureau. Worse still, it does not show the date of application and the signature of
a certain Ma. Paz R. Semilla indicated in the form who appears to be petitioner's authorized
filer.

A review of the records reveal that the original of the aforecited application was lost during
the time petitioner transferred its office (TSN, p. 6, Hearing of December 9, 1994). Attempt
was made to prove that petitioner exerted efforts to recover the original copy, but to no avail.
Despite this, however, We observe that petitioner completely failed to establish the missing
dates and signatures abovementioned. On this score, said application has no probative value
in demonstrating the fact of its filing within two years after the [filing of the VAT return for
the quarter] when petitioner's sales of goods were made as prescribed under Section 106(b) of
the Tax Code. We believe thus that petitioner failed to file an application for refund in due
form and within the legal period set by law at the administrative level. Hence, the case at bar
has failed to satisfy the requirement on the prior filing of an application for refund with the
respondent before the commencement of a judicial claim for refund, as prescribed under
Section 230 of the Tax Code. This fact constitutes another one of the many reasons for not
granting petitioner's judicial claim.
As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation
timely filed its administrative claim for refund of its input VAT for the first quarter of 1992, but also
whether petitioner corporation actually filed such administrative claim in the first place. For failing to
prove that it had earlier filed with the BIR an application for refund/credit of its input VAT for the
first quarter of 1992, within the period prescribed by law, then the case instituted by petitioner
corporation with the CTA for the refund/credit of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70% export requirement

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross
selling price or gross value in money of goods sold, bartered or exchanged. Yet, the same provision
subjected the following sales made by VAT-registered persons to 0% VAT

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate.

"Export Sales" means the sale and shipment or exportation of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be agreed upon which
may influence or determine the transfer of ownership of the goods so exported, or foreign
currency denominated sales. "Foreign currency denominated sales", means sales to
nonresidents of goods assembled or manufactured in the Philippines, for delivery to residents
in the Philippines and paid for in convertible foreign currency remitted through the banking
system in the Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for VAT
purposes, although the VAT rate applied is 0%. A sale by a VAT-registered taxpayer of goods and/or
services taxed at 0% shall not result in any output VAT, while the input VAT on its purchases of
goods or services related to such zero-rated sale shall be available as tax credit or refund.20

Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said
regulations imposed additional requirements, not found in the law itself, for the zero-rating of its sales
to Philippine Smelting and Refining Corporation (PASAR) and Philippine Phosphate, Inc.
(PHILPHOS), both of which are registered not only with the BOI, but also with the then Export
Processing Zone Authority (EPZA).21

The contentious provisions of Revenue Regulations No. 2-88 read

SEC. 2. Zero-rating. (a) Sales of raw materials to BOI-registered exporters. Sales of raw
materials to export-oriented BOI-registered enterprises whose export sales, under rules and
regulations of the Board of Investments, exceed seventy percent (70%) of total annual
production, shall be subject to zero-rate under the following conditions:

"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for
zero-rating for each and every separate buyer, in accordance with Section 8(d) of
Revenue Regulations No. 5-87. The application should be accompanied with a
favorable recommendation from the Board of Investments."
 "(2) The raw materials sold are to be used exclusively by the buyer in the
manufacture, processing or repacking of his own registered export product;

"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales
invoice. The exporter (buyer) can no longer claim from the Bureau of Internal
Revenue or any other government office tax credits on their zero-rated purchases;

(b) Sales of raw materials to foreign buyer. Sales of raw materials to a nonresident foreign
buyer for delivery to a resident local export-oriented BOI-registered enterprise to be used in
manufacturing, processing or repacking of the said buyer's goods and paid for in foreign
currency, inwardly remitted in accordance with Central Bank rules and regulations shall be
subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals, that
Section 2 of Revenue Regulations No. 2-88 should be applied in the cases at bar; and to be entitled to
the zero-rating of its sales to PASAR and PHILPHOS, petitioner corporation, as a VAT-registered
seller, must be able to prove not only that PASAR and PHILPHOS are BOI-registered corporations,
but also that more than 70% of the total annual production of these corporations are actually exported.
Revenue Regulations No. 2-88 merely echoed the requirement imposed by the BOI on export-oriented
corporations registered with it.

While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds
that its application must be limited and placed in the proper context. Note that Section 2 of Revenue
Regulations No. 2-88 referred only to the zero-rated sales of raw materials to export-oriented BOI-
registered enterprises whose export sales, under BOI rules and regulations, should exceed seventy
percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the
sales made by petitioner corporation to PASAR and PHILPHOS. At the onset, it must be emphasized
that PASAR and PHILPHOS, in addition to being registered with the BOI, were also registered with
the EPZA and located within an export-processing zone. Petitioner corporation does not claim that its
sales to PASAR and PHILPHOS are zero-rated on the basis that said sales were made to export-
oriented BOI-registered corporations, but rather, on the basis that the sales were made to EPZA-
registered enterprises operating within export processing zones. Although sales to export-oriented
BOI-registered enterprises and sales to EPZA-registered enterprises located within export processing
zones were both deemed export sales, which, under Section 100(a) of the Tax Code of 1977, as
amended, shall be subject to 0% VAT distinction must be made between these two types of sales
because each may have different substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and
shipment or exportation of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported, or foreign currency denominated sales." Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987 - which, in the years concerned (i.e.,
1990 and 1992), governed enterprises registered with both the BOI and EPZA, provided a more
comprehensive definition of export sales, as quoted below:
 "ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from
invoices, bills of lading, inward letters of credit, landing certificates, and other commercial
documents, of export products exported directly by a registered export producer or the net
selling price of export product sold by a registered export producer or to an export trader that
subsequently exports the same: Provided, That sales of export products to another producer or
to an export trader shall only be deemed export sales when actually exported by the latter, as
evidenced by landing certificates of similar commercial documents: Provided, further,
That without actual exportation the following shall be considered constructively exported for
purposes of this provision: (1) sales to bonded manufacturing warehouses of export-oriented
manufacturers; (2) sales to export processing zones; (3) sales to registered export traders
operating bonded trading warehouses supplying raw materials used in the manufacture of
export products under guidelines to be set by the Board in consultation with the Bureau of
Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic
missions and other agencies and/or instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products whether paid for in foreign currency or not:
Provided, further, That export sales of registered export trader may include commission
income; and Provided, finally, That exportation of goods on consignment shall not be deemed
export sales until the export products consigned are in fact sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use to Filipinos
abroad and other non-residents of the Philippines as well as returning Overseas Filipinos
under the Internal Export Program of the government and paid for in convertible foreign
currency inwardly remitted through the Philippine banking systems shall also be considered
export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the
sales of export products to another producer or to an export trader, provided that the export products
are actually exported. For purposes of VAT zero-rating, such producer or export trader must be
registered with the BOI and is required to actually export more than 70% of its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers
constructive exportation as export sales. Among other types of constructive exportation specifically
identified by the said provision are sales to export processing zones. Sales to export processing zones
are subjected to special tax treatment. Article 77 of the same Code establishes the tax treatment of
goods or merchandise brought into the export processing zones. Of particular relevance herein is
paragraph 2, which provides that "Merchandise purchased by a registered zone enterprise from the
customs territory and subsequently brought into the zone, shall be considered as export sales and the
exporter thereof shall be entitled to the benefits allowed by law for such transaction."

Such tax treatment of goods brought into the export processing zones are only consistent with the
Destination Principle and Cross Border Doctrine to which the Philippine VAT system adheres.
According to the Destination Principle,22 goods and services are taxed only in the country where these
are consumed. In connection with the said principle, the Cross Border Doctrine23 mandates that no
VAT shall be imposed to form part of the cost of the goods destined for consumption outside the
territorial border of the taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT, while those destined for use or consumption
within the Philippines shall be imposed with 10% VAT.24 Export processing zones25 are to be
managed as a separate customs territory from the rest of the Philippines and, thus, for tax purposes,
are effectively considered as foreign territory. For this reason, sales by persons from the Philippine
customs territory to those inside the export processing zones are already taxed as exports.

Plainly, sales to enterprises operating within the export processing zones are export sales, which,
under the Tax Code of 1977, as amended, were subject to 0% VAT. It is on this ground that petitioner
corporation is claiming refund/credit of the input VAT on its zero-rated sales to PASAR and
PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the zero-rated sales to export-
oriented BOI-registered enterprises and zero-rated sales to EPZA-registered enterprises operating
within export processing zones is actually supported by subsequent development in tax laws and
regulations. In Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as amended,26 the
BIR defined with more precision what are zero-rated export sales

(1) The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose
export sales exceed seventy percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the preceding
taxable year shall be considered an export-oriented enterprise upon accreditation as such
under the provisions of the Export Development Act (R.A. 7844) and its implementing rules
and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g.
Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of
1992.

The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export sales, which are
subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which
applied to zero-rated export sales to export-oriented BOI-registered enterprises, should not be applied
to the applications for refund/credit of input VAT filed by petitioner corporation since it based its
applications on the zero-rating of export sales to enterprises registered with the EPZA and located
within export processing zones.

Sufficiency of evidence

There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual
bases of its claim for tax credit or refund, but once it has submitted all the required documents, it is
the function of the BIR to assess these documents with purposeful dispatch.28 It therefore falls upon
herein petitioner corporation to first establish that its sales qualify for VAT zero-rating under the
existing laws (legal basis), and then to present sufficient evidence that said sales were actually made
and resulted in refundable or creditable input VAT in the amount being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner corporation cover
only input VAT on its purportedly zero-rated sales to PASAR and PHILPHOS; however, a more
thorough perusal of its applications, VAT returns, pleadings, and other records of these cases would
reveal that it is also claiming refund/credit of its input VAT on purchases of capital goods and sales of
gold to the Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner corporation have
sufficient legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the
Tax Code of 1977, as amended, allowed the refund/credit of input VAT on export sales to enterprises
operating within export processing zones and registered with the EPZA, since such export sales were
deemed to be effectively zero-rated sales.29 The fact that PASAR and PHILPHOS, to whom petitioner
corporation sold its products, were operating inside an export processing zone and duly registered
with EPZA, was never raised as an issue herein. Moreover, the same fact was already judicially
recognized in the case Atlas Consolidated Mining & Development Corporation v. Commissioner of
Internal Revenue.30 Section 106(c) of the same Code likewise permitted a VAT-registered taxpayer to
apply for refund/credit of the input VAT paid on capital goods imported or locally purchased to the
extent that such input VAT has not been applied against its output VAT. Meanwhile, the effective
zero-rating of sales of gold to the CBP from 1989 to 1991 31 was already affirmed by this Court
in Commissioner of Internal Revenue v. Benguet Corporation,32 wherein it ruled that

At the time when the subject transactions were consummated, the prevailing BIR regulations
relied upon by respondent ordained that gold sales to the Central Bank were zero-rated. The
BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which
prescribed that gold sold to the Central Bank shall be considered export and therefore shall be
subject to the export and premium duties. In coming out with this interpretation, the BIR also
considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold to the
Central Bank are considered constructive exports. x x x.

This Court now comes to the question of whether petitioner corporation has sufficiently established
the factual bases for its applications for refund/credit of input VAT. It is in this regard that petitioner
corporation has failed, both in the administrative and judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue
regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is not relevant to the
applications for refund/credit of input VAT filed by petitioner corporation; nonetheless, the said
applications must have been in accordance with Revenue Regulations No. 3-88, amending Section 16
of Revenue Regulations No. 5-87, which provided as follows

SECTION 16. Refunds or tax credits of input tax.

xxxx

(c) Claims for tax credits/refunds. Application for Tax Credit/Refund of Value-Added Tax
Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city or
municipality where the principal place of business of the applicant is located or directly with
the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be
submitted together with the application. The original copy of the said invoice/receipt,
however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate
or refund. In addition, the following documents shall be attached whenever applicable:

xxxx

"3. Effectively zero-rated sale of goods and services.

"i) photo copy of approved application for zero-rate if filing for the first time.

"ii) sales invoice or receipt showing name of the person or entity to whom the
sale of goods or services were delivered, date of delivery, amount of
consideration, and description of goods or services delivered.

"iii) evidence of actual receipt of goods or services.

"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase
price, amount of value-added tax paid and description of the capital
equipment locally purchased.

"ii) with respect to capital equipment imported, the photo copy of import
entry document for internal revenue tax purposes and the confirmation
receipt issued by the Bureau of Customs for the payment of the value-added
tax.

"5. In applicable cases,

where the applicant's zero-rated transactions are regulated by certain government agencies, a
statement therefrom showing the amount and description of sale of goods and services, name
of persons or entities (except in case of exports) to whom the goods or services were sold, and
date of transaction shall also be submitted.
 In all cases, the amount of refund or tax credit that may be granted shall be limited to the
amount of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated
transaction during the period covered by the application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and
services, and the VAT paid (inputs) on purchases of goods and services cannot be directly
attributed to any of the aforementioned transactions, the following formula shall be used to
determine the creditable or refundable input tax for zero-rated sale:

Amount of Zero-rated Sale

Total Sales

X
Total Amount of Input Taxes
=
Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the
BIR, and before the lapse of the two-year prescriptive period, the taxpayer-applicant may already file
a Petition for Review before the CTA. If the taxpayer's claim is supported by voluminous documents,
such as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall be
governed by CTA Circular No. 1-95, as amended, reproduced in full below

In the interest of speedy administration of justice, the Court hereby promulgates the following
rules governing the presentation of voluminous documents and/or long accounts, such as
receipts, invoices and vouchers, as evidence to establish certain facts pursuant to Section 3(c),
Rule 130 of the Rules of Court and the doctrine enunciated in Compania Maritima vs. Allied
Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after
motion and approval by the Court, present:

(a) a Summary containing, among others, a chronological listing of the numbers,

dates and amounts covered by the invoices or receipts and the amount/s of tax paid;
and (b) a Certification of an independent Certified Public Accountant attesting to the
correctness of the contents of the summary after making an examination, evaluation
and audit of the voluminous receipts and invoices. The name of the accountant or
partner of the firm in charge must be stated in the motion so that he/she can be
commissioned by the Court to conduct the audit and, thereafter, testify in Court
relative to such summary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for
marking, identification and comparison with the originals thereof need not be done before the
Court or Clerk of Court anymore after the introduction of the summary and CPA certification.
It is enough that the receipts, invoices, vouchers or other documents covering the said
accounts or payments to be introduced in evidence must be pre-marked by the party
concerned and submitted to the Court in order to be made accessible to the adverse party who
desires to check and verify the correctness of the summary and CPA certification. Likewise,
 the originals of the voluminous receipts, invoices or accounts must be ready for verification
and comparison in case doubt on the authenticity thereof is raised during the hearing or
resolution of the formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the CTA when the
said Circular was issued, then petitioner corporation must have complied therewith during the course
of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of
therein respondent, Manila Mining Corporation, for refund of the input VAT on its supposed zero-
rated sales of gold to the CBP because it was unable to substantiate its claim. In the same case, this
Court emphasized the importance of complying with the substantiation requirements for claiming
refund/credit of input VAT on zero-rated sales, to wit

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a
VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts.

This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the
requirements in claiming tax credits/refunds.

xxxx

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before
it are litigated de novo, party litigants should prove every minute aspect of their cases. No
evidentiary value can be given the purchase invoices or receipts submitted to the BIR as the
rules on documentary evidence require that these documents must be formally offered before
the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output
tax but this does not ipso fact mean that [the seller] is entitled to the amount of refund
sought as it is required by law to present evidence showing the input taxes it paid
during the year in question. What is being claimed in the instant petition is the refund
of the input taxes paid by the herein petitioner on its purchase of goods and services.
Hence, it is necessary for the Petitioner to show proof that it had indeed paid the
input taxes during the year 1991. In the case at bar, Petitioner failed to discharge this
duty. It did not adduce in evidence the sales invoice, receipts or other documents
showing the input value added tax on the purchase of goods and services.

xxx

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides
categorically that the Court of Tax Appeals shall be a court of record and as such it is
required to conduct a formal trial (trial de novo) where the parties must present their
 evidence accordingly if they desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)

A "sales or commercial invoice" is a written account of goods sold or services rendered

indicating the prices charged therefor or a list by whatever name it is known which is used in
the ordinary course of business evidencing sale and transfer or agreement to sell or transfer
goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or
other settlement between seller and buyer of goods, debtor or creditor, or person rendering
services and client or customer.

These sales invoices or receipts issued by the supplier are necessary to substantiate the actual
amount or quantity of goods sold and their selling price, and taken collectively are the best
means to prove the input VAT payments.36

Although the foregoing decision focused only on the proof required for the applicant for refund/credit
to establish the input VAT payments it had made on its purchases from suppliers, Revenue
Regulations No. 3-88 also required it to present evidence proving actual zero-rated VAT sales to
qualified buyers, such as (1) photocopy of the approved application for zero-rate if filing for the first
time; (2) sales invoice or receipt showing the name of the person or entity to whom the goods or
services were delivered, date of delivery, amount of consideration, and description of goods or
services delivered; and (3) the evidence of actual receipt of goods or services.

Also worth noting in the same decision is the weight given by this Court to the certification by the
independent certified public accountant (CPA), thus

Respondent contends, however, that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers' invoices or receipts which were
examined, evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as
amended by CTA Circular No. 10-97 should substantiate its claims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-
97, which either expressly or impliedly suggests that summaries and schedules of input VAT
payments, even if certified by an independent CPA, suffice as evidence of input VAT
payments.

xxxx

The circular, in the interest of speedy administration of justice, was promulgated to avoid the
time-consuming procedure of presenting, identifying and marking of documents before the
Court. It does not relieve respondent of its imperative task of pre-marking photocopies of
sales receipts and invoices and submitting the same to the court after the independent CPA
shall have examined and compared them with the originals. Without presenting these pre-
marked documents as evidence from which the summary and schedules were based, the
court cannot verify the authenticity and veracity of the independent auditor's conclusions.
 There is, moreover, a need to subject these invoices or receipts to examination by the CTA in
order to confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation,
No. 5-87, all purchases covered by invoices other than a VAT invoice shall not be entitled to
a refund of input VAT.

xxxx

While the CTA is not governed strictly by technical rules of evidence, as rules of procedure
are not ends in themselves but are primarily intended as tools in the administration of justice,
the presentation of the purchase receipts and/or invoices is not mere procedural technicality
which may be disregarded considering that it is the only means by which the CTA may
ascertain and verify the truth of the respondent's claims.

The records further show that respondent miserably failed to substantiate its claims for input
VAT refund for the first semester of 1991. Except for the summary and schedules of input
VAT payments prepared by respondent itself, no other evidence was adduced in support of its
claim.

As for respondent's claim for input VAT refund for the second semester of 1991, it employed
the services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.)
executed a certification that:

We have examined the information shown below concerning the input tax payments
made by the Makati Office of Manila Mining Corporation for the period from July 1
to December 31, 1991. Our examination included inspection of the pertinent
suppliers' invoices and official receipts and such other auditing procedures as we
considered necessary in the circumstances. x x x

As the certification merely stated that it used "auditing procedures considered necessary" and
not auditing procedures which are in accordance with generally accepted auditing principles
and standards, and that the examination was made on "input tax payments by the Manila
Mining Corporation," without specifying that the said input tax payments are attributable to
the sales of gold to the Central Bank, this Court cannot rely thereon and regard it as sufficient
proof of the respondent's input VAT payments for the second semester.37

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-
rated sales in the first quarter of 1992, this Court already found that the petitioner corporation failed to
comply with Section 106(b) of the Tax Code of 1977, as amended, imposing the two-year prescriptive
period for the filing of the application for refund/credit thereof. This bars the grant of the application
for refund/credit, whether administratively or judicially, by express mandate of Section 106(e) of the
same Code.

Granting arguendo that the application of petitioner corporation for the refund/credit of the input
VAT on its zero-rated sales in the first quarter of 1992 was actually and timely filed, petitioner
corporation still failed to present together with its application the required supporting documents,
whether before the BIR or the CTA. As the Court of Appeals ruled
In actions involving claims for refund of taxes assessed and collected, the burden of proof
rests on the taxpayer. As clearly discussed in the CTA's decision, petitioner failed to
substantiate its claim for tax refunds. Thus:

"We note, however, that in the cases at bar, petitioner has relied totally on Revenue
Regulations No. 2-88 in determining compliance with the documentary requirements
for a successful refund or issuance of tax credit. Unmentioned is the applicable and
specific amendment later introduced by Revenue Regulations No. 3-88 dated April 7,
1988 (issued barely after two months from the promulgation of Revenue Regulations
No. 2-88 on February 15, 1988), which amended Section 16 of Revenue Regulations
No. 5-87 on refunds or tax credits of input tax. x x x.

xxxx

"A thorough examination of the evidence submitted by the petitioner before this
court reveals outright the failure to satisfy documentary requirements laid down under
the above-cited regulations. Specifically, petitioner was not able to present the
following documents, to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.

"e) original or attested copies of invoice or receipt on capital equipment

locally purchased; and

"f) photocopy of import entry document and confirmation receipt on

imported capital equipment.

"There is the need to examine the sales invoices or receipts in order to ascertain the
actual amount or quantity of goods sold and their selling price. Without them, this
Court cannot verify the correctness of petitioner's claim inasmuch as the regulations
require that the input taxes being sought for refund should be limited to the portion
that is directly and entirely attributable to the particular zero-rated transaction. In this
instance, the best evidence of such transaction are the said sales invoices or receipts.

"Also, even if sales invoices are produced, there is the further need to submit
evidence that such goods were actually received by the buyer, in this case, by CBP,
Philp[h]os and PASAR.

xxxx

"Lastly, this Court cannot determine whether there were actual local and imported
purchase of capital goods as well as domestic purchase of non-capital goods without
 the required purchase invoice or receipt, as the case may be, and confirmation
receipts.

"There is, thus, the imperative need to submit before this Court the original or attested
photocopies of petitioner's invoices or receipts, confirmation receipts and import
entry documents in order that a full ascertainment of the claimed amount may be
achieved.

"Petitioner should have taken the foresight to introduce in evidence all of the missing
documents abovementioned. Cases filed before this Court are litigated de novo. This
means that party litigants should endeavor to prove at the first instance every minute
aspect of their cases strictly in accordance with the Rules of Court, most especially on
documentary evidence." (pp. 37-42, Rollo)

Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the
sovereign authority, and should be construed in strictissimi juris against the person or entity
claiming the exemption. The taxpayer who claims for exemption must justify his claim by the
clearest grant of organic or statute law and should not be permitted to stand on vague
implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v.
Mun. of Agoo, La Union, 31 SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias
Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co.,
Inc. v. Commissioner of Customs, 44 SCRA 122).

There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-
destructive", as it finds comfort in the very SGV's stand, as follows:

"It is our understanding that the above procedure are sufficient for the purpose of the
Company. We make no presentation regarding the sufficiency of these procedures for
such purpose. We did not compare the total of the input tax claimed each quarter
against the pertinent VAT returns and books of accounts. The above procedures do
not constitute an audit made in accordance with generally accepted auditing
standards. Accordingly, we do not express an opinion on the company's claim for
input VAT refund or credit. Had we performed additional procedures, or had we
made an audit in accordance with generally accepted auditing standards, other matters
might have come to our attention that we would have accordingly reported on."

The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent

auditor. Indeed, SGV expressed that it "did not compare the total of the input tax claimed
each quarter against the VAT returns and books of accounts."38

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on
its zero-rated sales in the second, third, and fourth quarters of 1990, the appellate court likewise found
that petitioner corporation failed to sufficiently establish its claims. Already disregarding the
declarations made by the Court of Appeals on its erroneous application of Revenue Regulations No.
2-88, quoted hereunder is the rest of the findings of the appellate court after evaluating the evidence
submitted in accordance with the requirements under Revenue Regulations No. 3-88
 The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to
Sec. 245 of the National Internal Revenue Code, which recognized his power to "promulgate
all needful rules and regulations for the effective enforcement of the provisions of this Code."
Thus, it is incumbent upon a taxpayer intending to file a claim for refund of input VATs or
the issuance of a tax credit certificate with the BIR x x x to prove sales to such buyers as
required by Revenue Regulations No. 3-98. Logically, the same evidence should be presented
in support of an action to recover taxes which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing
sales of gold, copper concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS],
respectively, and the dates and amounts of the same, nor any evidence of actual receipt by the
said buyers of the mineral products. It merely presented receipts of purchases from suppliers
on which input VATs were allegedly paid. Thus, the Court of Tax Appeals correctly denied
the claims for refund of input VATs or the issuance of tax credit certificates of petitioner
[corporation]. Significantly, in the resolution, dated 7 June 2000, this Court directed the
parties to file memoranda discussing, among others, the submission of proof for "its
[petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the
parties, including the petitioner, failed to address this issue, thereby necessitating the
affirmance of the ruling of the Court of Tax Appeals on this point.39

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled
is the general rule that the jurisdiction of this Court in cases brought before it from the Court of
Appeals, by way of a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court,
is limited to reviewing or revising errors of law; findings of fact of the latter are conclusive. 40 This
Court is not a trier of facts. It is not its function to review, examine and evaluate or weigh the
probative value of the evidence presented.41

The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law is
on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth
or falsehood of alleged facts."42

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these
sales in the amount it had declared in its returns; whether all the input VAT subject of its applications
for refund/credit can be attributed to its zero-rated sales; and whether it had not previously applied the
input VAT against its output VAT liabilities, are all questions of fact which could only be answered
after reviewing, examining, evaluating, or weighing the probative value of the evidence it presented,
and which this Court does not have the jurisdiction to do in the present Petitions for Review
on Certiorari under Rule 45 of the revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact
under particular circumstances,43 none of these exist in the instant cases. The Court of Appeals, in
both cases, found a dearth of evidence to support the claims for refund/credit of the input VAT of
petitioner corporation, and the records bear out this finding. Petitioner corporation itself cannot
dispute its non-compliance with the requirements set forth in Revenue Regulations No. 3-88 and CTA
Circular No. 1-95, as amended. It concentrated its arguments on its assertion that the substantiation
requirements under Revenue Regulations No. 2-88 should not have applied to it, while being
conspicuously silent on the evidentiary requirements mandated by other relevant regulations.
Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening
of its cases or holding of new trial before the CTA for the reception of additional evidence, may be
granted. Petitioner corporation prays that the Court exercise its discretion on the matter in its favor,
consistent with the policy that rules of procedure be liberally construed in pursuance of substantive
justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered
in accordance with Section 1, Rule 37 of the revised Rules of Court, which provides

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration.
Within the period for taking an appeal, the aggrieved party may move the trial court to set
aside the judgment or final order and grant a new trial for one or more of the following causes
materially affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have
guarded against and by reason of which such aggrieved party has probably been impaired in
his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered and produced at the trial, and which if presented would probably alter the result.

Within the same period, the aggrieved party may also move fore reconsideration upon the
grounds that the damages awarded are excessive, that the evidence is insufficient to justify the
decision or final order, or that the decision or final order is contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its cases
and/or holding of new trial before the CTA by contending that the "[f]ailure of its counsel to adduce
the necessary evidence should be construed as excusable negligence or mistake which should
constitute basis for such re-opening of trial as for a new trial, as counsel was of the belief that such
evidence was rendered unnecessary by the presentation of unrebutted evidence indicating that
respondent [Commissioner] has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-
rated." 44 The CTA denied such motion on the ground that it was not accompanied by an affidavit of
merit as required by Section 2, Rule 37 of the revised Rules of Court. The Court of Appeals affirmed
the denial of the motion, but apart from this technical defect, it also found that there was no
justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases
and/or holding of new trial based on the technicality that said motion was unaccompanied by an
affidavit of merit, this Court rules in favor of the petitioner corporation. The facts which should
otherwise be set forth in a separate affidavit of merit may, with equal effect, be alleged and
incorporated in the motion itself; and this will be deemed a substantial compliance with the formal
requirements of the law, provided, of course, that the movant, or other individual with personal
knowledge of the facts, take oath as to the truth thereof, in effect converting the entire motion for new
trial into an affidavit.45 The motion of petitioner corporation was prepared and verified by its counsel,
and since the ground for the motion was premised on said counsel's excusable negligence or mistake,
then the obvious conclusion is that he had personal knowledge of the facts relating to such negligence
or mistake. Hence, it can be said that the motion of petitioner corporation for the re-opening of its
cases and/or holding of new trial was in substantial compliance with the formal requirements of the
revised Rules of Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the
re-opening of its cases and/or holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July 1998, by the CTA
in another case, CTA Case No. 5296, involving the claim of petitioner corporation for refund/credit of
input VAT for the third quarter of 1993. The said Resolution allowed the re-opening of CTA Case No.
5296, earlier dismissed by the CTA, to give the petitioner corporation the opportunity to present the
missing export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of the trial court,47 may
likewise be extended to the CTA. When the denial of the motion rests upon the discretion of a lower
court, this Court will not interfere with its exercise, unless there is proof of grave abuse thereof.48

That the CTA granted the motion for re-opening of one case for the presentation of additional
evidence and, yet, deny a similar motion in another case filed by the same party, does not necessarily
demonstrate grave abuse of discretion or arbitrariness on the part of the CTA. Although the cases
involve identical parties, the causes of action and the evidence to support the same can very well be
different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No. 5296,
petitioner corporation was claiming refund/credit of the input VAT on its zero-rated sales, consisting
of actual export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into account
the presentation by petitioner corporation of inward remittances of its export sales for the quarter
involved, its Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report showing its
sales to the said foreign corporation, and its application for refund. In contrast, the present Petitions
involve the claims of petitioner corporation for refund/credit of the input VAT on its purchases of
capital goods and on its effectively zero-rated sales to CBP and EPZA-registered enterprises PASAR
and PHILPHOS for the second, third, and fourth quarters of 1990 and first quarter of 1992. There
being a difference as to the bases of the claims of petitioner corporation for refund/credit of input
VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are resulting variances as to the
evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by
petitioner corporation, emphasizes that the decision of the CTA to allow petitioner corporation to
present evidence "is applicable pro hac vice or in this occasion only as it is the finding of [the CTA]
that petitioner [corporation] has established a few of the aforementioned material points regarding the
possible existence of the export documents together with the prior and succeeding returns for the
quarters involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be
bound by its ruling in CTA Case No. 5296, when these cases do not involve the exact same
circumstances that compelled it to grant the motion of petitioner corporation for re-opening of CTA
Case No. 5296.

Finally, assuming for the sake of argument that the non-presentation of the required documents was
due to the fault of the counsel of petitioner corporation, this Court finds that it does not constitute
excusable negligence or mistake which would warrant the re-opening of the cases and/or holding of
new trial.

Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and
generally imputable to the party because if it is imputable to the counsel, it is binding on the client. To
follow a contrary rule and allow a party to disown his counsel's conduct would render proceedings
indefinite, tentative, and subject to re-opening by the mere subterfuge of replacing the counsel. What
the aggrieved litigant should do is seek administrative sanctions against the erring counsel and not ask
for the reversal of the court's ruling.49

As elucidated by this Court in another case,50 the general rule is that the client is bound by the action
of his counsel in the conduct of his case and he cannot therefore complain that the result of the
litigation might have been otherwise had his counsel proceeded differently. It has been held time and
again that blunders and mistakes made in the conduct of the proceedings in the trial court as a result of
the ignorance, inexperience or incompetence of counsel do not qualify as a ground for new trial. If
such were to be admitted as valid reasons for re-opening cases, there would never be an end to
litigation so long as a new counsel could be employed to allege and show that the prior counsel had
not been sufficiently diligent, experienced or learned.

Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could
not have guarded against.51 Revenue Regulations No. 3-88, which was issued on 15 February 1988,
had been in effect more than two years prior to the filing by petitioner corporation of its earliest
application for refund/credit of input VAT involved herein on 21 August 1990. CTA Circular No. 1-
95 was issued only on 25 January 1995, after petitioner corporation had filed its Petitions before the
CTA, but still during the pendency of the cases of petitioner corporation before the tax court. The
counsel of petitioner corporation does not allege ignorance of the foregoing administrative regulation
and tax court circular, only that he no longer deemed it necessary to present the documents required
therein because of the presentation of alleged unrebutted evidence of the zero-rated sales of petitioner
corporation. It was a judgment call made by the counsel as to which evidence to present in support of
his client's cause, later proved to be unwise, but not necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the non-presentation of the
required documentary evidence was due to the excusable mistake of its counsel, a ground under
Section 1, Rule 37 of the revised Rules of Court for the grant of a new trial. "Mistake," as it is referred
to in the said rule, must be a mistake of fact, not of law, which relates to the case. 52 In the present
case, the supposed mistake made by the counsel of petitioner corporation is one of law, for it was
grounded on his interpretation and evaluation that Revenue Regulations No. 3-88 and CTA Circular
No. 1-95, as amended, did not apply to his client's cases and that there was no need to comply with
the documentary requirements set forth therein. And although the counsel of petitioner corporation
advocated an erroneous legal position, the effects thereof, which did not amount to a deprivation of
his client's right to be heard, must bind petitioner corporation. The question is not whether petitioner
corporation succeeded in establishing its interests, but whether it had the opportunity to present its
side.53

Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the
ground of mistake must show that ordinary prudence could not have guarded against it. A new trial is
not a refuge for the obstinate.54 Ordinary prudence in these cases would have dictated the presentation
of all available evidence that would have supported the claims for refund/credit of input VAT of
petitioner corporation. Without sound legal basis, counsel for petitioner corporation concluded that
Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to its
client's claims. The obstinacy of petitioner corporation and its counsel is demonstrated in their failure,
nay, refusal, to comply with the appropriate administrative regulations and tax court circular in
pursuing the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even though
these were separately instituted in a span of more than two years. It is also evident in the failure of
petitioner corporation to address the issue and to present additional evidence despite being given the
opportunity to do so by the Court of Appeals. As pointed out by the appellate court, in its Decision,
dated 15 September 2000, in CA-G.R. SP No. 46718

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file
memoranda discussing, among others, the submission of proof for "its [petitioner's] sales of
gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties, including the
petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of the
Court of Tax Appeals on this point.55

Summary

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive period
for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the
quarterly VAT return, and that sales to EPZA-registered enterprises operating within economic
processing zones were effectively zero-rated and were not covered by Revenue Regulations No. 2-88,
it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of
capital goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990 and
the first quarter of 1992, for not being established and substantiated by appropriate and sufficient
evidence. Petitioner corporation is also not entitled to the re-opening of its cases and/or holding of
new trial since the non-presentation of the required documentary evidence before the BIR and the
CTA by its counsel does not constitute excusable negligence or mistake as contemplated in Section 1,
Rule 37 of the revised Rules of Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the
Decisions, dated 6 July 1999 and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos.
47607 and 46718, respectively, are hereby AFFIRMED. Costs against petitioner.

Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.

 EN BANC

June 30, 1987

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous.
We have carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So
finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase price was
to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were made in cash
and through irrevocable letters of credit. 3 Fourteen promissory notes were signed for the balance by
the NDC and, as required by the shipbuilders, guaranteed by the Republic of the
Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in due
time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in
Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on
the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable
on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon
served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The
NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of
P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a petition
for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the
Tax Code, thus:

SEC. 37. Income from sources within the Philippines. (a) Gross income from sources
within the Philippines. The following items of gross income shall be treated as gross
income from sources within the Philippines:
 (1) Interest. Interest derived from sources within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision
because all the related activities the signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their delivery to the NDC were done in Tokyo. 8 The law,
however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic
and resident corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and collect
income tax on interest received by foreign corporations not engaged in trade or business
within the Philippines is not planted upon the condition that 'the activity or labor and the
sale from which the (interest) income flowed had its situs' in the Philippines. The law
specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there
speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where
the contract is signed. The residence of the obligor who pays the interest rather than the
physical location of the securities, bonds or notes or the place of payment, is the determining
factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p.
128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of
L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co.,
Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest
payment paid by him can have no other source than within the Philippines. The interest is
paid not by the bond, note or other interest-bearing obligations, but by the obligor. (See
mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly
organized and existing under the laws of the Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-going vessels purchased and
acquired by it from the Japanese corporations, including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA
Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of
these promisory notes, which are duly signed by its Vice Chairman and General Manager,
petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and
1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on
the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial
Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which
paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the
Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National
 Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to
the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the
purchase price of the vessels acquired by petitioner is interest derived from sources within the
Philippines subject to income tax under the then Section 24(b)(1) of the National Internal
Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. xxxx xxx xxx xxx

(b) Exclusion from gross income. The following items shall not be included in gross
income and shall be exempt from taxation under this Title:

xxx xxx xxx

(4) Interest on Government Securities. Interest upon the obligations of the Government of
the Republic of the Philippines or any political subdivision thereof, but in the case of such
obligations issued after approval of this Code, only to the extent provided in the act
authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in
fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization
but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest
remitted because of the undertaking signed by the Secretary of Finance in each of the promissory
notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of
the Philippines, the due and punctual payment of both principal and interest of the above
note.10

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this question
must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes.
In fact, such undertaking was made by the government in consonance with and certainly not against
the following provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership
(companies colectivas), in whatever capacity acting, including lessees or mortgagors of real
or personal capacity, executors, administrators, receivers, conservators, fiduciaries,
 employers, and all officers and employees of the Government of the Philippines having
control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or categorical gains, profits and income of any nonresident alien
individual, not engaged in trade or business within the Philippines and not having any office
or place of business therein, shall (except in the cases provided for in subsection (a) of this
section) deduct and withhold from such annual or periodical gains, profits and income a tax to
twenty (now 30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations
subject to taxation under this Title not engaged in trade or business within the Philippines and
not having any office or place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in section fifty-three a tax
equal to thirty (now 35%) per centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations
of the NDC but without diminution of its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines,
the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its
proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests
earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the
Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to
withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the
Tax Code, thus:

Section 53(c). Return and Payment. Every person required to deduct and withhold any tax
under this section shall make return thereof, in duplicate, on or before the fifteenth day of
April of each year, and, on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the Philippines authorized to
receive it. Every such person is made personally liable for such tax, and is indemnified
against the claims and demands of any person for the amount of any payments made in
accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax
Appeals, 13 the Court quoted with approval the following regulation of the BIR on the responsibilities
of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due,
and promptly causing a query to be addressed to the Commissioner of Internal Revenue for
the determination whether or not the income paid to an individual is not subject to
withholding. In case the Commissioner of Internal Revenue decides that the income paid to an
 individual is not subject to withholding, the withholding agent may thereupon remit the
amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released from
liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon
exemption from taxation; hence, an exempting provision should be construed strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the
government an so should be held liable for its omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so

ordered.

Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano,
Gancayno, Padilla, Bidin, Sarmiento and Cortez, JJ., concur
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 163072 April 2, 2009

MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner,

vs.
CITY OF PASAY, SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF
PASAY, CITY TREASURER OF PASAY, and CITY ASSESSOR OF PASAY, Respondents.

DECISION

CARPIO, J.:

This is a petition for review on certiorari1 of the Decision2 dated 30 October 2002 and the Resolution
dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.

The Facts

Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino
International Airport (NAIA) Complex under Executive Order No. 903 (EO 903),3 otherwise known
as the Revised Charter of the Manila International Airport Authority. EO 903 was issued on 21 July
1983 by then President Ferdinand E. Marcos. Under Sections 34 and 225 of EO 903, approximately
600 hectares of land, including the runways, the airport tower, and other airport buildings, were
transferred to MIAA. The NAIA Complex is located along the border between Pasay City and
Paraaque City.

On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the City of
Pasay for the taxable years 1992 to 2001. MIAAs real property tax delinquency for its real properties
located in NAIA Complex, Ninoy Aquino Avenue, Pasay City (NAIA Pasay properties) is tabulated
as follows:

TAX DECLA- TAXABLE

TAX DUE PENALTY TOTAL
RATION YEAR

A7-183-08346 1997-2001 243,522,855.00 123,351,728.18 366,874,583.18

A7-183-05224 1992-2001 113,582,466.00 71,159,414.98 184,741,880.98

A7-191-00843 1992-2001 54,454,800.00 34,115,932.20 88,570,732.20

A7-191-00140 1992-2001 1,632,960.00 1,023,049.44 2,656,009.44

 A7-191-00139 1992-2001 6,068,448.00 3,801,882.85 9,870,330.85

A7-183-05409 1992-2001 59,129,520.00 37,044,644.28 96,174,164.28

A7-183-05410 1992-2001 20,619,720.00 12,918,254.58 33,537,974.58

A7-183-05413 1992-2001 7,908,240.00 4,954,512.36 12,862,752.36

A7-183-05412 1992-2001 18,441,981.20 11,553,901.13 29,995,882.33

A7-183-05411 1992-2001 109,946,736.00 68,881,630.13 178,828,366.13

A7-183-05245 1992-2001 7,440,000.00 4,661,160.00 12,101,160.00

GRAND TOTAL P642,747,726.20 P373,466,110.13 P1,016,213,836.33

On 24 August 2001, the City of Pasay, through its City Treasurer, issued notices of levy and warrants
of levy for the NAIA Pasay properties. MIAA received the notices and warrants of levy on 28 August
2001. Thereafter, the City Mayor of Pasay threatened to sell at public auction the NAIA Pasay
properties if the delinquent real property taxes remain unpaid.

On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and injunction
with prayer for preliminary injunction or temporary restraining order. The petition sought to enjoin
the City of Pasay from imposing real property taxes on, levying against, and auctioning for public sale
the NAIA Pasay properties.

On 30 October 2002, the Court of Appeals dismissed the petition and upheld the power of the City of
Pasay to impose and collect realty taxes on the NAIA Pasay properties. MIAA filed a motion for
reconsideration, which the Court of Appeals denied. Hence, this petition.

The Court of Appeals Ruling

The Court of Appeals held that Sections 193 and 234 of Republic Act No. 7160 or the Local
Government Code, which took effect on 1 January 1992, withdrew the exemption from payment of
real property taxes granted to natural or juridical persons, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under Republic Act No. 6938,
non-stock and non-profit hospitals and educational institutions. Since MIAA is a government-owned
corporation, it follows that its tax exemption under Section 21 of EO 903 has been withdrawn upon
the effectivity of the Local Government Code.

The Issue

The issue raised in this petition is whether the NAIA Pasay properties of MIAA are exempt from real
property tax.
The Courts Ruling

The petition is meritorious.

In ruling that MIAA is not exempt from paying real property tax, the Court of Appeals cited Sections
193 and 234 of the Local Government Code which read:

SECTION 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.

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

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise to a
taxable person;

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

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

(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and

(e) Machinery and equipment used for pollution control and environment protection.

Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code.

The Court of Appeals held that as a government-owned corporation, MIAAs tax exemption under
Section 21 of EO 903 has already been withdrawn upon the effectivity of the Local Government Code
in 1992.

In Manila International Airport Authority v. Court of Appeals6 (2006 MIAA case), this Court already
resolved the issue of whether the airport lands and buildings of MIAA are exempt from tax under
existing laws. The 2006 MIAA case originated from a petition for prohibition and injunction which
MIAA filed with the Court of Appeals, seeking to restrain the City of Paraaque from imposing real
property tax on, levying against, and auctioning for public sale the airport lands and buildings located
in Paraaque City. The only difference between the 2006 MIAA case and this case is that the 2006
MIAA case involved airport lands and buildings located in Paraaque City while this case involved
airport lands and buildings located in Pasay City. The 2006 MIAA case and this case raised the same
threshold issue: whether the local government can impose real property tax on the airport lands,
consisting mostly of the runways, as well as the airport buildings, of MIAA. In the 2006 MIAA case,
this Court held:

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of

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

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth.

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands and
Buildings of MIAA are intended for public use, and at the very least intended for public service.
Whether intended for public use or public service, the Airport Lands and Buildings are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the
Republic and thus exempt from real estate tax under Section 234(a) of the Local Government
Code.7 (Emphasis in the original)

The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlled
corporations" which means that a government "instrumentality" may or may not be a "government-
owned or controlled corporation." Obviously, the term government "instrumentality" is broader than
the term "government-owned or controlled corporation." Section 2(10) provides:

SEC. 2. General Terms Defined. x x x

(10) Instrumentality refers to any agency of the national Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions and government-
owned or controlled corporations.

The term "government-owned or controlled corporation" has a separate definition under Section
2(13)8 of the Introductory Provisions of the Administrative Code of 1987:

SEC. 2. General Terms Defined. x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of
its capital stock: Provided, That government-owned or controlled corporations may further be
categorized by the department of Budget, the Civil Service Commission, and the Commission on
Audit for the purpose of the exercise and discharge of their respective powers, functions and
responsibilities with respect to such corporations.

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

A close scrutiny of the definition of "government-owned or controlled corporation" in Section 2(13)

will show that MIAA would not fall under such definition. MIAA is a government
"instrumentality" that does not qualify as a "government-owned or controlled corporation." As
explained in the 2006 MIAA case:

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares. x x x

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

xxx

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

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

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

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is
that MIAA is vested with corporate powers. x x x

When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police
authority and the levying of fees and charges. At the same time, MIAA exercises "all the powers of a
corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."9

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

which is exempt from any kind of tax from the local governments. Indeed, the exercise of the taxing
power of local government units is subject to the limitations enumerated in Section 133 of the Local
Government Code.10 Under Section 133(o)11 of the Local Government Code, local government units
have no power to tax instrumentalities of the national government like the MIAA. Hence, MIAA is
not liable to pay real property tax for the NAIA Pasay properties.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended for
public use, and as such are exempt from real property tax under Section 234(a) of the Local
Government Code. However, under the same provision, if MIAA leases its real property to a taxable
person, the specific property leased becomes subject to real property tax.12 In this case, only those
portions of the NAIA Pasay properties which are leased to taxable persons like private parties are
subject to real property tax by the City of Pasay.

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 30 October 2002 and
the Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.
We DECLARE the NAIA Pasay properties of the Manila International Airport
Authority EXEMPT from real property tax imposed by the City of Pasay. We declare VOID all the
real property tax assessments, including the final notices of real property tax delinquencies, issued by
the City of Pasay on the NAIA Pasay properties of the Manila International Airport Authority, except
for the portions that the Manila International Airport Authority has leased to private parties.

No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 51593 November 5, 1992

NATIONAL DEVELOPMENT COMPANY, plaintiff-appellee,

vs.
CEBU CITY and AUGUSTO PACIS as Treasurer of Cebu City, defendant-appellants.

BELLOSILLO, J.:

Is a public land reserved by the President for warehousing purposes in favor of a government-owned
or controlled corporation, 1 as well as the warehouse subsequently erected thereon, exempt from real
property tax?

Petitioner National Development Company (NDC), a government-owned or controlled corporation

(GOCC) existing by virtue of C.A. 182 2 and E.O. 399, 3 is authorized to engage in commercial,
industrial, mining, agricultural and other enterprises necessary or contributory to economic
development or important to public interest. It also operates, in furtherance of its objectives,
subsidiary corporations one of which is the now defucnt National Warehousing Corporation (NWC). 4

On August 10, 1939, the President issued Proclamation No. 430 5 reserving Block no. 4, Reclamation
Area No. 4, of Cebu City, consisting of 4,599 square meters, for warehousing purposes under the
administration of NWC. 6 Subsequently, in 1940, a warehouse with a floor area of 1,940 square
meters more or less, was constructed thereon. 7

On October 4, 1947, E.O. 93 dissolved NWC 8 with NDC taking over its assets and functions. 9

Commencing 1948, Cebu City (CEBU) assessed and collected from NDC real estate taxes on the land
and the warehouse thereon. 10 By the first quarter of 1970, a total of P100,316.31 was paid by
NDC 11 of which only P3,895.06 was under protest. 12

On 20 March 1970, NDC wrote the City Assessor demanding full refund of the real estate taxes paid
to CEBU claiming that the land and the warehouse standing thereon belonged to the Republic and
therefore exempt from taxation. 13 CEBU did not acquiesce in the demand, hence, the present suit
filed 25 October 1972 in the Court of First Instance of Manila.

On 29 May 1973, the Court of First Instance of Manila, Branch XXII, promulgated a decision 14 the
dispositive portion of which reads
 WHEREFORE, judgment is hereby rendered sentencing the City of Cebu, thru the
Treasurer of said City, to refund to the plaintiff, National Development Company, the
real estate taxes paid by it for the parcel of land covered by Presidential Proclamation
No. 430 of August 10, 1939, and the warehouse erected thereon from and after
October 25, 1966, with interests thereon at the legal rate from the date of the filing of
the complaint and the costs of the suit.

The defendants appealed to the Court of Appeals which however certified the case to Us as one
involving pure questions of law, pursuant to Sec. 17, R.A. 296.

In this appeal, CEBU assigns five (5) errors 15 imputed to the trial court which may be synopsized into
whether NDC is exempted from payment of the real estate taxes on the land reserved by the President
for warehousing purposes as well as the warehouse constructed thereon, and in the affirmative,
whether NDC may recover in refund unprotested real estate taxes it paid from 1948 to 1970.

On the first question, CEBU insists on taxability of the subject properties, claiming that no law grants
NDC exemption from real estate taxes, and that NDC, as recipient of the land reserved by the
President pursuant to Sec. 83 of the Public Land Act, 16 is liable for payment or ordinary (real estate)
taxes under Sec. 115 therefore. CEBU contends that the properties have ceased to be tax exempt
under the Assessment Law. 17 when the government disposed of them in favor of NDC, and even
assuming that title to the land remains with the government (ownership being the basis for real estate
taxability under the Assessment Law), the Supreme Court rulings establish increasing rather than
"ownership" as basis for real estate tax liability.

On the other hand, NDC maintains the Sec. 3 of the Assessment Law, which exempts properties
owned by the Republic from real estate tax, includes subject properties in the exemption. It invokes
the ruling in Board of Assessment Appeals vs. CTA & NWSA 18 which held that properties of NWSA, a
GOCC, were exempt from real estate tax because Sec. 3 of the Assessment Law applied to all
government properties whether held in governmental or proprietary capacity. NDC rejects the
applicability of Sec. 115 of the Public Land Act to the subject land, claiming that provision
contemplates dispositions of public land with eventual transfer of title. In addition, NDC believes that
it is neither a grantee of a public land nor an applicant within the purview of the same provision.

As already adverted to, one of the principal issues before Us is the interpretation of a provision of the
Assessment Law, the precursor of the then Real Property Tax Code and the Local Government Code,
where "ownership" of the property and not "use" is the test of tax liability. 19

Section, 3 par. (a), of the Assessment Law, on which NDC claims real estate tax exemption, provides

Section 3. Property exempt from tax. The exemptions shall be as follows: (a)
Property owned by the United States of America, the Commonwealth of the
Philippines, any province, city, municipality at municipal district . . .

The same opinion of NDC was passed upon in National Development Co. v. Province of Nueva
Ecija 20 where We held that its properties were not comprehended in Sec. 3, par (a), of the Assessment
Law. In part, We stated:
 1. Commonwealth Act No. 182 which created NDC contains no provision exempting
it from the payment of real estate tax on properties it may acquire . . . There is
justification in the contention of plaintiff-appellee that . . . [I]t is undeniable that to
any municipality the principal source of revenue with which it would defray its
operation will came from real property taxes. If the National Development Company
would be exempt from paying real property taxes over these properties, the town of
Gabaldon will bee deprived of much needed revenues with which it will maintain
itself and finance the compelling needs of its inhabitants (p. 6, Brief of Plaintiff-
Appellee).

2. Defendant-appellant NDC does not come under classification of municipal or

public corporation in the sense that it may sue and be sued in the same manner as any
other private corporations, and in this sense, it is an entity different from the
government, defendant corporation may be sued without its consent, and is subject to
taxation. In the case NDC vs. Jose Yulo Tobias, 7 SCRA 692, it was held that . . .
plaintiff is neither the Government of the Republic nor a branch or subdivision
thereof, but a government owned and controlled corporation which cannot be said to
exercise a sovereign function (Association Cooperativa de Credito Agricola de
Miagao vs. Monteclaro, 74 Phil. 281). it is a business corporation, and as such, its
causes of action are subject to the statute of limitations. . . . That plaintiff herein does
not exercise sovereign powers and, hence, cannot invoke the exemptions thereof
but is an agency for the performance of purely corporate, proprietary or business
functions, is apparent from its Organic Act (Commonwealth Act 182, as amended by
Commonwealth Act 311) pursuant to Section 3 of which it "shall be subject to the
provisions of the Corporation Law insofar as they are not inconsistent" with the
provisions of said Commonwealth Act, "and shall have the general powers mentioned
in said" Corporation Law, and, hence, "may engage in commercial, industrial,
mining, agricultural, and other enterprises which may be necessary or contributory to
the economic development of the country, or important in the public interest," as well
as "acquire, hold, mortgage and alienate personal and real property in the Philippines
or elsewhere; . . . make contracts of any kind and description", and "perform any and
all acts which a corporation or natural persons is authorized to perform under the laws
now existing or which may be enacted hereafter."

We find no compelling reason why the foregoing ruling, although referring to lands which would
eventually be transferred to private individuals, should not apply equally to this case.

NDC cites Board of Assessment Appeals, Province of Laguna v. Court of Tax Appeal and National
Waterworks and Sewerage Authority (NWSA). In that case, We held that properties of NWSA, a
GOCC, were exempt from real estate tax because Sec. 3, par (c), of R.A. 470 did not distinguish
between those possessed by the government in sovereign/governmental/political capacity and those in
private/proprietary/patrimonial character.

The conflict between NDC v. Nueva Ecija, supra, and BAA v. CTA and NWSA, supra, is more
superficial than real. The NDC decision speaks of properties owned by NDC, while the BAA ruling
concerns properties belonging to the Republic. The latter case appears to be exceptional because the
parties therein stipulated
 1. That the petitioner National Waterworks and Sewerage Authority (NAWASA) is a
public corporation created by virtue of Republic Act. No. 1383, and that it is owned
by the Government of the Philippines as well as all property comprising waterworks
and sewerage systems placed under it (Emphasis supplied).

There, the Court observed: "It is conceded, in the stipulation of facts, that the property involved in this
case "is owned by the Government of the Philippines." Hence, it belongs to the Republic of the
Philippines and falls squarely within letter of the above provision."

In the case at bar, no similar statement appears in the stipulation of facts, hence, ownership of subject
properties should first be established. For, while it may be stated that the Republic owns NDC, it does
not necessary follow that properties owned by NDC, are also owned by Republic in the same way
that stockholders are not ipso facto owners of the properties of their corporation.

The Republic, like any individual, may form a corporation with personality and existence distinct
from its own. The separate personality allows a GOCC to hold and possess properties in its own name
and, thus, permit greater independence and flexibility in its operations. It may, therefore, be stated that
tax exemption of property owned by the Republic of the Philippines "refers to properties owned by
the Government and by its agencies which do not have separate and distinct personalities
(unincorporated entities). We find the separate opinion of Justice Bautista-Angelo in Gonzales
v. Hechanova, et al., 21 appropriate and enlightening

. . . The Government of the Republic of the Philippines under the Revised

Administrative Code refers to that entity through which the functions of government
are exercised, including the various arms through which political authority is made
effective whether they be provincial, municipal or other form of local government,
whereas a government instrumentality refers to corporations owned or controlled by
the government to promote certain aspects of the economic life of our people. A
government agency therefore, must necessarily after refer to the government itself to
the Republic, as distinguished from any government instrumentality which has a
personality distinct and separate from it (Section 2).

The foregoing discussion does not mean that because NDC, like most GOCC's engages in commercial
enterprises all properties of the government and its unincorporated agencies possessed in propriety
character are taxable. Similarly, in the case at bar, NDC proceeded on the premise that the BAA ruling
declared all properties owed by GOCC's as properties in the name of the Republic, hence, exempt
under Sec. 3 of the Assessment Law. 22

To come within the ambit of the exemption provided in Art. 3, par. (a), of the Assessment Law, it is
important to establish that the property is owned by the government or its unincorporated agency, and
once government ownership is determined, the nature of the use of the property, whether for
proprietary or sovereign purposes, becomes immaterial. What appears to have been ceded to NWC
(later transferred to NDC), in the case before Us, is merely the administration of the property while
the government retains ownership of what has been declared reserved for warehousing purposes under
Proclamation No. 430.

Incidentally, the parties never raised the issued the issue of ownership from the court a quo to this
Court.
A reserved land is defined as a "[p]ublic land that has been withheld or kept back from sale or
disposition." 23 The land remains "absolute property of the government." 24 The government "does not
part with its title by reserving them (lands), but simply gives notice to all the world that it desires
them for a certain purpose." 25 Absolute disposition of land is not implied from reservation; 26 it
merely means "a withdrawal of a specified portion of the public domain from disposal under the land
laws and the appropriation thereof, for the time being, to some particular use or purpose of the general
government." 27 As its title remains with the Republic, the reserved land is clearly recovered by the
tax exemption provision.

CEBU nevertheless contends that the reservation of the property in favor of NWC or NDC is a form
of disposition of public land which, subjects the recipient (NDC ) to real estate taxation under Sec.
115 of the Public Land Act. as amended by R.A. 436, 28 which estate:

Sec 115. All lands granted by virtue of this Act, including homesteads upon which
final proof has not been made or approved shall, even though and while the title
remains in the State, be subject to the ordinary taxes, which shall be paid by the
grantee or the applicant, beginning with the year next following the one in which the
homestead application has been filed, or the concession has been approved, or the
contract has been signed, as the case may be, on the basis of the value fixed in such
filing, approval or signing of the application, concession or contract.

The essential question then is whether lands reserved pursuant to Sec. 83 are comprehended in Sec.
115 and, therefore, taxable.

Section 115 of the Public Land Act should be treated as an exception to Art. 3, par. (a), of the
Assessment Law. While ordinary public lands are tax exempt because title thereto belongs to the
Republic, Sec. 115 subjects them to real estate tax even before ownership thereto is transferred in the
name of the beneficiaries. Sec. 115 comprehends three (3) modes of disposition of Lands under the
Public Land Act, to wit: homestead, concession, and contract.

Liability to real property taxes under Sec. 115 is predicated on (a) filing of homestead application,
(b) approval of concession and, (c) signing of contract. Significantly, without these words, the date of
the accrual of the real estate tax would be indeterminate. Since NDC is not a homesteader and no
"contract" (bilateral agreement) was signed, it would appear, then, that reservation under Sec. 83,
being a unilateral act of the President, falls under "concession".

"Concession" as a technical term under the Public Land Act is synonymous with "alienation" and
"disposition", and is defined in Sec. 10 as "any of the methods authorized by this Act for the
acquisition, lease, use, or benefit of the lands of the public domain other than timber or mineral
lands." Logically, where Sec. 115 contemplates authorized methods for acquisition, lease, use, or
benefit under the Act, the taxability of the land would depend on whether reservation under Sec. 83 is
one such method of acquisition, etc. Tersely put, is reservation synonymous with alienation? Or, are
the two terms antithetical and mutually exclusive? Indeed, reservation connotes retention, while
concession (alienation) signifies cession.

Section 8 and 88 of the Public Land Act provide that reserved lands are excluded from that may be
subject of disposition, to wit
 Sec. 8. Only those lands shall be declared open to disposition or concession which
have been officially delimited and classified and, when practicable, surveyed,
and which have not been reserved for public or quasi-public uses, nor appropriated by
the Government, nor in any manner become private property , nor those on which a
private right authorized and recognized by this Act or any valid law may be claimed,
or which, having been reserved or appropriated, have ceased to be so.

Sec. 88. The tract or tracts of land reserved under the provisions of section eighty-
three shall be non-alienable and shall not be subject to occupation, entry, sale, lease,
or other disposition until again declared alienable under the provisions of this Act or
by proclamation of the President (Emphasis supplied)

As We view it, the effect of reservation under Sec. 83 is to segregate a piece of public land and
transform it into non-alienable or non-disposable under the Public Land Act. Section 115, on the other
hand, applies to disposable public lands. Clearly, therefore, Sec. 115 does not apply to lands reserved
under Sec. 83. Consequently, the subject reserved public land remains tax exempt.

However, as regards the warehouse constructed on a public reservation, a different rule should apply
because "[t]he exemption of public property from taxation does not extend to improvements on the
public lands made by pre-emptioners, homesteaders and other claimants, or occupants, at their own
expense, and these are taxable by the state . . ." 29 Consequently, the warehouse constructed on the
reserved land by NWC (now under administration by NDC), indeed, should properly be assessed real
estate tax as such improvement does not appear to belong to the Republic.

Since the reservation is exempt from realty tax, the erroneous tax payments collected by CEBU
should be refunded to NDC. This is in consonance with Sec. 40, par. (a) of the former Real Property
Tax Code which exempted from taxation real property owned by the Republic of the Philippines or
any of its political subdivisions, as well as any GOCC so exempt by its charter. 30

As regards the requirement of paying under protest before judicial recourse, CEBU argues that in any
case NDC is not entitled to refund because Sec. 75 of R.A. 3857, the Revised Charter of the City of
Cebu, 31 requires payment under protest before resorting to judicial action for tax refund; that it could
not have acted on the first demand letter of NDC of 20 May 1970 because it was sent to the City
Assessor and not to the City Treasurer; that, consequently, there having been no appropriate prior
demand, resort to judicial remedy is premature; and, that even on the premise that there was proper
demand, NDC has yet to exhaust administrative remedies by way of appeal to the Department of
Finance and/or Auditor General before taking judicial action.

NDC does not agree. It disputes the applicability of the payment-under-protest requirement is Sec. 75
of the Revised Cebu City Charter because the issue is not the validity of tax assessment but recovery
of erroneous payments under Arts. 2154 and 2155 of the Civil Code. 32 It cites the case of East Asiatic
Co., Ltd. v. City of Davao 33 which held that where the tax is unauthorized, "it is not a tax assessed
under the charter of the appellant City of Davao and for that reason no protest is necessary for a claim
or demand for its refund." In Ramie Textiles, Inc. vs. Mathay, Sr., 34We held

. . . Protest is not a requirement in order that a taxpayer who paid under a mistaken
belief that it is required by law, may claim for a refund. Section 54 35 of
Commonwealth Act No. 470 does not apply to petitioner which could conceivably
 not have been expected to protest a payment it honestly believed to be due. The same
refers only to the case where the taxpayer, despite his knowledge of the erroneous or
illegal assessment, still pays and fails to make the proper protest, for in such case, he
should manifest an unwillingness to pay, and failing so, the taxpayer is deemed to
have waved his right to claim a refund.

In the case at bar, petitioner, therefore, cannot be said to have waived his right. He
had no knowledge of the fact that it was exempted from payment of the realty tax
under Commonwealth Act No. 470. Payment was made through error or mistake, in
the honest belief that petitioner was liable, and therefore could not have been made
under protest, but with complete voluntariness. In any case, a taxpayer should not be
held to suffer loss by his good intention to comply with what he believes is his legal
obligation, where such obligation does not really exist . . . The fact that petitioner
paid thru error or mistake, and the government accepted the payment, gave rise to the
application of the principle of solutio indebiti under Article 2154 of the New Civil
Code, which provides that "if something is received when there is no right to demand
it, and it was unduly delivered through mistake, the obligation to return it arises."
There is, therefore, created a tie or juridical relation in the nature of solutio
indebiti, expressly classified as quasi-contract under Section 2, Chapter I of Title
XVII of the New Civil code.

The quasi-contract of solutio indebiti is one of the concrete manifestations of the

ancient principle that no one shall enrich himself unjustly at the expense of another . .
. Hence, it would seem unedifying for the government, that knowing it has no right at
all to collect or to receive money for alleged taxes paid by mistake, it would be
reluctant to return the same . . . Petitioner is not unsatisfied in the assessment of its
property. Assessment having been made, it paid the real estate taxes without knowing
that it is exempt.

As regards the claim for refund of tax payments spanning more than twenty (20) years, We also said
in Ramie Textiles that

Solutio indebiti is a quasi-contract, and the instant case being in the nature of solutio
indebiti, the claim for refund must be commenced within six (6) years from date of
payment pursuant to Article 1145 (2) of the New Civil Code 36 . . .

We sustain the appellate court to the extent that its decision covers improperly collected taxes on the
reserved land under Proclamation No. 430, thus

The defense of prescription invoked by the defendant which counsel for the plaintiff,
however, did not answer in its memorandum, is partly well-taken. Actions for refund
of taxes illegally collected must be commenced within six (6) years from the date of
collection. . . . .

The stipulation of facts and the pleadings filed by the parties do not contain data
specifying when and how much were paid by the year, of the taxes sought to be
refunded. Accordingly, the Court has no other alternative but to order the refund of an
 undetermined amount based, however, on the date of payment counted six (6) years
backward from October 25, 1972, when the complaint in this case was filed. 37

As regards exhaustion of administrative remedies, We agree with the trial court that the case
constitutes an exception to the rule, as it involves purely question of law. 38 Specifically, on the
requirement of appeal to the Secretary of Finance, We further held in the same Ramie Textiles that
"[E]qually not applicable is Section 17 of Commonwealth Act No. 470 39 cited by respondent in
relation to the right of a, property owner to contest the validity of assessment . . ."

Respondent CEBU likewise invites Our attention to the availability of appeal to the Government
Auditing Office although no authority is cited to Us. We do not find any either to sustain the
procedure.

WHEREFORE, finding that National Development Company (NDC) is exempt from real estate tax
on the reserved land but liable for the warehouse erected thereon, the decision appealed from is
accordingly MODIFIED. Consequently, let this case be remanded to the court of origin, now the
Regional Trial Court of Manila, to determine the proper liability of NDC, particularly on its
warehouse, and effect the corresponding refund, payment or set-off, as the case may be, conformably
with this decision. No costs.

SO ORDERED.

Cruz, Padilla and Grio-Aquino, JJ., concur.

Medialdea, J., is on leave.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS
R. OSMEA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4, May 1995 2 denying the
motion to reconsider the decision.

We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

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

virtue of Republic Act No. 6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the Province of Cebu . . . (Sec. 3,
RA 6958). It is also mandated to:

a) encourage, promote and develop international and

domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country;
and
 b) upgrade the services and facilities of the airports
and to formulate internationally acceptable standards
of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. The authority shall be exempt from

realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-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 (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming
in its favor the aforecited Section 14 of RA 6958 which exempt it from payment of
realty taxes. It was also asserted that it is an instrumentality of the government
performing governmental functions, citing section 133 of the Local Government
Code of 1991 which puts limitations on the taxing powers of local government units:

Sec. 133. Common Limitations on the Taxing Powers of Local

Government Units. Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and
barangay shall not extend to the levy of the following:

a) . . .

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National

Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Governmental Code that took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA No.
6938, non-stock, and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)
 xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. . . .

(a) . . .

xxx xxx xxx

(c) . . .

Except as provided herein, any exemption from payment of real

property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
controlled corporations are hereby withdrawn upon the effectivity of
this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while it
is indeed a government-owned corporation, it nonetheless stands on the same footing
as an agency or instrumentality of the national government. Petitioner insisted that
while it is indeed a government-owned corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the national government by the very nature
of its powers and functions.

Respondent City, however, asserted that MACIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the Local Government
Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings,
to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides
the express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government of
Cebu are exempted from paying realty taxes in view of the exemption granted under
RA 6958 to pay the same (citing Section 14 of RA 6958).
 However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA
7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall provide
for a more responsive and accountable local government structure instituted through a
system of decentralization whereby local government units shall be given more
powers, authority, responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local government units. . . . 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT

THE PETITIONER IS VESTED WITH GOVERNMENT POWERS
AND FUNCTIONS WHICH PLACE IT IN THE SAME
CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF
THE GOVERNMENT.

II RESPONDENT JUDGE ERRED IN RULING THAT

PETITIONER IS LIABLE TO PAY REAL PROPERTY TAXES TO
THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned or
controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to perform
governmental functions primarily to promote certain aspects of the economic life of the
people. 6 Considering its task "not merely to efficiently operate and manage the Mactan-Cebu
International Airport, but more importantly, to carry out the Government policies of
promoting and developing the Central Visayas and Mindanao regions as centers of
international trade and tourism, and accelerating the development of the means of
transportation and communication in the country," 7 and that it is an attached agency of the
Department of Transportation and Communication (DOTC), 8 the petitioner "may stand in
[sic] the same footing as an agency or instrumentality of the national government." Hence, its
tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn with
the passage of the Local Government Code of 1991 (hereinafter LGC) because Section 133
thereof specifically states that the taxing powers of local government units shall not extend to
the levy of taxes of fees or charges of any kind on the national government its agencies and
instrumentalities."

As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco
vs. Philippine Amusement and Gaming Corporation; 9

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (McCulloch v. Maryland,
4 Wheat 316, 4 L Ed. 579).

This doctrine emanates from the "supremacy" of the National Government over local
government.

Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them. (Antieau Modern Constitutional
Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using
the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to
tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the
very entity which has the inherent power to wield it. (Emphasis supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the questioned
provisions of the Code do not contain any distinction between a governmental function as
against one performing merely proprietary ones such that the exemption privilege withdrawn
under the said Code would apply to all government corporations." For it is clear from Section
133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing power of the local
government units.

In its comment respondent City of Cebu alleges that as local a government unit and a political
subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction.
Such power is guaranteed by the Constitution 10 and enhanced further by the LGC. While it
may be true that under its Charter the petitioner was exempt from the payment of realty
taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In response to the
petitioner's claim that such exemption was not repealed because being an instrumentality of
the National Government, Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the
petitioner is likewise a government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned corporation, and Section 234 thereof does not
distinguish between government-owned or controlled corporations performing governmental
and purely proprietary functions. Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned corporation, 12 and to reject the application of
Basco because it was "promulgated . . . before the enactment and the singing into law of R.A.
No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the
framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found
only in the responsibility of the legislature which imposes the tax on the constituency who are
to pay it. Nevertheless, effective limitations thereon may be imposed by the people through
their Constitutions. 13 Our Constitution, for instance, provides that the rule of taxation shall be
uniform and equitable and Congress shall evolve a progressive system of taxation. 14 So potent
indeed is the power that it was once opined that "the power to tax involves the power to
destroy." 15Verily, taxation is a destructive power which interferes with the personal and
property for the support of the government. Accordingly, tax statutes must be construed
strictly against the government and liberally in favor of the taxpayer. 16 But since taxes are
what we pay for civilized society, 17 or are the lifeblood of the nation, the law frowns against
exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi
juris against the taxpayers and liberally in favor of the taxing authority. 18 A claim of
exemption from tax payment must be clearly shown and based on language in the law too
plain to be mistaken. 19 Elsewise stated, taxation is the rule, exemption therefrom is the
exception. 20 However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical effect of the
exemption is merely to reduce the amount of money that has to be handled by the government
in the course of its operations. 21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution. 22 Under the latter, the exercise of the power may be subject to such guidelines
and limitations as the Congress may provide which, however, must be consistent with the
basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of
the taxing authority. The only exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23

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

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:

Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, "inheritance, gifts, legacies and other

acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained by
the local government unit concerned:

(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes fees or charges on agricultural and aquatic products when

sold by marginal farmers or fishermen;

(g) Taxes on business enterprise certified to be the Board of

Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;
 (h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;

(i) Percentage or value added tax (VAT) on sales, barters or

exchanges or similar transactions on goods or services except as
otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and person

engage in the transportation of passengers of freight by hire and
common carriers by air, land, or water, except as provided in this
code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually

exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprise and Cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines;
and

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE

NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by the
LGC. The term "taxes" is well understood so as to need no further elaboration, especially in
the light of the above enumeration. The term "fees" means charges fixed by law or Ordinance
for the regulation or inspection of business activity, 24while "charges" are pecuniary liabilities
such as rents or fees against person or property. 25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section
232. It reads as follows:

Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other improvements not hereafter
specifically exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons, including
government owned and controlled corporations, except as provided therein. It provides:

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

(a) Real property owned by the Republic of the Philippines or any of

its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents

appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as

provided for under R.A. No. 6938; and;

(e) Machinery and equipment used for pollution control and

environmental protection.

Except as provided herein, any exemptions from payment of real

property tax previously granted to or presently enjoyed by, all
persons whether natural or juridical, including all government owned
or controlled corporations are hereby withdrawn upon the effectivity
of his Code.

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on

the basis of ownership are real properties owned by: (i) the Republic,
(ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and
(vi) registered cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the

basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the

basis of the actual, direct and exclusive use to which they are devoted
are: (i) all lands buildings and improvements which are actually,
 directed and exclusively used for religious, charitable or educational
purpose; (ii) all machineries and equipment actually, directly and
exclusively used or by local water districts or by government-owned
or controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power; and (iii)
all machinery and equipment used for pollution control and
environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously

granted to natural or juridical persons including government-owned
or controlled corporations are withdrawn upon the effectivity of the
Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It
provides:

Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in

this code, tax exemptions or incentives granted to or presently enjoyed by all persons,
whether natural or juridical, including government-owned, or controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non stock
and non profit hospitals and educational constitutions, are hereby withdrawn upon the
effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of exceptions of provisos in these section, as shown by the
following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of

Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise
provided herein," with the "herein" to mean, of course, the section, it should have used the
clause "unless otherwise provided in this Code." The former results in absurdity since the
section itself enumerates what are beyond the taxing powers of local government units and,
where exceptions were intended, the exceptions were explicitly indicated in the text. For
instance, in item (a) which excepts the income taxes "when livied on banks and other
financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes, fees,
and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section interchangeably
uses therein the clause "except as otherwise provided herein" as in items (c) and (i), or the
clause "except as otherwise provided herein" as in items (c) and (i), or the clause "excepts as
provided in this Code" in item (j). These clauses would be obviously unnecessary or mere
surplus-ages if the opening clause of the section were" "Unless otherwise provided in this
Code" instead of "Unless otherwise provided herein". In any event, even if the latter is used,
since under Section 232 local government units have the power to levy real property tax,
except those exempted therefrom under Section 234, then Section 232 must be deemed to
qualify Section 133.

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its
agencies and instrumentalties, and local government units"; however, pursuant to Section 232,
provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial used thereof has been granted, for
consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph
of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical

persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except
upon the effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational
institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234, which enumerates the properties exempt from real property tax. But the last
paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all
others not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as the real property is owned by the Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption
is withdrawn if the beneficial use of such property has been granted to taxable person for
consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the
petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government,

its agencies, or instrumentalities, and local government units.

I must show that the parcels of land in question, which are real property, are any one of those
enumerated in Section 234, either by virtue of ownership, character, or use of the property.
Most likely, it could only be the first, but not under any explicit provision of the said section,
for one exists. In light of the petitioner's theory that it is an "instrumentality of the
Government", it could only be within be first item of the first paragraph of the section by
expanding the scope of the terms Republic of the Philippines" to embrace . . . . .
. "instrumentalities" and "agencies" or expediency we quote:

(a) real property owned by the Republic of the Philippines, or any of

the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not interchangeable.
The former is boarder and synonymous with "Government of the Republic of the Philippines"
which the Administrative Code of the 1987 defines as the "corporate governmental entity
though which the functions of the government are exercised through at the Philippines,
including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous
reason, the provincial, city, municipal or barangay subdivision or other forms of local
government." 27 These autonomous regions, provincial, city, municipal or barangay
subdivisions" are the political subdivision. 28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." 29 The National
Government then is composed of the three great departments the executive, the legislative and
the judicial. 30
An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" 31 while an "instrumentality"
refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy; usually
through a charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations". 32

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption
from payment of real property taxes under the last sentence of the said section to the agencies
and instrumentalities of the National Government mentioned in Section 133(o), then it should
have restated the wording of the latter. Yet, it did not Moreover, that Congress did not wish to
expand the scope of the exemption in Section 234(a) to include real property owned by other
instrumentalities or agencies of the government including government-owned and controlled
corporations is further borne out by the fact that the source of this exemption is Section 40(a)
of P.D. No. 646, otherwise known as the Real Property Tax Code, which reads:

Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions and
any government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the
above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a
taxable person.

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph of
Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments 33 and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals. 34 The
power to tax is the most effective instrument to raise needed revenues to finance and support
myriad activities of local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of
the people. It may also be relevant to recall that the original reasons for the withdrawal of tax
exemption privileges granted to government-owned and controlled corporations and all other
units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need for this
entities to share in the requirements of the development, fiscal or otherwise, by paying the
taxes and other charges due from them. 35
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong
to the Republic of the Philippines whose beneficial use has been granted to the petitioner, and
(b) whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International
AirPort in the Province of Cebu", 36 which belonged to the Republic of the Philippines, then
under the Air Transportation Office (ATO). 37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands"
among other things, to the petitioner and not just the transfer of the beneficial use thereof,
with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate owned
and/or administered by the airports." 38 Hence, the petitioner is now the owner of the land in
question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It
was only exempted from the payment of real property taxes. The grant of the privilege only in
respect of this tax is conclusive proof of the legislative intent to make it a taxable person
subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be
an "agency" or "instrumentality" of the Government, a taxable person for such purpose in
view of the withdrawal in the last paragraph of Section 234 of exemptions from the payment
of real property taxes, which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco

vs. Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided
before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that
even instrumentalities or agencies of the government performing governmental functions may
be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national
policy, no one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 191109 July 18, 2012

REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE RECLAMATION

AUTHORITY (PRA), Petitioner,
vs.
CITY OF PARANAQUE, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, on pure
questions of law, assailing the January 8, 2010 Order 1 of the Regional Trial Court, Branch 195,
Parafiaque City (RTC), which ruled that petitioner Philippine Reclamation Authority (PRA) is a
government-owned and controlled corporation (GOCC), a taxable entity, and, therefore, . not exempt
from payment of real property taxes. The pertinent portion of the said order reads:

In view of the finding of this court that petitioner is not exempt from payment of real property taxes,
respondent Paraaque City Treasurer Liberato M. Carabeo did not act xxx without or in excess of
jurisdiction, or with grave abuse of discretion amounting to lack or in excess of jurisdiction in issuing
the warrants of levy on the subject properties.

WHEREFORE, the instant petition is dismissed. The Motion for Leave to File and Admit Attached
Supplemental Petition is denied and the supplemental petition attached thereto is not admitted.

The Public Estates Authority (PEA) is a government corporation created by virtue of Presidential
Decree (P.D.) No. 1084 (Creating the Public Estates Authority, Defining its Powers and Functions,
Providing Funds Therefor and For Other Purposes) which took effect on February 4,

1977 to provide a coordinated, economical and efficient reclamation of lands, and the administration
and operation of lands belonging to, managed and/or operated by, the government with the object of
maximizing their utilization and hastening their development consistent with public interest.

On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued by then President
Ferdinand Marcos, PEA was designated as the agency primarily responsible for integrating, directing
and coordinating all reclamation projects for and on behalf of the National Government.

On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O. No. 380 transforming
PEA into PRA, which shall perform all the powers and functions of the PEA relating to reclamation
activities.
By virtue of its mandate, PRA reclaimed several portions of the foreshore and offshore areas of
Manila Bay, including those located in Paraaque City, and was issued Original Certificates of Title
(OCT Nos. 180, 202, 206, 207, 289, 557, and 559) and Transfer Certificates of Title (TCT Nos.
104628, 7312, 7309, 7311, 9685, and 9686) over the reclaimed lands.

On February 19, 2003, then Paraaque City Treasurer Liberato M. Carabeo (Carabeo) issued
Warrants of Levy on PRAs reclaimed properties (Central Business Park and Barangay San Dionisio)
located in Paraaque City based on the assessment for delinquent real property taxes made by then
Paraaque City Assessor Soledad Medina Cue for tax years 2001 and 2002.

On March 26, 2003, PRA filed a petition for prohibition with prayer for temporary restraining order
(TRO) and/or writ of preliminary injunction against Carabeo before the RTC.

On April 3, 2003, after due hearing, the RTC issued an order denying PRAs petition for the issuance
of a temporary restraining order.

On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to proceed with the public
auction of the subject reclaimed properties on April 7, 2003. In response, Carabeo sent a letter stating
that the public auction could not be deferred because the RTC had already denied PRAs TRO
application.

On April 25, 2003, the RTC denied PRAs prayer for the issuance of a writ of preliminary injunction
for being moot and academic considering that the auction sale of the subject properties on April 7,
2003 had already been consummated.

On August 3, 2009, after an exchange of several pleadings and the failure of both parties to arrive at a
compromise agreement, PRA filed a Motion for Leave to File and Admit Attached Supplemental
Petition which sought to declare as null and void the assessment for real property taxes, the levy based
on the said assessment, the public auction sale conducted on April 7, 2003, and the Certificates of
Sale issued pursuant to the auction sale.

On January 8, 2010, the RTC rendered its decision dismissing PRAs petition. In ruling that PRA was
not exempt from payment of real property taxes, the RTC reasoned out that it was a GOCC under
Section 3 of P.D. No. 1084. It was organized as a stock corporation because it had an authorized
capital stock divided into no par value shares. In fact, PRA admitted its corporate personality and that
said properties were registered in its name as shown by the certificates of title. Therefore, as a GOCC,
local tax exemption is withdrawn by virtue of Section 193 of Republic Act (R.A.) No. 7160 Local
Government Code (LGC) which was the prevailing law in 2001 and 2002 with respect to real property
taxation. The RTC also ruled that the tax exemption claimed by PRA under E.O. No. 654 had already
been expressly repealed by R.A. No. 7160 and that PRA failed to comply with the procedural
requirements in Section 206 thereof.

Not in conformity, PRA filed this petition for certiorari assailing the January 8, 2010 RTC Order
based on the following GROUNDS

I
THE TRIAL COURT GRAVELY ERRED IN FINDING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAX ON THE SUBJECT RECLAIMED LANDS CONSIDERING

THAT PETITIONER IS AN INCORPORATED INSTRUMENTALITY OF THE NATIONAL

GOVERNMENT AND IS, THEREFORE, EXEMPT FROM PAYMENT OF REAL PROPERTY
TAX UNDER SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS--VIS MANILA INTERNATIONAL AIRPORT AUTHORITY V.
COURT OF APPEALS.

II

THE TRIAL COURT GRAVELY ERRED IN FAILING TO CONSIDER THAT RECLAIMED

LANDS ARE PART OF THE PUBLIC DOMAIN AND, HENCE, EXEMPT FROM REAL
PROPERTY TAX.

PRA asserts that it is not a GOCC under Section 2(13) of the Introductory Provisions of the
Administrative Code. Neither is it a GOCC under Section 16, Article XII of the 1987 Constitution
because it is not required to meet the test of economic viability. Instead, PRA is a government
instrumentality vested with corporate powers and performing an essential public service pursuant to
Section 2(10) of the Introductory Provisions of the Administrative Code. Although it has a capital
stock divided into shares, it is not authorized to distribute dividends and allotment of surplus and
profits to its stockholders. Therefore, it may not be classified as a stock corporation because it lacks
the second requisite of a stock corporation which is the distribution of dividends and allotment of
surplus and profits to the stockholders.

It insists that it may not be classified as a non-stock corporation because it has no members and it is
not organized for charitable, religious, educational, professional, cultural, recreational, fraternal,
literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers as provided in Section 88 of the Corporation Code.

Moreover, PRA points out that it was not created to compete in the market place as there was no
competing reclamation company operated by the private sector. Also, while PRA is vested with
corporate powers under P.D. No. 1084, such circumstance does not make it a corporation but merely
an incorporated instrumentality and that the mere fact that an incorporated instrumentality of the
National Government holds title to real property does not make said instrumentality a GOCC. Section
48, Chapter 12, Book I of the Administrative Code of 1987 recognizes a scenario where a piece of
land owned by the Republic is titled in the name of a department, agency or instrumentality.

Thus, PRA insists that, as an incorporated instrumentality of the National Government, it is exempt
from payment of real property tax except when the beneficial use of the real property is granted to a
taxable person. PRA claims that based on Section 133(o) of the LGC, local governments cannot tax
the national government which delegate to local governments the power to tax.

It explains that reclaimed lands are part of the public domain, owned by the State, thus, exempt from
the payment of real estate taxes. Reclaimed lands retain their inherent potential as areas for public use
or public service. While the subject reclaimed lands are still in its hands, these lands remain public
lands and form part of the public domain. Hence, the assessment of real property taxes made on said
lands, as well as the levy thereon, and the public sale thereof on April 7, 2003, including the issuance
of the certificates of sale in favor of the respondent Paraaque City, are invalid and of no force and
effect.

On the other hand, the City of Paraaque (respondent) argues that PRA since its creation consistently
represented itself to be a GOCC. PRAs very own charter (P.D. No. 1084) declared it to be a GOCC
and that it has entered into several thousands of contracts where it represented itself to be a GOCC. In
fact, PRA admitted in its original and amended petitions and pre-trial brief filed with the RTC of
Paraaque City that it was a GOCC.

Respondent further argues that PRA is a stock corporation with an authorized capital stock divided
into 3 million no par value shares, out of which 2 million shares have been subscribed and fully paid
up. Section 193 of the LGC of 1991 has withdrawn tax exemption privileges granted to or presently
enjoyed by all persons, whether natural or juridical, including GOCCs.

Hence, since PRA is a GOCC, it is not exempt from the payment of real property tax.

THE COURTS RULING

The Court finds merit in the petition.

Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a GOCC as
follows:

SEC. 2. General Terms Defined. x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one

(51) percent of its capital stock: x x x.

On the other hand, Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. x x x

From the above definitions, it is clear that a GOCC must be "organized as a stock or non-stock
corporation" while an instrumentality is vested by law with corporate powers. Likewise, when the law
makes a government instrumentality operationally autonomous, the instrumentality remains part of
the National Government machinery although not integrated with the department framework.
When the law vests in a government instrumentality corporate powers, the instrumentality does not
necessarily become a corporation. Unless the government instrumentality is organized as a stock or
non-stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers.

Many government instrumentalities are vested with corporate powers but they do not become stock or
non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed
a GOCC. Examples are the Mactan International Airport Authority, the Philippine Ports Authority,
the University of the Philippines, and Bangko Sentral ng Pilipinas. All these government
instrumentalities exercise corporate powers but they are not organized as stock or non-stock
corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called government corporate entities. They
are not, however, GOCCs in the strict sense as understood under the Administrative Code, which is
the governing law defining the legal relationship and status of government entities.2

Correlatively, Section 3 of the Corporation Code defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends x
x x." Section 87 thereof defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." Further, Section 88 provides that non-
stock corporations are "organized for charitable, religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers."

Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it
has capital stock divided into shares; and (2) that it is authorized to distribute dividends and
allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock corporations, they must have members
and must not distribute any part of their income to said members.3

In the case at bench, PRA is not a GOCC because it is neither a stock nor a non-stock corporation. It
cannot be considered as a stock corporation because although it has a capital stock divided into no par
value shares as provided in Section 74 of P.D. No. 1084, it is not authorized to distribute dividends,
surplus allotments or profits to stockholders. There is no provision whatsoever in P.D. No. 1084 or in
any of the subsequent executive issuances pertaining to PRA, particularly, E.O. No. 525, 5 E.O. No.
6546 and EO No. 7987 that authorizes PRA to distribute dividends, surplus allotments or profits to its
stockholders.

PRA cannot be considered a non-stock corporation either because it does not have members. A non-
stock corporation must have members.8 Moreover, it was not organized for any of the purposes
mentioned in Section 88 of the Corporation Code. Specifically, it was created to manage all
government reclamation projects.

Furthermore, there is another reason why the PRA cannot be classified as a GOCC. Section 16,
Article XII of the 1987 Constitution provides as follows:

Section 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic
viability.

The fundamental provision above authorizes Congress to create GOCCs through special charters on
two conditions: 1) the GOCC must be established for the common good; and 2) the GOCC must meet
the test of economic viability. In this case, PRA may have passed the first condition of common good
but failed the second one - economic viability. Undoubtedly, the purpose behind the creation of PRA
was not for economic or commercial activities. Neither was it created to compete in the market place
considering that there were no other competing reclamation companies being operated by the private
sector. As mentioned earlier, PRA was created essentially to perform a public service considering that
it was primarily responsible for a coordinated, economical and efficient reclamation, administration
and operation of lands belonging to the government with the object of maximizing their utilization
and hastening their development consistent with the public interest. Sections 2 and 4 of P.D. No. 1084
reads, as follows:

Section 2. Declaration of policy. It is the declared policy of the State to provide for a coordinated,
economical and efficient reclamation of lands, and the administration and operation of lands
belonging to, managed and/or operated by the government, with the object of maximizing their
utilization and hastening their development consistent with the public interest.

Section 4. Purposes. The Authority is hereby created for the following purposes:

(a) To reclaim land, including foreshore and submerged areas, by dredging, filling or other
means, or to acquire reclaimed land;

(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and sell any
and all kinds of lands, buildings, estates and other forms of real property, owned, managed,
controlled and/or operated by the government.

(c) To provide for, operate or administer such services as may be necessary for the efficient,
economical and beneficial utilization of the above properties.

The twin requirement of common good and economic viability was lengthily discussed in the case of
Manila International Airport Authority v. Court of Appeals,9 the pertinent portion of which reads:

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution.

The first condition is that the government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or controlled corporation must
meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation, organization, or
regulation of private corporations. Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic
viability.
The Constitution expressly authorizes the legislature to create "government-owned or controlled
corporations" through special charters only if these entities are required to meet the twin conditions of
common good and economic viability. In other words, Congress has no power to create government-
owned or controlled corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial activities and
need to compete in the market place. Being essentially economic vehicles of the State for the common
good meaning for economic development purposes these government-owned or controlled
corporations with special charters are usually organized as stock corporations just like ordinary
private corporations.

In contrast, government instrumentalities vested with corporate powers and performing governmental
or public functions need not meet the test of economic viability. These instrumentalities perform
essential public services for the common good, services that every modern State must provide its
citizens. These instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-owned or controlled
corporations" referred to in Section 16, Article XII of the 1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities known as "government-owned or controlled
corporations" must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their incometo meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government creates
a corporation, there is a sense in which this corporation becomes exempt from the test of economic
performance. We know what happened in the past. If a government corporation loses, then it makes
its claim upon the taxpayers' money through new equity infusions from the government and what is
always invoked is the common good. That is the reason why this year, out of a budget of P115 billion
for the entire government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been relocated to
agrarian reform, to social services like health and education, to augment the salaries of grossly
underpaid public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good,"
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. And so, Madam President, I
reiterate, for the committee's consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR THE
ECONOMIC TEST," together with the common good.1wphi1

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant addition,
however, is the phrase "in the interest of the common good and subject to the test of economic
viability." The addition includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector can do better. Moreover,
economic viability is more than financial viability but also includes capability to make profit and
generate benefits not quantifiable in financial terms.

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.

However, government-owned or controlled corporations with special charters, organized essentially

for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-
owned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.
[Emphases supplied]

This Court is convinced that PRA is not a GOCC either under Section 2(3) of the Introductory
Provisions of the Administrative Code or under Section 16, Article XII of the 1987 Constitution. The
facts, the evidence on record and jurisprudence on the issue support the position that PRA was not
organized either as a stock or a non-stock corporation. Neither was it created by Congress to operate
commercially and compete in the private market. Instead, PRA is a government instrumentality vested
with corporate powers and performing an essential public service pursuant to Section 2(10) of the
Introductory Provisions of the Administrative Code. Being an incorporated government
instrumentality, it is exempt from payment of real property tax.

Clearly, respondent has no valid or legal basis in taxing the subject reclaimed lands managed by PRA.
On the other hand, Section 234(a) of the LGC, in relation to its Section 133(o), exempts PRA from
paying realty taxes and protects it from the taxing powers of local government units.

Sections 234(a) and 133(o) of the LGC provide, as follows:

SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.

xxxx

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. [Emphasis supplied]

It is clear from Section 234 that real property owned by the Republic of the Philippines (the Republic)
is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person.
In this case, there is no proof that PRA granted the beneficial use of the subject reclaimed lands to a
taxable entity. There is no showing on record either that PRA leased the subject reclaimed properties
to a private taxable entity.

This exemption should be read in relation to Section 133(o) of the same Code, which prohibits local
governments from imposing "taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities x x x." The Administrative Code allows real property owned by the
Republic to be titled in the name of agencies or instrumentalities of the national government. Such
real properties remain owned by the Republic and continue to be exempt from real estate tax.

Indeed, the Republic grants the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when the title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such arrangement
does not result in the loss of the tax exemption, unless "the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person."10

The rationale behind Section 133(o) has also been explained in the case of the Manila International
Airport Authority,11 to wit:

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality from local
taxation, such exemption is construed liberally in favor of the national government instrumentality. As
this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor
of non tax-liability of such agencies.

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

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is when
the legislature clearly intended to tax government instrumentalities for the delivery of essential public
services for sound and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the Code,
local governments cannot tax national government instrumentalities. As this Court held in Basco v.
Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control
the operation of constitutional laws enacted by Congress to carry into execution the powers vested in
the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can
regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for
regulation." (U.S. v. Sanchez, 340 US 42)

The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it. [Emphases supplied]

The Court agrees with PRA that the subject reclaimed lands are still part of the public domain, owned
by the State and, therefore, exempt from payment of real estate taxes.
Section 2, Article XII of the 1987 Constitution reads in part, as follows:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural resources
shall not be alienated. The exploration, development, and utilization of natural resources shall be
under the full control and supervision of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens,
or corporations or associations at least 60 per centum of whose capital is owned by such citizens.
Such agreements may be for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and under such terms and conditions as may provided by law. In cases of water
rights for irrigation, water supply, fisheries, or industrial uses other than the development of
waterpower, beneficial use may be the measure and limit of the grant.

Similarly, Article 420 of the Civil Code enumerates properties belonging to the State:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. [Emphases supplied]

Here, the subject lands are reclaimed lands, specifically portions of the foreshore and offshore areas of
Manila Bay. As such, these lands remain public lands and form part of the public domain. In the case
of Chavez v. Public Estates Authority and AMARI Coastal Development Corporation,12 the Court
held that foreshore and submerged areas irrefutably belonged to the public domain and were
inalienable unless reclaimed, classified as alienable lands open to disposition and further declared no
longer needed for public service. The fact that alienable lands of the public domain were transferred to
the PEA (now PRA) and issued land patents or certificates of title in PEAs name did not
automatically make such lands private. This Court also held therein that reclaimed lands retained their
inherent potential as areas for public use or public service.

As the central implementing agency tasked to undertake reclamation projects nationwide, with
authority to sell reclaimed lands, PEA took the place of DENR as the government agency charged
with leasing or selling reclaimed lands of the public domain. The reclaimed lands being leased or sold
by PEA are not private lands, in the same manner that DENR, when it disposes of other alienable
lands, does not dispose of private lands but alienable lands of the public domain. Only when qualified
private parties acquire these lands will the lands become private lands. In the hands of the government
agency tasked and authorized to dispose of alienable of disposable lands of the public domain, these
lands are still public, not private lands.

Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain" as well
as "any and all kinds of lands." PEA can hold both lands of the public domain and private lands. Thus,
the mere fact that alienable lands of the public domain like the Freedom Islands are transferred to
PEA and issued land patents or certificates of title in PEA's name does not automatically make such
lands private.13
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the Administrative Code
of 1987, thus:

SEC 14. Power to Reserve Lands of the Public and Private Dominion of the Government.-

(1)The President shall have the power to reserve for settlement or public use, and for specific public
purposes, any of the lands of the public domain, the use of which is not otherwise directed by law.
The reserved land shall thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation.

Reclaimed lands such as the subject lands in issue are reserved lands for public use. They are
properties of public dominion. The ownership of such lands remains with the State unless they are
withdrawn by law or presidential proclamation from public use.

Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of Manila
Bay are part of the "lands of the public domain, waters x x x and other natural resources" and
consequently "owned by the State." As such, foreshore and submerged areas "shall not be alienated,"
unless they are classified as "agricultural lands" of the public domain. The mere reclamation of these
areas by PEA does not convert these inalienable natural resources of the State into alienable or
disposable lands of the public domain. There must be a law or presidential proclamation officially
classifying these reclaimed lands as alienable or disposable and open to disposition or concession.
Moreover, these reclaimed lands cannot be classified as alienable or disposable if the law has reserved
them for some public or quasi-public use.

As the Court has repeatedly ruled, properties of public dominion are not subject to execution or
foreclosure sale.14 Thus, the assessment, levy and foreclosure made on the subject reclaimed lands by
respondent, as well as the issuances of certificates of title in favor of respondent, are without basis.

WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of the Regional Trial Court,
Branch 195, Paraaque City, is REVERSED and SET ASIDE. All reclaimed properties owned by the
Philippine Reclamation Authority are hereby declared EXEMPT from real estate taxes. All real estate
tax assessments, including the final notices of real estate tax delinquencies, issued by the City of
Paraaque on the subject reclaimed properties; the assailed auction sale, dated April 7, 2003; and the
Certificates of Sale subsequently issued by the Paraaque City Treasurer in favor of the City of
Paraaque, are all declared VOID.

SO ORDERED.
 FIRST DIVISION

[G.R. No. 184879, February 23 : 2011]

REPUBLIC OF THE PHILIPPINES (DEPARTMENT OF TRANSPORTATION AND

COMMUNICATIONS), PETITIONER, VS. CITY OF MANDALUYONG, RESPONDENT.

RESOLUTION

PEREZ, J.:

The subject of this petition for review on certiorari is the writ of possession issued in favor of
respondent City of Mandaluyong by the Regional Trial Court (RTC Branch 213), Branch 213,
Mandaluyong City of real properties forming part of the EDSA Metro Rail Transit (MRT) III.

Petitioner Republic of the Philippines (Republic) is represented in this suit by the Department of
Transportation and Communications (DOTC), which is the primary policy, planning, programming,
regulating and administrative entity of the executive branch of the government in the promotion,
development, and regulation of dependable and coordinated networks of transportation and
communications systems, as well as in the fast, safe, efficient, and reliable postal, transportation and
communications services; while respondent City Government of Mandaluyong is a local government
unit tasked, among others, with meeting the priority needs and service requirements of its constituents
in Mandaluyong City.[1]

The material facts and events leading to this controversy are as follows:

On 8 August 1997, the DOTC entered into a Revised and Restated Agreement to Build, Lease and
Transfer a Light Rail System for EDSA (BLT) with Metro Rail Transit Corporation Limited (Metro
Rail), a foreign corporation. Under the BLT Agreement, Metro Rail shall be responsible for the
design, construction, equipping, completion, testing, and commissioning of the Light Rail Transit
System-LRTS Phase I (EDSA MRT III).[2] The DOTC shall operate the same but ownership of the
EDSA MRT III shall remain with Metro Rail during the Revenue and Construction periods. At the
end of the Revenue Period,[3] Metro Rail shall transfer to DOTC its title to and all of its rights and
interests therein, in exchange for US$1.00.[4]

On even date, Metro Rail then assigned all its rights and obligations under the BLT Agreement to
Metro Rail Transit Corporation (MRTC), a domestic corporation.

In an agreement dated 15 July 2000, Metro Rail turned over the EDSA MRT III System to the DOTC
for its operation.[5]

In a joint resolution dated 5 April 2001, the City Assessors of Mandaluyong City, Quezon City,
Makati City and Pasay City fixed the current and market value of EDSA MRT III at US$655 Million
or P32.75 Billion, and which will be divided proportionately according to distance traversed among
these cities.[6]

On 4 June 2001, the Office of the City Assessor of Mandaluyong issued Tax Declaration No. D-013-
06267 in the name of MRTC, fixing the market value of the railways, train cars, three (3) stations and
miscellaneous expenses at P5,974,365,000.00 and the assessed value at
P4,779,492,000.00.[7] Subsequently on 18 June 2001, the said Office of the City Assessor of
Mandaluyong City demanded payment of real property taxes due under the aforesaid tax
declaration.[8]

The computation of real property tax of MRTC was pegged at P317,250,730.23 from the taxable year
2000 until August 2001.[9] Two (2) years later or on August 2003, another demand was made on
MRTC placing the deficiency real estate tax due to the City of Mandaluyong at P769,784,981.52. [10]

Initially, a Notice of Delinquency dated 24 June 2005 was sent to MRTC wherein the assessed
deficiency real property tax amounted to P12,843,928.79,[11] however the City Treasurer of
Mandaluyong issued another Notice of Delinquency on 7 September 2005 rectifying the 24 June 2005
notice by increasing the deficiency real property tax to P1,306,617,522.96.[12]

On the same date, the City Treasurer issued and served a Warrant of Levy upon MRTC with the
corresponding Notices of Levy upon the City Assessor and the Registrar of Deeds of Mandaluyong
City.[13]

On 5 December 2005, petitioner Republic filed a case for Declaration of Nullity of Real Property Tax
Assessment and Warrant of Levy with a prayer for a Temporary Restraining Order (TRO) and Writ of
Preliminary Injunction before the Regional Trial Court (RTC Branch 208), Branch 208, Mandaluyong
City, docketed as Civil Case No. MC05-2882.

Petitioner Republic alleged that since Metro Rail had transferred to the DOTC the actual use,
possession and operation of the EDSA MRT III System, Metro Rail or MRTC does not have actual or
beneficial use and possession of the EDSA MRT III properties as to subject it to payment of real
estate taxes. On the other hand, notwithstanding the transfer to DOTC of the actual use, possession
and operation of the EDSA MRT III, petitioner Republic is not liable because local government units
are legally proscribed from imposing taxes of any kind on it under Section 133(o) of Republic Act
No. 7160. Likewise, under Section 234 of the same law, petitioner is exempted from payment of real
property tax.[14]

MRTC filed a complaint-in-intervention and sought to declare the nullity of the real property tax
assessments.

The posting and publication of the Notice of Auction were made on 26 February 2006 and 5 March
2006.[15]

On 22 March 2006, the RTC Branch 208, through Presiding Judge Esteban A. Tacla, Jr., denied both
petitioner Republic's and MRTC's applications for TRO.[16]

Consequently, on 24 March 2006, a public auction was conducted. For lack of bidders, the real
properties were forfeited in favor of the City of Mandaluyong for the price of P1,483,700,100.18.[17]

On 15 September 2006, the RTC Branch 208 issued an order denying petitioner and MRTC's
application for issuance of a writ of preliminary injunction. A motion for reconsideration was filed
but it was eventually denied on 9 March 2007. The issue on the validity of tax assessment however is
pending before that court.
Petitioner Republic filed a petition for certiorari before the Court of Appeals challenging the denial of
both the TRO and injunction by RTC Branch 208.

Meanwhile, respondent manifested before the Court of Appeals that due to the failure of MRTC to
exercise the right of redemption, the City Treasurer of Mandaluyong executed a Final Deed of Sale in
favor of the purchaser in the auction sale. Subsequently, Tax Declaration No. D-013-06267 in
MRTC's name was cancelled and Tax Declaration No. D-013-10636 was issued in its place.[18]

On 11 April 2008, respondent filed an ex parte petition praying for the issuance of a writ of
possession before RTC Branch 213 of Mandaluyong and docketed as LRC Case No. MC-08-
460.[19] Petitioner Republic countered that the instant petition does not fall within the cases when a
writ of possession may be issued. Moreover, petitioner argued that the pendency of Civil Case No.
MC05-2882 assailing the validity of the tax assessment and the subsequent auction sale of the
properties pre-empts the issuance of said writ.[20]

On 30 July 2008, the RTC Branch 213, through Judge Carlos A. Valenzuela, granted the petition for
the issuance of a writ of possession.[21] A subsequent motion for reconsideration filed by petitioner
was denied for lack of merit.[22]

While MRTC appealed said order to the Court of Appeals, petitioner Republic filed the instant case
raising a question of law, i.e. the propriety of the issuance of a writ of possession. To support its main
thesis that the RTC Branch 213 erred in issuing a writ of possession, petitioner claims that since
EDSA MRT properties are beneficially owned by DOTC, it should not have been assessed for
payment of real property taxes. Being a governmental entity, it is exempt from payment of real
property tax under Section 234 of the Local Government Code. Therefore, no tax delinquency exist
authorizing respondent to sell the subject properties through public auction. It then follows that
respondent has no legal right to a writ of possession.[23]

Petitioner Republic then asserts that the auction sale conducted by respondent cannot be likened to an
extrajudicial foreclosure sale of a real estate mortgage under Act No. 3135 as a justification for the
issuance of a writ of possession. Petitioner Republic reasons that the EDSA MRT properties were not
put up as a collateral or security for a loan or indebtedness which was secured from respondent, nor
was there any mortgage contract voluntarily entered into by petitioner or even by MRTC.[24]

Finally, petitioner Republic adds that all requisites of litis pendencia exist in CA-G.R. SP No. 98334,
which is a case for denial of injunction and TRO and in the present case, concerning the issuance of a
writ of possession because there is identity of parties, rights asserted and reliefs prayer
for. Respondent seeks to acquire possession over the EDSA MRT III properties on the basis of its tax
assessments and auction sale, which petitioner Republic seeks to permanently enjoin respondent from
enjoying when it initiated Civil Case No. MC05-2882. The pendency of CA-G.R. SP No. 98334
before the Court of Appeals, assailing the Orders denying respondent's prayer for a TRO and
injunction should have pre-empted the issuance of the writ of possession by reason of litis
pendencia.[25]

In a Resolution dated 10 November 2008, this Court directed the parties to maintain the
status quo and enjoined the enforcement and implementation of the Order and Writ of Possession
dated 22 October 2008.[26]
Respondent filed its comment refuting the allegations of petitioner. Respondent does not contest
petitioner's immunity from local taxes. In fact, it has assessed MRTC, and not petitioner, for real
property tax. Respondent defends the RTC's issuance of a writ of possession after it was established
that there was a valid foreclosure sale of MRTC's properties for non-payment of real property taxes
and after the title had been consolidated in respondent's name. Respondent also avers that the subject
public auction sale is an execution sale within the purview of Section 33, Rule 39 of the Rules of
Court, thus a writ of possession was validly issued. Respondent subscribes to this Court's ruling
in Ong v. Court of Appeals[27] which clarified that there is no forum shopping where a petition for the
issuance of a writ of possession is filed despite the pendency of an action for annulment of mortgage
and foreclosure sale.[28]

This case is, ultimately, between a local government's power to tax and the national government's
privilege of tax exemption. That issue needs full hearing and deliberation, as indeed, the issue pends
before the RTC, at first instance. Such trial of facts and issues must proceed. It should not be pre-
empted by the present petition that deals with precisely the herein respondent's intended end result.

A writ of possession is a mere incident in the transfer of title.[29] In the instant case, it stemmed from
the exercise of alleged ownership by respondent over EDSA MRT III properties by virtue of a tax
delinquency sale. The issue of whether the auction sale should be enjoined is still pending before the
Court of Appeals. Pending determination, it is premature for respondent to have conducted the
auction sale and caused the transfer of title over the real properties to its name. The denial by the
RTC to issue an injunction or TRO does not automatically give respondent the liberty to proceed with
the actions sought to be enjoined, especially so in this case where a certiorari petition assailing the
denial is still being deliberated in the Court of Appeals. All the more it is premature for the RTC to
issue a writ of possession where the ownership of the subject properties is derived from an auction
sale, the validity of which is still being threshed out in the Court of Appeals. The RTC should have
held in abeyance the issuance of a writ of possession. At this juncture, the writ issued is premature
and has no force and effect.

WHEREFORE, the petition is GRANTED. The Decision and Order dated 30 July 2008 and 6
October 2008, respectively of RTC Branch 213 of Mandaluyong City in LRC Case No. M-08-460 are
hereby VACATED and SET ASIDE. The status quo Order dated 10 November 2008
is MAINTAINED. The Court of Appeals is ORDERED to resolve CA-G.R. SP No. 98334 with
deliberate dispatch.

SO ORDERED.

Corona, C.J., (Chairperson), Velasco, Jr., Nachura,* and Del Castillo JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 167000 June 8, 2011

GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), Petitioner,

vs.
GROUP MANAGEMENT CORPORATION (GMC) AND LAPU-LAPU DEVELOPMENT &
HOUSING Corporation (LLDHc), Respondents.

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

G.R. No. 169971

GROUP MANAGEMENT CORPORATION (GMC), Petitioner,

vs.
LAPU-LAPU DEVELOPMENT & HOUSING Corporation (LLDHc) and GOVERNMENT
SERVICE INSURANCE SYSTEM (GSIS), Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

At bar are two consolidated Petitions for Review on Certiorari concerning 78 parcels of land located
in Barrio Marigondon, Lapu-Lapu City. The parties in both cases have been in litigation over these
lots for the last two decades in what seems to be an endless exercise of filing repetitious suits before
the Court of Appeals and even this Court, questioning the various decisions and resolutions issued by
the two separate trial courts involved. With this decision, it is intended that all legal disputes among
the parties concerned, particularly over all the issues involved in these cases, will finally come to an
end

In the Petition in G.R. No. 167000, the Government Service Insurance System (GSIS) seeks to reverse
and set aside the November 25, 2004 Decision1 and January 20, 2005 Resolution2 of the Twentieth
Division of the Court of Appeals in CA-G.R. SP No. 85096 and to annul and set aside the March 11,
20043 and May 7, 20044 Orders of the Regional Trial Court (RTC) of Lapu-Lapu City (Lapu-Lapu
RTC) in Civil Case No. 2203-L.

In the Petition in G.R. No. 169971, Group Management Corporation (GMC) seeks to reverse and set
aside the September 23, 2005 Decision5 in CA-G.R. SP No. 84382 wherein the Special Nineteenth
Division of the Court of Appeals annulled and set aside the March 11, 2004 Order of the Lapu-Lapu
RTC in Civil Case No. 2203-L.

Both these cases stem from the same undisputed factual antecedents as follows:
Lapu-Lapu Development & Housing Corporation6 (LLDHC) was the registered owner of seventy-
eight (78) lots (subject lots), situated in Barrio Marigondon, Lapu-Lapu City.

On February 4, 1974, LLDHC and the GSIS entered into a Project and Loan Agreement for the
development of the subject lots. GSIS agreed to extend a Twenty-Five Million Peso-loan
(P25,000,000.00) to LLDHC, and in return, LLDHC will develop, subdivide, and sell its lots to GSIS
members. To secure the payment of the loan, LLDHC executed a real estate mortgage over the subject
lots in favor of GSIS.

For LLDHCs failure to fulfill its obligations, GSIS foreclosed the mortgage. As the lone bidder in the
public auction sale, GSIS acquired the subject lots, and eventually was able to consolidate its
ownership over the subject lots with the corresponding transfer certificates of title (TCTs) issued in its
name.

On November 19, 1979, GMC offered to purchase on installments the subject lots from GSIS for a
total price of One Million One Hundred Thousand Pesos (P1,100,000.00), with the aggregate area
specified as 423,177 square meters. GSIS accepted the offer and on February 26, 1980, executed a
Deed of Conditional Sale over the subject lots. However, when GMC discovered that the total area of
the subject lots was only 298,504 square meters, it wrote GSIS and proposed to proportionately
reduce the purchase price to conform to the actual total area of the subject lots. GSIS approved this
proposal and an Amendment to the Deed of Conditional Sale was executed to reflect the final sales
agreement between GSIS and GMC.

On April 23, 1980, LLDHC filed a complaint for Annulment of Foreclosure with Writ of Mandatory
Injunction against GSIS before the RTC of Manila (Manila RTC). This became Civil Case No. R-82-
34297 and was assigned to Branch 38.

On November 3, 1989, GMC filed its own complaint against GSIS for Specific Performance with
Damages before the Lapu-Lapu RTC. The complaint was docketed as Civil Case No. 2203-L and it
sought to compel GSIS to execute a Final Deed of Sale over the subject lots since the purchase price
had already been fully paid by GMC. GSIS, in defense, submitted to the court a Commission on Audit
(COA) Memorandum dated April 3, 1989, purportedly disallowing in audit the sale of the subject lots
for "apparent inherent irregularities," the sale price to GMC being lower than GSISs purchase price at
the public auction. LLDHC, having been allowed to intervene, filed a Motion to Dismiss GMCs
complaint. When this motion was denied, LLDHC filed its Answer-in-Intervention and participated in
the ensuing proceedings as an intervenor.

GMC, on February 1, 1992, filed its own Motion to Intervene with a Complaint-in-Intervention in
Civil Case No. R-82-3429. This was dismissed on February 17, 1992 and finally denied on March 23,
1992 by the Manila RTC on the ground that GMC can protect its interest in another proceeding.8

On February 24, 1992, after a full-blown trial, the Lapu-Lapu RTC rendered its Decision9 in Civil
Case No. 2203-L, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering defendant to:

 1. Execute the final deed of absolute sale and deliver the seventy-eight (78) certificates of title
covering said seventy-eight (78) parcels of land to the [Group Management Corporation
(GMC)];

2. Pay [GMC] actual damages, plus attorneys fees and expenses of litigation, in the amount
of P285,638.88 and P100,000.00 exemplary damages;

3. [D]ismissing in toto intervenors complaint-in-intervention for lack of evidence of legal

standing and legal interest in the suit, as well as failure to substantiate any cause of action
against either [GMC] or [GSIS].10

In deciding in favor of GMC, the Lapu-Lapu RTC held that there existed a valid and binding sales
contract between GSIS and GMC, which GSIS could not continue to ignore without any justifiable
reason especially since GMC had already fully complied with its obligations. 11

The Lapu-Lapu RTC found GSISs invocation of COAs alleged disapproval of the sale belated and
self-serving. The Lapu-Lapu RTC said that COA, in disapproving GSISs sale of the subject lots to
GMC, violated its own circular which excludes the disposal by a government owned and/or controlled
corporation of its "acquired assets" (e.g., foreclosed assets or collaterals acquired in the regular course
of business).12 The Lapu-Lapu RTC also held that COA may not intrude into GSISs charter-granted
power to dispose of its acquired assets within five years from acquisition by "preventing/aborting the
sale in question by refusing to pass it in audit."13 Moreover, the Lapu-Lapu RTC held that the GSIS-
proferred COA Memorandum was inadmissible in evidence not only because as a mere photocopy it
failed to measure up to the "best evidence" rule under the Revised Rules of Court, but also because no
one from COA, not even the auditor who supposedly prepared it, was ever presented to testify to the
veracity of its contents or its due execution.14

In dismissing LLDHCs complaint-in-intervention, the Lapu-Lapu RTC held that LLDHC failed to
prove its legal personality as a party-intervenor and all it was able to establish was a "suggestion of
right for [GSIS] to renege [on] the sale for reasons peculiar to [GSIS] but not transmissible nor subject
to invocation by [LLDHC]."15

LLDHC and GSIS filed their separate Notices of Appeal but these were dismissed by the Lapu-Lapu
RTC on December 6, 1993.16

On May 10, 1994, the Manila RTC rendered a Decision17 in Civil Case No. R-82-3429. The Manila
RTC held that GSIS was unable to prove the alleged violations committed by LLDHC to warrant the
foreclosure of the mortgage over the subject lots. Thus, the Manila RTC annulled the foreclosure
made by GSIS and ordered LLDHC to pay GSIS the balance of its loan with interest, to wit:

WHEREFORE, judgment is hereby rendered:

1. ANNULLING the foreclosure by the defendant GSIS of the mortgage over the seventy-
eight (78) parcels of land here involved:

2. CANCELLING the consolidated certificates of [title] issued in the name of GSIS and
directing the Register of Deeds of Lapu-Lapu City to issue new certificates of [title] over
 those seventy-eight (78) parcels of land in the name of the plaintiff, in exactly the same
condition as they were before the foreclosure;

3. ORDERING the plaintiff to pay the GSIS the amount of P9,200,000.00 with interest
thereon at the rate of twelve (12%) percent per annum commencing from October 12, 1989
until fully paid; and

4. ORDERING defendant GSIS to execute a properly registrable release of discharge of

mortgage over the parcels of land here involved after full payment of such amount by the
plaintiff.

All claims and counterclaims by the parties as against each other are hereby dismissed.

No pronouncement as to costs.18

Armed with the Manila RTC decision, LLDHC, on July 27, 1994, filed before the Court of Appeals a
Petition for Annulment of Judgment of the Lapu-Lapu RTC Decision in Civil Case No. 2203-
L.19 LLDHC alleged that the Manila RTC decision nullified the sale of the subject lots to GMC and
consequently, the Lapu-Lapu RTC decision was also nullified.

This petition, docketed as CA-G.R. SP No. 34696, was dismissed by the Court of Appeals on
December 29, 1994.20 The Court of Appeals, in finding that the grounds LLDHC relied on were
without merit, said:

In fine, there being no showing from the allegations of the petition that the respondent court is without
jurisdiction over the subject matter and of the parties in Civil Case No. 2309 [2203-L], petitioner has
no cause of action for the annulment of judgment. The complaint must allege ultimate facts for the
annulment of the decision (Avendana v. Bautista, 142 SCRA 41). We find none in this case.21

No appeal having been taken by LLDHC, the decision of the Court of Appeals in CA-G.R. SP No.
34696 became final and executory on January 28, 1995, as stated in the Entry of Final Judgment dated
August 18, 1995.22

On February 2, 1995, LLDHC filed before this Court a Petition for Certiorari23 docketed as G.R. No.
118633. LLDHC, in seeking to annul the February 24, 1992 Decision of the Lapu-Lapu RTC, again
alleged that the Manila RTC Decision nullified the Lapu-Lapu RTC Decision.

Finding the petition a mere reproduction of the Petition for Annulment filed before the Court of
Appeals in CA-G.R. SP No. 34696, this Court, in a Resolution24 dated September 6, 1996, dismissed
the petition in this wise:

In a last ditch attempt to annul the February 24, 1992 Decision of the respondent court, this petition
was brought before us on February 2, 1995.

Dismissal of this petition is inevitable.

The instant petition which is captioned, For: Certiorari With Preliminary Injunction, is actually
another Petition for Annulment of Judgment of the February 24, 1992 Decision of the respondent
Regional Trial Court of Lapu-lapu City, Branch 27 in Civil Case No. 2203-L. A close perusal of this
petition as well as the Petition for Annulment of Judgment brought by the petitioner before the Court
of Appeals in CA-G.R. SP No. 34696 reveals that the instant petition is a mere reproduction of the
petition/complaint filed before the appellate tribunal for annulment of judgment. Paragraphs two (2)
to eighteen (18) of this petition were copied verbatim from the Petition for Annulment of Judgment
earlier filed in the court a quo, except for the designation of the parties thereto, i.e., plaintiff was
changed to petitioner, defendant to respondent. In fact, even the prayer in this petition is the same
prayer in the Petition for Annulment of Judgment dismissed by the Court of Appeals, x x x.

xxxx

Under Section 9(2) of Batas Pambansa Blg. 129, otherwise known as "The Judiciary Reorganization
Act of 1980," it is the Court of Appeals (then the Intermediate Appellate Court), and not this Court,
which has jurisdiction to annul judgments of Regional Trial Courts, viz:

SEC. 9. Jurisdiction -- The Intermediate Appellate Court shall exercise:

xxxx

(2) Exclusive original jurisdiction over actions for annulment of judgments of Regional Trial Courts;
and

xxxx

Thus, this Court apparently has no jurisdiction to entertain a petition which is evidently another
petition to annul the February 24, 1992 Decision of the respondent Branch 27, Regional Trial Court of
Lapu-lapu City, it appearing that jurisdiction thereto properly pertains to the Court of Appeals. Such a
petition was brought before the appellate court, but due to petitioners failure to nullify Judge Risos
Decision in said forum, LLDHC, apparently at a loss as to what legal remedy to take, brought the
instant petition under the guise of a petition for certiorari under Rule 65 seeking once again to annul
the judgment of Branch 27.

Instead of filing this petition for certiorari under Rule 65, which is essentially another Petition to
Annul Judgment, petitioner LLDHC should have filed a timely Petition for Review under Rule 45 of
the Revised Rules of Court of the decision of the Court of Appeals, dated December 29, 1994,
dismissing the Petition for Annulment of Judgment filed by the petitioner LLDHC before the court a
quo. But, this is all academic now. The appellate courts decision had become final and executory on
January 28, 1995.25

Despite such pronouncements, this Court, nevertheless, passed upon the merits of LLDHCs Petition
for Certiorari in G.R. No. 118633. This Court said that the petition, "which was truly for annulment of
judgment,"26 cannot prosper because the two grounds on which a judgment may be annulled were not
present in the case.27 Going further, this Court held that even if the petition were to be given due
course as a petition for certiorari under Rule 65 of the Revised Rules of Court, it would still be
dismissible for not being brought within a reasonable period of time as it took LLDHC almost three
years from the time it received the February 24, 1992 decision until the time it brought this action.28
LLDHCs motion for reconsideration was denied with finality29 on November 18, 1996, and on
February 18, 1997, an Entry of Judgment30 was made certifying that the September 6, 1996
Resolution of this Court in G.R. No. 118633 had become final and executory on December 23, 1996.

Consequently, on November 28, 1996, the Lapu-Lapu RTC issued an Order31 directing the execution
of the judgment in Civil Case No. 2203-L. A corresponding Writ of Execution32 was issued on
December 17, 1996. The Motions to Stay Execution filed by LLDHC and GSIS were denied by the
Lapu-Lapu RTC on February 19, 1997.33

Meanwhile, on December 27, 1996, the Court of Appeals rendered a Decision34 in the separate
appeals taken by GSIS and LLDHC from the May 10, 1994 Manila RTC Decision in Civil Case No.
R-82-3429. This case, docketed as CA-G.R. CV No. 49117, affirmed the Manila RTC decision with
modification insofar as awarding LLDHC attorneys fees and litigation expenses.

On March 3, 1997, GSIS came to this Court on a Petition for Review of the Court of Appeals
decision in CA-G.R. CV No. 49117. This was docketed as G.R. No. 127732 and was dismissed on
April 14, 199735 due to late filing, the due date being January 31, 1997. This dismissal became final
and executory on May 30, 1997.36

On March 8, 1997, LLDHC filed a Petition for Certiorari with preliminary injunction before the
Court of Appeals, praying that GMC and the Lapu-Lapu RTC be ordered to cease and desist from
proceeding with the execution of its Decision in Civil Case No. 2203-L, on the theory that the Manila
RTC decision was a supervening event which made it mandatory for the Lapu-Lapu RTC to stop the
execution of its decision. This case was docketed as CA-G.R. SP No. 44052. On July 16, 1997, the
Court of Appeals issued an Order temporarily restraining the Lapu-Lapu RTC and GMC from
executing the February 24, 1992 decision in Civil Case No. 2203-L so as not to render the resolution
of the case moot and academic.37

On July 21, 1997, because of GSISs continued refusal to implement the December 17, 1996 Writ of
Execution, the Lapu-Lapu RTC, upon GMCs motion, issued an Order38 redirecting its instructions to
the Register of Deeds of Lapu-Lapu City, to wit:

WHEREFORE, the defendant GSIS having refused to implement the Order of this Court dated
December 17, 1996 the Court in accordance with Rule 39, Sec. 10-a of the 1997 Rules of Procedure,
hereby directs the Register of Deeds of Lapu-lapu City to cancel the Transfer Certificate of Titles of
the properties involved in this case and to issue new ones in the name of the plaintiff and to deliver
the same to the latter within ten (10) days after this Order shall have become final.39

While the TRO issued by the Court of Appeals in CA-G.R. SP No. 44052 was in effect, the Manila
RTC, on August 1, 1997, issued a Writ of Execution40 of its judgment in Civil Case No. R-82-3429.
On August 7, 1997, the Sheriff implemented the Writ and ordered the Register of Deeds of Lapu-
Lapu City to cancel the consolidated certificates of title issued in the name of GSIS and to issue new
ones in favor of LLDHC. In conformity with the TRO, the Lapu-Lapu RTC on August 19, 1997,
ordered41 the suspension of its July 21, 1997 Order. With no similar restraining order against the
execution of the Manila RTC Decision, a Writ of Possession was issued on August 21, 1997 to cause
GSIS and all persons claiming rights under it to vacate the properties in question and to place LLDHC
in peaceful possession thereof.42
On October 23, 1997, the Lapu-Lapu RTC, being aware of the events that have taken place while the
TRO was in effect, issued an Order43 reiterating its previous Orders of November 28, 1996, December
17, 1996, and July 21, 1997. The Lapu-Lapu RTC held that since the restraining order issued by the
Court of Appeals in CA-G.R. SP No. 44052 had already lapsed by operation of law, and the February
24, 1992 Decision in Civil Case No. 2203-L had not only become final and executory but had been
affirmed and upheld by both the Court of Appeals and this Court, the inescapable mandate was to give
due course to the efficacy of its decision. The Lapu-Lapu RTC thus directed the Register of Deeds of
Lapu-Lapu City to effect the transfer of the titles to the subject lots in favor of GMC and declared
"any and all acts done by the Register of Deeds of Lapu-Lapu City null and void starting with the
surreptitious issuance of the new certificates of title in the name of [LLDHC], contrary" to its decision
and orders.44

On November 13, 1997, LLDHC filed before the Court of Appeals another Petition
for Certiorari with preliminary injunction and motion to consolidate with CA-G.R. SP No. 44052.
This case was docketed as CA-G.R. SP No. 45946, but was dismissed45 on November 20, 1997 for
LLDHCs failure to comply with Section 1, Rule 65 of the 1997 Rules of Civil Procedure which
requires the petition to be accompanied by, among others, "copies of all pleadings and documents
relevant and pertinent thereto."46

The petition in CA-G.R. SP No. 44052 would likewise be dismissed47 by the Court of Appeals on
January 9, 1998, but this time, on the merits, to wit:

The validity of the decision of the respondent judge in Civil Case No. 2303-L has thus been brought
both before this Court and to the Supreme Court by the petitioner. In both instances the respondent
judge has been upheld. The instant petition is petitioners latest attempt to resist the implementation or
execution of that decision using as a shield a decision of a Regional Trial Court in the National
Capital Region. We are not prepared to allow it. The applicable rule and jurisprudence are clear. The
prevailing party is entitled as a matter of right to a writ of execution, and the issuance thereof is a
ministerial duty compellable by mandamus. We do not believe that there exists in this instance a
supervening event which would justify a deviation from this rule.48

Prior to this, however, on November 28, 1997, the Lapu-Lapu RTC, acting on GMCs Omnibus
Motion, made the following orders: for LLDHC to show cause why it should not be declared in
contempt; for a writ of preliminary prohibitory injunction to be issued to restrain all persons acting on
LLDHCs orders from carrying out such orders in defiance of its final and executory judgment; and
for a writ of preliminary mandatory injunction to be issued to direct the ouster of LLDHC. The Lapu-
Lapu RTC also declared the Register of Deeds of Lapu-Lapu City in contempt and directed the Office
of the City Sheriff to implement the above orders and to immediately detain and confine the Register
of Deeds of Lapu-Lapu City at the City Jail if he continues to refuse to transfer the titles of the subject
lots after ten days from receipt of this order.49

On December 22, 1997, the Lapu-Lapu RTC denied50 the motion for reconsideration filed by the
Register of Deeds of Lapu-Lapu City. In separate motions, LLDHC, and again the Register of Deeds
of Lapu-Lapu City, sought the reconsideration of the November 28, 1997 and December 22, 1997
Orders. On May 27, 1998, the Lapu-Lapu RTC, acting under a new judge,51 granted both motions and
accordingly set aside the November 28, 1997 and December 22, 1997 Orders.52
With the denial53 of its motion for reconsideration on August 4, 1998, GMC came to this Court on a
Petition for Certiorari, Prohibition and Mandamus, seeking to set aside the May 27, 1998 Order of the
Lapu-Lapu RTC in Civil Case No. 2203-L. The Petition was referred to the Court of Appeals, which
under Batas Pambansa Blg. 129, exercises original jurisdiction to issue such writs.54 This was
docketed as CA-G.R. SP No. 50650.

On April 30, 1999, the Court of Appeals rendered its Decision55 in CA-G.R. SP No. 50650, the
dispositive portion of which reads:

WHEREFORE, the petition being partly meritorious, the Court hereby resolves as follows:

(1) To AFFIRM the Orders of May 28, 1998 and August 4, 1998 in Civil Case No. 2203-L
insofar as they set aside the order holding respondent Register of Deeds guilty of indirect
contempt of court and to NULLIFY said orders in so far as they set aside the directives
contained in paragraphs (a) and (b) and (c) of the order dated November 28, 1997.

(2) To DECLARE without FORCE and EFFECT insofar as petitioner Group Management
Corporation is concerned the decision in Civil Case No. R-82-3429 as well as the orders and
writs issued for its execution and enforcement: and

(3) To ENJOIN respondent Lapu-Lapu Development and Housing Corporation, along with its
agents and representatives and/or persons/public officials/employees acting in its interest,
specifically respondent Regional Trial Court of Manila Branch 38, and respondent Register of
Deeds of Lapu-Lapu City, from obstructing, interfering with or in any manner delaying the
implementation/execution/ enforcement by the Lapu-Lapu City RTC of its order and writ of
execution in Civil Case No. 2203-L.

For lack of sufficient basis the charge of contempt of court against respondent Lapu-Lapu
Development and Housing Corporation and the public respondents is hereby DISMISSED.56

With the denial of LLDHCs motion for reconsideration on December 29, 1999,57 LLDHC, on
January 26, 2000, filed before this Court a Petition for Review on Certiorari assailing the April 30,
1999 decision of the Court of Appeals in CA-G.R. SP No. 50650. This petition was docketed as G.R.
No. 141407.

This Court dismissed LLDHCs petition and upheld the decision of the Court of Appeals in CA-G.R.
SP No. 50650 in its decision dated September 9, 2002. 58 LLDHCs Motion for Reconsideration and
Second Motion for Reconsideration were also denied on November 13, 200259 and February 3,
2003,60 respectively.

The September 9, 2002 decision of this Court in G.R. No. 141407 became final on March 10, 2003.61

On March 11, 2004, the Lapu-Lapu RTC, acting on GMCs Motion for Execution, issued an
Order62 the dispositive portion of which reads:

WHEREFORE, in light of the foregoing considerations, plaintiff Group Management Corporations

motion is GRANTED, while defendant GSIS motion to stay the issuance of a writ of execution is
denied for lack of merit. Consequently, the Sheriff of this Court is directed to proceed with the
immediate implementation of this Courts decision dated February 24, 1992, by enforcing completely
this Courts Order of Execution dated November 28, 1996, the writ of execution dated December 17,
1996, the Order dated July 21, 1997, the Order dated October 23 1997, the Order dated November 28,
1997 and the Order dated December 22, 1997.63

On May 7, 2004, the Lapu-Lapu RTC denied64 the motions for reconsideration filed by LLDHC and
GSIS.

On May 27, 2004, LLDHC filed before the Court of Appeals a Petition for Certiorari, Prohibition
and Mandamus65against the Lapu-Lapu RTC for having issued the Orders of March 11, 2004 and May
7, 2004 (assailed Orders). This petition docketed as CA-G.R. SP No. 84382, sought the annulment of
the assailed Orders and for the Court of Appeals to command the Lapu-Lapu RTC to desist from
further proceeding in Civil Case No. 2203-L, to dismiss GMCs Motion for Execution, and for the
issuance of a Temporary Restraining Order (TRO)/Writ of Preliminary Injunction against the Lapu-
Lapu RTC and GMC.

On July 6, 2004, GSIS filed its own Petition for Certiorari and Prohibition with Preliminary
Injunction and Temporary Restraining Order66 before the Court of Appeals to annul the assailed
Orders of the Lapu-Lapu RTC, to prohibit the judge therein and the Register of Deeds of Lapu-Lapu
City from implementing such assailed Orders, and for the issuance of a TRO and writ of preliminary
injunction to maintain the status quo while the case is under litigation. This petition was docketed as
CA-G.R. SP No. 85096.

The Court of Appeals initially dismissed outright LLDHCs petition for failure to attach the Required
Secretarys Certificate/Board Resolution authorizing petitioner to initiate the petition, 67 but in a
Resolution68 dated August 2, 2004, after having found the explanation for the mistake satisfactory, the
Court of Appeals, "on equitable consideration and for the purpose of preserving the status quo during
the pendency of the appeal,"69 issued a TRO against the Lapu-Lapu RTC from enforcing its
jurisdiction and judgment/order in Civil Case No. 2203-L until further orders. In its August 30, 2004
Resolution,70 the Court of Appeals, without resolving the case on its merits, also issued a Writ of
Preliminary Injunction, commanding the Lapu-Lapu RTC to cease and desist from implementing the
assailed Orders in Civil Case No. 2203-L, until further orders.

On November 25, 2004, the Twentieth Division of the Court of Appeals promulgated its decision in
CA-G.R. SP No. 85096. It dismissed GSISs petition and affirmed the assailed Orders of March 11,
2004 and May 7, 2004. The Court of Appeals found no merit in GSISs petition since the judgment in
Civil Case No. 2203-L, which was decided way back on February 24, 1992, had long become final
and executory, which meant that the Lapu-Lapu RTC had no legal obstacle to cause said judgment to
be executed and enforced. The Court of Appeals quoted in full, portions of this Courts Decision in
G.R. No. 141407 to underscore the fact that no less than the Supreme Court had declared that the
decision in Civil Case No. 2203-L was valid and binding and had become final and executory a long
time ago and had not been in any way nullified by the decision rendered by the Manila RTC on May
10, 1994 in Civil Case No. R-82-3429. On January 20, 2005, the Court of Appeals upheld its decision
and denied GSISs Motion for Reconsideration.71

However, on September 23, 2005, the Special Nineteenth Division of the Court of Appeals came out
with its own decision in CA-G.R. SP No. 84382. It granted LLDHCs petition, contrary to the Court
of Appeals decision in CA-G.R. SP No. 85096, and annulled and set aside the March 11, 2004 Order
of the Lapu-Lapu RTC in this wise:

WHEREFORE, finding merit in the instant Petition for Certiorari, Prohibition and Mandamus, the
same is hereby GRANTED, and the assailed Order, dated March 11, 2004, of the Regional Trial
Court, 7th Judicial Region, Branch 27, Lapulapu City, in Civil Case No. 2203-L is ANNULLED
AND SET ASIDE.

Accordingly, respondent Judge Benedicto Cobarde is hereby ORDERED:

a) to DESIST from further proceeding in Civil Case No. 2203-L; and

b) to DISMISS GMCs Motion for Execution in the abovementioned case;

Meanwhile, the Writ of Preliminary Injunction earlier issued is hereby declared PERMANENT. No
pronouncement as to costs.72

GSIS73 and GMC74 are now before this Court, with their separate Petitions for Review on Certiorari,
assailing the decisions of the Court of Appeals in CA-G.R. SP No. 85096 and CA-G.R. SP No. 84382,
respectively.

G.R. No. 167000

In G.R. No. 167000, GSIS is assailing the Orders issued by the Lapu-Lapu RTC on March 11, 2004
and May 7, 2004 for being legally unenforceable on GSIS because the titles of the 78 lots in
Marigondon, Lapu-Lapu City were already in LLDHCs name, due to the final and executory
judgment rendered by the Manila RTC in Civil Case No. R-82-3429. GSIS contends that it is legally
and physically impossible for it to comply with the assailed Orders as the "subject matter to be
delivered or performed have already been taken away from" 75 GSIS. GSIS asserts that the
circumstances which have arisen, from the judgment of the Manila RTC to the cancellation of GSISs
titles, are "supervening events" which should be considered as an exception to the doctrine of finality
of judgments because they render the execution of the final and executory judgment of the Lapu-Lapu
RTC in Civil Case No. 2203-L unjust and inequitable. GSIS further claims that it should not be made
to pay damages of any kind because its funds and properties are exempt from execution, garnishment,
and other legal processes under Section 39 of Republic Act No. 8291.

LLDHC, in its Compliance,76 believes that it was impleaded in this case as a mere nominal party since
it filed its own Petition for Certiorari before the Court of Appeals, which was granted in CA-G.R. SP
No. 84382. LLDHC essentially agrees with GSIS that the implementation of the assailed Orders have
become legally impossible due to the fully implemented Writ of Execution issued by the Manila RTC
in Civil Case No. R-82-3429. LLDHC alleges that because of this "supervening event," GSIS cannot
be compelled to execute a final deed of sale in GMCs favor, and "LLDHC cannot be divested of its
titles, ownership and possession" of the subject properties.77

GMC in its comment78 argues that GSIS has no legal standing to institute this petition because it has
no more interest in the subject lots, since it is no longer in possession and the titles thereto have
already been registered in LLDHCs name. GMC claims that the decision of the Special Nineteenth
Division of the Court of Appeals is barred by res judicata, and that LLDHC is guilty of forum
shopping for filing several petitions before the Court of Appeals and this Court with the same issues
and arguments. GMC also asserts that the judgment in Civil Case No. R-82-3429 is enforceable only
between GSIS and LLDHC as GMC was not a party to the case, and that the Manila RTC cannot
overrule the Lapu-Lapu RTC, they being co-equal courts.

G.R. No. 169971

In G.R. No. 169971, GMC is praying that the decision of the Special Nineteenth Division of the Court
of Appeals in CA-G.R. SP No. 84382 be reversed and set aside. GMC is claiming that the Court of
Appeals, in rendering the said decision, committed a palpable legal error by overruling several final
decisions rendered by the Lapu-Lapu RTC, the Court of Appeals, and this Court.79 GMC claims that
the Lapu-Lapu RTCs duty to continue with the implementation of its orders is purely ministerial as
the judgment has not only become final and executory, but has been affirmed by both the Court of
Appeals and the Supreme Court in several equally final and executory decisions. 80 GMC, repeating its
arguments in G.R. No. 167000, maintains that the petition is barred by res judicata, that there is forum
shopping, and that the Manila RTC decision is not binding on GMC.

LLDHC in its comment81 insists that there is a supervening event which rendered it necessary to stay
the execution of the judgment of the Lapu-Lapu RTC. LLDHC also asserts that, as correctly found by
the Court of Appeals in CA-G.R. SP No. 84382, the Lapu-Lapu RTC decision in Civil Case No.
2203-L was not affirmed with finality by the Court of Appeals and the Supreme Court as the decision
was not reviewed on the merits.

SUMMARY OF THE ISSUES

The present case is peculiar in the sense that it involves two conflicting final and executory decisions
of two different trial courts. Moreover, one of the RTC decisions had been fully executed and
implemented. To complicate things further, the parties have previously filed several petitions, which
have reached not only the Court of Appeals but also this Court. Upon consolidation of the two
petitions, this Court has narrowed down the issues to the following:

1. Whether or not the decision of the Manila RTC in Civil Case No. R-82-3429 constitutes a
supervening event, which should be admitted as an exception to the doctrine of finality of
judgments.

2. Whether or not the September 23, 2005 Decision of the Special Nineteenth Division of the
Court of Appeals in CA-G.R. SP No. 84382 and GSISs Petition in G.R. No. 167000 are
barred by res judicata.

3. Whether or not there is a legal and physical impossibility for GSIS to comply with the
March 11, 2004 and May 7, 2004 Orders of the Lapu-Lapu RTC in Civil Case No. 2203-L.

4. Whether or not LLDHC and GSIS are guilty of forum shopping.

DISCUSSION

First Issue:
Supervening Event

It is well-settled that once a judgment attains finality, it becomes immutable and unalterable. It may
not be changed, altered or modified in any way even if the modification were for the purpose of
correcting an erroneous conclusion of fact or law. This is referred to as the "doctrine of finality of
judgments," and this doctrine applies even to the highest court of the land.82 This Court explained its
rationale in this wise:

The doctrine of finality of judgment is grounded on fundamental considerations of public policy and
sound practice, and that, at the risk of occasional errors, the judgments or orders of courts must
become final at some definite time fixed by law; otherwise, there would be no end to litigations, thus
setting to naught the main role of courts of justice which is to assist in the enforcement of the rule of
law and the maintenance of peace and order by settling justiciable controversies with finality.83

This Court has, on several occasions, ruled that the doctrine of finality of judgments admits of certain
exceptions, namely: "the correction of clerical errors, the so-called nunc pro tunc entries which cause
no prejudice to any party, void judgments, and whenever circumstances transpire after the finality of
the decision which render its execution unjust and inequitable."84

Both GSIS and LLDHC claim that the execution of the decision and orders in Civil Case No. 2203-L
should be stayed because of the occurrence of "supervening events" which render the execution of the
judgment "impossible, unfair, unjust and inequitable."85 However, in order for an event to be
considered a supervening event to justify the alteration or modification of a final judgment, the event
must have transpired after the judgment has become final and executory, to wit:

Supervening events refer to facts which transpire after judgment has become final and executory or to
new circumstances which developed after the judgment has acquired finality, including matters which
the parties were not aware of prior to or during the trial as they were not yet in existence at that time.86

The Lapu-Lapu RTC Decision in Civil Case No. 2203-L was promulgated on February 24, 1992,
while the Manila RTC Decision in Civil Case No. R-82-3429 was promulgated on May 10, 1994. As
early as December 6, 1993, both GSISs and LLDHCs appeals of the Lapu-Lapu RTC Decision were
dismissed by the said RTC.87 Only GSIS moved to reconsider this dismissal, which was denied on
July 6, 1994.88 Strictly speaking, the Lapu Lapu RTC Decision should have attained finality at that
stage; however, LLDHC filed with the Court of Appeals its Petition for Annulment of Judgment (CA-
G.R. SP No. 34696) on July 27, 1994 and it used therein the Manila RTC Decision as its main ground
for annulment of the Lapu-Lapu RTC decision.

The Court of Appeals nonetheless dismissed LLDHCs Petition for Annulment of Judgment, in CA-
G.R. SP No. 34696,89 and that became final and executory on January 28, 1995,90 after LLDHC
interposed no appeal. The entry of judgment in this case was issued on August 18, 1995.91 Moreover,
the similar petition of LLDHC before this Court in G.R. No. 118633 was decided on September 6,
1996 and became final and executory on December 23, 1996. Therefore, the ruling by the Manila
RTC is evidently not a supervening event. It was already in existence even before the decision in Civil
Case No. 2203-L attained finality.
Just as LLDHC and GSIS, as the losing parties, had the right to file their respective appeals within the
prescribed period, GMC, as the winning party in Civil Case No. 2203-L, equally had the correlative
right to benefit from the finality of the resolution of its case,92 to wit:

A final judgment vests in the prevailing party a right recognized and protected by law under the due
process clause of the Constitution. A final judgment is "a vested interest which it is right and equitable
that the government should recognize and protect, and of which the individual could not be deprived
arbitrarily without injustice."93(Citations omitted.)

Since the Manila RTC decision does not constitute a supervening event, there is therefore neither
reason nor justification to alter, modify or annul the Lapu-Lapu RTC Decision and Orders, which
have long become final and executory. Thus, in the present case, GMC must not be deprived of its
right to enjoy the fruits of a final verdict.

It is settled in jurisprudence that to stay execution of a final judgment, a supervening event "must
create a substantial change in the rights or relations of the parties which would render execution of a
final judgment unjust, impossible or inequitable making it imperative to stay immediate execution in
the interest of justice."94

However, what would be unjust and inequitable is for the Court to accord preference to the Manila
RTC Decision on this occasion when in the past, the Court of Appeals and this Court have repeatedly,
consistently, and with finality rejected LLDHCs moves to use the Manila RTC Decision as a ground
to annul, and/or to bar the execution of, the Lapu Lapu RTC Decision. To be sure, in the Decision
dated September 9, 2002 in G.R. No. 141407, penned by former Chief Justice Artemio V.
Panganiban, the Court already passed upon the lack of effect of the Manila RTC Decision on the
finality of the Lapu Lapu RTC decision in this wise:

The records of the case clearly show that the Lapulapu Decision has become final and executory and
is thus valid and binding upon the parties. Obviously, petitioner [LLDHC] is again trying another
backdoor attempt to annul the final and executory Decision of the Lapulapu RTC.

First, it was petitioner that filed on March 11, 1992 a Notice of Appeal contesting the Lapulapu RTC
Judgment in Civil Case No. 2203-L rendered on February 24, 1992. The Notice was however rejected
by the said RTC for being frivolous and dilatory. Since petitioner had done nothing thereafter, the
Decision clearly became final and executory.

However, upon receipt of the Manila RTC Decision, petitioner found a new tool to evade the already
final Lapulapu Decision by seeking the annulment of the latter in a Petition with the CA. However,
the appellate court dismissed the action, because petitioner had been unable to prove any of the
grounds for annulment; namely lack of jurisdiction or extrinsic fraud. Because no appeal had been
taken by petitioner, the ruling of the CA also became final and executory.

Second, the Supreme Court likewise recognized the finality of the CA Decision when it threw out
LLDHCs Petition for Certiorari in GR No. 118633. This Court ruled thus:

"Instead of filing this petition for certiorari under Rule 65, which is essentially another Petition to
Annul Judgment, petitioner LLDHC should have filed a timely Petition for Review under Rule 45 of
the Revised Rules of Court of the decision of the Court of Appeals, dated December 29, 1994,
dismissing the Petition for Annulment of Judgment filed by the petitioner LLDHC before the court a
quo. But this is all academic now. The appellate courts decision had become final and executory on
January 28, 1995."

Jurisprudence mandates that when a decision becomes final and executory, it becomes valid and
binding upon the parties and their successors in interest. Such decision or order can no longer be
disturbed or reopened no matter how erroneous it may have been. Petitioners failure to file an appeal
within the reglementary period renders the judgment final and executory. The perfection of an appeal
in the manner and within the period prescribed by law is mandatory. Failure to conform to the rules
regarding appeal will render the judgment final and executory and, hence, unappealable. Therefore,
since the Lapulapu Decision has become final and executory, its execution has become mandatory and
ministerial on the part of the judge.

The CA correctly ruled that the Lapulapu Judgment is binding upon petitioner [LLDHC] which, by its
own motion, participated as an intervenor. In fact, the latter filed an Answer in Intervention and
thereafter actively took part in the trial. Thus, having had an opportunity to be heard and to seek a
reconsideration of the action or ruling it complained of, it cannot claim that it was denied due process
of law. What the law prohibits is the absolute absence of the opportunity to be heard. Jurisprudence
teaches that a party cannot feign denial of due process if it has been afforded the opportunity to
present its side.

Petitioner likewise claims that Private Respondent GMC cannot escape the adverse effects of the final
and executory judgment of the Manila RTC.

Again, we do not agree. A trial court has no power to stop an act that has been authorized by another
trial court of equal rank. As correctly stated by the CA, the Decision rendered by the Manila RTC --
while final and executory -- cannot bind herein private respondent [GMC], which was not a party to
the case before the said RTC. A personal judgment is binding only upon the parties, their agents,
representatives and successors in interest.1avvphi1

Third, petitioner grievously errs in insisting that the judgment of the Manila RTC nullified that of the
Lapulapu RTC. As already adverted to earlier, courts of coequal and coordinate jurisdiction may not
interfere with or pass upon each others orders or processes, since they have the same power and
jurisdiction. Except in extreme situations authorized by law, they are proscribed from doing
so.95(Emphases supplied.)

It likewise does not escape the attention of this Court that the only reason the Manila RTC Decision
was implemented ahead of the Lapu Lapu RTC Decision was that LLDHC successfully secured a
TRO from the Court of Appeals through its petition for certiorari docketed as CA-G.R. SP No. 44052,
which was eventually dismissed by the appellate court. The Court of Appeals ruled that the Manila
RTC Decision did not constitute a supervening event that would forestall the execution of the Lapu
Lapu RTC Decision. This decision of the Court of Appeals likewise became final and executory in
1998.

It bears repeating that the issue of whether or not the Manila RTC Decision could nullify or render
unenforceable the Lapu Lapu RTC Decision has been litigated many times over in different fora. It
would be the height of inequity if the Court were to now reverse the Court of Appeals and its own
final and executory rulings and allow GSIS to prevent the execution of the Lapu Lapu RTC Decision
on the same legal grounds previously discredited by the courts.

Second Issue:

Res Judicata

GMC asserts that the September 23, 2005 Decision of the Special Nineteenth Division of the Court of
Appeals in CA-G.R. SP No. 84382 and the petition herein by GSIS in G.R. No. 167000 are barred by
res judicata as the issues involved had been fully resolved not only by the lower courts but by this
Court as well. GSIS and LLDHC both insist that res judicata does not apply as this Court "has not yet
rendered a decision involving the same or any similar petition."96 The petitions by LLDHC before the
Court of Appeals and GSIS before this Court both prayed for the annulment of the March 11, 2004
and May 7, 2004 Orders of the Lapu-Lapu RTC in Civil Case No. 2203-L. These assailed Orders
were both issued to resolve the parties motions and to have the February 24, 1992 judgment
implemented and executed.

In Republic of the Philippines (Civil Aeronautics Administration) v. Yu, 97 this Court expounded on
the concept of res judicata and explained it in this wise:

Res judicata literally means "a matter adjudged; a thing judicially acted upon or decided; a thing or
matter settled by judgment." Res judicata lays the rule that an existing final judgment or decree
rendered on the merits, and without fraud or collusion, by a court of competent jurisdiction, upon any
matter within its jurisdiction, is conclusive of the rights of the parties or their privies, in all other
actions or suits in the same or any other judicial tribunal of concurrent jurisdiction on the points and
matters in issue in the first suit.98

In Villanueva v. Court of Appeals,99 we enumerated the elements of res judicata as follows:

a) The former judgment or order must be final;

b) It must be a judgment or order on the merits, that is, it was rendered after a consideration of
the evidence or stipulations submitted by the parties at the trial of the case;

c) It must have been rendered by a court having jurisdiction over the subject matter and the
parties; and

d) There must be, between the first and second actions, identity of parties, of subject matter
and of cause of action. This requisite is satisfied if the two (2) actions are substantially
between the same parties.100

All three parties herein are in agreement with the facts that led to the petitions in this case. However,
not all of them agree that the matters involved in this case have already been judicially settled. While
GMC contends that GSISs petition is barred by res judicata, both GSIS and LLDHC assert that this
Court has not yet decided any similar petition, thus disputing the claim of res judicata.
Res judicata has two concepts: (1) "bar by prior judgment" as enunciated in Rule 39, Section 47(b) of
the 1997 Rules of Civil Procedure; and (2) "conclusiveness of judgment" in Rule 39, Section 47(c),
which reads as follows:

(b) In other cases, the judgment or final order is, with respect to the matter directly adjudged
or as to any other matter that could have been raised in relation thereto, conclusive between
the parties and their successors in interest by title subsequent to the commencement of the
action or special proceeding, litigating for the same thing and under the same title and in the
same capacity; and

(c) In any other litigation between the same parties or their successors in interest, that only is
deemed to have been adjudged in a former judgment or final order which appears upon its
face to have been so adjudged, or which was actually and necessarily included therein or
necessary thereto.

In explaining the two concepts of res judicata, this Court held that:

There is "bar by prior judgment" when, as between the first case where the judgment was rendered,
and the second case that is sought to be barred, there is identity of parties, subject matter, and causes
of action. But where there is identity of parties and subject matter in the first and second cases, but no
identity of causes of action, the first judgment is conclusive only as to those matters actually and
directly controverted and determined and not as to matters merely involved therein. This is
"conclusiveness of judgment." Under the doctrine of conclusiveness of judgment, facts and issues
actually and directly resolved in a former suit cannot again be raised in any future case between the
same parties, even if the latter suit may involve a different claim or cause of action. The identity of
causes of action is not required but merely identity of issues.101

In Pealosa v. Tuason,102 we laid down the test in determining whether or not the causes of action in
the first and second cases are identical:

Would the same evidence support and establish both the present and former cause of action? If so, the
former recovery is a bar; if otherwise, it does not stand in the way of the former action.103

Res judicata clearly exists in G.R. No. 167000 and in CA-G.R. SP No. 84382 because both GSISs
and LLDHCs actions put in issue the validity of the Lapu-Lapu RTC Decision and were based on the
assumption that it has either been modified, altered or nullified by the Manila RTC Decision.

In CA-G.R. SP No. 84382, LLDHC sought to annul the assailed Orders of the Lapu-Lapu RTC and to
order the judge therein to desist from further proceeding in Civil Case No. 2203-L. LLDHC sought
for the same reliefs in its Petition for Annulment of Judgment in CA-G.R. SP No. 34696 and G.R. No.
118633, in its Petition for Certiorari in CA-G.R. SP No. 44052, and in its Petition for Review
on Certiorari in G.R. No. 141407, all of which have been decided with finality.

In G.R. No. 167000, GSIS is praying for the reversal of the November 25, 2004 Decision and January
20, 2005 Resolution in CA-G.R. SP No. 85096, wherein the Court of Appeals affirmed the assailed
Orders. The validity of these assailed Orders hinges on the validity of the Lapu-Lapu RTC Decision,
which issue had already been decided with finality by both the Court of Appeals and this Court.
Notwithstanding the difference in the forms of actions GSIS and LLDHC filed, the doctrine of res
judicata still applies considering that the parties were litigating the same thing, i.e., the 78 lots in
Marigondon, Lapu-Lapu City, and more importantly, the same contentions and evidence were used in
all causes of action. As this Court held in Mendiola v. Court of Appeals104:

The test of identity of causes of action lies not in the form of an action but on whether the same
evidence would support and establish the former and the present causes of action. The difference of
actions in the aforesaid cases is of no moment. x x x.105

The doctrine of res judicata makes a final judgment on the merits rendered by a court of competent
jurisdiction conclusive as to the rights of the parties and their privies and amounts to an absolute bar
to subsequent actions involving the same claim, demand, or cause of action.106 Even a finding of
conclusiveness of judgment operates as estoppel with respect to matters in issue or points
controverted, on the determination of which the finding or judgment was anchored.107

Evidently, this Court could dispose of this case simply upon the application of the principle of res
judicata. It is clear that GSISs petition in G.R. No. 167000 and LLDHCs petition in CA-G.R. SP No.
84382 should have never reached those stages for having been barred by a final and executory
judgment on their claims. However, considering the nature of the case before us, this Court is
compelled to make a final determination of the issues in the interest of substantial justice and to end
the wasteful use of our courts time and resources.

Third Issue:

GSISs Compliance with the

Lapu-Lapu RTC Judgment and Orders

GSIS asserts that the assailed Orders cannot be enforced upon it given the physical and legal
impossibility for it to comply as the titles over the subject properties were transferred to LLDHC
under the Manila RTC writ of execution.

A closer perusal of the March 11, 2004 and May 7, 2004 Orders shows that GSISs argument holds no
water. The May 7, 2004 Order denied GSISs and LLDHCs motions for reconsideration of the March
11, 2004 Order. The March 11, 2004 Order resolved GMCs urgent manifestation and motion to
proceed with the implementation of the February 24, 1992 final and executory decision and GSISs
and LLDHCs opposition thereto, as well as GSISs motion to stay the issuance of a writ of execution
against it. The dispositive portion of the Order reads:

WHEREFORE, in the light of the foregoing considerations, plaintiff Group Management

Corporations motion is GRANTED, while defendant GSIS motion to stay the issuance of a writ of
execution is denied for lack of merit. Consequently, the Sheriff of this Court is directed to proceed
with the immediate implementation of this Courts decision dated February 24, 1992, by
enforcing completely this Courts Order of Execution dated November 28, 1996, the writ of execution
dated December 17, 1996, the Order dated July 21, 1997, the Order dated October 23, 1997, the Order
dated November 28, 1997 and the Order dated December 22, 1997.108(Emphasis ours.)

While the previous orders and writs of execution issued by the Lapu-Lapu RTC required the GSIS to
execute the final deed of sale and to deliver the subject properties, the Lapu-Lapu RTC, in its
subsequent Orders, modified this by directing its order to the Register of Deeds of Lapu-Lapu City. In
its July 21, 1997 Order,109 the Lapu-Lapu RTC, seeing GSISs obstinate refusal to implement the
courts previous orders, directed the Register of Deeds of Lapu-Lapu City to cancel the Transfer
Certificates of Title of the subject properties and to issue new ones in the name of GMC, and to
deliver the same to GMC. Moreover, in its October 23, 1997 Order, the Lapu-Lapu RTC, noting the
implemented judgment of the Manila RTC, declared the issuance of new titles to LLDHC null and
void for being contrary to the courts February 24, 1992 decision and directed the Register of Deeds
to effect the transfer of the titles to GMC.

Considering that the assailed Orders merely directed the Lapu-Lapu RTCs Sheriff to proceed with
the implementation of the courts previous orders, that is, to make sure that the Register of Deeds of
Lapu-Lapu City complied with the orders, GSIS had nothing to comply with insofar as the titles to,
and possession of, the subject properties were concerned, the Orders being clearly directed towards
the Sheriff of the Lapu-Lapu RTC and the Register of Deeds of Lapu-Lapu City. Hence, GSISs
argument of legal and physical impossibility of compliance with the assailed Orders is baseless.

GSIS also argues that it cannot be the "subject [of any] execution including [the] payment of any
damage and other monetary judgments because all GSIS funds and properties are absolutely and
expressly exempt from execution and other legal processes under Section 39 of Republic Act No.
8291."110

Section 39 of Republic Act No. 8291 provides:

SECTION 39. Exemption from Tax, Legal Process and Lien. It is hereby declared to be the policy
of the State that the actuarial solvency of the funds of the GSIS shall be preserved and maintained at
all times and that contribution rates necessary to sustain the benefits under this Act shall be kept as
low as possible in order not to burden the members of the GSIS and their employers. Taxes imposed
on the GSIS tend to impair the actuarial solvency of its funds and increase the contribution rate
necessary to sustain the benefits of this Act. Accordingly, notwithstanding any laws to the contrary,
the GSIS, its assets, revenues including all accruals thereto, and benefits paid, shall be exempt from
all taxes, assessments, fees, charges or duties of all kinds. These exemptions shall continue unless
expressly and specifically revoked and any assessment against the GSIS as of the approval of this Act
are hereby considered paid. Consequently, all laws, ordinances, regulations, issuances, opinions or
jurisprudence contrary to or in derogation of this provision are hereby deemed repealed, superseded
and rendered ineffective and without legal force and effect.

xxxx

The funds and/or the properties referred to herein as well as the benefits, sums or monies
corresponding to the benefits under this Act shall be exempt from attachment, garnishment, execution,
levy or other processes issued by the courts, quasi judicial agencies or administrative bodies including
Commission on Audit (COA) disallowances and from all financial obligations of the members,
including his pecuniary accountability arising from or caused or occasioned by his exercise or
performance of his official functions or duties, or incurred relative to or in connection with his
position or work except when his monetary liability, contractual or otherwise, is in favor of the GSIS.

This Court, in Rubia v. Government Service Insurance System,111 held that the exemption of GSIS is
not absolute and does not encompass all of its funds, to wit:
In so far as Section 39 of the GSIS charter exempts the GSIS from execution, suffice it to say that
such exemption is not absolute and does not encompass all the GSIS funds. By way of illustration and
as may be gleaned from the Implementing Rules and Regulation of the GSIS Act of 1997, one
exemption refers to social security benefits and other benefits of GSIS members under Republic Act
No. 8291 in connection with financial obligations of the members to other parties. The pertinent GSIS
Rule provides:

Rule XV. Funds of the GSIS

Section 15.7 Exemption of Benefits of Members from Tax, Attachment, Execution, Levy or other
Legal Processes. The social security benefits and other benefits of GSIS members under R.A. 8291
shall be exempt from tax, attachment, garnishment, execution, levy or other processes issued by the
courts, quasi-judicial agencies or administrative bodies in connection with all financial obligations
of the member, including his pecuniary accountability arising from or caused or occasioned by his
exercise or performance of his official functions or duties or incurred in connection with his position
or work, as well as COA disallowances. Monetary liability in favor of the GSIS, however, may be
deducted from the benefits of the member. [Emphasis supplied]

The processual exemption of the GSIS funds and properties under Section 39 of the GSIS Charter, in
our view, should be read consistently with its avowed principal purpose: to maintain actuarial
solvency of the GSIS in the protection of assets which are to be used to finance the retirement,
disability and life insurance benefits of its members. Clearly, the exemption should be limited to the
purposes and objects covered. Any interpretation that would give it an expansive construction to
exempt all GSIS assets from legal processes absolutely would be unwarranted.

Furthermore, the declared policy of the State in Section 39 of the GSIS Charter granting GSIS an
exemption from tax, lien, attachment, levy, execution, and other legal processes should be read
together with the grant of power to the GSIS to invest its "excess funds" under Section 36 of the same
Act. Under Section 36, the GSIS is granted the ancillary power to invest in business and other
ventures for the benefit of the employees, by using its excess funds for investment purposes. In the
exercise of such function and power, the GSIS is allowed to assume a character similar to a private
corporation. Thus, it may sue and be sued, as also, explicitly granted by its charter. Needless to say,
where proper, under Section 36, the GSIS may be held liable for the contracts it has entered into in the
course of its business investments. For GSIS cannot claim a special immunity from liability in regard
to its business ventures under said Section. Nor can it deny contracting parties, in our view, the right
of redress and the enforcement of a claim, particularly as it arises from a purely contractual
relationship, of a private character between an individual and the GSIS.112

This ruling has been reiterated in the more recent case of Government Service Insurance System v.
Regional Trial Court of Pasig City, Branch 71,113 wherein GSIS, which was also the petitioner in that
case, asked to reverse this Courts findings in Rubia and grant GSIS absolute immunity. This Court
rejected that plea and held that GSIS should not be allowed to hide behind such immunity especially
since its obligation arose from its own wrongful action in a business transaction.

In this case, the monetary judgments against GSIS arose from its failure to comply with its private and
contractual obligation to GMC. As such, GSIS cannot claim immunity from the enforcement of the
final and executory judgment against it.114
Fourth Issue:

Forum Shopping

On the issue of forum shopping, this Court already found LLDHC guilty of forum shopping and was
adjudged to pay treble costs way back in 2002 in G.R. No. 141407115:

There is forum shopping whenever, as a result of an adverse opinion in one forum, a party seeks a
favorable opinion (other than by appeal or certiorari) from another. In Gatmaytan v. CA, the
petitioner therein repeatedly availed itself of several judicial remedies in different courts,
simultaneously or successively. All those remedies were substantially founded on the same
transactions and the same essential facts and circumstances; and all raised substantially the same
issues either pending in, or already resolved adversely by, some other court. This Court held that
therein petitioner was trying to increase his chances of obtaining a favorable decision by filing
multiple suits in several courts. Hence, he was found guilty of forum shopping.

In the present case, after the Lapulapu RTC had rendered its Decision in favor of private respondent,
petitioner filed several petitions before this Court and the CA essentially seeking the annulment
thereof. True, petitioner had filed its Complaint in the Manila RTC before private respondent filed its
own suit in the Lapulapu RTC. Records, however, show that private respondent learned of the Manila
case only when petitioner filed its Motion for Intervention in the Lapulapu RTC. When GMC filed its
own Motion to Intervene in the Manila RTC, it was promptly rebuffed by the judge therein. On the
other hand, petitioner was able to present its side and to participate fully in the proceedings before the
Lapulapu RTC.

On July 27, 1994, almost two years after the dismissal of its appeal by the Lapulapu RTC, petitioner
filed in the CA a suit for the annulment of that RTC judgment. On December 29, 1994, this suit was
rejected by the CA in a Decision which became final and executory on January 28, 1995, after no
appeal was taken by petitioner. However, this action did not stop petitioner. On February 2, 1995, it
filed with this Court another Petition deceptively cloaked as certiorari, but which in reality sought the
annulment of the Lapulapu Decision. This Court dismissed the Petition on September 6, 1996.
Petitioners Motion for Reconsideration was denied with finality on November 18, 1996.

On November 28, 1996, Judge Risos of the Lapulapu RTC directed the execution of the judgment in
the case filed before it. The Motion to Stay Execution filed by petitioner was denied on February 19,
1997. Undaunted, it filed in this Court another Petition for Certiorari, Prohibition and Mandamus. On
September 21, 1998, we referred the Petition to the CA for appropriate action. This new Petition again
essentially sought to annul the final and executory Decision rendered by the Lapulapu RTC. Needless
to say, the new suit was unsuccessful. Still, this rejection did not stop petitioner. It brought before this
Court the present Petition for Review on Certiorari alleging the same facts and circumstances and
raising the same issues already decided by this Court in G.R. No. 118633.

First Philippine International Bank v. CA stresses that what is truly important to consider in
determining whether forum shopping exists is the vexation caused the courts and the parties-litigants
by one who asks different courts and/or administrative agencies to rule on the same or related facts
and causes and/or to grant the same or substantially the same relief, in the process creating the
possibility of conflicting rulings and decisions.
Petitioner in the present case sued twice before the CA and thrice before this Court, alleging
substantially the same facts and circumstances, raising essentially the same issues, and praying for
almost identical reliefs for the annulment of the Decision rendered by the Lapulapu RTC. This
insidious practice of repeatedly bringing essentially the same action -- albeit disguised in various
nomenclatures -- before different courts at different times is forum shopping no less. Because of
petitioners actions, the execution of the Lapulapu Decision has been needlessly delayed and several
courts vexed.116

There is forum shopping when two or more actions or proceedings, other than appeal or certiorari,
involving the same parties for the same cause of action, are instituted either simultaneously or
successively to obtain a more favorable decision.117 This Court, in Spouses De la Cruz v.
Joaquin,118 explained why forum shopping is disapproved of:

Forum shopping trifles with the courts, abuses their processes, degrades the administration of justice,
and congests court dockets. Willful and deliberate violation of the rule against it is a ground for the
summary dismissal of the case; it may also constitute direct contempt of court.119

It is undeniable that both LLDHC and GSIS are guilty of forum shopping, for having gone through
several actions and proceedings from the lowest court to this Court in the hopes that they will obtain a
decision favorable to them. In all those actions, only one issue was in contention: the ownership of the
subject lots. In the process, the parties degraded the administration of justice, congested our court
dockets, and abused our judicial system. Moreover, the simultaneous and successive actions filed
below have resulted in conflicting decisions rendered by not only the trial courts but also by different
divisions of the Court of Appeals.

The very purpose of the rule against forum shopping was to stamp out the abominable practice of
trifling with the administration of justice. 120 It is evident from the history of this case that not only
were the parties and the courts vexed, but more importantly, justice was delayed. As this Court held in
the earlier case of LLDHC against GMC: "[The] insidious practice of repeatedly bringing essentially
the same action albeit disguised in various nomenclatures before different courts at different times
is forum shopping no less."121

Conclusion

Nonetheless, like we said, substantial justice requires the resolution of this controversy on its merits.
It is the duty of this Court to put an end to this long-delayed litigation and render a decision, which
will bind all parties with finality.

Although it is settled that the Lapu-Lapu RTC Decision was not in any way nullified by the Manila
RTC Decision, it is this Courts duty to resolve the legal implications of having two conflicting, final,
and executory decisions in existence. In Collantes v. Court of Appeals,122 this Court, faced with the
similar issue of having two conflicting, final and executory decisions before it, offered three options
to solve the dilemma: "the first is for the parties to assert their claims anew, the second is to determine
which judgment came first, and the third is to determine which of the judgments had been rendered by
a court of last resort."123

In Collantes, this Court applied the first option and resolved the conflicting issues anew. However,
resorting to the first solution in the case at bar would entail disregarding not only the final and
executory decisions of the Lapu-Lapu RTC and the Manila RTC, but also the final and executory
decisions of the Court of Appeals and this Court. Moreover, it would negate two decades worth of
litigating. Thus, we find it more equitable and practicable to apply the second and third options
consequently maintaining the finality of one of the conflicting judgments. The primary criterion under
the second option is the time when the decision was rendered and became final and executory, such
that earlier decisions should prevail over the current ones since final and executory decisions vest
rights in the winning party. In the third solution, the main criterion is the determination of which court
or tribunal rendered the decision. Decisions of this Court should be accorded more respect than those
made by the lower courts.124

Applying these criteria to the case at bar, the February 24, 1992 Decision of the Lapu-Lapu RTC in
Civil Case No. 2203-L was not only promulgated first; it also attained finality on January 28, 1995,
before the Manila RTCs May 10, 1994 Decision in Civil Case No. R-82-3429 became final on May
30, 1997. It is especially noteworthy that months after the Lapu-Lapu RTC issued its writ of execution
on December 17, 1996, the Manila RTC issued its own writ of execution on August 1, 1997. To
recall, the Manila RTC writ was only satisfied first because the Court of Appeals in CA-G.R. SP No.
44052 deemed it appropriate to issue a temporary restraining order against the execution of the Lapu-
Lapu RTC Decision, pending the case before it. Hence, the fact that the Manila RTC Decision was
implemented and executed first does not negate the fact that the Lapu-Lapu RTC Decision was not
only rendered earlier, but had also attained finality earlier. Furthermore, while both judgments
reached the Court of Appeals, only Civil Case No. 2203-L was passed upon on the merits by this
Court. In G.R. No. 141407, this Court resolved LLDHCs petition for review on certiorari seeking to
annul the Court of Appeals Decision in CA-G.R. SP No. 50650. This Court, in dismissing the
petition, upheld the validity of the Lapu-Lapu RTC Decision and declared that the Manila RTC
Decision cannot bind GMC. That decision became final and executory way back on March 10, 2003.

While this Court cannot blame the parties for exhausting all available remedies to obtain a favorable
judgment, the issues involved in this case should have been resolved upon the finality of this Courts
decision in G.R. No. 141407. As pronounced by this Court in Villanueva v. Court of Appeals125:

The interest of the judicial system in preventing relitigation of the same dispute recognizes that
judicial resources are finite and the number of cases that can be heard by the court is limited. Every
dispute that is reheard means that another will be delayed. In modern times when court dockets are
filled to overflowing, this concern is of critical importance. x x x.126

In summary, this Court finds the execution of the Lapu-Lapu RTC Decision in Civil Case No. 2203-L
to be in order. We affirm the assailed Orders of March 11, 2004 and May 7, 2004, which reiterate,
among others, the October 23, 1997 Order issued by the Lapu-Lapu RTC, directing the Register of
Deeds of Lapu-Lapu City to cancel the certificates of title of LLDHC and to issue new ones in GMCs
name. Whatever rights are due LLDHC from GSIS as a result of the final judgment of the Manila
RTC in Civil Case No. R-82-3429, which we have previously held to be binding between GSIS and
LLDHC, may be threshed out in an appropriate proceeding. Such proceeding shall not further delay
the execution of the Lapu-Lapu RTC Decision.

WHEREFORE, in view of the foregoing, the petition in G.R. No. 167000 is DENIED and the
Decision dated November 25, 2004 and Resolution dated January 20, 2005 of the Twentieth Division
of the Court of Appeals are AFFIRMED. The petition in G.R. No. 169971 is GRANTED and the
Decision dated September 23, 2005 of the Special Nineteenth Division of the Court of Appeals is
hereby REVERSED AND SET ASIDE.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,

vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their capacities as
appointed and Acting Members of the CENTRAL BOARD OF ASSESSMENT APPEALS;
TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C. FLORES, in their
capacities as appointed and Acting Members of the BOARD OF ASSESSMENT APPEALS of
Manila; and NICOLAS CATIIL in his capacity as City Assessor of Manila, respondents.

Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:

This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board
of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v.
Board of Assessment Appeals of Manila and City Assessor of Manila" which affirmed the March 29,
1976 decision of the Board of Tax Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615,
615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros
Reyes v. City Assessor of Manila" upholding the classification and assessments made by the City
Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in
Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling
sites by tenants. Said tenants were paying monthly rentals not exceeding three hundred pesos
(P300.00) in July, 1971. On July 14, 1971, the National Legislature enacted Republic Act No. 6359
prohibiting for one year from its effectivity, an increase in monthly rentals of dwelling units or of
lands on which another's dwelling is located, where such rentals do not exceed three hundred pesos
(P300.00) a month but allowing an increase in rent by not more than 10% thereafter. The said Act also
suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity thereby
disallowing the ejectment of lessees upon the expiration of the usual legal period of lease. On October
12, 1972, Presidential Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to
increase monthly rentals below P300.00 and by indefinitely suspending the aforementioned provision
of the Civil Code, excepting leases with a definite period. Consequently, the Reyeses, petitioners
herein, were precluded from raising the rentals and from ejecting the tenants. In 1973, respondent City
Assessor of Manila re-classified and reassessed the value of the subject properties based on the
schedule of market values duly reviewed by the Secretary of Finance. The revision, as expected,
entailed an increase in the corresponding tax rates prompting petitioners to file a Memorandum of
Disagreement with the Board of Tax Assessment Appeals. They averred that the reassessments made
were "excessive, unwarranted, inequitable, confiscatory and unconstitutional" considering that the
taxes imposed upon them greatly exceeded the annual income derived from their properties. They
argued that the income approach should have been used in determining the land values instead of the
comparable sales approach which the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax
Assessment Appeals, however, considered the assessments valid, holding thus:

WHEREFORE, and considering that the appellants have failed to submit concrete evidence
which could overcome the presumptive regularity of the classification and assessments appear
to be in accordance with the base schedule of market values and of the base schedule of
building unit values, as approved by the Secretary of Finance, the cases should be, as they are
hereby, upheld.

SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of Assessment Appeals.1wphi1 They submitted, among
others, the summary of the yearly rentals to show the income derived from the properties. Respondent
City Assessor, on the other hand, submitted three (3) deeds of sale showing the different market
values of the real property situated in the same vicinity where the subject properties of petitioners are
located. To better appreciate the locational and physical features of the land, the Board of Hearing
Commissioners conducted an ocular inspection with the presence of two representatives of the City
Assessor prior to the healing of the case. Neither the owners nor their authorized representatives were
present during the said ocular inspection despite proper notices served them. It was found that certain
parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive
portion of which reads:

WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.

For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266,
the appealed Decision is modified by allowing a 20% reduction in their respective market
values and applying therein the assessment level of 30% to arrive at the corresponding
assessed value.

SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES

APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.
The petition is impressed with merit.

The crux of the controversy is in the method used in tax assessment of the properties in question.
Petitioners maintain that the "Income Approach" method would have been more realistic for in
disregarding the effect of the restrictions imposed by P.D. 20 on the market value of the properties
affected, respondent Assessor of the City of Manila unlawfully and unjustifiably set increased new
assessed values at levels so high and successive that the resulting annual real estate taxes would
admittedly exceed the sum total of the yearly rentals paid or payable by the dweller tenants under P.D.
20. Hence, petitioners protested against the levels of the values assigned to their properties as revised
and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the
income approach is used in determining land values in some vicinities, it maintains that when income
is affected by some sort of price control, the same is rejected in the consideration and study of land
values as in the case of properties affected by the Rent Control Law for they do not project the true
market value in the open market (Rollo, p. 21). Thus, respondents opted instead for the "Comparable
Sales Approach" on the ground that the value estimate of the properties predicated upon prices paid in
actual, market transactions would be a uniform and a more credible standards to use especially in case
of mass appraisal of properties (Ibid.). Otherwise stated, public respondents would have this Court
completely ignore the effects of the restrictions of P.D. No. 20 on the market value of properties
within its coverage. In any event, it is unquestionable that both the "Comparable Sales Approach" and
the "Income Approach" are generally acceptable methods of appraisal for taxation purposes (The Law
on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that
the propriety of one as against the other would of course depend on several factors. Hence, as early as
1923 in the case of Army & Navy Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil.
383), it has been stressed that the assessors, in finding the value of the property, have to consider all
the circumstances and elements of value and must exercise a prudent discretion in reaching
conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only
be uniform, but must also be equitable and progressive.

Uniformity has been defined as that principle by which all taxable articles or kinds of property of the
same class shall be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of
taxation required in the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second
Edition). Thus, the need to examine closely and determine the specific mandate of the Constitution.

Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude the power to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights, both the due process and equal protection clauses of the
Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were
otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to
destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655
[1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 439 [1985]).

In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
confiscation of property. That would be a clear abuse of power (Sison v. Ancheta, supra).

The taxing power has the authority to make a reasonable and natural classification for purposes of
taxation but the government's act must not be prompted by a spirit of hostility, or at the very least
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different both in the privileges conferred and the liabilities imposed
(Ibid., p. 662).

Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal and assessment of real property for taxation purposes is
that the property must be "appraised at its current and fair market value."

By no strength of the imagination can the market value of properties covered by P.D. No. 20 be
equated with the market value of properties not so covered. The former has naturally a much lesser
market value in view of the rental restrictions.

Ironically, in the case at bar, not even the factors determinant of the assessed value of subject
properties under the "comparable sales approach" were presented by the public respondents, namely:
(1) that the sale must represent a bonafide arm's length transaction between a willing seller and a
willing buyer and (2) the property must be comparable property (Rollo, p. 27). Nothing can justify or
support their view as it is of judicial notice that for properties covered by P.D. 20 especially during
the time in question, there were hardly any willing buyers. As a general rule, there were no takers so
that there can be no reasonable basis for the conclusion that these properties were comparable with
other residential properties not burdened by P.D. 20. Neither can the given circumstances be
nonchalantly dismissed by public respondents as imposed under distressed conditions clearly
implying that the same were merely temporary in character. At this point in time, the falsity of such
premises cannot be more convincingly demonstrated by the fact that the law has existed for around
twenty (20) years with no end to it in sight.

Verily, taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any arbitrariness will
negate the very reason for government itself It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which is
the promotion of the common good, may be achieved (Commissioner of Internal Revenue v. Algue
Inc., et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened
by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle
of social justice should not now be penalized by the same government by the imposition of excessive
taxes petitioners can ill afford and eventually result in the forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would amount to
only P10.00 per sq. meter at the time in question.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE; and (e) the respondent Board of Assessment Appeals
of Manila and the City Assessor of Manila are ordered to make a new assessment by the income
approach method to guarantee a fairer and more realistic basis of computation (Rollo, p. 71).

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Grio-Aquino, Medialdea, Regalado and Davide, Jr., JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAAQUE, CITY ASSESSOR OF PARAAQUE,
and CITY TREASURER OF PARAAQUE, respondents.

DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Paraaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive
Order No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,
Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land,3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of
Air Transportation.4 The MIAA Charter further provides that no portion of the land transferred to
MIAA shall be disposed of through sale or any other mode unless specifically approved by the
President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real
estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with
respondent City of Paraaque to pay the real estate tax imposed by the City. MIAA then paid some of
the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:

TAX TAXABLE
TAX DUE PENALTY TOTAL
DECLARATION YEAR
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
 E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.006

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque threatened
to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax
delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt from real
estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the
proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought
to restrain the City of Paraaque from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the 60-
day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's motion for
reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5 December
2002 the present petition for review.7

Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public market of Barangay
La Huerta; and in the main lobby of the Paraaque City Hall. The City of Paraaque published the
notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general
circulation in the Philippines. The notices announced the public auction sale of the Airport Lands and
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall
Building of Paraaque City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
motion sought to restrain respondents the City of Paraaque, City Mayor of
Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the City
Assessor of Paraaque ("respondents") from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
The Court ordered respondents to cease and desist from selling at public auction the Airport Lands
and Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Paraaque, and the Solicitor General
subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties since
the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA
Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general
public. Since the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234
of the Local Government Code because the Airport Lands and Buildings are owned by the Republic.
To justify the exemption, MIAA invokes the principle that the government cannot tax itself. MIAA
points out that the reason for tax exemption of public property is that its taxation would not inure to
any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of
the Local Government Code. Respondents also argue that a basic rule of statutory construction is that
the express mention of one person, thing, or act excludes all others. An international airport is not
among the exceptions mentioned in Section 193 of the Local Government Code. Thus, respondents
assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where we
held that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real
estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are
exempt from real estate tax.

The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Paraaque, and all proceedings taken pursuant to such assessments, are void. In
such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the

National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.

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

Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt
from real estate tax. Respondents claim that the deletion of the phrase "any government-owned or
controlled so exempt by its charter" in Section 234(e) of the Local Government Code withdrew the
real estate tax exemption of government-owned or controlled corporations. The deleted phrase
appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the entities exempt from
real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real estate
tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or
controlled corporation as follows:

SEC. 2. General Terms Defined. x x x x

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

or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to
the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares. Section 10 of the MIAA Charter9provides:

SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to
Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
 determined jointly with the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to
be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided in
the General Appropriations Act.

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

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends x x
x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.

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

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

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

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is
that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, 12 police
authority13 and the levying of fees and charges.14 At the same time, MIAA exercises "all the powers of
a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate
and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock or
non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed
a government-owned or controlled corporation. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng
Pilipinas. All these government instrumentalities exercise corporate powers but they are not organized
as stock or non-stock corporations as required by Section 2(13) of the Introductory Provisions of the
Administrative Code. These government instrumentalities are sometimes loosely called government
corporate entities. However, they are not government-owned or controlled corporations in the strict
sense as understood under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality from local
taxation, such exemption is construed liberally in favor of the national government instrumentality. As
this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely
to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may be
construed liberally, in favor of non tax-liability of such agencies.19

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

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is when
the legislature clearly intended to tax government instrumentalities for the delivery of essential
public services for sound and compelling policy considerations. There must be express language in
the law empowering local governments to tax national government instrumentalities. Any doubt
whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held
in Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to carry
into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in
such a way as to prevent it from consummating its federal responsibilities, or even to
seriously burden it in the accomplishment of them." (Antieau, Modern Constitutional
Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax
as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned
by the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

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

The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal
fees and other charges from the public does not remove the character of the Airport Lands and
Buildings as properties for public use. The operation by the government of a tollway does not change
the character of the road as one for public use. Someone must pay for the maintenance of the road,
either the public indirectly through the taxes they pay the government, or only those among the public
who actually use the road through the toll fees they pay upon using the road. The tollway system is
even a more efficient and equitable manner of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions
and other conditions for the use of the road do not affect the public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed user's
tax. This means taxing those among the public who actually use a public facility instead of taxing all
the public including those who never use the particular public facility. A user's tax is more equitable
a principle of taxation mandated in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic," 22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside the
commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters, the
promenades, and public works of general service supported by said towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease it
for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public
place to the defendant for private use the plaintiff municipality exceeded its authority in the
exercise of its powers by executing a contract over a thing of which it could not dispose, nor
is it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce, as
was decided by the supreme court of Spain in its decision of February 12, 1895, which says:
"Communal things that cannot be sold because they are by their very nature outside of
commerce are those for public use, such as the plazas, streets, common lands, rivers,
fountains, etc." (Emphasis supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and cannot
be disposed of or even leased by the municipality to private parties. While in case of war or
during an emergency, town plazas may be occupied temporarily by private individuals, as was
done and as was tolerated by the Municipality of Pozorrubio, when the emergency has ceased,
said temporary occupation or use must also cease, and the town officials should see to it that
the town plazas should ever be kept open to the public and free from encumbrances or illegal
private constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

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

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw
from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section eighty-
three shall be non-alienable and shall not be subject to occupation, entry, sale, lease, or
other disposition until again declared alienable under the provisions of this Act or by
proclamation of the President. (Emphasis and underscoring supplied)

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

The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of
1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is not
otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the
Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to
real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed in
behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the executive
head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even
its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the President
of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings
from the Bureau of Air Transportation of the Department of Transportation and Communications. The
MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to
the ownership and administration of the Authority, subject to existing rights, if any. The
Bureau of Lands and other appropriate government agencies shall undertake an actual survey
of the area transferred within one year from the promulgation of this Executive Order and the
corresponding title to be issued in the name of the Authority. Any portion thereof shall not
be disposed through sale or through any other mode unless specifically approved by the
President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to
the Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are hereby
transferred to the Authority. (Emphasis supplied)
 SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of
Air Transportation and Transitory Provisions. The Manila International Airport including
the Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands
and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for
both international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous body;
and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies
and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was
not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose
was merely to reorganize a division in the Bureau of Air Transportation into a separate and
autonomous body. The Republic remains the beneficial owner of the Airport Lands and Buildings.
MIAA itself is owned solely by the Republic. No party claims any ownership rights over MIAA's
assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x
x dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does
not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and Buildings.
This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

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

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local
governments from imposing "[t]axes, fees or charges of any kind on the National Government, its
agencies and instrumentalities x x x." The real properties owned by the Republic are titled either in
the name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real properties remain owned
by the Republic and continue to be exempt from real estate tax.

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

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use
of such land area for a consideration to a taxable person and therefore such land area is subject to
real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or
juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions are hereby withdrawn upon effectivity of this Code.
(Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not
exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To repeat,
the provisions lay down the explicit proposition that the withdrawal of realty tax exemption
applies to all persons. The reference to or the inclusion of GOCCs is only clarificatory or
illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized under our
laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus, the
determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its
status whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and
234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code."
Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)

By express mandate of the Local Government Code, local governments cannot impose any kind of tax
on national government instrumentalities like the MIAA. Local governments are devoid of power to
tax the national government, its agencies and instrumentalities. The taxing powers of local
governments do not extend to the national government, its agencies and instrumentalities, "[u]nless
otherwise provided in this Code" as stated in the saving clause of Section 133. The saving clause
refers to Section 234(a) on the exception to the exemption from real estate tax of real property owned
by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall
within any of the exempt entities under Section 193. (Emphasis supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is
not included in the enumeration of exempt entities in Section 193. Under this theory, local
governments can impose any kind of local tax, and not only real estate tax, on the national
government.

Under the minority's theory, many national government instrumentalities with juridical personalities
will also be subject to any kind of local tax, and not only real estate tax. Some of the national
government instrumentalities vested by law with juridical personalities are: Bangko Sentral ng
Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) does not distinguish between national government instrumentalities with or without
juridical personalities. Where the law does not distinguish, courts should not distinguish. Thus,
Section 133(o) applies to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from local taxation is not whether
MIAA is a juridical person, but whether it is a national government instrumentality under Section
133(o) of the Local Government Code. Section 133(o) is the specific provision of law prohibiting
local governments from imposing any kind of tax on the national government, its agencies and
instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise provided
in this Code." This means that unless the Local Government Code grants an express authorization,
local governments have no power to tax the national government, its agencies and instrumentalities.
Clearly, the rule is local governments have no power to tax the national government, its agencies and
instrumentalities. As an exception to this rule, local governments may tax the national government, its
agencies and instrumentalities only if the Local Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial use
of its real properties to a taxable entity. Section 234(a) of the Local Government Code provides:

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

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property to a
taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national government,
its agencies and instrumentalities are subject to any kind of tax by local governments. The exception
to the exemption applies only to real estate tax and not to any other tax. The justification for the
exception to the exemption is that the real property, although owned by the Republic, is not devoted to
public use or public service but devoted to the private gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has any
one presenteda persuasive argument that there is such a conflict. The minority's assumption of an
irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise
provided in this Code." By its own words, Section 193 admits the superiority of other provisions of
the Local Government Code that limit the exercise of the taxing power in Section 193. When a
provision of law grants a power but withholds such power on certain matters, there is no conflict
between the grant of power and the withholding of power. The grantee of the power simply cannot
exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers.
By their very meaning and purpose, the "common limitations" on the taxing power prevail over the
grant or exercise of the taxing power. If the taxing power of local governments in Section 193 prevails
over the limitations on such taxing power in Section 133, then local governments can impose any kind
of tax on the national government, its agencies and instrumentalities a gross absurdity.

Local governments have no power to tax the national government, its agencies and instrumentalities,
except as otherwise provided in the Local Government Code pursuant to the saving clause in Section
133 stating "[u]nless otherwise provided in this Code." This exception which is an exception to the
exemption of the Republic from real estate tax imposed by local governments refers to Section
234(a) of the Code. The exception to the exemption in Section 234(a) subjects real property owned by
the Republic, whether titled in the name of the national government, its agencies or instrumentalities,
to real estate tax if the beneficial use of such property is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-
owned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling
when it provides:

SEC. 2. General Terms Defined. Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes that
a statute may require a different meaning than that defined in the Administrative Code. However, this
does not automatically mean that the definition in the Administrative Code does not apply to the
Local Government Code. Section 2 of the Administrative Code clearly states that "unless the specific
words x x x of a particular statute shall require a different meaning," the definition in Section 2 of the
Administrative Code shall apply. Thus, unless there is specific language in the Local Government
Code defining the phrase "government-owned or controlled corporation" differently from the
definition in the Administrative Code, the definition in the Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative
Code. Indeed, there is none. The Local Government Code is silent on the definition of the phrase
"government-owned or controlled corporation." The Administrative Code, however, expressly defines
the phrase "government-owned or controlled corporation." The inescapable conclusion is that the
Administrative Code definition of the phrase "government-owned or controlled corporation" applies
to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus,
the Administrative Code is the governing law defining the status and relationship of government
departments, bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides for a
different status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation" should
apply only to corporations organized under the Corporation Code, the general incorporation law, and
not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs
are not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special charter.
Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter 40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos
each, which shall be fully subscribed by the Government, and one hundred and twenty million
preferred shares with a par value of ten pesos each, which shall be issued in accordance with
the provisions of Sections seventy-seven and eighty-three of this Code. (Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be
Five Billion Pesos to be divided into Fifty Million common shares with par value of P100 per
share. These shares are available for subscription by the National Government. Upon the
effectivity of this Charter, the National Government shall subscribe to Twenty-Five Million
 common shares of stock worth Two Billion Five Hundred Million which shall be deemed
paid for by the Government with the net asset values of the Bank remaining after the transfer
of assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)

Other government-owned corporations organized as stock corporations under their special charters are
the Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and the
Philippine National Bank44 before it was reorganized as a stock corporation under the Corporation
Code. All these government-owned corporations organized under special charters as stock
corporations are subject to real estate tax on real properties owned by them. To rule that they are not
government-owned or controlled corporations because they are not registered with the Securities and
Exchange Commission would remove them from the reach of Section 234 of the Local Government
Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first
condition is that the government-owned or controlled corporation must be established for the common
good. The second condition is that the government-owned or controlled corporation must meet the test
of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin conditions of
common good and economic viability. In other words, Congress has no power to create government-
owned or controlled corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial activities and
need to compete in the market place. Being essentially economic vehicles of the State for the common
good meaning for economic development purposes these government-owned or controlled
corporations with special charters are usually organized as stock corporations just like ordinary
private corporations.

In contrast, government instrumentalities vested with corporate powers and performing governmental
or public functions need not meet the test of economic viability. These instrumentalities perform
essential public services for the common good, services that every modern State must provide its
citizens. These instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-owned or controlled
corporations" referred to in Section 16, Article XII of the 1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or public
services. However, when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities known as "government-owned or controlled
corporations" must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet
operating expenses solely from commercial transactions in competition with the private sector. The
intent of the Constitution is to prevent the creation of government-owned or controlled corporations
that cannot survive on their own in the market place and thus merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test
of economic performance. We know what happened in the past. If a government corporation
loses, then it makes its claim upon the taxpayers' money through new equity infusions from
the government and what is always invoked is the common good. That is the reason why this
year, out of a budget of P115 billion for the entire government, about P28 billion of this will
go into equity infusions to support a few government financial institutions. And this is all
taxpayers' money which could have been relocated to agrarian reform, to social services like
health and education, to augment the salaries of grossly underpaid public employees. And yet
this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse themselves
from the responsibility of meeting the market test so that they become viable. And so, Madam
President, I reiterate, for the committee's consideration and I am glad that I am joined in this
proposal by Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY
OR THE ECONOMIC TEST," together with the common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test of
economic viability." The addition includes the ideas that they must show capacity to function
efficiently in business and that they should not go into activities which the private sector can
do better. Moreover, economic viability is more than financial viability but also includes
capability to make profit and generate benefits not quantifiable in financial
terms.46 (Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from withholding such essential
services from the public.
However, government-owned or controlled corporations with special charters, organized essentially
for economic or commercial objectives, must meet the test of economic viability. These are the
government-owned or controlled corporations that are usually organized under their special charters
as stock corporations, like the Land Bank of the Philippines and the Development Bank of the
Philippines. These are the government-owned or controlled corporations, along with government-
owned or controlled corporations organized under the Corporation Code, that fall under the definition
of "government-owned or controlled corporations" in Section 2(10) of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create MIAA
to compete in the market place. MIAA does not compete in the market place because there is no
competing international airport operated by the private sector. MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. The operation of an
international airport requires the presence of personnel from the following government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and animal
diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off from,
the airport; and

7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers
and airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative
fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:
 SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-
owned or controlled corporation. Without a change in its capital structure, MIAA remains a
government instrumentality under Section 2(10) of the Introductory Provisions of the Administrative
Code. More importantly, as long as MIAA renders essential public services, it need not comply with
the test of economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or
controlled corporations" under Section 16, Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The
Administrative Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of

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

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)

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

4. Conclusion

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

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As
properties of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public dominion are not
subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
estate tax imposed by the City of Paraaque. We declare VOID all the real estate tax assessments,
including the final notices of real estate tax delinquencies, issued by the City of Paraaque on the
Airport Lands and Buildings of the Manila International Airport Authority, except for the portions
that the Manila International Airport Authority has leased to private parties. We also
declare VOID the assailed auction sale, and all its effects, of the Airport Lands and Buildings of the
Manila International Airport Authority.

No costs.

SO ORDERED.

Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez,

Corona, Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr.,
J.J., concur.

x-------------------------------------------------------------------------------x
DISSENTING OPINION

TINGA, J. :

The legally correct resolution of this petition would have had the added benefit of an utterly fair and
equitable result a recognition of the constitutional and statutory power of the City of Paraaque to
impose real property taxes on the Manila International Airport Authority (MIAA), but at the same
time, upholding a statutory limitation that prevents the City of Paraaque from seizing and conducting
an execution sale over the real properties of MIAA. In the end, all that the City of Paraaque would
hold over the MIAA is a limited lien, unenforceable as it is through the sale or disposition of MIAA
properties. Not only is this the legal effect of all the relevant constitutional and statutory provisions
applied to this case, it also leaves the room for negotiation for a mutually acceptable resolution
between the City of Paraaque and MIAA.

Instead, with blind but measured rage, the majority today veers wildly off-course, shattering statutes
and judicial precedents left and right in order to protect the precious Ming vase that is the Manila
International Airport Authority (MIAA). While the MIAA is left unscathed, it is surrounded by the
wreckage that once was the constitutional policy, duly enacted into law, that was local autonomy.
Make no mistake, the majority has virtually declared war on the seventy nine (79) provinces, one
hundred seventeen (117) cities, and one thousand five hundred (1,500) municipalities of the
Philippines.1

The icing on this inedible cake is the strained and purposely vague rationale used to justify the
majority opinion. Decisions of the Supreme Court are expected to provide clarity to the parties and to
students of jurisprudence, as to what the law of the case is, especially when the doctrines of long
standing are modified or clarified. With all due respect, the decision in this case is plainly so, so
wrong on many levels. More egregious, in the majority's resolve to spare the Manila International
Airport Authority (MIAA) from liability for real estate taxes, no clear-cut rule emerges on the
important question of the power of local government units (LGUs) to tax government corporations,
instrumentalities or agencies.

The majority would overturn sub silencio, among others, at least one dozen precedents enumerated
below:

1) Mactan-Cebu International Airport Authority v. Hon. Marcos,2 the leading case penned in 1997 by
recently retired Chief Justice Davide, which held that the express withdrawal by the Local
Government Code of previously granted exemptions from realty taxes applied to instrumentalities and
government-owned or controlled corporations (GOCCs) such as the Mactan-Cebu International
Airport Authority (MCIAA). The majority invokes the ruling in Basco v. Pagcor,3 a precedent
discredited in Mactan, and a vanguard of a doctrine so noxious to the concept of local government
rule that the Local Government Code was drafted precisely to counter such philosophy. The efficacy
of several rulings that expressly rely on Mactan, such as PHILRECA v. DILG Secretary,4City
Government of San Pablo v. Hon. Reyes5 is now put in question.

2) The rulings in National Power Corporation v. City of Cabanatuan,6 wherein the Court, through
Justice Puno, declared that the National Power Corporation, a GOCC, is liable for franchise taxes
under the Local Government Code, and succeeding cases that have relied on it such as Batangas
Power Corp. v. Batangas City7 The majority now states that deems instrumentalities as defined under
the Administrative Code of 1987 as purportedly beyond the reach of any form of taxation by LGUs,
stating "[l]ocal governments are devoid of power to tax the national government, its agencies and
instrumentalities."8 Unfortunately, using the definition employed by the majority, as provided by
Section 2(d) of the Administrative Code, GOCCs are also considered as instrumentalities, thus leading
to the astounding conclusion that GOCCs may not be taxed by LGUs under the Local Government
Code.

3) Lung Center of the Philippines v. Quezon City,9 wherein a unanimous en banc Court held that the
Lung Center of the Philippines may be liable for real property taxes. Using the majority's reasoning,
the Lung Center would be properly classified as an instrumentality which the majority now holds as
exempt from all forms of local taxation.10

4) City of Davao v. RTC,11 where the Court held that the Government Service Insurance System
(GSIS) was liable for real property taxes for the years 1992 to 1994, its previous exemption having
been withdrawn by the enactment of the Local Government Code. 12 This decision, which expressly
relied on Mactan, would be directly though silently overruled by the majority.

5) The common essence of the Court's rulings in the two Philippine Ports Authority v. City of
Iloilo,13 cases penned by Justices Callejo and Azcuna respectively, which relied in part on Mactan in
holding the Philippine Ports Authority (PPA) liable for realty taxes, notwithstanding the fact that it is
a GOCC. Based on the reasoning of the majority, the PPA cannot be considered a GOCC. The
reliance of these cases on Mactan, and its rationale for holding governmental entities like the PPA
liable for local government taxation is mooted by the majority.

6) The 1963 precedent of Social Security System Employees Association v. Soriano, 14 which declared
the Social Security Commission (SSC) as a GOCC performing proprietary functions. Based on the
rationale employed by the majority, the Social Security System is not a GOCC. Or perhaps more
accurately, "no longer" a GOCC.

7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit Authority v.
Central Board of Assessment.15 The characterization therein of the Light Rail Transit Authority
(LRTA) as a "service-oriented commercial endeavor" whose patrimonial property is subject to local
taxation is now rendered inconsequential, owing to the majority's thinking that an entity such as the
LRTA is itself exempt from local government taxation16, irrespective of the functions it performs.
Moreover, based on the majority's criteria, LRTA is not a GOCC.

8) The cases of Teodoro v. National Airports Corporation17 and Civil Aeronautics Administration v.
Court of Appeals.18 wherein the Court held that the predecessor agency of the MIAA, which was
similarly engaged in the operation, administration and management of the Manila International
Agency, was engaged in the exercise of proprietary, as opposed to sovereign functions. The majority
would hold otherwise that the property maintained by MIAA is actually patrimonial, thus implying
that MIAA is actually engaged in sovereign functions.

9) My own majority in Phividec Industrial Authority v. Capitol Steel, 19 wherein the Court held that
the Phividec Industrial Authority, a GOCC, was required to secure the services of the Office of the
Government Corporate Counsel for legal representation.20 Based on the reasoning of the majority,
Phividec would not be a GOCC, and the mandate of the Office of the Government Corporate Counsel
extends only to GOCCs.
10) Two decisions promulgated by the Court just last month (June 2006), National Power Corporation
v. Province of Isabela21 and GSIS v. City Assessor of Iloilo City.22 In the former, the Court
pronounced that "[a]lthough as a general rule, LGUs cannot impose taxes, fees, or charges of any kind
on the National Government, its agencies and instrumentalities, this rule admits of an exception, i.e.,
when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities." Yet the majority now rules that the exceptions in the LGC no longer hold,
since "local governments are devoid of power to tax the national government, its agencies and
instrumentalities."23 The ruling in the latter case, which held the GSIS as liable for real property taxes,
is now put in jeopardy by the majority's ruling.

There are certainly many other precedents affected, perhaps all previous jurisprudence regarding local
government taxation vis-a-vis government entities, as well as any previous definitions of GOCCs, and
previous distinctions between the exercise of governmental and proprietary functions (a distinction
laid down by this Court as far back as 191624). What is the reason offered by the majority for
overturning or modifying all these precedents and doctrines? None is given, for the majority takes
comfort instead in the pretense that these precedents never existed. Only children should be permitted
to subscribe to the theory that something bad will go away if you pretend hard enough that it does not
exist.

I.

Case Should Have Been Decided

Following Mactan Precedent

The core issue in this case, whether the MIAA is liable to the City of Paraaque for real property
taxes under the Local Government Code, has already been decided by this Court in the Mactan case,
and should have been resolved by simply applying precedent.

Mactan Explained

A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority
(MCIAA) claimed that it was exempt from payment of real property taxes to the City of Cebu,
invoking the specific exemption granted in Section 14 of its charter, Republic Act No. 6958, and its
status as an instrumentality of the government performing governmental functions.25 Particularly,
MCIAA invoked Section 133 of the Local Government Code, precisely the same provision utilized by
the majority as the basis for MIAA's exemption. Section 133 reads:

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:

xxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities
and local government units. (emphasis and underscoring supplied).
However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless otherwise
provided herein." It then considered the other relevant provisions of the Local Government Code,
particularly the following:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemption or incentives granted to, or enjoyed by all persons, whether natural or juridical, including
government-owned and controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.26

SECTION 232. Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila area may levy an annual ad valorem tax on real property such as land, building,
machinery, and other improvements not hereafter specifically exempted.27

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

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person:

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit
or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively
used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned and controlled corporations engaged in the distribution of water
and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code.28

Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to tax the
National Government, its agencies and instrumentalities, as evidenced by these cited provisions which
"otherwise provided." But what was the extent of the limitation under Section 133? This is how the
Court, correctly to my mind, defined the parameters in Mactan:

The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local
government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the
exceptions thereto. The use of exceptions or provisos in these sections, as shown by the following
clauses:

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in Section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in
Section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided
herein," with the "herein" to mean, of course, the section, it should have used the clause "unless
otherwise provided in this Code." The former results in absurdity since the section itself enumerates
what are beyond the taxing powers of local government units and, where exceptions were intended,
the exceptions are explicitly indicated in the next. For instance, in item (a) which excepts income
taxes "when levied on banks and other financial institutions"; item (d) which excepts "wharfage on
wharves constructed and maintained by the local government unit concerned"; and item (1) which
excepts taxes, fees and charges for the registration and issuance of licenses or permits for the driving
of "tricycles." It may also be observed that within the body itself of the section, there are exceptions
which can be found only in other parts of the LGC, but the section interchangeably uses therein the
clause, "except as otherwise provided herein" as in items (c) and (i), or the clause "except as provided
in this Code" in item (j). These clauses would be obviously unnecessary or mere surplusages if the
opening clause of the section were "Unless otherwise provided in this Code" instead of "Unless
otherwise provided herein." In any event, even if the latter is used, since under Section 232 local
government units have the power to levy real property tax, except those exempted therefrom under
Section 234, then Section 232 must be deemed to qualify Section 133.

Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as
laid down in Section 133, the taxing powers of local government units cannot extend to the levy of,
inter alia, "taxes, fees and charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232, provinces, cities,
and municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter
alia, "real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person,"
as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or judicial persons,

including government-owned and controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer
to Section 234 which enumerates the properties exempt from real property tax. But the last paragraph
of Section 234 further qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as to real property
owned by the Republic of the Philippines or any of its political subdivisions covered by item (a) of the
first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has
been granted to a taxable person for consideration or otherwise.

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. Any claim
to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions
provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said
section is qualified by Sections 232 and 234.29

The Court in Mactan acknowledged that under Section 133, instrumentalities were generally exempt
from all forms of local government taxation, unless otherwise provided in the Code. On the other
hand, Section 232 "otherwise provided" insofar as it allowed LGUs to levy an ad valorem real
property tax, irrespective of who owned the property. At the same time, the imposition of real
property taxes under Section 232 is in turn qualified by the phrase "not hereinafter specifically
exempted." The exemptions from real property taxes are enumerated in Section 234, which
specifically states that only real properties owned "by the Republic of the Philippines or any of its
political subdivisions" are exempted from the payment of the tax. Clearly, instrumentalities or
GOCCs do not fall within the exceptions under Section 234.30

Mactan Overturned the

Precedents Now Relied

Upon by the Majority

But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR, 31 decided before the
enactment of the Local Government Code. The Court in Basco declared the PAGCOR as exempt from
local taxes, justifying the exemption in this wise:

Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a
government owned or controlled corporation with an original charter, PD 1869. All of its shares of
stocks are owned by the National Government. In addition to its corporate powers (Sec. 3, Title II, PD
1869) it also exercises regulatory powers xxx

PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local
government.

"The states have no power by taxation or otherwise, to retard impede, burden or in any manner control
the operation of constitutional laws enacted by Congress to carry into execution the powers vested in
the federal government." (McCulloch v. Marland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on
the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can
regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activates or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it.32

Basco is as strident a reiteration of the old guard view that frowned on the principle of local
autonomy, especially as it interfered with the prerogatives and privileges of the national government.
Also consider the following citation from Maceda v. Macaraig, 33 decided the same year as Basco.
Discussing the rule of construction of tax exemptions on government instrumentalities, the sentiments
are of a similar vein.

Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.

The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of
treatment among tax payers.

The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to reduce
the amount of money that has to be handled by government in the course of its operations. For these
reasons, provisions granting exemptions to government agencies may be construed liberally, in favor
of non tax-liability of such agencies.

In the case of property owned by the state or a city or other public corporations, the express
exemption should not be construed with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property "exemption is the rule and taxation the
exception."34

Strikingly, the majority cites these two very cases and the stodgy rationale provided therein. This
evinces the perspective from which the majority is coming from. It is admittedly a viewpoint once
shared by this Court, and en vogue prior to the enactment of the Local Government Code of 1991.

However, the Local Government Code of 1991 ushered in a new ethos on how the art of governance
should be practiced in the Philippines, conceding greater powers once held in the private reserve of
the national government to LGUs. The majority might have private qualms about the wisdom of the
policy of local autonomy, but the members of the Court are not expected to substitute their personal
biases for the legislative will, especially when the 1987 Constitution itself promotes the principle of
local autonomy.

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions and duties of local officials,
and all other matters relating to the organization and operation of the local units.

xxx

Section 5. Each local government unit shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.

xxx

The Court in Mactan recognized that a new day had dawned with the enactment of the 1987
Constitution and the Local Government Code of 1991. Thus, it expressly rejected the contention of
the MCIAA that Basco was applicable to them. In doing so, the language of the Court was dramatic, if
only to emphasize how monumental the shift in philosophy was with the enactment of the Local
Government Code:

Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the
[Local Government Code]. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt
its wisdom.35 (emphasis supplied)

The Court Has Repeatedly

Reaffirmed Mactan Over the

Precedents Now Relied Upon

By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead. The
notion that instrumentalities may be subjected to local taxation by LGUs was again affirmed in
National Power Corporation v. City of Cabanatuan,36 which was penned by Justice Puno. NPC or
Napocor, invoking its continued exemption from payment of franchise taxes to the City of
Cabanatuan, alleged that it was an instrumentality of the National Government which could not be
taxed by a city government. To that end, Basco was cited by NPC. The Court had this to say about
Basco.

xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to
the effectivity of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However, as this Court ruled in the case
of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos, nothing prevents Congress
from decreeing that even instrumentalities or agencies of the government performing governmental
functions may be subject to tax. In enacting the LGC, Congress exercised its prerogative to tax
instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national
government, was subject to real property tax.37

In the 2003 case of Philippine Ports Authority v. City of Iloilo,38 the Court, in the able ponencia of
Justice Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes were assessed under
the old Real Property Tax Code and not the Local Government Code, the Court again cited Mactan to
refute PPA's invocation of Basco as the basis of its exemption.

[Basco] did not absolutely prohibit local governments from taxing government instrumentalities. In
fact we stated therein:

The power of local government to "impose taxes and fees" is always subject to "limitations" which
Congress may provide by law. Since P.D. 1869 remains an "operative" law until "amended, repealed
or revoked". . . its "exemption clause" remains an exemption to the exercise of the power of local
governments to impose taxes and fees.

Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos,
where the Basco case was similarly invoked for tax exemption, we stated: "[N]othing can prevent
Congress from decreeing that even instrumentalities or agencies of the Government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom." The fact that tax exemptions of
government-owned or controlled corporations have been expressly withdrawn by the present Local
Government Code clearly attests against petitioner's claim of absolute exemption of government
instrumentalities from local taxation.39

Just last month, the Court in National Power Corporation v. Province of Isabela40 again rejected Basco
in emphatic terms. Held the Court, through Justice Callejo, Sr.:

Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case, the Court
noted primarily that the Basco case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the National Government was in
effect. It further explained that in enacting the LGC, Congress empowered the LGUs to impose
certain taxes even on instrumentalities of the National Government.41

The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo 42 case, a
decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's properties at
public auction for failure to pay realty taxes. The Court again reiterated that "it was the intention of
Congress to withdraw the tax exemptions granted to or presently enjoyed by all persons, including
government-owned or controlled corporations, upon the effectivity" of the Code.43 The Court in the
second Public Ports Authority case likewise cited Mactan as providing the "raison d'etre for the
withdrawal of the exemption," namely, "the State policy to ensure autonomy to local governments and
the objective of the [Local Government Code] that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest development as self-reliant communities. . . . "44

Last year, the Court, in City of Davao v. RTC,45 affirmed that the legislated exemption from real
property taxes of the Government Service Insurance System (GSIS) was removed under the Local
Government Code. Again, Mactan was relied upon as the governing precedent. The removal of the tax
exemption stood even though the then GSIS law46 prohibited the removal of GSIS' tax exemptions
unless the exemption was specifically repealed, "and a provision is enacted to substitute the declared
policy of exemption from any and all taxes as an essential factor for the solvency of the fund."47 The
Court, citing established doctrines in statutory construction and Duarte v. Dade48 ruled that such
proscription on future legislation was itself prohibited, as "the legislature cannot bind a future
legislature to a particular mode of repeal."49

And most recently, just less than one month ago, the Court, through Justice Corona in Government
Service Insurance System v. City Assessor of Iloilo50 again affirmed that the Local Government Code
removed the previous exemption from real property taxes of the GSIS. Again Mactan was cited as
having "expressly withdrawn the [tax] exemption of the [GOCC].51

Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule
employed by the Court since its adoption, the doctrine therein consistent with the Local Government
Code. Corollarily, Basco, the polar opposite of Mactan has been emphatically rejected and declared
inconsistent with the Local Government Code.

II.

Majority, in Effectively Overturning Mactan,

Refuses to Say Why Mactan Is Wrong

The majority cites Basco in support. It does not cite Mactan, other than an incidental reference that it
is relied upon by the respondents.52 However, the ineluctable conclusion is that the majority rejects
the rationale and ruling in Mactan. The majority provides for a wildly different interpretation of
Section 133, 193 and 234 of the Local Government Code than that employed by the Court in Mactan.
Moreover, the parties in Mactan and in this case are similarly situated, as can be obviously deducted
from the fact that both petitioners are airport authorities operating under similarly worded charters.
And the fact that the majority cites doctrines contrapuntal to the Local Government Code as in Basco
and Maceda evinces an intent to go against the Court's jurisprudential trend adopting the philosophy
of expanded local government rule under the Local Government Code.
Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the
majority's studied murkiness vis--vis the Mactan precedent. The majority is obviously inconsistent
with Mactan and there is no way these two rulings can stand together. Following basic principles in
statutory construction, Mactan will be deemed as giving way to this new ruling.

However, the majority does not bother to explain why Mactan is wrong. The interpretation in Mactan
of the relevant provisions of the Local Government Code is elegant and rational, yet the majority
refuses to explain why this reasoning of the Court in Mactan is erroneous. In fact, the majority does
not even engage Mactan in any meaningful way. If the majority believes that Mactan may still stand
despite this ruling, it remains silent as to the viable distinctions between these two cases.

The majority's silence on Mactan is baffling, considering how different this new ruling is with the
ostensible precedent. Perhaps the majority does not simply know how to dispense with the ruling in
Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more honorable end than
death by amnesia or ignonominous disregard. The majority could have devoted its discussion in
explaining why it thinks Mactan is wrong, instead of pretending that Mactan never existed at all. Such
an approach might not have won the votes of the minority, but at least it would provide some degree
of intellectual clarity for the parties, LGUs and the national government, students of jurisprudence and
practitioners. A more meaningful debate on the matter would have been possible, enriching the study
of law and the intellectual dynamic of this Court.

There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the
MIAA are similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in
the business of operating an airport. They are the owners of airport properties they respectively
maintain and hold title over these properties in their name.53 These entities are both owned by the
State, and denied by their respective charters the absolute right to dispose of their properties without
prior approval elsewhere.54 Both of them are

not empowered to obtain loans or encumber their properties without prior approval the prior approval
of the President.55

III.

Instrumentalities, Agencies

And GOCCs Generally

Liable for Real Property Tax

I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my position
lies with Mactan, which will further demonstrate why the majority has found it inconvenient to even
grapple with the precedent that is Mactan in the first place.

Mactan held that the prohibition on taxing the national government, its agencies and instrumentalities
under Section 133 is qualified by Section 232 and Section 234, and accordingly, the only relevant
exemption now applicable to these bodies is as provided under Section 234(o), or on "real property
owned by the Republic of the Philippines or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person."
It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a
governmental entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all persons,
including [GOCCs]", thus encompassing the two classes of persons recognized under our laws,
natural persons56 and juridical persons.57

The fact that the Local Government Code mandates the withdrawal of previously granted exemptions
evinces certain key points. If an entity was previously granted an express exemption from real
property taxes in the first place, the obvious conclusion would be that such entity would ordinarily be
liable for such taxes without the exemption. If such entities were already deemed exempt due to some
overarching principle of law, then it would be a redundancy or surplusage to grant an exemption to an
already exempt entity. This fact militates against the claim that MIAA is preternaturally exempt from
realty taxes, since it required the enactment of an express exemption from such taxes in its charter.

Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person. The
general rule laid down in Section 232 is given short shrift. In arriving at this conclusion, several leaps
in reasoning are committed.

Majority's Flawed Definition

of GOCCs.

The majority takes pains to assert that the MIAA is not a GOCC, but rather an instrumentality.
However, and quite grievously, the supposed foundation of this assertion is an adulteration.

The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation.58 Most tellingly, the majority selectively cites a portion of Section 2(10) of
the Administrative Code of 1987, as follows:

Instrumentality refers to any agency of the National Government not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy, usually through a
charter. xxx59 (emphasis omitted)

However, Section 2(10) of the Administrative Code, when read in full, makes an important
clarification which the majority does not show. The portions omitted by the majority are highlighted
below:

(10)Instrumentality refers to any agency of the National Government not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions and government
owned or controlled corporations.60

Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is also
worth citing in full:
(4) Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein. (emphasis supplied)61

Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an agency of
the National Government. Thus, there actually is no point in the majority's assertion that MIAA is not
a GOCC, since based on the majority's premise of Section 133 as the key provision, the material
question is whether MIAA is either an instrumentality, an agency, or the National Government itself.
The very provisions of the Administrative Code provide that a GOCC can be either an instrumentality
or an agency, so why even bother to extensively discuss whether or not MIAA is a GOCC?

Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer,62 the
Supreme Court already noted that a corporation of which the government is the majority stockholder
"remains an agency or instrumentality of government."63

Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal. However,
the entire discussion of the majority on the definition of a GOCC, obiter as it may ultimately be,
deserves emphatic refutation. The views of the majority on this matter are very dangerous, and would
lead to absurdities, perhaps unforeseen by the majority. For in fact, the majority effectively
declassifies many entities created and recognized as GOCCs and would give primacy to the
Administrative Code of 1987 rather than their respective charters as to the definition of these entities.

Majority Ignores the Power

Of Congress to Legislate and

Define Chartered Corporations

First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must be
"organized as a stock or non-stock corporation," as defined under the Corporation Code. To insist on
this as an absolute rule fails on bare theory. Congress has the undeniable power to create a corporation
by legislative charter, and has been doing so throughout legislative history. There is no constitutional
prohibition on Congress as to what structure these chartered corporations should take on. Clearly,
Congress has the prerogative to create a corporation in whatever form it chooses, and it is not bound
by any traditional format. Even if there is a definition of what a corporation is under the Corporation
Code or the Administrative Code, these laws are by no means sacrosanct. It should be remembered
that these two statutes fall within the same level of hierarchy as a congressional charter, since they all
are legislative enactments. Certainly, Congress can choose to disregard either the Corporation Code or
the Administrative Code in defining the corporate structure of a GOCC, utilizing the same extent of
legislative powers similarly vesting it the putative ability to amend or abolish the Corporation Code or
the Administrative Code.

These principles are actually recognized by both the Administrative Code and the Corporation Code.
The definition of GOCCs, agencies and instrumentalities under the Administrative Code are laid
down in the section entitled "General Terms Defined," which qualifies:

Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a
particular statute, shall require a different meaning: (emphasis supplied)
xxx

Similar in vein is Section 6 of the Corporation Code which provides:

SEC. 4. Corporations created by special laws or charters. Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar as they are applicable.
(emphasis supplied)

Thus, the clear doctrine emerges the law that governs the definition of a corporation or entity
created by Congress is its legislative charter. If the legislative enactment defines an entity as a
corporation, then it is a corporation, no matter if the Corporation Code or the Administrative Code
seemingly provides otherwise. In case of conflict between the legislative charter of a government
corporation, on one hand, and the Corporate Code and the Administrative Code, on the other, the
former always prevails.

Majority, in Ignoring the

Legislative Charters, Effectively

Classifies Duly Established GOCCs,

With Disastrous and Far Reaching

Legal Consequences

Second, the majority claims that MIAA does not qualify either as a stock or non-stock corporation, as
defined under the Corporation Code. It explains that the MIAA is not a stock corporation because it
does not have any capital stock divided into shares. Neither can it be considered as a non-stock
corporation because it has no members, and under Section 87, a non-stock corporation is one where
no part of its income is distributable as dividends to its members, trustees or officers.

This formulation of course ignores Section 4 of the Corporation Code, which again provides that
corporations created by special laws or charters shall be governed primarily by the provisions of the
special law or charter, and not the Corporation Code.

That the MIAA cannot be considered a stock corporation if only because it does not have a stock
structure is hardly a plausible proposition. Indeed, there is no point in requiring a capital stock
structure for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.

Admittedly, there are GOCCs established in such a manner, such as the National Power Corporation
(NPC), which is provided with authorized capital stock wholly subscribed and paid for by the
Government of the Philippines, divided into shares but at the same time, is prohibited from
transferring, negotiating, pledging, mortgaging or otherwise giving these shares as security for
payment of any obligation.64 However, based on the Corporation Code definition relied upon by the
majority, even the NPC cannot be considered as a stock corporation. Under Section 3 of the
Corporation Code, stock corporations are defined as being "authorized to distribute to the holders of
its shares dividends or allotments of the surplus profits on the basis of the shares held."65 On the other
hand, Section 13 of the NPC's charter states that "the Corporation shall be non-profit and shall devote
all its returns from its capital investment, as well as excess revenues from its operation, for
expansion."66 Can the holder of the shares of NPC, the National Government, receive its surplus
profits on the basis of its shares held? It cannot, according to the NPC charter, and hence, following
Section 3 of the Corporation Code, the NPC is not a stock corporation, if the majority is to be
believed.

The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income as
dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of its
gross operating income to the national government. How about the Philippine Health Insurance
Corporation, created with the "status of a tax-exempt government corporation attached to the
Department of Health" under Rep. Act No. 7875.67 It too cannot be considered as a stock corporation
because it has no capital stock structure. But using the criteria of the majority, it is doubtful if it would
pass muster as a non-stock corporation, since the PHIC or Philhealth, as it is commonly known, is
expressly empowered "to collect, deposit, invest, administer and disburse" the National Health
Insurance Fund.68 Or how about the Social Security System, which under its revised charter, Republic
Act No. 8282, is denominated as a "corporate body."69 The SSS has no capital stock structure, but has
capital comprised of contributions by its members, which are eventually remitted back to its members.
Does this disqualify the SSS from classification as a GOCC, notwithstanding this Court's previous
pronouncement in Social Security System Employees Association v. Soriano?70

In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or non-
stock,71 declare and remit at least fifty percent (50%) of their annual net earnings as cash, stock or
property dividends to the National Government.72 But according to the majority, non-stock
corporations are prohibited from declaring any part of its income as dividends. But if Republic Act
No. 7656 requires even non-stock corporations to declare dividends from income, should it not follow
that the prohibition against declaration of dividends by non-stock corporations under the Corporation
Code does not apply to government-owned or controlled corporations? For if not, and the majority's
illogic is pursued, Republic Act No. 7656, passed in 1993, would be fatally flawed, as it would
contravene the Administrative Code of 1987 and the Corporation Code.

In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be illustrated by
Republic Act No. 7656. Following the majority's definition of a GOCC and in accordance with
Republic Act No. 7656, here are but a few entities which are not obliged to remit fifty (50%) of its
annual net earnings to the National Government as they are excluded from the scope of Republic Act
No. 7656:

1) Philippine Ports Authority73 has no capital stock74, no members, and obliged to apply the balance
of its income or revenue at the end of each year in a general reserve.75

2) Bases Conversion Development Authority76 - has no capital stock,77 no members.

3) Philippine Economic Zone Authority78 - no capital stock,79 no members.

4) Light Rail Transit Authority80 - no capital stock,81 no members.

5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to remit fifty percent
(50%) of its net profits to the National Treasury.84

6) National Power Corporation85 - has capital stock but is prohibited from "distributing to the holders
of its shares dividends or allotments of the surplus profits on the basis of the shares held;"86 no
members.

7) Manila International Airport Authority no capital stock87, no members88, mandated to remit

twenty percent (20%) of its annual gross operating income to the National Treasury.89

Thus, for the majority, the MIAA, among many others, cannot be considered as within the coverage
of Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else then could
Executive Order No. 483, signed in 1998 by President Ramos, be explained? The issuance provides:

WHEREAS, Section 1 of Republic Act No. 7656 provides that:

"Section 1. Declaration of Policy. - It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned and/or controlled
corporations, without impairing their viability and the purposes for which they have been established,
shall share a substantial amount of their net earnings to the National Government."

WHEREAS, to support the viability and mandate of government-owned and/or controlled

corporations [GOCCs], the liquidity, retained earnings position and medium-term plans and programs
of these GOCCs were considered in the determination of the reasonable dividend rates of such
corporations on their 1997 net earnings.

WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended the

adjustment on the percentage of annual net earnings that shall be declared by the Manila International
Airport Authority [MIAA] and Phividec Industrial Authority [PIA] in the interest of national economy
and general welfare.

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the powers
vested in me by law, do hereby order:

SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA and PIA as
dividends to the National Government as provided for under Section 3 of Republic Act No. 7656 is
adjusted from at least fifty percent [50%] to the rates specified hereunder:

1. Manila International Airport Authority - 35% [cash]

2. Phividec Industrial Authority - 25% [cash]

SECTION 2. The adjusted dividend rates provided for under Section 1 are only applicable on 1997
net earnings of the concerned government-owned and/or controlled corporations.

Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a
GOCC, for how else could it have come under the coverage of Republic Act No. 7656, a law
applicable only to GOCCs? But, the majority apparently disagrees, and resultantly holds that MIAA is
not obliged to remit even the reduced rate of thirty five percent (35%) of its net earnings to the
national government, since it cannot be covered by Republic Act No. 7656.

All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I stated
earlier, I find it illogical that chartered corporations are compelled to comply with the templates of the
Corporation Code, especially when the Corporation Code itself states that these corporations are to be
governed by their own charters. This is especially true considering that the very provision cited by the
majority, Section 87 of the Corporation Code, expressly says that the definition provided therein is
laid down "for the purposes of this [Corporation] Code." Read in conjunction with Section 4 of the
Corporation Code which mandates that corporations created by charter be governed by the law
creating them, it is clear that contrary to the majority, MIAA is not disqualified from classification as
a non-stock corporation by reason of Section 87, the provision not being applicable to corporations
created by special laws or charters. In fact, I see no real impediment why the MIAA and similarly
situated corporations such as the PHIC, the SSS, the Philippine Deposit Insurance Commission, or
maybe even the NPC could at the very least, be deemed as no stock corporations (as differentiated
from non-stock corporations).

The point, stripped to bare simplicity, is that entity created by legislative enactment is a corporation if
the legislature says so. After all, it is the legislature that dictates what a corporation is in the first
place. This is better illustrated by another set of entities created before martial law. These include the
Mindanao Development Authority,90 the Northern Samar Development Authority,91 the Ilocos Sur
Development Authority,92 the Southeastern Samar Development Authority93 and the Mountain
Province Development Authority.94 An examination of the first section of the statutes creating these
entities reveal that they were established "to foster accelerated and balanced growth" of their
respective regions, and towards such end, the charters commonly provide that "it is recognized that a
government corporation should be created for the purpose," and accordingly, these charters "hereby
created a body corporate."95 However, these corporations do not have capital stock nor members, and
are obliged to return the unexpended balances of their appropriations and earnings to a revolving fund
in the National Treasury. The majority effectively declassifies these entities as GOCCs, never mind
the fact that their very charters declare them to be GOCCs.

I mention these entities not to bring an element of obscurantism into the fray. I cite them as examples
to emphasize my fundamental pointthat it is the legislative charters of these entities, and not the
Administrative Code, which define the class of personality of these entities created by Congress. To
adopt the view of the majority would be, in effect, to sanction an implied repeal of numerous
congressional charters for the purpose of declassifying GOCCs. Certainly, this could not have been
the intent of the crafters of the Administrative Code when they drafted the "Definition of Terms"
incorporated therein.

MIAA Is Without

Doubt, A GOCC

Following the charters of government corporations, there are two kinds of GOCCs, namely: GOCCs
which are stock corporations and GOCCs which are no stock corporations (as distinguished from non-
stock corporation). Stock GOCCs are simply those which have capital stock while no stock GOCCs
are those which have no capital stock. Obviously these definitions are different from the definitions of
the terms in the Corporation Code. Verily, GOCCs which are not incorporated with the Securities and
Exchange Commission are not governed by the Corporation Code but by their respective charters.

For the MIAA's part, its charter is replete with provisions that indubitably classify it as a GOCC.
Observe the following provisions from MIAA's charter:

SECTION 3. Creation of the Manila International Airport Authority.There is hereby established a

body corporate to be known as the Manila International Airport Authority which shall be attached to
the Ministry of Transportation and Communications. The principal office of the Authority shall be
located at the New Manila International Airport. The Authority may establish such offices, branches,
agencies or subsidiaries as it may deem proper and necessary; Provided, That any subsidiary that may
be organized shall have the prior approval of the President.

The land where the Airport is presently located as well as the surrounding land area of approximately
six hundred hectares, are hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any. The Bureau of Lands and other
appropriate government agencies shall undertake an actual survey of the area transferred within one
year from the promulgation of this Executive Order and the corresponding title to be issued in the
name of the Authority. Any portion thereof shall not be disposed through sale or through any other
mode unless specifically approved by the President of the Philippines.

xxx

SECTION 5. Functions, Powers, and Duties. The Authority shall have the following functions,
powers and duties:

xxx

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

(e) To adopt and use a corporate seal;

(f) To succeed by its corporate name;

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

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

(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever kind and nature, whether movable or immovable, or
any interest therein;

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

xxx

(o) To exercise all the powers of a corporation under the Corporation Law, insofar as these powers are
not inconsistent with the provisions of this Executive Order.
xxx

SECTION 16. Borrowing Power. The Authority may, after consultation with the Minister of
Finance and with the approval of the President of the Philippines, as recommended by the Minister of
Transportation and Communications, raise funds, either from local or international sources, by way of
loans, credits or securities, and other borrowing instruments, with the power to create pledges,
mortgages and other voluntary liens or encumbrances on any of its assets or properties.

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

Except as expressly authorized by the President of the Philippines the total outstanding indebtedness
of the Authority in the principal amount, in local and foreign currency, shall not at any time exceed
the net worth of the Authority at any given time.

xxx

The President or his duly authorized representative after consultation with the Minister of Finance
may guarantee, in the name and on behalf of the Republic of the Philippines, the payment of the loans
or other indebtedness of the Authority up to the amount herein authorized.

These cited provisions establish the fitness of MIAA to be the subject of legal relations. 96 MIAA
under its charter may acquire and possess property, incur obligations, and bring civil or criminal
actions. It has the power to contract in its own name, and to acquire title to real or personal property.
It likewise may exercise a panoply of corporate powers and possesses all the trappings of corporate
personality, such as a corporate name, a corporate seal and by-laws. All these are contained in
MIAA's charter which, as conceded by the Corporation Code and even the Administrative Code, is
the primary law that governs the definition and organization of the MIAA.

In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in the very
first paragraph of the present petition before this Court.97 So does, apparently, the Department of
Budget and Management, which classifies MIAA as a "government owned & controlled corporation"
on its internet website.98 There is also the matter of Executive Order No. 483, which evinces the belief
of the then-president of the Philippines that MIAA is a GOCC. And the Court before had similarly
characterized MIAA as a government-owned and controlled corporation in the earlier MIAA case,
Manila International Airport Authority v. Commission on Audit.99

Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is because
MIAA is actually an instrumentality. But the very definition relied upon by the majority of an
instrumentality under the Administrative Code clearly states that a GOCC is likewise an
instrumentality or an agency. The question of whether MIAA is a GOCC might not even be
determinative of this Petition, but the effect of the majority's disquisition on that matter may even be
more destructive than the ruling that MIAA is exempt from realty taxes. Is the majority ready to live
up to the momentous consequences of its flawed reasoning?
Novel Proviso in 1987 Constitution

Prescribing Standards in the

Creation of GOCCs Necessarily

Applies only to GOCCs Created

After 1987.

One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to
Section 16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs through
special charters be "in the interest of the common good and subject to the test of economic viability."
For the majority, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. But this test of "economic viability" is new
to the constitutional framework. No such test was imposed in previous Constitutions, including the
1973 Constitution which was the fundamental law in force when the MIAA was created. How then
could the MIAA, or any GOCC created before 1987 be expected to meet this new precondition to the
creation of a GOCC? Does the dissent seriously suggest that GOCCs created before 1987 may be
declassified on account of their failure to meet this "economic viability test"?

Instrumentalities and Agencies

Also Generally Liable For

Real Property Taxes

Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then argues
that MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of Section 2(10)
of the Administrative Code. A more convincing view offered during deliberations, but which was not
adopted by the ponencia, argued that MIAA is not an instrumentality but an agency, considering the
fact that under the Administrative Code, the MIAA is attached within the department framework of
the Department of Transportation and Communications.100Interestingly, Executive Order No. 341,
enacted by President Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities are
expressly defined as "an agency not integrated within the department framework," that view
concluded that MIAA cannot be deemed an instrumentality.

Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative Code
considers GOCCs as agencies,101 so the fact that MIAA is an agency does not exclude it from
classification as a GOCC. On the other hand, the majority justifies MIAA's purported exemption on
Section 133 of the Local Government Code, which similarly situates "agencies and instrumentalities"
as generally exempt from the taxation powers of LGUs. And on this point, the majority again evades
Mactan and somehow concludes that Section 133 is the general rule, notwithstanding Sections 232
and 234(a) of the Local Government Code. And the majority's ultimate conclusion? "By express
mandate of the Local Government Code, local governments cannot impose any kind of tax on national
government instrumentalities like the MIAA. Local governments are devoid of power to tax the
national government, its agencies and instrumentalities."102
The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and
LGUs. Sections 133 and 234(a) ensure that the Republic of the Philippines or its political subdivisions
shall not be subjected to any form of local government taxation, except realty taxes if the beneficial
use of the property owned has been granted for consideration to a taxable entity or person. On the
other hand, Section 133 likewise assures that government instrumentalities such as GOCCs may not
be arbitrarily taxed by LGUs, since they could be subjected to local taxation if there is a specific
proviso thereon in the Code. One such proviso is Section 137, which as the Court found in National
Power Corporation,103 permits the imposition of a franchise tax on businesses enjoying a franchise,
even if it be a GOCC such as NPC. And, as the Court acknowledged in Mactan, Section 232 provides
another exception on the taxability of instrumentalities.

The majority abjectly refuses to engage Section 232 of the Local Government Code although it
provides the indubitable general rule that LGUs "may levy an annual ad valorem tax on real property
such as land, building, machinery, and other improvements not hereafter specifically exempted." The
specific exemptions are provided by Section 234. Section 232 comes sequentially after Section
133(o),104 and even if the sequencing is irrelevant, Section 232 would fall under the qualifying phrase
of Section 133, "Unless otherwise provided herein." It is sad, but not surprising that the majority is
not willing to consider or even discuss the general rule, but only the exemptions under Section 133
and Section 234. After all, if the majority is dead set in ruling for MIAA no matter what the law says,
why bother citing what the law does say.

Constitution, Laws and

Jurisprudence Have Long

Explained the Rationale

Behind the Local Taxation

Of GOCCs.

This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more evident
than in the succeeding discussion of the majority, which asserts that the power of local governments
to tax national government instrumentalities be construed strictly against local governments. The
Maceda case, decided before the Local Government Code, is cited, as is Basco. This section of the
majority employs deliberate pretense that the Code never existed, or that the fundamentals of local
autonomy are of limited effect in our country. Why is it that the Local Government Code is barely
mentioned in this section of the majority? Because Section 5 of the Code, purposely omitted by the
majority provides for a different rule of interpretation than that asserted:

Section 5. Rules of Interpretation. In the interpretation of the provisions of this Code, the following
rules shall apply:

(a) Any provision on a power of a local government unit shall be liberally interpreted in its favor, and
in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the
lower local government unit. Any fair and reasonable doubt as to the existence of the power shall be
interpreted in favor of the local government unit concerned;
(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local
government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption, incentive or
relief granted by any local government unit pursuant to the provisions of this Code shall be construed
strictly against the person claiming it; xxx

Yet the majority insists that "there is no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one government
pocket to another."105 I wonder whether the Constitution satisfies the majority's desire for "a sound
and compelling policy." To repeat:

Article II. Declaration of Principles and State Policies

xxx

Sec. 25. The State shall ensure the autonomy of local governments.

Article X. Local Government

xxx

Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.

xxx

Section 5. Each local government unit shall have the power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.

Or how about the Local Government Code, presumably an expression of sound and compelling policy
considering that it was enacted by the legislature, that veritable source of all statutes:

SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its power
to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions
herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local government units.

Justice Puno, in National Power Corporation v. City of Cabanatuan, 106 provides a more "sound and
compelling policy considerations" that would warrant sustaining the taxability of government-owned
entities by local government units under the Local Government Code.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the
people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises." With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.107

I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential shift
brought about the acceptance of the principles of local autonomy:

In recent years, the increasing social challenges of the times expanded the scope of state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and similar objectives.
Taxation assumes even greater significance with the ratification of the 1987 Constitution.
Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the
1987 Constitution, viz:

"Section 5. Each Local Government unit shall have the power to create its own sources of revenue, to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the Local Governments."

This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local government
leaders." 35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:

"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of decentralization
with effective mechanisms of recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions and duties of local officials,
and all other matters relating to the organization and operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local Government Code
of 1991 (LGC), various measures have been enacted to promote local autonomy. These include the
Barrio Charter of 1959, the Local Autonomy Act of 1959, the Decentralization Act of 1967 and the
Local Government Code of 1983. Despite these initiatives, however, the shackles of dependence on
the national government remained. Local government units were faced with the same problems that
hamper their capabilities to participate effectively in the national development efforts, among which
are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited
authority to prioritize and approve development projects, (d) heavy dependence on external sources of
income, and (e) limited supervisory control over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves
the determination of the actual rates to the respective sanggunian.108

And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of Iloilo 109,
provides especially clear and emphatic rationale:

In closing, we reiterate that in taxing government-owned or controlled corporations, the State

ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV, 38 we
elucidated:

Actually, the State has no reason to decry the taxation of NPC's properties, as and by way of real
property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the
Government in development and nation-building, particularly in the local government level.

xxxxxxxxx

To all intents and purposes, real property taxes are funds taken by the State with one hand and given
to the other. In no measure can the government be said to have lost anything.

Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of
government was that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other charges due from
them.110

How does the majority counter these seemingly valid rationales which establish the soundness of a
policy consideration subjecting national instrumentalities to local taxation? Again, by simply ignoring
that these doctrines exist. It is unfortunate if the majority deems these cases or the principles of
devolution and local autonomy as simply too inconvenient, and relies instead on discredited
precedents. Of course, if the majority faces the issues squarely, and expressly discusses why Basco
was right and Mactan was wrong, then this entire endeavor of the Court would be more intellectually
satisfying. But, this is not a game the majority wants to play.

Mischaracterization of My

Views on the Tax Exemption

Enjoyed by the National Government

Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing my
views on that provision as if I had been interpreting the provision as making "the national
government, which itself is a juridical person, subject to tax by local governments since the national
government is not included in the enumeration of exempt entities in Section 193."111

Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the
majority. My main thesis on the matter merely echoes the explicit provision of Section 193 that unless
otherwise provided in the Local Government Code (LGC) all tax exemptions enjoyed by all persons,
whether natural or juridical, including GOCCs, were withdrawn upon the effectivity of the Code.
Since the provision speaks of withdrawal of tax exemptions of persons, it follows that the exemptions
theretofore enjoyed by MIAA which is definitely a person are deemed withdrawn upon the advent of
the Code.

On the other hand, the provision does not address the question of who are beyond the reach of the
taxing power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof assumes that the
person or entity involved is subject to tax. Thus, Section 193 does not apply to entities which were
never given any tax exemption. This would include the national government and its political
subdivisions which, as a general rule, are not subjected to tax in the first place.112 Corollarily, the
national government and its political subdivisions do not need tax exemptions. And Section 193
which ordains the withdrawal of tax exemptions is obviously irrelevant to them.

Section 193 is in point for the disposition of this case as it forecloses dependence for the grant of tax
exemption to MIAA on Section 21 of its charter. Even the majority should concede that the charter
section is now ineffectual, as Section 193 withdraws the tax exemptions previously enjoyed by all
juridical persons.

With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the
effectivity of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have to rely
on a basis other than Section 21 of its charter.

Lung Center of the Philippines v. Quezon City113 provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center was
organized as a trust administered by an eponymous GOCC organized with the SEC.114 There is no
doubt it is a GOCC, even by the majority's reckoning. Applying the Administrative Code, it is also
considered as an agency, the term encompassing even GOCCs. Yet since the Administrative Code
definition of "instrumentalities" encompasses agencies, especially those not attached to a line
department such as the Lung Center, it also follows that the Lung Center is an instrumentality, which
for the majority is exempt from all local government taxes, especially real estate taxes. Yet just in
2004, the Court unanimously held that the Lung Center was not exempt from real property taxes. Can
the majority and Lung Center be reconciled? I do not see how, and no attempt is made to demonstrate
otherwise.

Another key point. The last paragraph of Section 234 specifically asserts that any previous
exemptions from realty taxes granted to or enjoyed by all persons, including all GOCCs, are thereby
withdrawn. The majority's interpretation of Sections 133 and 234(a) however necessarily implies that
all instrumentalities, including GOCCs, can never be subjected to real property taxation under the
Code. If that is so, what then is the sense of the last paragraph specifically withdrawing previous tax
exemptions to all persons, including GOCCs when juridical persons such as MIAA are anyway, to his
view, already exempt from such taxes under Section 133? The majority's interpretation would
effectively render the express and emphatic withdrawal of previous exemptions to GOCCs inutile. Ut
magis valeat quam pereat. Hence, where a statute is susceptible of more than one interpretation, the
court should adopt such reasonable and beneficial construction which will render the provision thereof
operative and effective, as well as harmonious with each other.115

But, the majority seems content rendering as absurd the Local Government Code, since it does not
have much use anyway for the Code's general philosophy of fiscal autonomy, as evidently seen by the
continued reliance on Basco or Maceda. Local government rule has never been a grant of
emancipation from the national government. This is the favorite bugaboo of the opponents of local
autonomythe fallacy that autonomy equates to independence.

Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government
instrumentality is beyond the reach of local taxation because it is not subject to taxes, fees or charges
of any kind. Moreover, the taxation of national instrumentalities and agencies by LGUs should be
strictly construed against the LGUs, citing Maceda and Basco. No mention is made of the subsequent
rejection of these cases in jurisprudence following the Local Government Code, including Mactan.
The majority is similarly silent on the general rule under Section 232 on real property taxation or
Section 5 on the rules of construction of the Local Government Code.

V.

MIAA, and not the National Government

Is the Owner of the Subject Taxable Properties

Section 232 of the Local Government Code explicitly provides that there are exceptions to the general
rule on rule property taxation, as "hereafter specifically exempted." Section 234, certainly "hereafter,"
provides indubitable basis for exempting entities from real property taxation. It provides the most
viable legal support for any claim that an governmental entity such as the MIAA is exempt from real
property taxes. To repeat:

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

xxx

(f) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person:

The majority asserts that the properties owned by MIAA are owned by the Republic of the
Philippines, thus placing them under the exemption under Section 234. To arrive at this conclusion,
the majority employs four main arguments.

MIAA Property Is Patrimonial

And Not Part of Public Dominion

The majority claims that the Airport Lands and Buildings are property of public dominion as defined
by the Civil Code, and therefore owned by the State or the Republic of the Philippines. But as pointed
out by Justice Azcuna in the first PPA case, if indeed a property is considered part of the public
dominion, such property is "owned by the general public and cannot be declared to be owned by a
public corporation, such as [the PPA]."

Relevant on this point are the following provisions of the MIAA charter:

Section 3. Creation of the Manila International Airport Authority. xxx

The land where the Airport is presently located as well as the surrounding land area of approximately
six hundred hectares, are hereby transferred, conveyed and assigned to the ownership and
administration of the Authority, subject to existing rights, if any. xxx Any portion thereof shall not be
disposed through sale or through any other mode unless specifically approved by the President of the
Philippines.

Section 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other property, movable or immovable, belonging to the
Airport, and all assets, powers rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment which are necessary
for the operation of crash fire and rescue facilities, are hereby transferred to the Authority.

Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express
transfer of ownership between the MIAA and the national government. If the distinction is to be
blurred, as the majority does, between the State/Republic/Government and a body corporate such as
the MIAA, then the MIAA charter showcases the remarkable absurdity of an entity transferring
property to itself.

Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership over
property of public dominion to an entity that it similarly owns. It is just like a family transferring
ownership over the properties its members own into a family corporation. The family exercises
effective control over the administration and disposition of these properties. Yet for several purposes
under the law, such as taxation, it is the corporation that is deemed to own those properties. A similar
situation obtains with MIAA, the State, and the Airport Lands and Buildings.

The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful
doctrines in this regard. The Court refuted the claim that the properties of the PPA were owned by the
Republic of the Philippines, noting that PPA's charter expressly transferred ownership over these
properties to the PPA, a situation which similarly obtains with MIAA. The Court even went as far as
saying that the fact that the PPA "had not been issued any torrens title over the port and port facilities
and appurtenances is of no legal consequence. A torrens title does not, by itself, vest ownership; it is
merely an evidence of title over properties. xxx It has never been recognized as a mode of acquiring
ownership over real properties."116

The Court further added:

xxx The bare fact that the port and its facilities and appurtenances are accessible to the general public
does not exempt it from the payment of real property taxes. It must be stressed that the said port
facilities and appurtenances are the petitioner's corporate patrimonial properties, not for public use,
and that the operation of the port and its facilities and the administration of its buildings are in the
nature of ordinary business. The petitioner is clothed, under P.D. No. 857, with corporate status and
corporate powers in the furtherance of its proprietary interests xxx The petitioner is even empowered
to invest its funds in such government securities approved by the Board of Directors, and derives its
income from rates, charges or fees for the use by vessels of the port premises, appliances or
equipment. xxx Clearly then, the petitioner is a profit-earning corporation; hence, its patrimonial
properties are subject to tax.117

There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public use. A
similar argument was propounded by the Light Rail Transit Authority in Light Rail Transit Authority
v. Central Board of Assessment,118 which was cited in Philippine Ports Authority and deserves
renewed emphasis. The Light Rail Transit Authority (LRTA), a body corporate, "provides valuable
transportation facilities to the paying public."119 It claimed that its carriage-ways and terminal stations
are immovably attached to government-owned national roads, and to impose real property taxes
thereupon would be to impose taxes on public roads. This view did not persuade the Court, whose
decision was penned by Justice (now Chief Justice) Panganiban. It was noted:

Though the creation of the LRTA was impelled by public service to provide mass transportation to
alleviate the traffic and transportation situation in Metro Manila its operation undeniably partakes
of ordinary business. Petitioner is clothed with corporate status and corporate powers in the
furtherance of its proprietary objectives. Indeed, it operates much like any private corporation
engaged in the mass transport industry. Given that it is engaged in a service-oriented commercial
endeavor, its carriageways and terminal stations are patrimonial property subject to tax,
notwithstanding its claim of being a government-owned or controlled corporation.

xxx

Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of
the carriageways and terminal stations are the commuting public. It adds that the public use character
of the LRT is not negated by the fact that revenue is obtained from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible only
to those who pay the required fare. It is thus apparent that petitioner does not exist solely for public
service, and that the LRT carriageways and terminal stations are not exclusively for public use.
Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom.120

xxx

Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable
entity.121

There is no substantial distinction between the properties held by the PPA, the LRTA, and the MIAA.
These three entities are in the business of operating facilities that promote public transportation.

The majority further asserts that MIAA's properties, being part of the public dominion, are outside the
commerce of man. But if this is so, then why does Section 3 of MIAA's charter authorize the
President of the Philippines to approve the sale of any of these properties? In fact, why does MIAA's
charter in the first place authorize the transfer of these airport properties, assuming that indeed these
are beyond the commerce of man?

No Trust Has Been Created

Over MIAA Properties For

The Benefit of the Republic

The majority posits that while MIAA might be holding title over the Airport Lands and Buildings, it is
holding it in trust for the Republic. A provision of the Administrative Code is cited, but said provision
does not expressly provide that the property is held in trust. Trusts are either express or implied, and
only those situations enumerated under the Civil Code would constitute an implied trust. MIAA does
not fall within this enumeration, and neither is there a provision in MIAA's charter expressly stating
that these properties are being held in trust. In fact, under its charter, MIAA is obligated to retain up to
eighty percent (80%) of its gross operating income, not an inconsequential sum assuming that the
beneficial owner of MIAA's properties is actually the Republic, and not the MIAA.

Also, the claim that beneficial ownership over the MIAA remains with the government and not MIAA
is ultimately irrelevant. Section 234(a) of the Local Government Code provides among those
exempted from paying real property taxes are "[r]eal property owned by the [Republic] except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person."
In the context of Section 234(a), the identity of the beneficial owner over the properties is not
determinative as to whether the exemption avails. It is the identity of the beneficial user of the
property owned by the Republic or its political subdivisions that is crucial, for if said beneficial user is
a taxable person, then the exemption does not lie.

I fear the majority confuses the notion of what might be construed as "beneficial ownership" of the
Republic over the properties of MIAA as nothing more than what arises as a consequence of the fact
that the capital of MIAA is contributed by the National Government. 122 If so, then there is no
difference between the State's ownership rights over MIAA properties than those of a majority
stockholder over the properties of a corporation. Even if such shareholder effectively owns the
corporation and controls the disposition of its assets, the personality of the stockholder remains
separately distinct from that of the corporation. A brief recall of the entrenched rule in corporate law
is in order:

The first consequence of the doctrine of legal entity regarding the separate identity of the corporation
and its stockholders insofar as their obligations and liabilities are concerned, is spelled out in this
general rule deeply entrenched in American jurisprudence:

Unless the liability is expressly imposed by constitutional or statutory provisions, or by the charter, or
by special agreement of the stockholders, stockholders are not personally liable for debts of the
corporation either at law or equity. The reason is that the corporation is a legal entity or artificial
person, distinct from the members who compose it, in their individual capacity; and when it contracts
a debt, it is the debt of the legal entity or artificial person the corporation and not the debt of the
individual members. (13A Fletcher Cyc. Corp. Sec. 6213)
The entirely separate identity of the rights and remedies of a corporation itself and its individual
stockholders have been given definite recognition for a long time. Applying said principle, the
Supreme Court declared that a corporation may not be made to answer for acts or liabilities of its
stockholders or those of legal entities to which it may be connected, or vice versa. (Palay Inc. v. Clave
et. al. 124 SCRA 638) It was likewise declared in a similar case that a bonafide corporation should
alone be liable for corporate acts duly authorized by its officers and directors. (Caram Jr. v. Court of
Appeals et.al. 151 SCRA, p. 372)123

It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the
powers of a corporation under the Corporation Law, including the right to corporate succession, and
the right to sue and be sued in its corporate name.124 The national government made a particular
choice to divest ownership and operation of the Manila International Airport and transfer the same to
such an empowered entity due to perceived advantages. Yet such transfer cannot be deemed
consequence free merely because it was the State which contributed the operating capital of this body
corporate.

The majority claims that the transfer the assets of MIAA was meant merely to effect a reorganization.
The imputed rationale for such transfer does not serve to militate against the legal consequences of
such assignment. Certainly, if it was intended that the transfer should be free of consequence, then
why was it effected to a body corporate, with a distinct legal personality from that of the State or
Republic? The stated aims of the MIAA could have very well been accomplished by creating an
agency without independent juridical personality.

VI.

MIAA Performs Proprietary Functions

Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its
political subdivisions from realty taxation. The obvious question is what comprises "the Republic of
the Philippines." I think the key to understanding the scope of "the Republic" is the phrase "political
subdivisions." Under the Constitution, political subdivisions are defined as "the provinces, cities,
municipalities and barangays."125 In correlation, the Administrative Code of 1987 defines "local
government" as referring to "the political subdivisions established by or in accordance with the
Constitution."

Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and are
accordingly exempt. The same could be said generally of the national government, which would be
similarly exempt. After all, even with the principle of local autonomy, it is inherently noxious and
self-defeatist for local taxation to interfere with the sovereign exercise of functions. However, the
exercise of proprietary functions is a different matter altogether.

Sovereign and Proprietary

Functions Distinguished

Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of
advancing the general interests of society and are merely optional.126 An exhaustive discussion on the
matter was provided by the Court in Bacani v. NACOCO:127

xxx This institution, when referring to the national government, has reference to what our
Constitution has established composed of three great departments, the legislative, executive, and the
judicial, through which the powers and functions of government are exercised. These functions are
twofold: constituent and ministrant. The former are those which constitute the very bonds of society
and are compulsory in nature; the latter are those that are undertaken only by way of advancing the
general interests of society, and are merely optional. President Wilson enumerates the constituent
functions as follows:

"'(1) The keeping of order and providing for the protection of persons and property from violence and
robbery.

'(2) The fixing of the legal relations between man and wife and between parents and children.

'(3) The regulation of the holding, transmission, and interchange of property, and the determination of
its liabilities for debt or for crime.

'(4) The determination of contract rights between individuals.

'(5) The definition and punishment of crime.

'(6) The administration of justice in civil cases.

'(7) The determination of the political duties, privileges, and relations of citizens.

'(8) Dealings of the state with foreign powers: the preservation of the state from external danger or
encroachment and the advancement of its international interests.'" (Malcolm, The Government of the
Philippine Islands, p. 19.)

The most important of the ministrant functions are: public works, public education, public charity,
health and safety regulations, and regulations of trade and industry. The principles determining
whether or not a government shall exercise certain of these optional functions are: (1) that a
government should do for the public welfare those things which private capital would not naturally
undertake and (2) that a government should do these things which by its very nature it is better
equipped to administer for the public welfare than is any private individual or group of individuals.
(Malcolm, The Government of the Philippine Islands, pp. 19-20.)

From the above we may infer that, strictly speaking, there are functions which our government is
required to exercise to promote its objectives as expressed in our Constitution and which are exercised
by it as an attribute of sovereignty, and those which it may exercise to promote merely the welfare,
progress and prosperity of the people. To this latter class belongs the organization of those
corporations owned or controlled by the government to promote certain aspects of the economic life
of our people such as the National Coconut Corporation. These are what we call government-owned
or controlled corporations which may take on the form of a private enterprise or one organized with
powers and formal characteristics of a private corporations under the Corporation Law.128
The Court in Bacani rejected the proposition that the National Coconut Corporation exercised
sovereign functions:

Does the fact that these corporations perform certain functions of government make them a part of the
Government of the Philippines?

The answer is simple: they do not acquire that status for the simple reason that they do not come
under the classification of municipal or public corporation. Take for instance the National Coconut
Corporation. While it was organized with the purpose of "adjusting the coconut industry to a position
independent of trade preferences in the United States" and of providing "Facilities for the better
curing of copra products and the proper utilization of coconut by-products," a function which our
government has chosen to exercise to promote the coconut industry, however, it was given a corporate
power separate and distinct from our government, for it was made subject to the provisions of our
Corporation Law in so far as its corporate existence and the powers that it may exercise are concerned
(sections 2 and 4, Commonwealth Act No. 518). It may sue and be sued in the same manner as any
other private corporations, and in this sense it is an entity different from our government. As this
Court has aptly said, "The mere fact that the Government happens to be a majority stockholder does
not make it a public corporation" (National Coal Co. vs. Collector of Internal Revenue, 46 Phil., 586-
587). "By becoming a stockholder in the National Coal Company, the Government divested itself of
its sovereign character so far as respects the transactions of the corporation. . . . Unlike the
Government, the corporation may be sued without its consent, and is subject to taxation. Yet the
National Coal Company remains an agency or instrumentality of government." (Government of the
Philippine Islands vs. Springer, 50 Phil., 288.)

The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez bears
noting:

The fact that government corporations are instrumentalities of the State does not divest them with
immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when the government
engages in a particular business through the instrumentality of a corporation, it divests itself pro hoc
vice of its sovereign character so as to subject itself to the rules governing private corporations, (PNB
v. Pabolan 82 SCRA 595) and is to be treated like any other corporation. (PNR v. Union de
Maquinistas Fogonero y Motormen, 84 SCRA 223)

In the same vein, when the government becomes a stockholder in a corporation, it does not exercise
sovereignty as such. It acts merely as a corporator and exercises no other power in the management of
the affairs of the corporation than are expressly given by the incorporating act. Nor does the fact that
the government may own all or a majority of the capital stock take from the corporation its character
as such, or make the government the real party in interest. (Amtorg Trading Corp. v. US 71 F2d 524,
528)129

MIAA Performs Proprietary

Functions No Matter How

Vital to the Public Interest

The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary
functions. The operation of an airport facility by the State may be imbued with public interest, but it is
by no means indispensable or obligatory on the national government. In fact, as demonstrated in other
countries, it makes a lot of economic sense to leave the operation of airports to the private sector.

The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and that
MIAA performs an essential public service as the primary domestic and international airport of the
Philippines. This premise is false, for one. On a local scale, MIAA competes with other international
airports situated in the Philippines, such as Davao International Airport and MCIAA. More
pertinently, MIAA also competes with other international airports in Asia, at least. International
airlines take into account the quality and conditions of various international airports in determining
the number of flights it would assign to a particular airport, or even in choosing a hub through which
destinations necessitating connecting flights would pass through.

Even if it could be conceded that MIAA does not compete in the market place, the example of the
Philippine National Railways should be taken into account. The PNR does not compete in the
marketplace, and performs an essential public service as the operator of the railway system in the
Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v. Philippine National
Railways,130 held that it was not.131

Even more relevant to this particular case is Teodoro v. National Airports Corporation,132 concerning
the proper appreciation of the functions performed by the Civil Aeronautics Administration (CAA),
which had succeeded the defunction National Airports Corporation. The CAA claimed that as an
unincorporated agency of the Republic of the Philippines, it was incapable of suing and being sued.
The Court noted:

Among the general powers of the Civil Aeronautics Administration are, under Section 3, to execute
contracts of any kind, to purchase property, and to grant concession rights, and under Section 4, to
charge landing fees, royalties on sales to aircraft of aviation gasoline, accessories and supplies, and
rentals for the use of any property under its management.

These provisions confer upon the Civil Aeronautics Administration, in our opinion, the power to sue
and be sued. The power to sue and be sued is implied from the power to transact private business. And
if it has the power to sue and be sued on its behalf, the Civil Aeronautics Administration with greater
reason should have the power to prosecute and defend suits for and against the National Airports
Corporation, having acquired all the properties, funds and choses in action and assumed all the
liabilities of the latter. To deny the National Airports Corporation's creditors access to the courts of
justice against the Civil Aeronautics Administration is to say that the government could impair the
obligation of its corporations by the simple expedient of converting them into unincorporated
agencies. 133

xxx

Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o
administer, operate, manage, control, maintain and develop the Manila International
Airport."134 Notwithstanding this expansion, in the 1988 case of CAA v. Court of Appeals135 the Court
reaffirmed the ruling that the CAA was engaged in "private or non-governmental functions."136 Thus,
the Court had already ruled that the predecessor agency of MIAA, the CAA was engaged in private or
non-governmental functions. These are more precedents ignored by the majority. The following
observation from the Teodoro case very well applies to MIAA.

The Civil Aeronautics Administration comes under the category of a private entity. Although not a
body corporate it was created, like the National Airports Corporation, not to maintain a necessary
function of government, but to run what is essentially a business, even if revenues be not its prime
objective but rather the promotion of travel and the convenience of the traveling public. It is engaged
in an enterprise which, far from being the exclusive prerogative of state, may, more than the
construction of public roads, be undertaken by private concerns.137

If the determinative point in distinguishing between sovereign functions and proprietary functions is
the vitality of the public service being performed, then it should be noted that there is no more
important public service performed than that engaged in by public utilities. But notably, the
Constitution itself authorizes private persons to exercise these functions as it allows them to operate
public utilities in this country138 If indeed such functions are actually sovereign and belonging
properly to the government, shouldn't it follow that the exercise of these tasks remain within the
exclusive preserve of the State?

There really is no prohibition against the government taxing itself,139 and nothing obscene with
allowing government entities exercising proprietary functions to be taxed for the purpose of raising
the coffers of LGUs. On the other hand, it would be an even more noxious proposition that the
government or the instrumentalities that it owns are above the law and may refuse to pay a validly
imposed tax. MIAA, or any similar entity engaged in the exercise of proprietary, and not sovereign
functions, cannot avoid the adverse-effects of tax evasion simply on the claim that it is imbued with
some of the attributes of government.

VII.

MIAA Property Not Subject to

Execution Sale Without Consent

Of the President.

Despite the fact that the City of Paraaque ineluctably has the power to impose real property taxes
over the MIAA, there is an equally relevant statutory limitation on this power that must be fully
upheld. Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred, conveyed
and assigned to the ownership and administration of the MIAA] shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines."140

Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be deemed
as repealing this prohibition under Section 3, even if it effectively forecloses one possible remedy of
the LGU in the collection of delinquent real property taxes. While the Local Government Code
withdrew all previous local tax exemptions of the MIAA and other natural and juridical persons, it did
not similarly withdraw any previously enacted prohibitions on properties owned by GOCCs, agencies
or instrumentalities. Moreover, the resulting legal effect, subjecting on one hand the MIAA to local
taxes but on the other hand shielding its properties from any form of sale or disposition, is not
contradictory or paradoxical, onerous as its effect may be on the LGU. It simply means that the LGU
has to find another way to collect the taxes due from MIAA, thus paving the way for a mutually
acceptable negotiated solution.141

There are several other reasons this statutory limitation should be upheld and applied to this case. It is
at this juncture that the importance of the Manila Airport to our national life and commerce may be
accorded proper consideration. The closure of the airport, even by reason of MIAA's legal omission to
pay its taxes, will have an injurious effect to our national economy, which is ever reliant on air travel
and traffic. The same effect would obtain if ownership and administration of the airport were to be
transferred to an LGU or some other entity which were not specifically chartered or tasked to perform
such vital function. It is for this reason that the MIAA charter specifically forbids the sale or
disposition of MIAA properties without the consent of the President. The prohibition prevents the
peremptory closure of the MIAA or the hampering of its operations on account of the demands of its
creditors. The airport is important enough to be sheltered by legislation from ordinary legal processes.

Section 3 of the MIAA charter may also be appreciated as within the proper exercise of executive
control by the President over the MIAA, a GOCC which despite its separate legal personality, is still
subsumed within the executive branch of government. The power of executive control by the
President should be upheld so long as such exercise does not contravene the Constitution or the law,
the President having the corollary duty to faithfully execute the Constitution and the laws of the
land.142 In this case, the exercise of executive control is precisely recognized and authorized by the
legislature, and it should be upheld even if it comes at the expense of limiting the power of local
government units to collect real property taxes.

Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA
properties could not be subject of execution sale without the consent of the President, I suspect that
the parties would feel little distress. Through such action, both the Local Government Code and the
MIAA charter would have been upheld. The prerogatives of LGUs in real property taxation, as
guaranteed by the Local Government Code, would have been preserved, yet the concerns about the
ruinous effects of having to close the Manila International Airport would have been averted. The
parties would then be compelled to try harder at working out a compromise, a task, if I might add,
they are all too willing to engage in.143 Unfortunately, the majority will cause precisely the opposite
result of unremitting hostility, not only to the City of Paraaque, but to the thousands of LGUs in the
country.

VIII.

Summary of Points

My points may be summarized as follows:

1) Mactan and a long line of succeeding cases have already settled the rule that under the Local
Government Code, enacted pursuant to the constitutional mandate of local autonomy, all natural and
juridical persons, even those GOCCs, instrumentalities and agencies, are no longer exempt from local
taxes even if previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted through subsequent
legislation.
2) Under the Local Government Code, particularly Section 232, instrumentalities, agencies and
GOCCs are generally liable for real property taxes. The only exemptions therefrom under the same
Code are provided in Section 234, which include real property owned by the Republic of the
Philippines or any of its political subdivisions.

3) The subject properties are owned by MIAA, a GOCC, holding title in its own name. MIAA, a
separate legal entity from the Republic of the Philippines, is the legal owner of the properties, and is
thus liable for real property taxes, as it does not fall within the exemptions under Section 234 of the
Local Government Code.

4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a result, the City
of Paraaque is prohibited from seizing or selling these properties by public auction in order to satisfy
MIAA's tax liability. In the end, MIAA is encumbered only by a limited lien possessed by the City of
Paraaque.

On the other hand, the majority's flaws are summarized as follows:

1) The majority deliberately ignores all precedents which run counter to its hypothesis, including
Mactan. Instead, it relies and directly cites those doctrines and precedents which were overturned by
Mactan. By imposing a different result than that warranted by the precedents without explaining why
Mactan or the other precedents are wrong, the majority attempts to overturn all these ruling sub
silencio and without legal justification, in a manner that is not sanctioned by the practices and
traditions of this Court.

2) The majority deliberately ignores the policy and philosophy of local fiscal autonomy, as mandated
by the Constitution, enacted under the Local Government Code, and affirmed by precedents. Instead,
the majority asserts that there is no sound rationale for local governments to tax national government
instrumentalities, despite the blunt existence of such rationales in the Constitution, the Local
Government Code, and precedents.

3) The majority, in a needless effort to justify itself, adopts an extremely strained exaltation of the
Administrative Code above and beyond the Corporation Code and the various legislative charters, in
order to impose a wholly absurd definition of GOCCs that effectively declassifies innumerable
existing GOCCs, to catastrophic legal consequences.

4) The majority asserts that by virtue of Section 133(o) of the Local Government Code, all national
government agencies and instrumentalities are exempt from any form of local taxation, in
contravention of several precedents to the contrary and the proviso under Section 133, "unless
otherwise provided herein [the Local Government Code]."

5) The majority erroneously argues that MIAA holds its properties in trust for the Republic of the
Philippines, and that such properties are patrimonial in character. No express or implied trust has been
created to benefit the national government. The legal distinction between sovereign and proprietary
functions, as affirmed by jurisprudence, likewise preclude the classification of MIAA properties as
patrimonial.

IX.
Epilogue

If my previous discussion still fails to convince on how wrong the majority is, then the following
points are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas (Bangko
Sentral) as a government instrumentality that exercises corporate powers but not organized as a stock
or non-stock corporation. Correspondingly for the majority, the Bangko ng Sentral is exempt from all
forms of local taxation by LGUs by virtue of the Local Government Code.

Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:

SECTION 125. Tax Exemptions. The Bangko Sentral shall be exempt for a period of five (5) years
from the approval of this Act from all national, provincial, municipal and city taxes, fees, charges and
assessments.

The New Central Bank Act was promulgated after the Local Government Code if the BSP is already
preternaturally exempt from local taxation owing to its personality as an "government
instrumentality," why then the need to make a new grant of exemption, which if the majority is to be
believed, is actually a redundancy. But even more tellingly, does not this provision evince a clear
intent that after the lapse of five (5) years, that the Bangko Sentral will be liable for provincial,
municipal and city taxes? This is the clear congressional intent, and it is Congress, not this Court
which dictates which entities are subject to taxation and which are exempt.

Perhaps this notion will offend the majority, because the Bangko Sentral is not even a government
owned corporation, but a government instrumentality, or perhaps "loosely", a "government corporate
entity." How could such an entity like the Bangko Sentral , which is not even a government owned
corporation, be subjected to local taxation like any mere mortal? But then, see Section 1 of the New
Central Bank Act:

SECTION 1. Declaration of Policy. The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. In line with this policy, and
considering its unique functions and responsibilities, the central monetary authority established under
this Act, while being a government-owned corporation, shall enjoy fiscal and administrative
autonomy.

Apparently, the clear legislative intent was to create a government corporation known as the Bangko
Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of the provision
and not the one that needs to be unearthed from the bowels of the archival offices of the House and
the Senate, is for naught to the majority, as it contravenes the Administrative Code of 1987, which
after all, is "the governing law defining the status and relationship of government agencies and
instrumentalities" and thus superior to the legislative charter in determining the personality of a
chartered entity. Its like saying that the architect who designed a school building is better equipped to
teach than the professor because at least the architect is familiar with the geometry of the classroom.

Consider further the example of the Philippine Institute of Traditional and Alternative Health Care
(PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as MIAA in that it
is established as a body corporate,144 and empowered with the attributes of a corporation,145 including
the power to purchase or acquire real properties.146 However the PITAHC has no capital stock and no
members, thus following the majority, it is not a GOCC.

The state policy that guides PITAHC is the development of traditional and alternative health
care,147 and its objectives include the promotion and advocacy of alternative, preventive and curative
health care modalities that have been proven safe, effective and cost effective.148 "Alternative health
care modalities" include "other forms of non-allophatic, occasionally non-indigenous or imported
healing methods" which include, among others "reflexology, acupuncture, massage, acupressure" and
chiropractics.149

Given these premises, there is no impediment for the PITAHC to purchase land and construct
thereupon a massage parlor that would provide a cheaper alternative to the opulent spas that have
proliferated around the metropolis. Such activity is in line with the purpose of the PITAHC and with
state policy. Is such massage parlor exempt from realty taxes? For the majority, it is, for PITAHC is
an instrumentality or agency exempt from local government taxation, which does not fall under the
exceptions under Section 234 of the Local Government Code. Hence, this massage parlor would not
just be a shelter for frazzled nerves, but for taxes as well.

Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to promote
an absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself up to all sorts
of mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils that could arise from
the majority ruling. This is indeed a very strange and very wrong decision.

I dissent.

DANTE O. TINGA

Associate Justice
 SECOND DIVISION

G.R. No. 196596, November 09, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY,

INC., Respondent.

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE,Respondent.

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY,

INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals
(CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011
decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October
4, 2011 resolution in CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed
from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No.
7303.chanroblesvirtuallawlibrary

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA)
No. 2794 authorizing its revenue officers to examine the latter's books of accounts and other
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAT) on business income; and
(3) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded the payment
of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on
August 3, 2005 a petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article
XIV, Section 4 (3) of the Constitution, which reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive
portion of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the
loan transactions of [DLSU] in the amount of P1,1681,774.00 is hereby CANCELLED. However,
[DLSU] is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus
25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due
computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties imposed by [the Commissioner]
were excluded, there. being no compromise agreement between the parties.

SO ORDERED.9ChanRoblesVirtualawlibrary
Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision.10 On April 6, 2010, the CTA Division denied the Commissioner's motion for reconsideration
while it held in abeyance the resolution on DLSU's motion for reconsideration. 11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution. 12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and exclusively for educational
purposes.13The Commissioner did not promptly object to the formal offer of supplemental evidence
despite notice.14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the
amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED.
[DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted amount
of P5,506,456.71...xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the...basic
deficiency taxes...until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code]...xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency
taxes, surcharge and deficiency interest which have accrued...from September 30, 2004 until fully
paid.15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that the
CTA Division erred in admitting DLSU's additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review
with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire
assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the
LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA Division erred
in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes.18chanroblesvirtuallawlibrary

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of the
CTA Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively for educational purposes; hence,
exempt from tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence confirming that
part of its rental income had indeed been used to pay the loan it obtained to build the university's
Physical Education - Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not
shown by supporting documents to have been actually, directly and exclusively used for educational
purposes, must be subjected to income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its loan
and mortgage documents.23 The CTA En Banc found that DLSU's DST payments had been remitted
to the BIR, evidenced by the stamp on the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of
Revenue Regulations (RR) No. 15-2001.25cralawred

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible even
if DLSU formally offered them only when it moved for reconsideration of the CTA Division's
original decision. Notably, the law creating the CTA provides that proceedings before it shall not be
governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10,
2010 decision.27 Thus, she came to this court for relief through a petition for review
on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to P2,554,825.47 inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA's validity was raised during trial;29 hence, the issue was deemed properly
submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
that the practice of issuing a LOA covering audit of unverified prior years is prohibited.30 The
prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if
the audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and
2002 are void, but the assessment for taxable year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay the loan
obtained to fund the construction of the Sports Complex, the rental income from other sources were
not shown to have been actually, directly and exclusively used for educational purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.chanroblesvirtuallawlibrary
The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed
of.35 DLSU's operations of canteens and bookstores within its campus even though exclusively
serving the university community do not negate income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized
with Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational institution] from any of [its] properties, real
or personal, or from any of (its] activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed by this Code. 37

The Commissioner argues that the CTA En Banc misread and misapplied the case of Commissioner
of Internal Revenue v. YMCA38 to support its conclusion that revenues however generated are
covered by the constitutional exemption, provided that, the revenues will be used for educational
purposes or will be held in reserve for such purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from property. 40 Thus, DLSU's
income from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it is
not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to
certain classes of taxpayers under RR No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The
belated submission of supplemental evidence reopened the case for trial, and worse, DLSU offered
the supplemental evidence only after it received the unfavorable CTA Division's original
decision.44 In any case, DLSU's submission of supplemental documentary evidence was unnecessary
since its rental income was taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior
years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void.46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior
Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income
tax, VAT and DST for taxable years 2001, 2002 and 2003.47 DLSU objects to the CTA En Banc's
conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No. 43-90
provides that:
chanRoblesvirtualLawlibrary
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.ChanRoblesVirtualawlibrary
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA
issued to DLSU follows this format, then any assessment arising from it must be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
situated parties, the same set of evidence should be appreciated and weighed in the same
manner.49 The CTA En Banc erred when it did not similarly appreciate DLSU's evidence as it did to
the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution.50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the
same as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on
DLSU's petition docketed as G.R. No. 198841.51chanroblesvirtuallawlibrary

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition.52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties.53

On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit educational
institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot
amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax Code is almost an exact replica of
Section 26 of the 1977 Tax Code - with the addition of non-stock, non-profit educational institutions
to the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973
Constitution was only for real property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes, was expressly
and categorically enshrined.55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that
is contrary to the Constitution void and without any force and effect. 56 Section 30 (H) of the 1997 Tax
Code insofar as it subjects to tax the income of whatever kind and character of a nonstock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes."57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for an
exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must prove
that: (1) it falls under the classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly and exclusively for educational
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is undisputedly a non-stock,
non-profit educational institution. It had also submitted evidence to prove that it actually, directly and
exclusively used its income for educational purposes.59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that
the tax exemption was granted "to incentivize private educational institutions to share with the State
the responsibility of educating the youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled
DLSU's loan and mortgage transactions had remitted to the BIR the DST through an imprinting
machine, a method allowed under RR No. 15-2001.61 In any case, DLSU argues that it cannot be held
liable for DST owmg to the exemption granted under the Constitution.62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of
supplemental evidence. Because of the Commissioner's failure to timely object, she became bound by
the results of the submission of such supplemental evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it
failed to raise this issue in both the administrative and judicial proceedings. 64 That it was asked on
crossexamination during the trial does not make it an issue that the CTA could resolve.65 The
Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational
institution is only exempt from property tax but not from tax on the income earned from the
property.66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67

In addition, DLSU prays that the Court award attorney's fees in its favor because it was constrained to
unnecessarily retain the services of counsel in this separate petition.68chanroblesvirtuallawlibrary

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which
we summarize as follows:

I. Whether DLSU's income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes;chanrobleslaw
 II. Whether the entire assessment should be voided because of the defective LOA;chanrobleslaw

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be disturbed by
the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational institutions proved to
have been used actually, directly and exclusively for educational purposes are exempt from
duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider
relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly and
exclusively for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock, non-profit educational institutions proved to have been
used actually, directly, and exclusively for educational purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law. Proprietary educational institutions,
including those cooperatively owned, may likewise be entitled to such exemptions subject to
the limitations provided by law including restrictions on dividends and provisions for
reinvestment [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions. 69
Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a
non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of nonstock, non-profit educational
institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-
profit educational institutions is conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations imposed by
Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption granted to
non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the Tax
Code. The relevant text reads:
chanRoblesvirtualLawlibrary
The following organizations shall not be taxed under this Title [Tax on Income] in respect to
income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any
of their activities conducted for profit regardless of the disposition made of such income shall be
subject to tax imposed under this Code. [underscoring and emphasis
supplied]ChanRoblesVirtualawlibrary
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock,
non-profit educational institutions such that the revenues and income they derived from their assets, or
from any of their activities conducted for profit, are taxable even if these revenues and income are
used for educational purposes.

Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression, 71 the Court in the YMCA case had
in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution.
The Court in that case made doctrinal pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property owned by the
YMCA, established as a "welfare, educational and charitable non-profit corporation," was subject to
income tax under the Tax Code and the Constitution.72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling
under Article VI, Section 28 (3) of the Constitution,73 the YMCA is not tax-exempt per se; "what is
exempted is not the institution itself...those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational
purposes."74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the income of
exempt organizations from any of their properties, real or personal, are subject to the same tax
imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last
paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from its
property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax
privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution
holding that the term educational institution, when used in laws granting tax exemptions, refers to the
school system (synonymous with formal education); it includes a college or an educational
establishment; it refers to the hierarchically structured and chronologically graded learnings organized
and provided by the formal school system.76

The Court then significantly laid down the requisites for availing the tax exemption under Article
XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used actually,
directly and exclusively for educational purposes.77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to
non-stock, non-profit educational institutions, provided, that the non-stock, non-profit
educational institutions prove that its assets and revenues are used actually, directly and
exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non profit educational institutions,

is not subject to limitations imposed by law.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions
is conditioned only on the actual, direct and exclusive use of their assets, revenues and
income78for educational purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable
institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts
from tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes...," Article XIV, Section 4
(3) categorically states that "[a]ll revenues and assets... used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is
not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records of
the 1986 Constitutional Commission79 to provide broader tax privilege to non-stock, non-profit
educational institutions as recognition of their role in assisting the State provide a public good. The
tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition
fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit
educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is unqualified
by any reference to the source of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.82 It may refer to the sale of goods, rendition of services, or the return of an investment.
Revenue is a component of the tax base in income tax,83 VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity. 86 It
may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of
goods, or any property from which the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT).87 Also, the landed cost of imported goods is a component of the tax base in
VAT on importation88 and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax
from which the entity shall be exempted from shall depend on whether the item is an item of revenue
or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley College,
Inc. v. Aquino.90 We ruled in that case that the test of exemption from taxation is the use of the
property for purposes mentioned in the Constitution. We also held that the exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main
purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes such
asset from the property tax exemption granted under the Constitution.91 There is no exemption
because the asset is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues shall be exempt
from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational
purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used
actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These are
two things that must be viewed and treated separately. But so long as the assets or revenues are used
actually, directly and exclusively for educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the Constitution to non-stock, non-profit educational institutions,
unlike the exemption that may be availed of by proprietary educational institutions, is not
subject to limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary
educational institutions cannot be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations imposed
by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock,
non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is
covered by Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.
Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which are
nonprofit shall pay a tax of ten percent (10%) on their taxable income...Provided, that if the gross
income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions...[the regular corporate income tax of 30%] shall be
imposed on the entire taxable income...92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced rate
of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary educational
institution is non profit and (2) its gross income from unrelated trade, business or activity does not
exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-
stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purpose. We
make this declaration in the exercise of and consistent with our duty93 to uphold the primacy of the
Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.

DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003 and
insists that the entire LOA should be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and
other accounting records of the taxpayer in order to determine the taxpayer's correct internal revenue
liabilities95 and for the purpose of collecting the correct amount oftax,96 in accordance with Section 5
of the Tax Code, which gives the CIR the power to obtain information, to summon/examine, and take
testimony of persons. The LOA commences the audit process97 and informs the taxpayer that it is
under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
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 3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year.
The practice of issuing [LOAs] covering audit of unverified prior years is hereby prohibited.
If the audit of a taxpayer shall include more than one taxable period, the other periods or
years shall be specifically indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to
inform the taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without
this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting records
from random unverified years, which may include documents from as far back as ten years in cases
of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years.
This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period is
specified in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void for having been unspecified on
separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at the CTA
Division, and thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the
trial.100 DLSU then raised the issue in its memorandum and motion for partial reconsideration with
the CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En
Banc could, as it did, pass upon the validity of the LOA.101 Besides, the Commissioner had the
opportunity to argue for the validity of the LOA at the CTA En Banc but she chose not to file her
comment and memorandum despite notice.102

III. The CTA correctly admitted the supplemental evidence formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of
documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration
with the CTA Division.103 The CTA Division admitted the supplemental evidence, which proved that
a portion of DLSU's rental income was used actually, directly and exclusively for educational
purposes. Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence.104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in the
form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal.105

Because of a party's failure to timely object, the evidence offered becomes part of the evidence in the
case. As a consequence, all the parties are considered bound by any outcome arising from the offer of
evidence properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence
despite notice.107 The Commissioner objected to the admission of the supplemental evidence only
when the case was on appeal to the CTA En Banc. By the time the Commissioner raised her
objection, it was too late; the formal offer, admission and evaluation of the supplemental evidence
were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality
or sufficiency of the supplemental evidence admitted, she was bound by the outcome of the CTA
Division's assessment of the evidence.108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's
admission of the formal offer of supplemental evidence, without prompt objection from the
Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' motion
for reconsideration.

In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached to its
motion for reconsideration with the CTA its Final Adjustment Return. The Commissioner, as in the
present case, did not oppose the taxpayer's motion for reconsideration and the admission of the Final
Adjustment Return.110We thus admitted and gave weight to the Final Adjustment Return although it
was only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings before it
shall not be governed strictly by the technical rules of evidence111 and that the paramount
consideration remains the ascertainment of truth. We ruled that procedural rules should not bar courts
from considering undisputed facts to arrive at a just determination of a controversy. 112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v.
Commissioner of Internal Revenue113 and Commissioner of Internal Revenue v. PERF Realty
Corporation,114 where the taxpayers also submitted the supplemental supporting document only upon
filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application
of the technical rules of evidence in the present tax assessment case. If anything, the liberal
application of the rules assumes greater force and significance in the case of a taxpayer who claims a
constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code,115 DLSU is claiming tax exemption based on the
Constitution. If liberality is afforded to taxpayers who paid more than they should have under a
statute, then with more reason that we should allow a taxpayer to prove its exemption from tax based
on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because
the Commissioner failed to promptly object, but more so because the strict application of the technical
tules of evidence may defeat the intent of the Constitution.

IV. The CTA's appreciation of evidence is generally binding on the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax problems, has
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.116 We thus accord the findings of fact by the CTA with the highest respect. These findings
of facts can only be disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used
actually, directly and exclusively for educational purposes a portion of its assessed income and that it
had remitted the DST payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its
assessed income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it
deduced that DLSU successfully proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.

The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the submission of the
supplemental evidence, which consisted of statement of receipts, statement of disbursement and fund
balance and statement of fund changes.118

These documents showed that DLSU borrowed P93.86 Million,119 which was used to build the
university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU's rental
income from its concessionaires were indeed transmitted and used for the payment of this loan. The
CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct
and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account),120 intended for the university's capital projects, was not
proved to have been used actually, directly and exclusively for educational purposes. The CTA
observed that "[DLSU]...failed to fully account for and substantiate all the disbursements from the
[fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires was
indeed used for educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the Independent
CPA who reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and
verification of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the same are faithful copies of original
documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the numbers, dates and
amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes paid;
(d) making findings as to compliance with substantiation requirements under pertinent tax
laws, regulations and jurisprudence; (e) submission of a formal report with certification of
authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on
such formal report; and (g) performing such other functions as the CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held
that only the portion of the rental income pertaining to the substantiated disbursements (i.e., proved
by receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years
2001 and 2002 due to the defective LOA.124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its
ruling on the evidence on record, which we reiterate, were examined and verified by the Independent
CPA. Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are
bound by its conclusions. In the present case, we do not agree with the method used by the CTA to
arrive at DLSU's unsubstantiated rental income (i.e., income not proved to have been actually, directly
and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable year
2003.125 DLSU earned this income from leasing a portion of its premises to: 1) MTO-Sports Complex,
2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the transactions
where the rental income was expended, viz.: 1) P4,007,724.00127 used to pay the loan obtained by
DLSU to build the Sports Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00 transferred
to the CF-CPA Account was used actually, directly and exclusively for educational purposes.
According to the Independent CPA' findings, DLSU was able to substantiate disbursements from the
CF-CPA Account amounting to P6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of
the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus, subject to income
tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements from
the CF-CPA Account for taxable year 2003 is only 26.68%.130 The CTA held as follows:
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However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner again
failed to fully account for and substantiate all the disbursements from the CF-CPA Account; thus
failing to prove that the rental income derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-Commissioned Independent CPA show that
the disbursements from the CF-CPA Account for fiscal year 2003 amounts to P-6,259,078.30 only.
Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is P6,259,078.3
(Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to P23,463,543.02
(Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements for fiscal
year 2003, arrived at by multiplying the ratio of 26.68% with the total rent income added to and used
in the CF-CPA Account in the amount of P6,602,655.00 ts P1,761,588.35.131 (emphasis
supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(P4,007,724.00) from the rental income (P10,610,379.00) earned from the abovementioned
concessionaries. The difference (P6,602,655.00) was the portion claimed to have been
deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements
(P1,761,308.37) from the P6,602,655.00 to arrive at the supposed unsubstantiated portion of
the rental income (P4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived by

multiplying the rental income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total
disbursements (P23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from the CF-
CPA Account as found by the Independent CPA (P6,259,078.30) by the total disbursements
(P23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional
grant of tax exemption to non-stock, nonprofit educational institutions. The CTA's reasoning is flawed
because it required DLSU to substantiate an amount that is greater than the rental income deposited in
the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental
income (which amounted to a total of P10.61 million)135 were used for educational purposes. This
amount was divided into two parts: (a) the P4.01 million, which was used to pay the loan obtained for
the construction of the Sports Complex; and (b) the P6.60 million, 136 which was transferred to the CF-
CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 million.137 These
figures, read in light of the constitutional exemption, raises the question: does DLSU claim that the
whole total CF-CPA disbursement of P23.46 million is tax-exempt so that it is required to prove
that all these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46 million
had been for educational purposes and should thus be tax-exempt; DLSU only claimed P10.61 million
for taxexemption and should thus be required to prove that this amount had been used as claimed.

Of this amount, P4.01 had been proven to have been used for educational purposes, as confirmed by
the Independent CPA. The amount in issue is therefore the balance of P6.60 million which was
transferred to the CF-CPA which in turn made disbursements of P23.46 million for various general
purposes, among them the P6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational
purposes in year 2003 in the amount P6.26 million. Based on these given figures, the CTA concluded
that the expenses for educational purposes that had been coursed through the CF-CPA should be
prorated so that only the portion that P6.26 million bears to the total CF-CPA disbursements should be
credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and
directly used for educational purposes should be tax-exempt. As already mentioned above, DLSU is
not claiming that the whole P23.46 million CF-CPA disbursement had been used for educational
purposes; it only claims that P6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used for educational
purposes.

That this fund had been first deposited into a separate fund (the CF-CPA established to fund capital
projects) lends peculiarity to the facts of this case, but does not detract from the fact that the deposited
funds were DLSU revenue funds that had been confirmed and proven to have been actually and
directly used for educational purposes via the CF-CPA. That the CF-CPA might have had other
sources of funding is irrelevant because the assessment in the present case pertains only to the rental
income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA funds used for
educational purposes should not be prorated as part of its total CF-CPA disbursements for purposes of
crediting to DLSU is also logical because no claim whatsoever had been made that the totality of the
CF-CPA disbursements had been for educational purposes. No prorating is necessary; to state the
obvious, exemption is based on actual and direct use and this DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the difference between what
it claimed and what it has proven. In more concrete terms, DLSU only had to prove that its rental
income for taxable year 2003 (P10,610,379.00) was used for educational purposes. Hence, while the
total disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only had to
substantiate its P10.6 million rental income, part of which was the P6,602,655.00 transferred to the
CF-CPA account. Of this latter amount, P6.259 million was substantiated to have been used for
educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003
as follows:
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CTA Decision138 Revised

Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of the

4,007,724.00 4,007,724.00
Sports Complex

Rental income deposited to the CF-CPA Account 6,602,655.00 6,602.655.00

Less: Substantiated portion of CF-CPA

1,761,588.35 6,259,078.30
disbursements

Tax base for deficiency income tax and VAT 4,841,066.65 343,576.70
On DLSU's argument that the CTA should have appreciated its evidence in the same way as it did
with the evidence submitted by Ateneo in another separate case, the CTA explained that the issue in
the Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes and
VAT under certain BIR and Department of Finance issuances139 that required the educational
institution to own and operate the canteens, or other commercial enterprises within its campus, as
condition for tax exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the exemption. 140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the
separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it
submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for
being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and
materiality of the evidence supporting their respective claims for tax exemption would necessarily
differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable years
they were assessed varied. The amount of tax assessment also varied. The amount of income proven
to have been used for educational purposes also varied because the amount substantiated
varied.142 Thus, the amount of tax assessment cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for taxable years
2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax
of P8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo
was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly
and exclusively for educational purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim were
not produced in court. Indeed, the Independent CPA testified that some disbursements had not been
proven to have been used actually, directly and exclusively for educational purposes.144

The final nail on the question of evidence is DLSU's own admission that the original of these
documents had not in fact been produced before the CTA although it claimed that there was no bad
faith on its part.145 To our mind, this admission is a good indicator of how the Ateneo and the DLSU
cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that the
contents of the missing supporting documents were proven by its recital in some other authentic
documents on record,146 can no longer be entertained at this late stage of the proceeding. The CTA did
not rule on this particular claim. The CTA also made no finding on DLSU's assertion of lack of bad
faith. Besides, it is not our duty to go over these documents to test the truthfulness of their contents,
this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and uniformity of
taxation means that all taxable articles or kinds of property of the same class shall be taxed at the
same rate.147 A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found.148The concept requires that all subjects of taxation similarly situated should
be treated alike and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because
their income proved to have been used actually, directly and exclusively for educational purposes
were exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if
they indeed used their revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its income and
revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a different result
happened because it failed to fully prove that it used actually, directly and exclusively for educational
purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of
taxation similarly situated are treated in literally the same way in all and every occasion. The fact that
the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that the
CTA or this Court would similarly decide every case for (or against) both universities. Success in tax
litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's
evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid
and remitted through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner
argues that DLSU is not allowed to use this method of payment because an educational institution is
excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code
and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the person
making, signing, issuing, accepting, or transferring the same.150 The Tax Code provides that whenever
one party to the document enjoys exemption from DST, the other party not exempt from DST shall be
directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the document,
such that the payment and compliance by one shall mean the full settlement of the DST due on the
document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These agreements
are subject to DST.151 For the purpose of showing that the DST on the loan agreement has been paid,
DLSU presented its agreements bearing the imprint showing that DST on the document has been paid
by the bank, its counterparty. The imprint should be sufficient proof that DST has been paid. Thus,
DLSU cannot be further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay
and remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As
correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line
Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions. RR
No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-Line Electronic
DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the assessed DST
deficiency, except for the unpaid balance of P13,265.48.152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal

Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total
amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition
of the Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case
No. 671, with the MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is P343,576.70.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question
of law, which involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the
National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary
non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;
 (c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the
Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements
that are available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965
or approximately P1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was P218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) of P334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of
any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of
Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30
of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays
that St. Luke's be ordered to pay P57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no
ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a
recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent against
petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However,
petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded withholding
tax for the taxable year 1998 in the respective amounts of P5,496,963.54 and P778,406.84 or in the
sum of P6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services
to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes
of St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a
charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are required to do so, where funds
derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which
ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from
taxation those corporations or associations which, otherwise, would be subject thereto, because of the
existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on
charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible
organization must be run to at least insure its existence, by operating within the limits of its own
resources, especially its regular income. In other words, it should always strive, whenever possible, to
have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA
explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-
stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax on
income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as
amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise
only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA]
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence aside
from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge
under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32
The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the
NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its
primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be,
in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus
on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30
state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;

xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B)
of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can
be construed together without the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered
by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, 37 this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The
club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government." 41 A non-profit club for the
benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities already assume a part of the
burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been funded by
appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital
de San Juan 45and Jesus Sacred Heart College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined in
the hospital, or receives subsidies from the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation." 48The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E)
of the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

 (2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must not only
be plowed back "whenever necessary or proper," but must be "devoted or used altogether to the
charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but
a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x."
It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction of
Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of P218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients P1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
P1,395,725,350.00

INCOME FROM OPERATIONS P334,642,615.00 100%

Free Services -218,187,498.00 -65.20%
INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for
the words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a "purpose to make profit over and above the cost" of services. 55 The P1.73
billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure
of P218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is "devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco,
who was a member of the Committee of Conference for the Senate, which introduced the phrase "or
from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posicin social econmica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y
es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity
conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted
for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on the
activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being
a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities
from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution
be "operated exclusively" for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-profit activities, under the last paragraph
of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers.1wphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus
exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the
Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is
PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010
and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential
income tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable
for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section
1, Rule 45 of the Rules of Court.

SO ORDERED.

Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.

 EN BANC
RENATO V. DIAZ and G.R. No. 193007
AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

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

DECISION ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief[1] assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the
approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424
(the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on
the other hand, claims that she served as Assistant Secretary of the Department of Trade and Industry
and consultant of the Toll Regulatory Board (TRB) in the past administration.

Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino IIIs
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees
within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not a sale
of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since
VAT was never factored into the formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents Cesar V.
Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days from notice.[2] Later, the Court issued
another resolution treating the petition as one for prohibition.[3]

On August 23, 2010 the Office of the Solicitor General filed the governments comment.[4] The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should seek the
meaning and intent of the law from the words used in the statute; and that the imposition of VAT on
tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.[5]

The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs)
between the government and tollway operators. At any rate, the non-impairment clause cannot limit
the States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed
that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since
this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.

In their reply[6] to the governments comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further,
the BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in
an escrow account. But this would be illegal since only the Congress can modify VAT rates and
authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-
2010), which directs toll companies to record an accumulated input VAT of zero balance in their
books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first
become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason,
the VAT on toll fees cannot be implemented.
The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms franchise grantees and sale of services under Section
108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax
on services; b) will impair the tollway operators right to a reasonable return of investment under their
TOAs; and c) is not administratively feasible and cannot be implemented.

The Courts Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather
than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action.
The government has sought reconsideration of the Courts resolution,[7] however, arguing that
petitioners allegations clearly made out a case for declaratory relief, an action over which the Court
has no original jurisdiction. The government adds, moreover, that the petition does not meet the
requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasi-
judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of Finance.

But there are precedents for treating a petition for declaratory relief as one for prohibition if the case
has far-reaching implications and raises questions that need to be resolved for the public good.[8] The
Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative authority.[9]

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact,
not only on the more than half a million motorists who use the tollways everyday, but more so on the
governments effort to raise revenue for funding various projects and for reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could
cause more mischief both to the tax-paying public and the government. A belated declaration of
nullity of the BIR action would make any attempt to refund to the motorists what they paid an
administrative nightmare with no solution. Consequently, it is not only the right, but the duty of the
Court to take cognizance of and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample
power to waive such technical requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement of locus standi which is a mere
procedural requisite.[10]

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed,
and collected, according to Section 108, on the gross receipts derived from the sale or exchange of
services as well as from the use or lease of properties. The third paragraph of Section 108 defines sale
or exchange of services as follows:

The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes; common carriers by air and
sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines; sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities, telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those under Section 119 of
this Code and non-life insurance companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of services rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services is not
exclusive.[11] By qualifying services with the words all kinds, Congress has given the term services
an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive
and broad is the VATs reach rather than establish concrete limits to its application. Thus, every
activity that can be imagined as a form of service rendered for a fee should be deemed included unless
some provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render. Essentially,
tollway operators construct, maintain, and operate expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular public highways that meander through populated
areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-
moving. In consideration for constructing tollways at their expense, the operators are allowed to
collect government-approved fees from motorists using the tollways until such operators could fully
recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the
tollway facilities over which the operator enjoys private proprietary rights[12] that its contract and the
law recognize. In this sense, the tollway operator is no different from the following service providers
under Section 108 who allow others to use their properties or facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.

It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered for a
fee regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. This means that services to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge and
skills.

And not only do tollway operators come under the broad term all kinds of services, they also come
under the specific class described in Section 108 as all other franchise grantees who are subject to
VAT, except those under Section 119 of this Code.

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio
and/or television broadcasting companies with gross annual incomes of less than P10 million and gas
and water utilities) that Section 119[13] spares from the payment of VAT. The word franchise broadly
covers government grants of a special right to do an act or series of acts of public concern.[14]

Petitioners of course contend that tollway operators cannot be considered franchise grantees under
Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates that the
franchise grantees it speaks of are those who hold legislative franchises. Petitioners give no reason,
and the Court cannot surmise any, for making a distinction between franchises granted by Congress
and franchises granted by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had been made by Congress itself.[15]
The term franchise has been broadly construed as referring, not only to authorizations that Congress
directly issues in the form of a special law, but also to those granted by administrative agencies to
which the power to grant franchises has been delegated by Congress.[16]

Tollway operators are, owing to the nature and object of their business, franchise grantees. The
construction, operation, and maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant to
the exercise of its delegated powers under P.D. 1112.[17] The franchise in this case is evidenced by a
Toll Operation Certificate.[18]

Petitioners contend that the public nature of the services rendered by tollway operators excludes such
services from the term sale of services under Section 108 of the Code. But, again, nothing in Section
108 supports this contention. The reverse is true. In specifically including by way of example electric
utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering public service for a fee to the imposition of VAT.
Businesses of a public nature such as public utilities and the collection of tolls or charges for its use or
service is a franchise.[19]

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course
of congressional deliberations of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,[20] statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. The congressional will is ultimately determined by the
language of the law that the lawmakers voted on. Consequently, the meaning and intention of the law
must first be sought in the words of the statute itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations, according to good and approved usage and
without resorting to forced or subtle construction.

Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to
taxing a tax.[21] Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:[22]

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

x x x The operation by the government of a tollway does not change the character of the road as one
for public use. Someone must pay for the maintenance of the road, either the public indirectly through
the taxes they pay the government, or only those among the public who actually use the road through
the toll fees they pay upon using the road. The tollway system is even a more efficient and equitable
manner of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it is for
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
intended for public use. Even if the government collects toll fees, the road is still intended for public
use if anyone can use the road under the same terms and conditions as the rest of the public. The
charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees
does not change the character of MIAA as an airport for public use. Such fees are often termed users
tax. This means taxing those among the public who actually use a public facility instead of taxing all
the public including those who never use the particular public facility. A users tax is more equitable a
principle of taxation mandated in the 1987 Constitution.[23] (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a users tax must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Paraaque City could
sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real
estate taxes. Since local governments have no power to tax the national government, the Court held
that the City could not proceed with the auction sale. MIAA forms part of the national government
although not integrated in the department framework.[24] Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man under Article 420(1)[25] of the Civil
Code and could not be sold at public auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish
a rule that tollway fees are users tax, but to make the point that airport lands and buildings are
properties of public dominion and that the collection of terminal fees for their use does not make them
private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR
and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible from
motorists, for the construction and maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it spends for the roadways. This is not
the case here. What the government seeks to tax here are fees collected from tollways that are
constructed, maintained, and operated by private tollway operators at their own expense under the
build, operate, and transfer scheme that the government has adopted for expressways.[26] Except for a
fraction given to the government, the toll fees essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense.
A tax is imposed under the taxing power of the government principally for the purpose of raising
revenues to fund public expenditures.[27] Toll fees, on the other hand, are collected by private
tollway operators as reimbursement for the costs and expenses incurred in the construction,
maintenance and operation of the tollways, as well as to assure them a reasonable margin of income.
Although toll fees are charged for the use of public facilities, therefore, they are not government
exactions that can be properly treated as a tax. Taxes may be imposed only by the government under
its sovereign authority, toll fees may be demanded by either the government or private individuals or
entities, as an attribute of ownership.[28]

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT
as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid
on goods, properties or services to the buyer. In such a case, what is transferred is not the sellers
liability but merely the burden of the VAT.[29]

Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax[30] and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in this
case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT
to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
users tax. VAT is assessed against the tollway operators gross receipts and not necessarily on the toll
fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that
one has to pay in order to use the tollways.[32]

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf
of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the
alleged diminution in return of investments that may result from the VAT imposition. She has no
interest at all in the profits to be earned under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.

Besides, her allegation that the private investors rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that
a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is
thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit
the State from exercising its sovereign taxing power based on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the
VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in
order to claim input VAT, the name, address and tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT
by rounding off the toll rate and putting any excess collection in an escrow account is also illegal,
while the alternative of giving change to thousands of motorists in order to meet the exact toll rate
would be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not
administratively feasible.[33]

Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least inconvenience
to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid
except to the extent that specific constitutional or statutory limitations are impaired.[34] Thus, even if
the imposition of VAT on tollway operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any law or the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it,[35] the facts pertaining to the matter are
not sufficiently established for the Court to pass judgment on. Besides, any concern about how the
VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIRs discretion
on the matter, absent any clear violation of law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)[36] of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations
with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-
inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive
the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities. Notably,
the right to claim the 2% transitional input VAT belongs to the tollway operators who have not
questioned the circulars validity. They are thus the ones who have a right to challenge the circular in a
direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the
VAT laws coverage when she sought to impose VAT on tollway operations. Section 108(A) of the
Code clearly states that services of all other franchise grantees are subject to VAT, except as may be
provided under Section 119 of the Code. Tollway operators are not among the franchise grantees
subject to franchise tax under the latter provision. Neither are their services among the VAT-exempt
transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege,
then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear
statutory grant and based on language in the law too plain to be mistaken.[37] But as the law is
written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply
apply the law as it is found.

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely uphold this legislative policy, as reflected first
and foremost in the language of the tax statute. Thus, any unwarranted burden that may be perceived
to result from enforcing such policy must be properly referred to Congress. The Court has no
discretion on the matter but simply applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has earnestly
pursued the VAT imposition against tollway operators. The executive exercises exclusive discretion
in matters pertaining to the implementation and execution of tax laws. Consequently, the executive is
more properly suited to deal with the immediate and practical consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS ASIDE the Courts
temporary restraining order dated August 13, 2010.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and
Builders Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act
(RA) 84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving creditable withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded
former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong
and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-
98. Petitioner argues that the MCIT violates the due process clause because it levies income tax even
if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98,
and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends
that these revenue regulations are contrary to law for two reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of
Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
 (2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional
and

(3) whether or not the imposition of CWT on income from sales of real properties classified
as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an
MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax
imposed under Section 27(A).4If the regular income tax is higher than the MCIT, the corporation does
not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited
against the normal income tax for the three immediately succeeding taxable years. Section 27(E) of
RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of
the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater
than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable
years.

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses
on account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection
(E) hereof, the term gross income shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually
sold including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of
services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby
imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately
following the taxable year in which such corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or negative taxable income or whenever the
amount of minimum corporate income tax is greater than the normal income tax due from such
corporation.

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

xxx xxx xxx

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

xxx xxx xxx

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

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

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

Those which are exempt from a Exempt

withholding tax at source as prescribed
in Sec. 2.57.5 of these regulations.
With a selling price of five hundred 1.5%
thousand pesos (P500,000.00) or less.
 With a selling price of more than five 3.0%
hundred thousand pesos (P500,000.00)
but not more than two million pesos
(P2,000,000.00).
With selling price of more than two 5.0%
million pesos (P2,000,000.00)

xxx xxx xxx

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

Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld
on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for
the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the
gross selling price/total amount of consideration or the fair market value determined in accordance
with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be imposed upon the withholding
agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(P500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (P500,000.00) but not more than Two Million Pesos
(P2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(P2,000,000.00).

xxx xxx xxx

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

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules
shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer
shall withhold the tax based on the gross selling price or fair market value of the property, whichever
is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the
[CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the taxes thereof have been duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and the
expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid
xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

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

xxx xxx xxx

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

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

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

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no
actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed
by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner
allege that its members have shut down their businesses as a result of the payment of the MCIT or
CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any actual,
specific and concrete instances cited that the assailed law and revenue regulations have actually and
adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal
claims which is susceptible of judicial resolution as distinguished from a hypothetical or abstract
difference or dispute.11 On the other hand, a question is considered ripe for adjudication when the act
being challenged has a direct adverse effect on the individual challenging it.12

Contrary to respondents assertion, we do not have to wait until petitioners members have shut down
their operations as a result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated
(DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said
to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle
such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions].15

Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute
that the individual members of petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to the
rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection
process.18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition.20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine
taxation system. It came about as a result of the perceived inadequacy of the self-assessment system in
capturing the true income of corporations.21 It was devised as a relatively simple and effective
revenue-raising instrument compared to the normal income tax which is more difficult to control and
enforce. It is a means to ensure that everyone will make some minimum contribution to the support of
the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in
the cost of government. In this regard, the Tax Reform Act introduces for the first time a new concept
called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and
for administrative convenience. This will go a long way in ensuring that corporations will pay their
just share in supporting our public life and our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make
a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in and
year out and paid no tax. So, if the corporation has been losing for the past five years to ten years,
then that corporation has no business to be in business. It is dead. Why continue if you are losing year
in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross
income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated
and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax
rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations.25 This grace
period allows a new business to stabilize first and make its ventures viable before it is subjected to the
MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income
tax which shall be credited against the normal income tax for the three immediately succeeding
years.27

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers noted
that most developing countries, particularly Latin American and Asian countries, have the same form
of safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said provision only considers the cost of
goods sold and other direct expenses; other major expenditures, such as administrative and interest
expenses which are equally necessary to produce gross income, were not taken into account.31 Thus,
pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of
capital because gross income, unlike net income, is not "realized gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest and the common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially,

this means that in the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why
it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility
of the legislature (which imposes the tax) to its constituency who are to pay it.37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of
life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the
due process clause may properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property. 40 But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.43

Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth
which flows into the taxpayer other than a mere return on capital. Capital is a fund or property
existing at one distinct point in time while income denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital. 46 For income to be taxable, the following
requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a
tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales.
Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates
the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporations gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate.49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base.51 Since our income tax laws are of American
origin, interpretations by American courts of our parallel tax laws have persuasive effect on the
interpretation of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On the question of the
AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.55

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax.56 This is because
deductions are a matter of legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax
base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of
its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the laws unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the
MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable
income:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax
due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the
MCIT on gross income notwithstanding the amount of the net income. But the law also states that the
MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case
that the MCIT would be less than the net income of the corporation which posts a zero or negative
taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT)
and maintains that the revenue regulations on the collection of CWT on sale of real estate categorized
as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value
(FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement.64 It is well-settled that an
administrative agency cannot amend an act of Congress.65

We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the governments cash
flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of income payable
to any person, national or juridical, residing in the Philippines. Such authority is derived from Section
57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section
57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is creditable against the income tax
liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in
the Real Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate
business income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70

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

xxx xxx xxx

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

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code,
as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

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

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the
tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold
the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at
the end of the taxable year. Instead, said withholding agents knowledge and privity are limited only
to the particular transaction in which he is a party. In such a case, his basis can only be the GSP or
FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax
and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its
GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and
CWT are distinguished as follows:
FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a full payments are intended to equal or at least
and final payment of the income tax due approximate the tax due of the payee on
from the payee on the said income. said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report the
income and/or pay the difference between
the tax withheld and the tax due on the
income. The payee also has the right to ask
for a refund if the tax withheld is more than
the tax due.

c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and
CWT disprove petitioners contention that ordinary assets are being lumped together with, and treated
similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment
of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT.
It follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

 (A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
33; and 282 of this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary
purposes, the same is not passive income76

It is income generated by the taxpayers assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received
from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable
to natural or juridical persons, residing in the Philippines." There is no requirement that this income
be passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains
to CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is
wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR
may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at
the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to
the constitutional guarantee of due process. More importantly, the due process requirement applies to
the power to tax.79 The CWT does not impose new taxes nor does it increase taxes. 80 It relates entirely
to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund.81 This argument
is misleading. The practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82

Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best addressed to the executive and legislative branches of
the government. Besides, the CWT is applied only on the amounts actually received or receivable by
the real estate entity. Sales on installment are taxed on a per-installment basis.83 Petitioners desire to
utilize for its operational and capital expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which can be demanded from the court or
from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of
doing business is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be valid, must (1) rest on substantial
distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only
and (4) apply equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can
be validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails
to realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger
and its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are
not similarly subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable
method to carry out its functions.90Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate.
The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the
BIR, are also subject to CWT for their transactions with said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should
not effect the regisration of any document transferring real property unless a certification is issued by
the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down
this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

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

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

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

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

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

CASTRO, J.:

This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act
2631,2 which provides as follows:

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

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

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

Such semi-postal stamps could not be made available during the period from August 19 to
September 30, 1957, for lack of time. However, two denominations of such stamps, one at "5
+ 5" centavos and another at "10 + 5" centavos, will soon be released for use by the public on
their mails to be posted during the same period starting with the year 1958.

xxx xxx xxx

During the period from August 19 to September 30 each year starting in 1958, no mail matter
of whatever class, and whether domestic or foreign, posted at any Philippine Post Office and
addressed for delivery in this country or abroad, shall be accepted for mailing unless it bears
 at least one such semi-postal stamp showing the additional value of five centavos intended for
the Philippine Tuberculosis Society.

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

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

Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:

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

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

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

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

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

5. Mails entitled to franking privilege. Government agencies, officials, and other persons
entitled to the franking privilege under existing laws may pay in cash such extra charge
intended for said society, instead of affixing the semi-postal stamps to their mails, provided
 that such mails are presented at the post-office window, where the five-centavo extra charge
for said society shall be collected on each piece of such mail matter. In such case, an official
receipt shall be issued for the total sum thus collected, in the manner stated in subparagraph 1.

Mail under permits, metered mails and franked mails not presented at the post-office window
shall be affixed with the necessary semi-postal stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as herein provided for other mails.

Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and
Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as
amended, exempts "copies of periodical publications received for mailing under any class of mail
matter, including newspapers and magazines admitted as second-class mail."

The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post
office in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014
Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp required by the statute, it
was returned to the petitioner.

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

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

I.

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

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

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

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

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

II.

We now consider the constitutional objections raised against the statute and the implementing orders.

1. It is said that the statute is violative of the equal protection clause of the Constitution. More
specifically the claim is made that it constitutes mail users into a class for the purpose of the tax while
leaving untaxed the rest of the population and that even among postal patrons the statute
discriminatorily grants exemption to newspapers while Administrative Order 9 of the respondent
Postmaster General grants a similar exemption to offices performing governmental functions. .

The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise tax,
laid upon the exercise of a privilege, namely, the privilege of using the mails. As such the objections
levelled against it must be viewed in the light of applicable principles of taxation.

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

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

While the principle that there must be a reasonable relationship between classification made
by the legislation and its purpose is undoubtedly true in some contexts, it has no application to
a measure whose sole purpose is to raise revenue ... So long as the classification imposed is
based upon some standard capable of reasonable comprehension, be that standard based upon
ability to produce revenue or some other legitimate distinction, equal protection of the law has
been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at
441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580
(1910).

We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution forbids. The
remedy for unwise legislation must be sought in the legislature. Now, the classification of mail users
is not without any reason. It is based on ability to pay, let alone the enjoyment of a privilege, and on
administrative convinience. In the allocation of the tax burden, Congress must have concluded that the
contribution to the anti-TB fund can be assured by those whose who can afford the use of the mails.

The classification is likewise based on considerations of administrative convenience. For it is now a

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

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

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

It is thus erroneous for the trial court to hold that because certain mail users are exempted from the
levy the law and administrative officials have sanctioned an invidious discrimination offensive to the
Constitution. The application of the lower courts theory would require all mail users to be taxed, a
conclusion that is hardly tenable in the light of differences in status of mail users. The Constitution
does not require this kind of equality.

As the United States Supreme Court has said, the legislature may withhold the burden of the tax in
order to foster what it conceives to be a beneficent enterprise.11 This is the case of newspapers which,
under the amendment introduced by Republic Act 2631, are exempt from the payment of the
additional stamp.

As for the Government and its instrumentalities, their exemption rests on the State's sovereign
immunity from taxation. The State cannot be taxed without its consent and such consent, being in
derogation of its sovereignty, is to be strictly construed.12 Administrative Order 9 of the respondent
Postmaster General, which lists the various offices and instrumentalities of the Government exempt
from the payment of the anti-TB stamp, is but a restatement of this well-known principle of
constitutional law.

The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the
exclusion of other diseases which, it is said, are equally a menace to public health. But it is never a
requirement of equal protection that all evils of the same genus be eradicated or none at all. 13 As this
Court has had occasion to say, "if the law presumably hits the evil where it is most felt, it is not to be
overthrown because there are other instances to which it might have been applied."14

2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for a
public purpose as no special benefits accrue to mail users as taxpayers, and second, because it violates
the rule of uniformity in taxation.

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

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather
than a graduated tax. A tax need not be measured by the weight of the mail or the extent of the service
rendered. We have said that considerations of administrative convenience and cost afford an adequate
ground for classification. The same considerations may induce the legislature to impose a flat tax
which in effect is a charge for the transaction, operating equally on all persons within the class
regardless of the amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp
act which imposed a flat rate of two cents on every $100 face value of stock transferred:

One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again
equality in this sense has to yield to practical considerations and usage. There must be a fixed
and indisputable mode of ascertaining a stamp tax. In another sense, moreover, there is
equality. When the taxes on two sales are equal, the same number of shares is sold in each
case; that is to say, the same privilege is used to the same extent. Valuation is not the only
thing to be considered. As was pointed out by the court of appeals, the familiar stamp tax of 2
cents on checks, irrespective of income or earning capacity, and many others, illustrate the
necessity and practice of sometimes substituting count for weight ...17

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

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

Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain
classes of mail matters (such as mail permits, metered mails, business reply cards, etc.), the five-
centavo charge may be paid in cash instead of the purchase of the anti-TB stamp. It further states that
mails deposited during the period August 19 to September 30 of each year in mail boxes without the
stamp should be returned to the sender, if known, otherwise they should be treated as nonmailable.

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

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

It is likewise true that the statute does not provide for the disposition of mails which do not bear the
anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in the mails unless it
bears such semi-postal stamp" is a declaration that such mail matter is nonmailable within the
meaning of section 1952 of the Administrative Code. Administrative Order 7 of the Postmaster
General is but a restatement of the law for the guidance of postal officials and employees. As for
Administrative Order 9, we have already said that in listing the offices and entities of the Government
exempt from the payment of the stamp, the respondent Postmaster General merely observed an
established principle, namely, that the Government is exempt from taxation.

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano, JJ., concur.
Zaldivar, J., is on leave.

Separate Opinions

FERNANDO, J., concurring:

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

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

It may not be acting in a proprietary capacity but in fixing the fees that it collects for the use of the
mails, the broad discretion that it enjoys is undeniable. In that sense, the principle announced
in Esteban v. Cabanatuan City,3 in an opinion by our Chief Justice, while not precisely controlling
furnishes for me more than ample support for the validity of the challenged legislation. Thus: "Certain
exactions, imposable under an authority other than police power, are not subject, however, to
qualification as to the amount chargeable, unless the Constitution or the pertinent laws provide
otherwise. For instance, the rates of taxes, whether national or municipal, need not be reasonable, in
the absence of such constitutional or statutory limitation. Similarly, when a municipal corporation
fixes the fees for the use of its properties, such as public markets, it does not wield the police power,
or even the power of taxation. Neither does it assert governmental authority. It exercises merely a
proprietary function. And, like any private owner, it is in the absence of the aforementioned
limitation, which does not exist in the Charter of Cabanatuan City (Republic Act No. 526) free to
charge such sums as it may deem best, regardless of the reasonableness of the amount fixed, for the
prospective lessees are free to enter into the corresponding contract of lease, if they are agreeable to
the terms thereof or, otherwise, not enter into such contract."

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

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

Since the power of judicial review flows logically from the judicial function of ascertaining the facts
and applying the law and since obviously the Constitution is the highest law before which statutes
must bend, then inferior tribunals can, in the discharge of their judicial functions, nullify legislative
acts. As a matter of fact, in clear cases, such is not only their power but their duty. In the language of
the present Chief Justice: "In fact, whenever the conflicting claims of the parties to a litigation cannot
properly be settled without inquiring into the validity of an act of Congress or of either House thereof,
the courts have, not only jurisdiction to pass upon said issue but, also, the duty to do so, which cannot
be evaded without violating the fundamental law and paving the way to its eventual destruction."6

Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must ever be kept in
mind. Thus: "It must be evident to any one that the power to declare a legislative enactment void is
one which the judge, conscious of the fallibility of the human judgment, will shrink from exercising in
any case where he can conscientiously and with due regard to duty and official oath decline the
responsibility."7

There must be a caveat however to the above Cooley pronouncement. Such should not be the case, to
paraphrase Freund, when the challenged legislation imperils freedom of the mind and of the person,
for given such an undesirable situation, "it is freedom that commands a momentum of respect." Here
then, fidelity to the great ideal of liberty enshrined in the Constitution may require the judiciary to
take an uncompromising and militant stand. As phrased by us in a recent decision, "if the liberty
involved were freedom of the mind or the person, the standard of its validity of governmental acts is
much more rigorous and exacting."8

So much for the appropriate judicial attitude. Now on the question of awareness of the controlling
constitutional doctrines.

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

A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite evident from the
various citations from his pen found in the majority opinion. For him, it would be a misreading of the
equal protection clause to ignore actual conditions and settled practices. Not for him the at times
academic and sterile approach to constitutional problems of this sort. Thus: "It would be a narrow
conception of jurisprudence to confine the notion of 'laws' to what is found written on the statute
books, and to disregard the gloss which life has written upon it. Settled state practice cannot supplant
constitutional guaranties, but it can establish what is state law. The Equal Protection Clause did not
write an empty formalism into the Constitution. Deeply embedded traditional ways of carrying out
state policy, such as those of which petitioner complains, are often tougher and truer law than the dead
words of the written text."11 This too, from the same distinguished jurist: "The Constitution does not
require things which are different in fact or opinion to be treated in law as though they were the
same."12
Now, as to non-delegation. It is to be admitted that the problem of non-delegation of legislative power
at times occasions difficulties. Its strict view has been announced by Justice Laurel in the aforecited
case of People v. Vera in this language. Thus: "In testing whether a statute constitutes an undue
delegation of legislative power or not, it is usual to inquire whether the statute was complete in all its
terms and provisions when it left the hands of the legislature so that nothing was left to the judgment
of any other appointee or delegate of the legislature. .... In United States v. Ang Tang Ho ..., this court
adhered to the foregoing rule; it held an act of the legislature void in so far as it undertook to authorize
the Governor-General, in his discretion, to issue a proclamation fixing the price of rice and to make
the sale of it in violation of the proclamation a crime."13

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

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

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

EN BANC

G.R. No. L-2947 January 11, 1951

MANILA RACE HORSE TRAINERS ASSOCIATION, INC., and JUAN T.

SORDAN, plaintiffs-appellants,
vs.
MANUEL DE LA FUENTE, defendant-appellee.

Soriano, Garde and Cervania for appellants.

City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for appellee.

TUASON, J.:

This action was instituted for a declaratory relief by the Manila Race Horses Trainers Association,
Inc., a non-stock corporation duly organized and existing under and by virtue of the laws of the
Philippines, who allege that they are owners of boarding stables for race horses and that their rights as
such are affected by Ordinance No. 3065 of the City of Manila approved on July 1, 1947.1 They made
the Mayor of Manila defendant and prayed that said ordinance be declared invalid as violative of the
Philippine Constitution.

The case was submitted on the pleadings, and the decision was that the ordinance in question "is
constitutional and valid and has been enacted in accordance with the powers of the Municipal Board
granted by the Charter of the City of Manila."

On appeal, the plaintiffs as appellants make three assignments of error, the first two of which are
discussed jointly in their brief under two separate topics.

First, it is maintained that the ordinance under consideration is a tax on race horses as distinct from
boarding stables. It is argued that by section 2 the basis of the license fees "is the number of race
horses kept or maintained in the boarding stables to be paid by the maintainers at the rate of P10.00 a
year for each race horse;" that "the fee is increased correspondingly P10 for each additional race horse
maintained or fed in the stable;" and that "by the same token, an empty stable for race horse pays no
license fee at all."

The spirit, rather than the letter, of an ordinance determines the construction thereof, and the court
looks less to its words and more to the context, subject matter, consequence and effect. Accordingly,
what is within the spirit is within the ordinance although it is not within the letter thereof, while that
which is in the letter, although not within the spirit, is not within the ordinance. (62 C. J. S., 845.)
From the context of Ordinance No. 3065, the intent to tax or license stables and not horses is clearly
manifest. The tax is assessed not on the owners of the horses but on the owners of the stables, as
counsel admit in their brief, although there is nothing, of course, to stop stable owners from shifting
the tax to the horse owners in the form of increased rents or fees, which is generally the case.
It is also plain from the text of the whole ordinance that the number of horses is used in the
assessment purely as a method of fixing an equitable and practical distribution of the burden imposed
by the measure. Far from being obnoxious, the method is fair and just. It is but fair and just that for a
boarding stable where only one horse is maintained proportionately less amount should be exacted
than for a stable where more horses are kept and from which greater income is derived.

We do not share plaintiff's opinion, apropos the second proposition, that the ordinance in question is
discriminatory and savors of class legislation. In taxing only boarding stables for race horses, we do
not believe that the ordinance, makes arbitrary classification. In the case of Eastern Theatrical Co.
Inc., vs. Alfonso, 46 Off. Gaz. Supp. to No. 11, p. 303,* it was said there is equality and uniformity in
taxation if all articles or kinds of property of the same class are taxed at the same rate. Thus, it was
held in that case, that "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 not argument at all against the equality and
uniformity of tax imposition." Applying this criterion to the present case, there would be
discrimination if some boarding stables of the same class used for the same number of horses were not
taxed or were made to pay less or more than others.

From the viewpoint of economics and public policy the taxing of boarding stables for race horses to
the exclusion of boarding stables for horses dedicated to other purposes is not indefensible. The
owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who
in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately
taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in
taxation is generally conceived in terms of ability to pay in relation to the benefits received by the
taxpayer and by the public from the business or property taxed. Race horses are devoted to gambling
if legalized, their owners derive fat income and the public hardly any profit from horse racing, and
this business demands relatively heavy police supervision. Taking everything into account, the
differentiation against which the plaintiffs complain conforms to the practical dictates of justice and
equity and is not discrimatory within the meaning of the Constitution.

One ground of attack in the court below on the constitutionality of the ordinance variance between
the title and the subject matter apparently has been abandoned. In its place a new question is
brought up on the appeal in the third and last assignment of error. It is now contended, for the first
time, that "the Municipal Board of Manila (is) without power to enact ordinance taxing private stables
for race horses," and that the lower court erred in not so declaring. This assignment of error has
reference to Class B or the second sub-paragraph of section 1 of the ordinance.

Not having been raised in the pleading, this question was properly ignored, not to say that even it had
been raised it would not have been available as basis for a declaration of nullity of the ordinance. The
clause of the ordinance taxing or licensing boarding stables for race horses does not prejudice the
plaintiffs in any material way, and it is well settled that a person who is not adversely affected by a
licensing ordinance may not attack its validity. Stated differently, he may not complain that a
licensing ordinance is invalid as against a class other than that to which he belongs. (62 C. J. S.830,
831.) By analogy, where a municipal ordinance is valid in some of its parts and invalid as to others
and the valid parts are separable from the invalid ones in which latter case the valid provisions
stand as operative the plaintiff may contest the validity of the provisions that injure his interest but
not those that do not.

We are of the opinion that the trial court committed no error and the judgment is affirmed with costs
against the plaintiff-appellants.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Montemayor, Reyes, Jugo and Bautista Angelo,
JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 3473 March 22, 1907

J. CASANOVAS, plaintiff-appellant,
vs.
JNO. S. HORD, defendant-appellee.

F.G. Waite for appellant.

Attorney-General Araneta for appellee.

WILLARD, J.:

The plaintiff brought this action against the defendant, the Collector of Internal Revenue, to recover
the sum of P9,600, paid by him under protest as taxes on certain mining claims owned by him in the
Province of Ambos Camarines. Judgment was rendered in the court below in favor of the defendant,
and from that judgment the plaintiff appealed.

There is no dispute about the facts.

In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of
the 14th of May, 1867, granted to the plaintiff certain mines in the said Province of Ambos
Camarines, of which mines the plaintiff is now the owner.

That there were valid perfected mining concessions granted prior to the 11th of April, 1899, is
conceded. They were so considered by the Collector of Internal Revenue and were by him said to fall
within the provisions of section 134 of Act No. 1189, known as the Internal Revenue Act. That
section is as follows:

SEC. 134. On all valid perfected mining concessions granted prior to April eleventh, eighteen
hundred and ninety-nine, there shall be levied and collected on the after January first,
nineteen hundred and five, the following taxes:

2. (a) On each claim containing an area of sixty thousand square meters, an annual tax of one
hundred pesos; (b) and at the same rate proportionately on each claim containing an area in
excess of, or less than, sixty thousand square meters.

3. On the gross output of each an ad valorem tax equal to three per centum of the actual
market value of such output.

The defendant accordingly imposed upon these properties the tax mentioned in section 134, which
tax, as has before been stated, plaintiff paid under protest.

The only question in the case is whether this section 134 is void or valid.
I. It is claimed by the plaintiff that it is void because it comes within the provision of section 5 of the
act of Congress of July 1, 19021 (32 U.S. Stat. L., 691), which provides "that no law impairing the
obligation of contracts shall be enacted." The royal decree of the 14th of May, 1867, provided, among
other things, as follows:

ART. 76. On each pertenencia minera (mining claim) of the area prescribed in the first
paragraph of article 13 (sixty thousand square meters) there shall be paid annually a fixed tax
of forty escudos (about P20.00). The pertenencia referred to in the second paragraph of the
same article, though of greater area than the others (one hundred and fifty thousand square
meters), shall pay only twenty escudos (about P10.00).

ART. 78. Pertenencia of iron mines and mines of combustible minerals shall be exempt from
the annual tax for a period of thirty years from the date of publication of this decree.

ART. 80. A further tax of three per centum on the gross earnings shall be paid without
deduction of costs of any kind whatsoever. All substances enumerated in section one shall be
exempt from said tax of three per centum for a period of thirty years.

ART. 81. No other taxes than those herein mentioned shall be imposed upon mining and
metallurgical industries.

The royal decree and regulation for its enforcement provided that the deeds granted by the
Government should be in a particular form, which form was inserted in the regulations. It must be
presumed that the deeds granted to the plaintiff were made as provided by law, and, in fact, one of
such concessions was exhibited during the argument in this court, and was found to be in exact
conformity with the form prescribed by law. The deed is as follows:

Don Camilo Garcia de Polavieja, Marquez de Polavieja, Teniente General de los Ejercitos
Nacionales, Caballero Gran Cruz de la Real y Militar Orden de San Hermenegildo, de la Real
y distinguida de Isabel la Catolica, de la del Merito Militar Roja, de la de la Corona de Italia,
Comendador de Carlos Tercero, Bennemerito de la Patria en grado eminente, condecorado
con varias cruses de distincion por meritos de guerra, Capitan General y Gobernador General
de Filipinas.

Whereas I have granted to Don Joaquin Casanovas y Llovet and to Don Martin Buck the
concession of a gold mine entitled "Nueva California Segunda" in the jurisdiction of Paracale,
Province of Ambos Camarines: Now, therefore, in the name of His Majesty the King (whom
God preserve), and pursuant to the provisions of article 37 of the royal decree of May 14,
1867, regulating mining in these Islands, I issue, this fifth day of November, eighteen hundred
and ninety-six, this title deed to four pertenencias, comprising an area of two hundred and
forty thousand square meters, as shown in the attached sketch map drafted by the engineer
Don Enrique Abella y Casariego, and dated at Manila December sixteenth of the said year,
subject to the following general terms and conditions:

1. That the mine shall be worked in conformity with the rules in mining, the grantee and his
laborers to be governed by the police rules established by existing regulations.

2. That the grantee shall be liable for all damages to third parties that may be caused by his
operations.

3. That the grantee shall likewise indemnify his neighbors for any damage they may suffer by
reason of water accumulated on his works, if, upon being requested, he fail to drain the same
within the time indicated.
 4. That he shall contribute for the drainage of the adjacent mines and for the general galleries
for drainage or haulage in proportion to the benefit he derives therefrom, whenever, by
authority of the Governor-General, such works shall be opened for a group of pertenencias or
for the entire mining locality in which the mine is situated.

5. That he shall commence work on the mine immediately upon receipt of this concession
unless prevented by force majeure.

6. That he shall keep the mine in active operation by employing at the rate of at least four
laborers for each pertenencia for at least six months of each year.

7. That he shall strengthen the walls of the mine within the time indicated whenever, by
reason of mismanagement of the work, it threatens to cave in, unless he be prevented by force
majeure.

8. That he shall not render further profitable development of the mine difficult or impossible
by avaricious operation.

9. That he shall not suspend the operation of the mine with the intention of abandoning the
same without first informing the Governor of his intention, in which case he must leave the
mine in a good state of timbering.

10. That he shall pay taxes on the mine and its output as prescribed in the royal decree.

11. Finally, that he shall comply with all the requirements contained in the royal decree and in
the regulations for concessions of the same nature as the present.

Without special conditions.

Now, therefore, by virtue of this title deed, I grant to Don Joaquin Casanovas y Llovet and to
Don Martin Buck the ownership of the said mine for an unlimited period of time so long as
they shall comply with the foregoing terms and conditions, to the end that they may develop
the same and make free use and disposition of the output thereof, with the right to alienate the
said mine subject to the provisions of existing laws, and to enjoy all the rights and benefits
conceded to such grantees by the royal decree and by the mining regulations. And for the
prompt fulfillment and observance of the said conditions, both on the part of the said grantees
and by all authorities, courts, corporations, and private persons whom it may concern, I have
ordered this title deed to be issued given under my hand and the proper seal and
countersigned by the undersigned Director-General of Civil Administration.

It seems very clear to us that this deed constituted a contract between the Spanish Government and the
plaintiff, the obligation of which contract was impaired by the enactment of section 134 of the Internal
Revenue Law above cited, thereby infringing the provisions above quoted from section 5 of the act of
Congress of July 1, 1902. This conclusion seems necessarily to result from the decisions of the
Supreme Court of the United States in similar cases. In the case of McGee vs. Mathis (4 Wallace,
143), it appeared that the State of Arkansas, by an act of the legislature of 1851, provided for the sale
of certain swamp lands granted to it by the United States; for the issue of transferable scrip receivable
for any lands not already taken up at the time of selection by the holder; for contracts for the making
of levees and drains, and for the payment of contractors in scrip and otherwise. In the fourteenth
section of this act it was provided that

To encourage by all just means the progress and completion of the reclaiming of such lands
by offering inducements to purchasers and contractors to take up said lands, all said swamp
 and overflowed lands shall be exempt from taxation for the term of ten years or until they
shall be reclaimed.

In 1855 this section was repealed and provision was made by law for the taxation of swamp and
overflowed lands, sold or to be sold, precisely as other lands. McGee, before this appeal, had become
the owner by transfer from contractors of a large amount of scrip issued under the Act of 1851, and
with this scrip, after the repeal, took up and paid for many sections and parts of sections of the granted
lands. Taxes were levied by the State on the lands so taken up by McGee. The Supreme Court held
that these taxes could not be collected. The Court said at page 156:

It seems quite clear that the Act of 1851 authorizing the issue of land scrip constituted a
contract between the State and the holders of the land scrip issued under the act.

In the case of the Home of the Friendless vs. Rouse (8 Wallace, 430), it appeared that on the 3d day of
February, 1853, the legislature of Missouri passed on act to incorporate the Home of the Friendless in
the city of St. Louis. Section 1 of the act provided that

All property of said corporation shall be exempt from taxation.

The court held that the State had no power afterwards to pass laws providing for the levying of taxes
upon this institution. The Court said among other things at page 438:

The validity of this contract is questioned at the bar on the ground that the legislature had no
authority to grant away the power of taxation. The answer to this position is, that the question
is no longer open for argument here, for it is settled by the repeated adjudications of this
court, that a State may be contract based on a consideration exempt the property of an
individual or corporation from taxation, either for a specified period or permanently. And it is
equally well settled that the exemption is presumed to be on sufficient consideration, and
binds the State if the charter containing it is accepted.

In the case of The Asylum vs. The City of New Orleans (105 U.S., 362), it appears that St. Ariva's
Asylum was incorporated by an act of the legislature of Louisiana, approved April 29, 1853. The law
incorporating it provided that it should enjoy the same exemption from taxation which was enjoyed by
the Orphan Boys' Asylum of New Orleans. The law relating to the last named institution provided
(page 364):

That, from and after the passage of this act, all the property, real and personal, belonging to
the Orphan Boys' Asylum of New Orleans be, and the same is hereby exempted from all
taxation, either by the State, parish, or city in which it is situated, any law to the contrary
notwithstanding.

It was held that the State had no power by subsequent legislation to impose taxes upon the property of
this institution.

That the doctrine announced in these cases is still maintained in that court is apparent from the case of
Powers vs. The Detroit, Grand Haven and Milwaukee Railway which was decided on the 16th of
April, 1906, and reported in 201 U. S., 543. Section 9 of the act of the legislature of Michigan,
incorporating the railway company, provided:

Said company shall, on or before the 1st day of July, pay to the State treasurer, an annual tax
of one per cent on the capital stock of said company, pain in, which tax shall be in lieu of all
other taxation.
The court said at page 556:

It has often been decided by this court, so often that a citation on authorities in unnecessary,
that the legislature of a State may, in the absence of special restrictions in its constitution,
make a valid contract with a corporation in respect to taxation, and that such contract can be
enforced against the State at the instance of the corporation.

The case at bar falls within the cases hereinbefore cited. It is to be distinguished from the case of the
Metropolitan Street Railway Company vs. The New York State Board of Tax Commissioners (199
U.S., 1). In that case it was provided by various acts of the legislature, that the companies therein
referred to, should pay annually to the city of New York, a fixed amount or percentage, varying from
2 to 8 per cent of their gross earnings additional taxes was sustained by the court. It was sustained on
the ground that the prior legislation did not expressly say that the taxes thus provided for should be in
lieu of all other taxes. The court said at page 37:

Applying these well-established rules to the several contracts, it will be perceived that there
was no express relinquishment of the right of taxation. The plaintiff in error must rely upon
some implication, and not upon any direct stipulation. In each contract there was a grant of
privileges, but the grant was specifically or privileges in respect to the construction, operation
and maintenance of the street railroad. These were all that in terms were granted. As
consideration for this grant, the grantees were to pay something, and such payment is
nowhere said to be in lieu of, or as an equivalent or substitute of taxes. All that can be
extracted from the language used, was a grant of privileges and a payment therefor. Other
words must be written into the contract before there can be found any relinquishment of the
power of taxation.

But in the case at bar, there is found not only the provisions for the payment of certain taxes annually,
but there is also found the provision contained in article 81, above quoted, which expressly declares
that no other taxes shall be imposed upon these mines.

The present case is to be distinguished also from that class of cases of which Grands Lodge vs. The
City of New Orleans (166 U.S., 143) is a type, and which includes Salt Company vs. East Saginaw
(13 Wall., 373) and Welch vs. Cook (97 U.S., 541). In these cases the exemption was a mere bounty
and did not form a part of any contract.

The fact that this concession was made by the Government of Spain, and not by the Government of
the United States, is not important. (Trustees of Dartmouth College vs. Woodward, 4 Wheaton, 518.)

Our conclusion is that the concessions granted by the Government of Spain to the plaintiff, constitute
contracts between the parties; that section 134 of the Internal Revenue Law impairs the obligation of
these contracts, and is therefore void as to them.

II. We think that this section is also void because in conflict with section 60 of the act of Congress of
July 1, 1902. This section is as follows:

That nothing in this Act shall be construed to effect the rights of any person, partnership, or
corporation, having a valid, perfected mining concession granted prior to April eleventh,
eighteen hundred and ninety-nine, but all such concessions shall be conducted under the
provisions of the law in force at the time they were granted, subject at all times to cancellation
by reason of illegality in the procedure by which they were obtained, or for failure to comply
with the conditions prescribed as requisite to their retention in the laws under which they were
granted: Provided, That the owner or owners of every such concession shall cause the corners
made by its boundaries to be distinctly marked with permanent monuments within six months
after this act has been promulgated in the Philippine Islands, and that any concessions, the
 boundaries of which are not so marked within this period shall be free and open to
explorations and purchase under the provisions of this act.2

This section seems to indicate that concessions, like those in question, can be canceled only by reason
of illegality in the procedure by which they were obtained, or for failure to comply with the conditions
prescribed as requisite for their retention in the laws under which they were granted. There is nothing
in the section which indicates that they can be canceled for failure to comply with the conditions
prescribed by subsequent legislation. In fact, the real intention of the act seems to be that such
concession should be subject to the former legislation and not to any subsequent legislation. There is
no claim in this case that there was any illegality in the procedure by which these concessions were
obtained, nor is there any claim that the plaintiff has not complied with the conditions prescribed in
the said royal decree of 1867.

III. In view of the result at which we have arrived, it is not necessary to consider the further claim
made by the plaintiff that the taxes imposed by article 134 above quoted, are in violation of the part of
section 5 of the act of July 1, 1902, which declares "that the rule of taxation in said Islands shall be
uniform."

The judgment of the court below is reversed, and judgment is ordered in favor of the plaintiff and
against the defendant for P9,600, with interest thereon, at 6 per cent, from the 21st day of February,
1906, and the costs of the Court of First Instance. No costs will be allowed to either party in this court.

After the expiration of twenty days let judgment be entered in accordance herewith and ten days
thereafter let the case be remanded to the court from whence it came for proper action. So ordered.

Arellano, C.J., Torres, Mapa, and Tracey, JJ., concur.

Johnson, J., dissents.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-9637 April 30, 1957

AMERICAN BIBLE SOCIETY, plaintiff-appellant,

vs.
CITY OF MANILA, defendant-appellee.

City Fiscal Eugenio Angeles and Juan Nabong for appellant.

Assistant City Fiscal Arsenio Naawa for appellee.

FELIX, J.:

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered

and doing business in the Philippines through its Philippine agency established in Manila in
November, 1898, with its principal office at 636 Isaac Peral in said City. The defendant appellee is a
municipal corporation with powers that are to be exercised in conformity with the provisions of
Republic Act No. 409, known as the Revised Charter of the City of Manila.

In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles
and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines and
translating the same into several Philippine dialects. On May 29 1953, the acting City Treasurer of the
City of Manila informed plaintiff that it was conducting the business of general merchandise since
November, 1945, without providing itself with the necessary Mayor's permit and municipal license, in
violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and
required plaintiff to secure, within three days, the corresponding permit and license fees, together with
compromise covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total
sum of P5,821.45 (Annex A).

Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit and
pay under protest the sum of P5,891.45, if suit was to be taken in court regarding the same (Annex B).
To avoid the closing of its business as well as further fines and penalties in the premises on October
24, 1953, plaintiff paid to the defendant under protest the said permit and license fees in the
aforementioned amount, giving at the same time notice to the City Treasurer that suit would be taken
in court to question the legality of the ordinances under which, the said fees were being collected
(Annex C), which was done on the same date by filing the complaint that gave rise to this action. In
its complaint plaintiff prays that judgment be rendered declaring the said Municipal Ordinance No.
3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and that
the defendant be ordered to refund to the plaintiff the sum of P5,891.45 paid under protest, together
with legal interest thereon, and the costs, plaintiff further praying for such other relief and remedy as
the court may deem just equitable.

Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the
Municipal Board of the City of Manila by virtue of the power granted to it by section 2444, subsection
(m-2) of the Revised Administrative Code, superseded on June 18, 1949, by section 18, subsection (1)
of Republic Act No. 409, known as the Revised Charter of the City of Manila, and praying that the
complaint be dismissed, with costs against plaintiff. This answer was replied by the plaintiff
reiterating the unconstitutionality of the often-repeated ordinances.

Before trial the parties submitted the following stipulation of facts:

COME NOW the parties in the above-entitled case, thru their undersigned attorneys and
respectfully submit the following stipulation of facts:

1. That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac Peral,
Manila, Bibles, New Testaments, bible portions and bible concordance in English and other
foreign languages imported by it from the United States as well as Bibles, New Testaments
and bible portions in the local dialects imported and/or purchased locally; that from the fourth
quarter of 1945 to the first quarter of 1953 inclusive the sales made by the plaintiff were as
follows:

Quarter Amount of Sales

4th quarter 1945 P1,244.21

1st quarter 1946 2,206.85

2nd quarter 1946 1,950.38

3rd quarter 1946 2,235.99

4th quarter 1946 3,256.04

1st quarter 1947 13,241.07

2nd quarter 1947 15,774.55

3rd quarter 1947 14,654.13

4th quarter 1947 12,590.94

1st quarter 1948 11,143.90

2nd quarter 1948 14,715.26

3rd quarter 1948 38,333.83

4th quarter 1948 16,179.90

1st quarter 1949 23,975.10

2nd quarter 1949 17,802.08

3rd quarter 1949 16,640.79

4th quarter 1949 15,961.38

1st quarter 1950 18,562.46

2nd quarter 1950 21,816.32

3rd quarter 1950 25,004.55

4th quarter 1950 45,287.92

1st quarter 1951 37,841.21

2nd quarter 1951 29,103.98

 3rd quarter 1951 20,181.10

4th quarter 1951 22,968.91

1st quarter 1952 23,002.65

2nd quarter 1952 17,626.96

3rd quarter 1952 17,921.01

4th quarter 1952 24,180.72

1st quarter 1953 29,516.21

2. That the parties hereby reserve the right to present evidence of other facts not herein
stipulated.

WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties
may present further evidence on their behalf. (Record on Appeal, pp. 15-16).

When the case was set for hearing, plaintiff proved, among other things, that it has been in existence
in the Philippines since 1899, and that its parent society is in New York, United States of America;
that its, contiguous real properties located at Isaac Peral are exempt from real estate taxes; and that it
was never required to pay any municipal license fee or tax before the war, nor does the American
Bible Society in the United States pay any license fee or sales tax for the sale of bible therein. Plaintiff
further tried to establish that it never made any profit from the sale of its bibles, which are disposed of
for as low as one third of the cost, and that in order to maintain its operating cost it obtains substantial
remittances from its New York office and voluntary contributions and gifts from certain churches,
both in the United States and in the Philippines, which are interested in its missionary work.
Regarding plaintiff's contention of lack of profit in the sale of bibles, defendant retorts that the
admissions of plaintiff-appellant's lone witness who testified on cross-examination that bibles bearing
the price of 70 cents each from plaintiff-appellant's New York office are sold here by plaintiff-
appellant at P1.30 each; those bearing the price of $4.50 each are sold here at P10 each; those bearing
the price of $7 each are sold here at P15 each; and those bearing the price of $11 each are sold here at
P22 each, clearly show that plaintiff's contention that it never makes any profit from the sale of its
bible, is evidently untenable.

After hearing the Court rendered judgment, the last part of which is as follows:

As may be seen from the repealed section (m-2) of the Revised Administrative Code and the
repealing portions (o) of section 18 of Republic Act No. 409, although they seemingly differ
in the way the legislative intent is expressed, yet their meaning is practically the same for the
purpose of taxing the merchandise mentioned in said legal provisions, and that the taxes to be
levied by said ordinances is in the nature of percentage graduated taxes (Sec. 3 of Ordinance
No. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, as amended by
Ordinance No. 3364).

IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so

holds that this case should be dismissed, as it is hereby dismissed, for lack of merits, with
costs against the plaintiff.

Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which certified the
case to Us for the reason that the errors assigned to the lower Court involved only questions of law.
Appellant contends that the lower Court erred:

1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not
unconstitutional;

2. In holding that subsection m-2 of Section 2444 of the Revised Administrative Code under
which Ordinances Nos. 2592 and 3000 were promulgated, was not repealed by Section 18 of
Republic Act No. 409;

3. In not holding that an ordinance providing for taxes based on gross sales or receipts, in
order to be valid under the new Charter of the City of Manila, must first be approved by the
President of the Philippines; and

4. In holding that, as the sales made by the plaintiff-appellant have assumed commercial
proportions, it cannot escape from the operation of said municipal ordinances under the cloak
of religious privilege.

The issues. As may be seen from the proceeding statement of the case, the issues involved in the
present controversy may be reduced to the following: (1) whether or not the ordinances of the City of
Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are constitutional and valid; and (2)
whether the provisions of said ordinances are applicable or not to the case at bar.

Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides
that:

(7) No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof, and the free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed. No religion test shall be
required for the exercise of civil or political rights.

Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529 and
3000, as respectively amended, are unconstitutional and illegal in so far as its society is concerned,
because they provide for religious censorship and restrain the free exercise and enjoyment of its
religious profession, to wit: the distribution and sale of bibles and other religious literature to the
people of the Philippines.

Before entering into a discussion of the constitutional aspect of the case, We shall first consider the
provisions of the questioned ordinances in relation to their application to the sale of bibles, etc. by
appellant. The records, show that by letter of May 29, 1953 (Annex A), the City Treasurer required
plaintiff to secure a Mayor's permit in connection with the society's alleged business of distributing
and selling bibles, etc. and to pay permit dues in the sum of P35 for the period covered in this
litigation, plus the sum of P35 for compromise on account of plaintiff's failure to secure the permit
required by Ordinance No. 3000 of the City of Manila, as amended. This Ordinance is of general
application and not particularly directed against institutions like the plaintiff, and it does not contain
any provisions whatever prescribing religious censorship nor restraining the free exercise and
enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:

SEC. 1. PERMITS NECESSARY. It shall be unlawful for any person or entity to conduct
or engage in any of the businesses, trades, or occupations enumerated in Section 3 of this
Ordinance or other businesses, trades, or occupations for which a permit is required for the
proper supervision and enforcement of existing laws and ordinances governing the sanitation,
security, and welfare of the public and the health of the employees engaged in the business
specified in said section 3 hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT
 THEREFOR FROM THE MAYOR AND THE NECESSARY LICENSE FROM THE CITY
TREASURER.

The business, trade or occupation of the plaintiff involved in this case is not particularly mentioned in
Section 3 of the Ordinance, and the record does not show that a permit is required therefor under
existing laws and ordinances for the proper supervision and enforcement of their provisions governing
the sanitation, security and welfare of the public and the health of the employees engaged in the
business of the plaintiff. However, sections 3 of Ordinance 3000 contains item No. 79, which reads as
follows:

79. All other businesses, trades or occupations not

mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00

Therefore, the necessity of the permit is made to depend upon the power of the City to license or tax
said business, trade or occupation.

As to the license fees that the Treasurer of the City of Manila required the society to pay from the 4th
quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including the sum of P50 as
compromise, Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028 prescribes
the following:

SEC. 1. FEES. Subject to the provisions of section 578 of the Revised Ordinances of the
City of Manila, as amended, there shall be paid to the City Treasurer for engaging in any of
the businesses or occupations below enumerated, quarterly, license fees based on gross sales
or receipts realized during the preceding quarter in accordance with the rates herein
prescribed: PROVIDED, HOWEVER, That a person engaged in any businesses or occupation
for the first time shall pay the initial license fee based on the probable gross sales or receipts
for the first quarter beginning from the date of the opening of the business as indicated herein
for the corresponding business or occupation.

xxx xxx xxx

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

xxx xxx xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance No.
2529, as amended, are not imposed directly upon any religious institution but upon those engaged in
any of the business or occupations therein enumerated, such as retail "dealers in general merchandise"
which, it is alleged, cover the business or occupation of selling bibles, books, etc.

Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2) of said
legal body, as amended by Act No. 3659, approved on December 8, 1929, empowers the Municipal
Board of the City of Manila:

(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or both,
and (b) retail dealers in new (not yet used) merchandise, which dealers are not yet subject to
the payment of any municipal tax.
 For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in
general merchandise, and (2) retail dealers exclusively engaged in the sale of (a) textiles . . .
(e) books, including stationery, paper and office supplies, . . .: PROVIDED,
HOWEVER, That the combined total tax of any debtor or manufacturer, or both, enumerated
under these subsections (m-1) and (m-2), whether dealing in one or all of the articles
mentioned herein, SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS PER ANNUM.

and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were enacted
in virtue of the power that said Act No. 3669 conferred upon the City of Manila. Appellant, however,
contends that said ordinances are longer in force and effect as the law under which they were
promulgated has been expressly repealed by Section 102 of Republic Act No. 409 passed on June 18,
1949, known as the Revised Manila Charter.

Passing upon this point the lower Court categorically stated that Republic Act No. 409 expressly
repealed the provisions of Chapter 60 of the Revised Administrative Code but in the opinion of the
trial Judge, although Section 2444 (m-2) of the former Manila Charter and section 18 (o) of the new
seemingly differ in the way the legislative intent was expressed, yet their meaning is practically the
same for the purpose of taxing the merchandise mentioned in both legal provisions and, consequently,
Ordinances Nos. 2529 and 3000, as amended, are to be considered as still in full force and effect
uninterruptedly up to the present.

Often the legislature, instead of simply amending the pre-existing statute, will repeal the old
statute in its entirety and by the same enactment re-enact all or certain portions of the
preexisting law. Of course, the problem created by this sort of legislative action involves
mainly the effect of the repeal upon rights and liabilities which accrued under the original
statute. Are those rights and liabilities destroyed or preserved? The authorities are divided as
to the effect of simultaneous repeals and re-enactments. Some adhere to the view that the
rights and liabilities accrued under the repealed act are destroyed, since the statutes from
which they sprang are actually terminated, even though for only a very short period of
time. Others, and they seem to be in the majority, refuse to accept this view of the situation,
and consequently maintain that all rights an liabilities which have accrued under the original
statute are preserved and may be enforced, since the re-enactment neutralizes the repeal,
therefore, continuing the law in force without interruption. (Crawford-Statutory Construction,
Sec. 322).

Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and wider
concept of taxation and is different from the provisions of Section 2444(m-2) that the former cannot
be considered as a substantial re-enactment of the provisions of the latter. We have quoted above the
provisions of section 2444(m-2) of the Revised Administrative Code and We shall now copy
hereunder the provisions of Section 18, subdivision (o) of Republic Act No. 409, which reads as
follows:

(o) To tax and fix the license fee on dealers in general merchandise, including importers and
indentors, except those dealers who may be expressly subject to the payment of some other
municipal tax under the provisions of this section.

Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail
dealers. For purposes of the tax on retail dealers, general merchandise shall be classified into
four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential
commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each
class but where commodities of different classes are sold in the same establishment, it shall
not be compulsory for the owner to secure more than one license if he pays the higher or
highest rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax as
such, as may be provided by ordinance.
 For purposes of this section, the term "General merchandise" shall include poultry and
livestock, agricultural products, fish and other allied products.

The only essential difference that We find between these two provisions that may have any bearing on
the case at bar, is that, while subsection (m-2) prescribes that the combined total tax of any dealer or
manufacturer, or both, enumerated under subsections (m-1) and (m-2), whether dealing in one or all
of the articles mentioned therein, shall not be in excess of P500 per annum, the corresponding section
18, subsection (o) of Republic Act No. 409, does not contain any limitation as to the amount of tax or
license fee that the retail dealer has to pay per annum. Hence, and in accordance with the weight of
the authorities above referred to that maintain that "all rights and liabilities which have accrued under
the original statute are preserved and may be enforced, since the reenactment neutralizes the repeal,
therefore continuing the law in force without interruption", We hold that the questioned ordinances of
the City of Manila are still in force and effect.

Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved by the
President of the Philippines as per section 18, subsection (ii) of Republic Act No. 409, which reads as
follows:

(ii) To tax, license and regulate any business, trade or occupation being conducted within the
City of Manila, not otherwise enumerated in the preceding subsections, including percentage
taxes based on gross sales or receipts, subject to the approval of the PRESIDENT, except
amusement taxes.

but this requirement of the President's approval was not contained in section 2444 of the former
Charter of the City of Manila under which Ordinance No. 2529 was promulgated. Anyway, as stated
by appellee's counsel, the business of "retail dealers in general merchandise" is expressly enumerated
in subsection (o), section 18 of Republic Act No. 409; hence, an ordinance prescribing a municipal tax
on said business does not have to be approved by the President to be effective, as it is not among those
referred to in said subsection (ii). Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the authority granted to it by law.

The question that now remains to be determined is whether said ordinances are inapplicable, invalid
or unconstitutional if applied to the alleged business of distribution and sale of bibles to the people of
the Philippines by a religious corporation like the American Bible Society, plaintiff herein.

With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028, appellant
contends that it is unconstitutional and illegal because it restrains the free exercise and enjoyment of
the religious profession and worship of appellant.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the
freedom of religious profession and worship. "Religion has been spoken of as a profession of faith to
an active power that binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has
reference to one's views of his relations to His Creator and to the obligations they impose of reverence
to His being and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342). The
constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries
with it the right to disseminate religious information. Any restraints of such right can only be justified
like other restraints of freedom of expression on the grounds that there is a clear and present danger of
any substantive evil which the State has the right to prevent". (Taada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license fee herein
involved is imposed upon appellant for its distribution and sale of bibles and other religious literature:

In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a license
be obtained before a person could canvass or solicit orders for goods, paintings, pictures,
wares or merchandise cannot be made to apply to members of Jehovah's Witnesses who went
about from door to door distributing literature and soliciting people to "purchase" certain
religious books and pamphlets, all published by the Watch Tower Bible & Tract Society. The
"price" of the books was twenty-five cents each, the "price" of the pamphlets five cents each.
It was shown that in making the solicitations there was a request for additional "contribution"
of twenty-five cents each for the books and five cents each for the pamphlets. Lesser sum
were accepted, however, and books were even donated in case interested persons were
without funds.

On the above facts the Supreme Court held that it could not be said that petitioners were
engaged in commercial rather than a religious venture. Their activities could not be described
as embraced in the occupation of selling books and pamphlets. Then the Court continued:

"We do not mean to say that religious groups and the press are free from all financial burdens
of government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L. ed. 660, 668,
56 S. Ct. 444. We have here something quite different, for example, from a tax on the income
of one who engages in religious activities or a tax on property used or employed in
connection with activities. It is one thing to impose a tax on the income or property of a
preacher. It is quite another to exact a tax from him for the privilege of delivering a sermon.
The tax imposed by the City of Jeannette is a flat license tax, payment of which is a condition
of the exercise of these constitutional privileges. The power to tax the exercise of a privilege
is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of this
religious practice can make its exercise so costly as to deprive it of the resources necessary
for its maintenance. Those who can tax the privilege of engaging in this form of missionary
evangelism can close all its doors to all those who do not have a full purse. Spreading
religious beliefs in this ancient and honorable manner would thus be denied the needy. . . .

It is contended however that the fact that the license tax can suppress or control this activity is
unimportant if it does not do so. But that is to disregard the nature of this tax. It is a license
tax a flat tax imposed on the exercise of a privilege granted by the Bill of Rights . . . The
power to impose a license tax on the exercise of these freedom is indeed as potent as the
power of censorship which this Court has repeatedly struck down. . . . It is not a nominal fee
imposed as a regulatory measure to defray the expenses of policing the activities in question.
It is in no way apportioned. It is flat license tax levied and collected as a condition to the
pursuit of activities whose enjoyment is guaranteed by the constitutional liberties of press and
religion and inevitably tends to suppress their exercise. That is almost uniformly recognized
as the inherent vice and evil of this flat license tax."

Nor could dissemination of religious information be conditioned upon the approval of an

official or manager even if the town were owned by a corporation as held in the case
of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself as held in the
case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme Court expressed the
opinion that the right to enjoy freedom of the press and religion occupies a preferred position
as against the constitutional right of property owners.

"When we balance the constitutional rights of owners of property against those of the people
to enjoy freedom of press and religion, as we must here, we remain mindful of the fact that
the latter occupy a preferred position. . . . In our view the circumstance that the property rights
to the premises where the deprivation of property here involved, took place, were held by
others than the public, is not sufficient to justify the State's permitting a corporation to govern
a community of citizens so as to restrict their fundamental liberties and the enforcement of
such restraint by the application of a State statute." (Taada and Fernando on the Constitution
of the Philippines, Vol. 1, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code,
provides:

SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. The following

organizations shall not be taxed under this Title in respect to income received by them as such

(e) Corporations or associations organized and operated exclusively for religious, charitable, .
. . or educational purposes, . . .: Provided, however, That the income of whatever kind and
character from any of its properties, real or personal, or from any activity conducted for
profit, regardless of the disposition made of such income, shall be liable to the tax imposed
under this Code;

Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff from this
tax and says that such exemption clearly indicates that the act of distributing and selling bibles, etc. is
purely religious and does not fall under the above legal provisions.

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in
some instances a little bit higher than the actual cost of the same but this cannot mean that appellant
was engaged in the business or occupation of selling said "merchandise" for profit. For this reason We
believe that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to
appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession
and worship as well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit
before any person can engage in any of the businesses, trades or occupations enumerated therein, We
do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution, nor
tax the exercise of religious practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this
point was elucidated as follows:

An ordinance by the City of Griffin, declaring that the practice of distributing either by hand
or otherwise, circulars, handbooks, advertising, or literature of any kind, whether said articles
are being delivered free, or whether same are being sold within the city limits of the City of
Griffin, without first obtaining written permission from the city manager of the City of
Griffin, shall be deemed a nuisance and punishable as an offense against the City of
Griffin, does not deprive defendant of his constitutional right of the free exercise and
enjoyment of religious profession and worship, even though it prohibits him from introducing
and carrying out a scheme or purpose which he sees fit to claim as a part of his religious
system.

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if
applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not
applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the business of
plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free
exercise and enjoyment of its religious profession and worship, as well as its rights of dissemination
of religious beliefs, We find that Ordinance No. 3000, as amended is also inapplicable to said
business, trade or occupation of the plaintiff.

Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision
appealed from, sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected from it.
Without pronouncement as to costs. It is so ordered.

Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion and Endencia, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA,
Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra;
HEIRS OF PATERNO MILLARE, respondents.

PARAS, J.:

This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of
Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior
College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial
Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare,
defendants," the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against the lot and building of the Abra Valley
Junior College, Inc., represented by Director Pedro Borgonia located at Bangued,
Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all
back taxes in the amount of P5,140.31 and back taxes and penalties from the
promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial,
be confiscated to apply for the payment of the back taxes and for the redemption of
the property in question, if the amount is less than P6,000.00, the remainder must be
returned to the Director of Pedro Borgonia, who represents the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before
the trial must be returned to said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the plaintiff.

SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning duly incorporated with the
Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the
respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul
and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said
"Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83
duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal
Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes
thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers
on July 8, 1972 for the sale at public auction of said college lot and building, which sale was held on
the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid
of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion
to dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then
Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs
of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by an amended answer
(Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp.
106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent
Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex
"6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver to the
Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner, through
Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB Check No.
904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial
court in its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court
respectfully enter into the following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the

complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra under Original Certificate of Title No. 0-
83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra

caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on
the property of said school under Original Certificate of Title No. 0-83 for the
satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of
Seizure being the one attached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc.
was sold at public auction for the satisfaction of the unpaid real property taxes
thereon and the same was sold to defendant Paterno Millare who offered the highest
bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant
Municipal Treasurer.
 5. That all other matters not particularly and specially covered by this stipulation of
facts will be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit

this stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes

Typ AGRIPINO BRILLANTES
Attorney for Plaintiff

Sgd. Loreto Roldan

Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre

Typ. DEMETRIO V. PRE
Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the
school is recognized by the government and is offering Primary, High School and College Courses,
and has a school population of more than one thousand students all in all; (b) that it is located right in
the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the Court of
First Instance building; (c) that the elementary pupils are housed in a two-storey building across the
street; (d) that the high school and college students are housed in the main building; (e) that the
Director with his family is in the second floor of the main building; and (f) that the annual gross
income of the school reaches more than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is
whether or not the lot and building in question are used exclusively for educational purposes. (Rollo,
p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z.
Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental
Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws applicable,
court decisions and jurisprudence, the school building and school lot used for educational purposes of
the Abra Valley College, Inc., are exempted from the payment of taxes." (Annexes "B," "B-1" of
Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because of the use of the second floor by the Director of
petitioner school for residential purposes. He thus ruled for the government and rendered the assailed
decision.

After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect
its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead
availed of the instant petition for review on certiorari with prayer for preliminary injunction before
this Court, which petition was filed on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition
(Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE
PETITIONER.

II

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF
THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES
MERELY BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE
COLLEGE BUILDING.

III

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF
THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING
PETITIONER TO PAY P5,140.31 AS REALTY TAXES.

IV

THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00

DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY
TAXES. (See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusively for educational
purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the
incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI
of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are
contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the
Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which
were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational
purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr.
Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial
purposes because the ground floor of the college building is being used and rented by a commercial
establishment, the Northern Marketing Corporation (See photograph attached as Annex "8"
(Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is Section
22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants
exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or
educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act
No. 409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious, charitable, scientific or educational
purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is the basic and
controlling guide, norm and standard to determine tax exemption, and not the mere incidental use
thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court
ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a
restaurant for its members, still these do not constitute business in the ordinary acceptance of the
word, but an institution used exclusively for religious, charitable and educational purposes, and as
such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this
Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as
a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the
exemption from payment of land tax in favor of the convent includes, not only the land actually
occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest.
The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also
qualifies for exemption because this constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases
of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of
Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus

Moreover, the exemption in favor of property used exclusively for charitable or

educational purposes is 'not limited to property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to
and reasonably necessary for the accomplishment of said purposes, such as in the
case of hospitals, "a school for training nurses, a nurses' home, property use to
provide housing facilities for interns, resident doctors, superintendents, and other
members of the hospital staff, and recreational facilities for student nurses, interns,
and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for the
inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the
Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI,
Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been
made that exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for
commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the
second floor of the main building in the case at bar for residential purposes of the Director and his
family, may find justification under the concept of incidental use, which is complimentary to the main
or primary purposeeducational, the lease of the first floor thereof to the Northern Marketing
Corporation cannot by any stretch of the imagination be considered incidental to the purpose of
education.

It will be noted however that the aforementioned lease appears to have been raised for the first time in
this Court. That the matter was not taken up in the to court is really apparent in the decision of
respondent Judge. No mention thereof was made in the stipulation of facts, not even in the description
of the school building by the trial judge, both embodied in the decision nor as one of the issues to
resolve in order to determine whether or not said properly may be exempted from payment of real
estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed
even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on
appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not
squarely raised below, still in the interest of substantial justice, this Court is not prevented from
considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to review
palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just
decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building
as well as the lot where it is built, should be taxed, not because the second floor of the same is being
used by the Director and his family for residential purposes, but because the first floor thereof is being
used for commercial purposes. However, since only a portion is used for purposes of commerce, it is
only fair that half of the assessed tax be returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby
AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner.

SO ORDERED.

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

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-38251 January 3, 1985

PABLO ARCEO, plaintiff-appellant,

vs.
JOSE OLIVEROS and RUFINA CABANGON, defendants-appellees.

CUEVAS, J.:

Appeal interposed by plaintiff Pablo Arceo from the decision 1 of the then Court of First Instance of
Quezon Branch IV, dismissing plaintiff's complaint seeking to exercise the right of redemption
under Sec. 119 of the Public Land Act (Commonwealth Act No. 141). The defunct Court of Appeals,
to which this case was originally appealed, certified the case to Us, since pure questions of law are
involved.

On June 27, 1963 plaintiff-appellant Pablo Arceo filed a complaint with the defunct Court of First
Instance of Quezon, against defendants-appellees, spouses Jose Oliveros and Rufina Cabangon. In his
complaint, Pablo alleged that Sixta Arceo, his sister and co-heir, sold to defendants-appellees on July
10, 1958 at Alabat, Quezon, her undivided interest in the parcel of land they have inherited from their
deceased father, Roberto Arceo, for P2,500.00 without his (Pablo's) consent. He further claimed that
from the time of the sale up to the present, defendants-appellees have not made any improvement on
the land although in peaceful and complete enjoyment of the property. Finally, Pablo averred that
being a co-owner and co-heir of said Sixta Arceo, he should be allowed to redeem and repurchase the
property subject of the sale in accordance with Section 119 of the Public Land Act, the land being
covered by a free patent title. 2

On July 22, 1963 defendants-appellees moved to dismiss the complaint on the following grounds:

1. Plaintiff has no legal capacity to sue;

2. There is another action pending between the same parties for the same cause;

3. Plaintiff's cause of action is barred by the statute of limitations;

4. The complaint states no cause of action; and

5. The instant action is prosecuted not in the name of the real party in interest. 3

6. After the filing of plaintiff's opposition 4 and defendant's reply 5 thereto, the court a
quo issued an order denying defendants' motion to dismiss and required them to file
their Answer. 6

In their answer, 7 defendants alleged that Sixta Arceo sold her definite share of one and one-half (1 )
hectares of the land subject of the litigation in favor of the defendants for the sum of P2,500.00; that
there was already a definite partition of said realty between plaintiff Pablo and his sister Sixta long
before the sale; that the conveyance was made only after Pablo manifested his unwillingness and
inability to buy the parcel in question, which was first offered to him; and that defendants have
introduced numerous improvements on the land in dispute. By way of affirmative defenses,
defendants reiterated the grounds set forth and relied upon by them in their motion to dismiss earlier
filed.

On June 23, 1965 the parties agreed to submit the case for resolution based on their pleadings,
memoranda and documentary evidence. 8

In a decision rendered on September 7, 1965, the then Court of First Instance of Quezon dismissed
plaintiff's complaint. 9 Plaintiff's motion for reconsideration 10 was denied. 11

Hence, this appeal.

Plaintiff-appellant contends that the court a quo erred

1. In upholding appellees' contention that appellant has no legal capacity to sue;

2. In ruling that, in the case at bar, legal redemption under Article 1612 and 1614 of
the New Civil Code supplements Section 119 of the Public Land Law;

3. In holding that lis pendens lies;

4. In dismissing the complaint; and

5. In rendering the judgment appealed from precisely based on the very grounds
previously raised in appellees' motion to dismiss which had been unconditionally
passed upon, resolved and denied. 12

The resolution of the instant appeal, hinges principally on the issue of lis pendens. Addressing himself
to this issue, appellant argues, 13 thus:

While it may be true that the aforesaid previous Civil Case NO. 435-G, and the
instant case involve almost the same parties, nevertheless, the rights asserted and the
reliefs sought respectively therein are entirely or essentially dissimilar. In
consequence thereof, this later case should not have been dismissed, on the ground of
the pendency of the stated prior suit. The anterior action is to enforce the alleged sale,
while the posterior action is to redeem legally the controverted property. If the first
litigation does not prosper and the disputed sale is voided, then this same case will
become useless and moot, but in the contrary result, whereby the same sale is upheld,
then the legal redemption sought in this subsequent case may lie.

Basis of plaintiff-appellant's submittal is the alleged analogous case" of Hongkong & Shanghai Bank
vs. Aldecoa & Co., 30 Phil. 257, where this Court held that when the former suit is for annulment of
mortgage, while the present action is for foreclosure of the same, lis pendens does not lie. 14

On the other hand, defendants-appellees' exception to plaintiff-appellant's stand on this issue

pendency of actionruns thus

... in the civil case still pending before the CFI of Quezon, Gumaca Branch, the
question of compulsory redemption under Section 119 of the Public Land Act was
invoked by Pablo Arceo as defendant therein by way of compulsory counterclaim in
his answer whereas the very same issue was asserted in the instant appealed case by
way of cause of action by plaintiff-appellant. There was, therefore, merely a change
 of the position of the parties from plaintiff to defendant and vice-versa in said two
civil cases although the existence of the same principal issue remains unaltered. 15

To substantiate their claim that the issue of compulsory redemption which is plaintiff-appellant's
cause of action in this case was also invoked by said Pablo Arceo by way of compulsory counterclaim
in a pending case between substantially the same parties, defendants-appellees point to two instances
in the amended Answer of January 13, 1964 filed in Civil Case No. 435-G by therein defendant Pablo
Arceo, plaintiff-appellant herein. 16

Under the hearing "Compulsory Counterclaim" of said amended Answer, then defendant now plaintiff
Pablo Arceo, under paragraph 16 alleged that

Defendants by way of compulsory counterclaim unto this Honorable Court

respectfully incorporate all the allegations in the foregoing answer and in addition,
respectfully manifest: That the property in question is covered by a Free Patent Title,
every conveyance of which or any portion of the same shall be subject to repurchase
by the applicant, his widow, or legal heirs within the period of five years from the
date of the conveyance (Sec. 119, C.A. No. 141, as amended) that it appearing as
admitted in par. 11 of the complaint that there was an offer to repurchase the same,
but which was refused, so that defendants have offered to repurchase the property
within the time allowed by law from the date of the conveyance, which offer was
denied, by reason of which unjustifiable refusal defendants suffered to lose damages,
actual and compensatory, in the amount equivalent to the fruits of the property from
the date of refusal to the time of reconveyance.

And in connection therewith, he prays that judgment issue

Ordering the plaintiffs (spouses Jose Oliveros and Rufina Cabangon) to resell or
reconvey the portion sold to the defendants (Pablo Arceo and Sixta Arceo),
(Emphasis supplied) 17

From the foregoing, defendants-appellees submit that a finding of lis pendens is in order.

We agree.

Pendency of another suit between the same parties to be a ground for dismissal requires: 1) Identity of
parties or at least such as representing the same interest in both actions; 2) Identity of rights asserted
and prayed for, the relief being founded on the same facts; and 3) the Identity in both cases is such
that the judgment which may be rendered in the pending case, regardless of which party is successful,
would amount to res judicata in the other case. 18

It is not disputed that there is another case, Civil Case No. 435-G, pending between plaintiff-appellant
Pablo Arceo and defendants-appellees Jose Oliveros and Rufina Cabangon. That case involves the
same parcel of land and similar issues as those in Civil Case No. C-105. In the said case, the Oliveros
spouses as plaintiffs, impugn the extrajudicial settlement between Sixta and Pablo wherein the former
renounced her right over the disputed lot in favor of the latter and seek to annul the transfer certificate
of title issued to Pablo Arceo over the said lot. Said spouses based their action upon a claim of
ownership over the land pursuant to a Deed of Absolute Sale 19whereby Sixta Arceo sold to them
her definite or specific share in the homestead she and her brother inherited from their father. In his
Answer in the said case (Case No. 435-G) Pablo Arceo, as defendant, sets up by way of counterclaim
his right of compulsory redemption over the same lot pursuant to Sec. 119 of the Public Land Act,
claiming further that the property has never been partitioned between him and her sister Sixta.
This is exactly what plaintiff-appellant Pablo Arceo seeks to accomplish in Civil Case No. C-105-to
exercise his right of compulsory redemption. In short, in both Civil Case No. 435-G and Civil Case
No. C105, the parties herein are litigating over the same subject matter (the lot inherited by the
Arceos from their father) and on the same issuesvalidity of the sale made by Sixta Arceo to the
Oliveros spouses; and Pablo Arceo's right of compulsory redemption under Section 119 of the Public
Land Act as a co-heir of his sister Sixta. The only difference being, that in Civil Case No. C-105,
Pablo Arceo asserts this right of compulsory redemption as a cause of action in his complaint;
whereas, in Case No. 435-G he asserts said claim by way of counterclaim, which makes no difference
anyway. For while lis pendens is normally interposed as a defense when another case is pending upon
the same cause of action between the same parties in two complaints, it may also be interposed even if
said claim is set forth by way of a counterclaim since the latter partakes the nature of a complaint by
the defendant against the plaintiff. 20 Hence, it has been held 21 that to interpose a cause of action in a
counterclaim and again advanced the same in a complaint against the same party, as in the case at bar,
would be violative of the rule against splitting a single cause of action which is prohibited by the
Rules of Court. 22

It is precisely for this reason that We cannot give our imprimatur to plaintiff-appellant's contention
that "if the first litigation does not prosper and the disputed sale is voided, then this second case will
become useless and moot, but in the contrary result whereby the same sale is upheld, then the legal
redemption sought in the subsequent case may lie." For even on the assumption that the sale by Sixta
in favor of the Oliveros spouses is upheld still the second case, Civil Case No. C-105, will be useless
because plaintiff-appellant is not deprived of litigating against the Oliveros on the issue of his claimed
compulsory counterclaim in Civil Case No. 435-G by reason of having set it up in his counterclaim in
the said case.

The principle upon which a "plea of another action pending" is sustained is that the latter action is
deemed unnecessary and vexatious. We find no circumstance whatsoever that will preclude the
applicability of said philosophy to the instant case.

Appellant cites and relies very heavily on the Hongkong & Shanghai Bank vs. Aldecoa &
Co. case 23 as authority in support of his submittal. Such reliance is, however, misplaced for the said
case grants him no support whatsoever. As correctly stated, the aforecited case involved two actions:
one for annulment of mortgage; and the other, for foreclosure of mortgage.

The right to foreclose not having been set-up or pleaded as a counterclaim in the first case no
adjudication may be had thereon, hence this pronouncement

xxx xxx xxx

The former suit is one to annul the mortgages. The present suit is one for the
foreclosure of the mortgage. It may be conceded that if the final judgment in the
former action is that the mortgages be annulled, such an adjudication will deny the
right of the bank to foreclose the mortgages. But will a decree holding them valid
prevent the bank from foreclosing them? Most certainly not. In such an event, the
judgment would not be a bar to the prosecution of the present action. The rule is not
predicated upon such a contingency. It is applicable, between the same parties, only
when the judgment to be rendered in the action first instituted will be such that,
regardless of which party is successful it will amount to res judicata against the
second action. . . . 24

In the instant case, however, the right of compulsory redemption and the validity of the sale by a co-
heir are in issue not only in Civil Case No. 435-G but also in Civil Case No. C105, and both suits are
between the same parties asserting Identical rights, praying similar reliefs premised essentially on the
same facts.
With this finding and conclusion, We find no further necessity in dwelling at length on the other
issues raised by the appellant.

WHEREFORE, the decision appealed from is hereby AFFIRMED.

Costs against appellant.

SO ORDERED.

Makasiar, Concepcion, Jr., Abad Santos and Escolin JJ., concur.

Separate Opinions

AQUINO, J., concurring:

I concur in the result. However, if the Gumaca case is still pending, and this matter should be
ascertained, this case should be consolidated with that case. Considering the length of time that has
transpired, it is necessary to know how the Gumaca case was decided.

Separate Opinions

AQUINO, J., concurring:

I concur in the result. However, if the Gumaca case is still pending, and this matter should be
ascertained, this case should be consolidated with that case. Considering the length of time that has
transpired, it is necessary to know how the Gumaca case was decided.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 189999 June 27, 2012

ANGELES UNIVERSITY FOUNDATION, Petitioner,

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

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, which seeks to reverse and set aside the Decision1 dated July 28, 2009 and
Resolution2 dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 90591. The CA
reversed the Decision3 dated September 21, 2007 of the Regional Trial Court of Angeles City, Branch
57 in Civil Case No. 12995 declaring petitioner exempt from the payment of building permit and
other fees and ordering respondents to refund the same with interest at the legal rate.

The factual antecedents:

Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25,
1962 and was converted into a non-stock, non-profit education foundation under the provisions of
Republic Act (R.A.) No. 60554on December 4, 1975.

Sometime in August 2005, petitioner filed with the Office of the City Building Official an application
for a building permit for the construction of an 11-storey building of the Angeles University
Foundation Medical Center in its main campus located at MacArthur Highway, Angeles City,
Pampanga. Said office issued a Building Permit Fee Assessment in the amount of P126,839.20. An
Order of Payment was also issued by the City Planning and Development Office, Zoning
Administration Unit requiring petitioner to pay the sum of P238,741.64 as Locational Clearance Fee. 5

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

Respondent City Treasurer referred the matter to the Bureau of Local Government Finance (BLGF) of
the Department of Finance, which in turn endorsed the query to the DOJ. Then Justice Secretary Raul
M. Gonzalez, in his letter-reply dated December 6, 2005, cited previous issuances of his office
(Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982) declaring petitioner to be exempt from the
payment of building permit fees. Under the 1st Indorsement dated January 6, 2006, BLGF reiterated
the aforesaid opinion of the DOJ stating further that "xxx the Department of Finance, thru this Bureau,
has no authority to review the resolution or the decision of the DOJ."7
Petitioner wrote the respondents reiterating its request to reverse the disputed assessments and
invoking the DOJ legal opinions which have been affirmed by Secretary Gonzalez. Despite
petitioners plea, however, respondents refused to issue the building permits for the construction of
the AUF Medical Center in the main campus and renovation of a school building located at Marisol
Village. Petitioner then appealed the matter to City Mayor Carmelo F. Lazatin but no written response
was received by petitioner.8

Consequently, petitioner paid under protest9 the following:

Medical Center (new construction)

Building Permit and Electrical Fee P 217,475.20

Locational Clearance Fee 283,741.64
Fire Code Fee 144,690.00
Total - P 645,906.84

School Building (renovation)

Building Permit and Electrical Fee P 37,857.20

Locational Clearance Fee 6,000.57
Fire Code Fee 5,967.74
Total - P 49,825.51

Petitioner likewise paid the following sums as required by the City Assessors Office:

Real Property Tax Basic Fee P 86,531.10

SEF 43,274.54

Locational Clearance Fee 1,125.00

Total P130,930.6410

[GRAND TOTAL - P 826,662.99]

By reason of the above payments, petitioner was issued the corresponding Building Permit, Wiring
Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner formally requested
the respondents to refund the fees it paid under protest. Under letters dated June 15, 2006 and August
7, 2006, respondent City Treasurer denied the claim for refund.11

On August 31, 2006, petitioner filed a Complaint12 before the trial court seeking the refund of
P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of attorneys
fees in the amount of P300,000.00 and litigation expenses.
In its Answer,13 respondents asserted that the claim of petitioner cannot be granted because its
structures are not among those mentioned in Sec. 209 of the National Building Code as exempted
from the building permit fee. Respondents argued that R.A. No. 6055 should be considered repealed
on the basis of Sec. 2104 of the National Building Code. Since the disputed assessments are
regulatory in nature, they are not taxes from which petitioner is exempt. As to the real property taxes
imposed on petitioners property located in Marisol Village, respondents pointed out that said
premises will be used as a school dormitory which cannot be considered as a use exclusively for
educational activities.

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

On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against the
respondents. The dispositive portion of the trial courts decision16 reads:

WHEREFORE, premises considered, judgment is rendered as follows:

a. Plaintiff is exempt from the payment of building permit and other fees Ordering the
Defendants to refund the total amount of Eight Hundred Twenty Six Thousand Six Hundred
Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal interest thereon at the rate of
twelve percent (12%) per annum commencing on the date of extra-judicial demand or June
14, 2006, until the aforesaid amount is fully paid.

b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand Pesos
(Php70,000.00), plus litigation expenses.

c. Ordering the Defendants to pay the costs of the suit.

SO ORDERED.17

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

Hence, this petition raising the following grounds:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A

QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE
APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTED FROM THE
ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE
HONORABLE COURTS EXERCISE OF ITS POWER OF SUPERVISION CONSIDERING
THAT:

I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE

COURT OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF
RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF
APPEALS TO DO.

A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT.

HENCE, THE COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED
DECISION THAT NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE
NOT EXEMPT.

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

GENERIS IN RULING IN THE QUESTIONED DECISION THAT THE TERM "OTHER
CHARGES IMPOSED BY THE GOVERNMENT" UNDER SECTION 8 OF RA 6055
DOES NOT INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR
CHARGES IS BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION
THAT THE TAXES, IMPORT DUTIES AND ASSESSMENTS AS PART OF THE
PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT
EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE
PURPOSES.

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

II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL
PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED
RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE.18

Petitioner stresses that the tax exemption granted to educational stock corporations which have
converted into non-profit foundations was broadened to include any other charges imposed by the
Government as one of the incentives for such conversion. These incentives necessarily included
exemption from payment of building permit and related fees as otherwise there would have been no
incentives for educational foundations if the privilege were only limited to exemption from taxation,
which is already provided under the Constitution.

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

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

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

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

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

R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to
non-stock, non-profit educational foundations. Section 8 of said law provides:

SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties,
assessments, and other charges imposed by the Government onall income derived from or property,
real or personal, used exclusively for the educational activities of the Foundation.(Emphasis supplied.)

On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National Building
Code of the Philippines. The said Code requires every person, firm or corporation, including any
agency or instrumentality of the government to obtain a building permit for any construction,
alteration or repair of any building or structure.19Building permit refers to "a document issued by the
Building Official x x x to an owner/applicant to proceed with the construction, installation, addition,
alteration, renovation, conversion, repair, moving, demolition or other work activity of a specific
project/building/structure or portions thereof after the accompanying principal plans, specifications
and other pertinent documents with the duly notarized application are found satisfactory and
substantially conforming with the National Building Code of the Philippines x x x and its
Implementing Rules and Regulations (IRR)."20 Building permit fees refers to the basic permit fee and
other charges imposed under the National Building Code.

Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional
indigenous family dwellings.21 Not being expressly included in the enumeration of structures to which
the building permit fees do not apply, petitioners claim for exemption rests solely on its interpretation
of the term "other charges imposed by the National Government" in the tax exemption clause of R.A.
No. 6055.

A "charge" is broadly defined as the "price of, or rate for, something," while the word "fee" pertains to
a "charge fixed by law for services of public officers or for use of a privilege under control of
government."22 As used in the Local Government Code of 1991 (R.A. No. 7160), charges refers to
pecuniary liability, as rents or fees against persons or property, while fee means a charge fixed by law
or ordinance for the regulation or inspection of a business or activity.23

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

Section 102. Declaration of Policy

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

Section 103. Scope and Application

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

xxxx

Section 301. Building Permits

No person, firm or corporation, including any agency orinstrumentality of the government shall erect,
construct, alter, repair, move, convert or demolish any building or structure or causethe same to be
done without first obtaining a building permittherefor from the Building Official assigned in the place
where thesubject building is located or the building work is to be done. (Italics supplied.)
That a building permit fee is a regulatory imposition is highlighted by the fact that in processing an
application for a building permit, the Building Official shall see to it that the applicant satisfies and
conforms with approved standard requirements on zoning and land use, lines and grades, structural
design, sanitary and sewerage, environmental health, electrical and mechanical safety as well as with
other rules and regulations implementing the National Building Code. 24 Thus, ancillary permits such
as electrical permit, sanitary permit and zoning clearance must also be secured and the corresponding
fees paid before a building permit may be issued. And as can be gleaned from the implementing rules
and regulations of the National Building Code, clearances from various government authorities
exercising and enforcing regulatory functions affecting buildings/structures, like local government
units, may be further required before a building permit may be issued.25

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

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

A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be
held to be a tax rather than an exercise of the police power.26 In this case, the Secretary of Public
Works and Highways who is mandated to prescribe and fix the amount of fees and other charges that
the Building Official shall collect in connection with the performance of regulatory functions, 27 has
promulgated and issued the Implementing Rules and Regulations 28 which provide for the bases of
assessment of such fees, as follows:

1. Character of occupancy or use of building

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

3. Floor area

4. Height

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

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

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

"The conservative and pivotal distinction between these two (2) powers rests in the purpose for which
the charge is made. If generation of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax."30 (Emphasis supplied.)
Concededly, in the case of building permit fees imposed by the National Government under
the National Building Code, revenue is incidentally generated for the benefit of local government
units. Thus:

Section 208. Fees

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

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

The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and
shall accrue to the General Fund of the province, city or municipality concerned.

Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced. Said
provision states:

SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.)

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

Now, on petitioners claim that it is exempted from the payment of real property tax assessed against
its real property presently occupied by informal settlers.

Section 28(3), Article VI of the 1987 Constitution provides:

xxxx

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used
for religious, charitable or educational purposes shall be exempt from taxation.

x x x x (Emphasis supplied.)

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

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

xxxx
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit
or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes;

x x x x (Emphasis supplied.)

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

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

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

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

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

No pronouncement as to costs.

SO ORDERED.
 THIRD DIVISION

CHEVRON PHILIPPINES, INC. (Formerly G.R. No. 173863

CALTEX PHILIPPINES, INC.),
Petitioner, Present:

CARPIO MORALES, J.,

Chairperson,
- versus - PERALTA,*
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

BASES CONVERSION DEVELOPMENT Promulgated:

AUTHORITY and CLARK
DEVELOPMENT CORPORATION, September 15, 2010
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
VILLARAMA, JR., J.:

This petition for review on certiorari assails the Decision[1] dated November 30, 2005 of the
Court of Appeals (CA) in CA-G.R. SP No. 87117, which affirmed the Resolution[2] dated August 2,
2004 and the Order[3] dated September 30, 2004 of the Office of the President in O.P. Case No. 04-D-
170.

The facts follow.

On June 28, 2002, the Board of Directors of respondent Clark Development Corporation
(CDC) issued and approved Policy Guidelines on the Movement of Petroleum Fuel to and from the
Clark Special Economic Zone (CSEZ)[4] which provided, among others, for the following fees and
charges:
1. Accreditation Fee

xxxx

2. Annual Inspection Fee

xxxx

3. Royalty Fees

Suppliers delivering fuel from outside sources shall be assessed the following royalty
fees:
 - Php0.50 per liter those delivering Coastal petroleum fuel to
CSEZ locators not sanctioned by CDC
- Php1.00 per liter those bringing-in petroleum fuel (except Jet
A-1) from outside sources

xxxx

4. Gate Pass Fee

x x x x[5]

The above policy guidelines were implemented effective July 27, 2002. On October 1, 2002,
CDC sent a letter[6] to herein petitioner Chevron Philippines, Inc. (formerly Caltex Philippines, Inc.), a
domestic corporation which has been supplying fuel to Nanox Philippines, a locator inside the CSEZ
since 2001, informing the petitioner that a royalty fee of P0.50 per liter shall be assessed on its
deliveries to Nanox Philippines effective August 1, 2002. Thereafter, on October 21, 2002 a
Statement of Account[7] was sent by CDC billing the petitioner for royalty fees in the amount
of P115,000.00 for its fuel sales from Coastal depot to Nanox Philippines from August 1-31
to September 3-21, 2002.

Claiming that nothing in the law authorizes CDC to impose royalty fees or any fees based on
a per unit measurement of any commodity sold within the special economic zone, petitioner sent a
letter[8] dated October 30, 2002 to the President and Chief Executive Officer of CDC, Mr. Emmanuel
Y. Angeles, to protest the assessment for royalty fees.Petitioner nevertheless paid the said fees under
protest on November 4, 2002.

On August 18, 2003, CDC again wrote a letter[9] to petitioner regarding the latters unsettled
royalty fees covering the period of December 2002 to July 2003. Petitioner responded through a
letter[10] dated September 8, 2003 reiterating its continuing objection over the assessed royalty fees
and requested a refund of the amount paid under protest on November 4, 2002. The letter also asked
CDC to revoke the imposition of such royalty fees. The request was denied by CDC in a
letter[11] dated September 29, 2003.

Petitioner elevated its protest before respondent Bases Conversion Development Authority
(BCDA) arguing that the royalty fees imposed had no reasonable relation to the probable expenses of
regulation and that the imposition on a per unit measurement of fuel sales was for a revenue
generating purpose, thus, akin to a tax. The protest was however denied by BCDA in a
letter[12] dated March 3, 2004.

Petitioner appealed to the Office of the President which dismissed[13] the appeal for lack of
merit on August 2, 2004 and denied[14] petitioners motion for reconsideration thereof on September
30, 2004.
 Aggrieved, petitioner elevated the case to the CA which likewise dismissed[15] the appeal for
lack of merit on November 30, 2005 and denied[16] the motion for reconsideration on July 26, 2006.

The CA held that in imposing the challenged royalty fees, respondent CDC was exercising its
right to regulate the flow of fuel into CSEZ, which is bolstered by the fact that it possesses exclusive
right to distribute fuel within CSEZ pursuant to its Joint Venture Agreement (JVA) [17] with Subic Bay
Metropolitan Authority (SBMA) and Coastal Subic Bay Terminal, Inc. (CSBTI) dated April 11,
1996. The appellate court also found that royalty fees were assessed on fuel delivered, not on the sale,
by petitioner and that the basis of such imposition was petitioners delivery receipts to
Nanox Philippines. The fact that revenue is incidentally also obtained does not make the imposition a
tax as long as the primary purpose of such imposition is regulation.[18]

Petitioner filed a motion for reconsideration but the CA denied the same in its
Resolution[19] dated July 26, 2006.

Hence, this petition raising the following grounds:

I. THE ISSUE RAISED BEFORE THE COURT A QUO IS A QUESTION OF

SUBSTANCE NOT HERETOFORE DETERMINED BY THE HONORABLE
SUPREME COURT.

II. THE RULING OF THE COURT OF APPEALS THAT THE CDC HAS THE
POWER TO IMPOSE THE QUESTIONED ROYALTY FEES IS CONTRARY
TO LAW.

III. THE COURT OF APPEALS WAS MANIFESTLY MISTAKEN AND

COMMITTED GRAVE ABUSE OF DISCRETION AND A CLEAR
MISUNDERSTANDING OF FACTS WHEN IT RULED CONTRARY TO
THE EVIDENCE THAT: (i) THE QUESTIONED ROYALTY FEE IS
PRIMARILY FOR REGULATION; AND (ii) ANY REVENUE EARNED
THEREFROM IS MERELY INCIDENTAL TO THE PURPOSE OF
REGULATION.

IV. THE COURT OF APPEALS FAILED TO GIVE DUE WEIGHT AND

CONSIDERATION TO THE EVIDENCE PRESENTED BY CPI SUCH AS
THE LETTERS COMING FROM RESPONDENT CDC ITSELF PROVING
THAT THE QUESTIONED ROYALTY FEES ARE IMPOSED ON THE
BASIS OF FUEL SALES (NOT DELIVERY OF FUEL) AND NOT FOR
REGULATION BUT PURELY FOR INCOME GENERATION, I.E. AS PRICE
OR CONSIDERATION FOR THE RIGHT TO MARKET AND DISTRIBUTE
FUEL INSIDE THE CSEZ.[20]

Petitioner argues that CDC does not have any power to impose royalty fees on sale of fuel
inside the CSEZ on the basis of purely income generating functions and its exclusive right to market and
distribute goods inside the CSEZ. Such imposition of royalty fees for revenue generating purposes
would amount to a tax, which the respondents have no power to impose. Petitioner stresses that the
royalty fee imposed by CDC is not regulatory in nature but a revenue generating measure to increase its
profits and to further enhance its exclusive right to market and distribute fuel in CSEZ.[21]

Petitioner would also like this Court to note that the fees imposed, assuming arguendo they
are regulatory in nature, are unreasonable and are grossly in excess of regulation costs. It adds that the
amount of the fees should be presumed to be unreasonable and that the burden of proving that the fees
are not unreasonable lies with the respondents.[22]

On the part of the respondents, they argue that the purpose of the royalty fees is to regulate
the flow of fuel to and from the CSEZ. Such being its main purpose, and revenue (if any) just an
incidental product, the imposition cannot be considered a tax. It is their position that the regulation is
a valid exercise of police power since it is aimed at promoting the general welfare of the public. They
claim that being the administrator of the CSEZ, CDC is responsible for the safe distribution of fuel
products inside the CSEZ.[23]

The petition has no merit.

In distinguishing tax and regulation as a form of police power, the determining factor is the
purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will be
deemed a tax even though the measure results in some form of regulation. On the other hand, if the
purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of
the state, even though incidentally, revenue is generated. Thus, in Gerochi v. Department of
Energy,[24] the Court stated:

The conservative and pivotal distinction between these two (2) powers rests
in the purpose for which the charge is made. If generation of revenue is the primary
purpose and regulation is merely incidental, the imposition is a tax; but if regulation
is the primary purpose, the fact that revenue is incidentally raised does not make the
imposition a tax.

In the case at bar, we hold that the subject royalty fee was imposed primarily
for regulatory purposes, and not for the generation of income or profits as petitioner
claims. The Policy Guidelines on the Movement of Petroleum Fuel to and from the Clark Special
Economic Zone[25] provides:

DECLARATION OF POLICY

It is hereby declared the policy of CDC to develop and maintain the Clark Special
Economic Zone (CSEZ) as a highly secured zone free from threats of any kind,
which could possibly endanger the lives and properties of locators, would-be
investors, visitors, and employees.
 It is also declared the policy of CDC to operate and manage the CSEZ as a separate
customs territory ensuring free flow or movement of goods and capital within,
into and exported out of the CSEZ.[26] (Emphasis supplied.)

From the foregoing, it can be gleaned that the Policy Guidelines was issued, first and foremost, to
ensure the safety, security, and good condition of the petroleum fuel industry within the CSEZ. The
questioned royalty fees form part of the regulatory framework to ensure free flow or movement of
petroleum fuel to and from the CSEZ. The fact that respondents have the exclusive right to distribute
and market petroleum products within CSEZ pursuant to its JVA with SBMA and CSBTI does not
diminish the regulatory purpose of the royalty fee for fuel products supplied by petitioner to its client
at the CSEZ.

As pointed out by the respondents in their Comment, from the time the JVA took effect up to the time
CDC implemented its Policy Guidelines on the Movement of Petroleum Fuel to and from the CSEZ,
suppliers/distributors were allowed to bring in petroleum products inside CSEZ without any charge at
all. But this arrangement clearly negates CDCs mandate under the JVA as exclusive distributor of
CSBTIs fuel products within CSEZ and respondents ownership of the Subic-Clark Pipeline.[27] On this
score, respondents were justified in charging royalty fees on fuel delivered by outside suppliers.

However, it was erroneous for petitioner to argue that such exclusive right of respondent CDC to
market and distribute fuel inside CSEZ is the sole basis of the royalty fees imposed under the Policy
Guidelines. Being the administrator of CSEZ, the responsibility of ensuring the safe, efficient and
orderly distribution of fuel products within the Zone falls on CDC. Addressing specific concerns
demanded by the nature of goods or products involved is encompassed in the range of services which
respondent CDC is expected to provide under the law, in pursuance of its general power
of supervision and control over the movement of all supplies and equipment into the CSEZ.

Section 2 of Executive Order No. 80[28] provides:

SEC. 2. Powers and Functions of the Clark Development Corporation. The

BCDA, as the incorporator and holding company of its Clark subsidiary, shall
determine the powers and functions of the CDC. Pursuant to Section 15 of RA 7227,
the CDC shall have the specific powers of the Export Processing Zone Authority as
provided for in Section 4 of Presidential Decree No. 66 (1972) as amended.

Among those specific powers granted to CDC under Section 4 of Presidential Decree No. 66 are:

(a) To operate, administer and manage the export processing zone established
in the Port of Mariveles, Bataan, and such other export processing zones as may be
established under this Decree; to construct, acquire, own, lease, operate and maintain
infrastructure facilities, factory building, warehouses, dams, reservoir, water
distribution, electric light and power system, telecommunications and transportation,
 or such other facilities and services necessary or useful in the conduct of commerce
or in the attainment of the purposes and objectives of this Decree;

xxxx

(g) To fix, assess and collect storage charges and fees, including rentals for
the lease, use or occupancy of lands, buildings, structure, warehouses, facilities and
other properties owned and administered by the Authority; and to fix and collect the
fees and charges for the issuance of permits, licenses and the rendering of services
not enumerated herein, the provisions of law to the contrary notwithstanding;

(h) For the due and effective exercise of the powers conferred by law and to
the extend (sic) [extent] requisite therefor, to exercise exclusive jurisdiction and sole
police authority over all areas owned or administered by the Authority. For this
purpose, the Authority shall have supervision and control over the bringing in or
taking out of the Zone, including the movement therein, of all cargoes, wares,
articles, machineries, equipment, supplies or merchandise of every type and
description;

x x x x (Emphasis supplied.)

In relation to the regulatory purpose of the imposed fees, this Court in Progressive Development
Corporation v. Quezon City,[29] stated that x x x the imposition questioned must relate to an
occupation or activity that so engages the public interest in health, morals, safety and development as
to require regulation for the protection and promotion of such public interest; the imposition must also
bear a reasonable relation to the probable expenses of regulation, taking into account not only the
costs of direct regulation but also its incidental consequences as well.

In the case at bar, there can be no doubt that the oil industry is greatly imbued with public interest as it
vitally affects the general welfare.[30] In addition, fuel is a highly combustible product which, if left
unchecked, poses a serious threat to life and property. Also, the reasonable relation between the
royalty fees imposed on a per liter basis and the regulation sought to be attained is that the higher the
volume of fuel entering CSEZ, the greater the extent and frequency of supervision and inspection
required to ensure safety, security, and order within the Zone.

Respondents submit that increased administrative costs were triggered by security risks that have
recently emerged, such as terrorist strikes in airlines and military/government facilities. Explaining
the regulatory feature of the charges imposed under the Policy Guidelines, then BCDA President Rufo
Colayco in his letter dated March 3, 2004 addressed to petitioners Chief Corporate Counsel, stressed:

The need for regulation is more evident in the light of the 9/11 tragedy considering
that what is being moved from one location to another are highly combustible fuel
products that could cause loss of lives and damage to properties, hence, a set of
guidelines was promulgated on 28 June 2002. It must be emphasized also that greater
security measure must be observed in the CSEZ because of the presence of the airport
which is a vital public infrastructure.
 We are therefore constrained to sustain the imposition of the royalty fees on
deliveries of CPIs fuel products to Nanox Philippines.[31]

As to the issue of reasonableness of the amount of the fees, we hold that no evidence was adduced by
the petitioner to show that the fees imposed are unreasonable.

Administrative issuances have the force and effect of law.[32] They benefit from the same presumption
of validity and constitutionality enjoyed by statutes. These two precepts place a heavy burden upon
any party assailing governmental regulations.[33] Petitioners plain allegations are simply not enough to
overcome the presumption of validity and reasonableness of the subject imposition.

WHEREFORE, the petition is DENIED for lack of merit and the Decision of the Court of Appeals
dated November 30, 2005 in CA-G.R. SP No. 87117 is hereby AFFIRMED.

With costs against the petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 101273 July 3, 1992

CONGRESSMAN ENRIQUE T. GARCIA (Second District of Bataan), petitioner,

vs.
THE EXECUTIVE SECRETARY, THE COMMISSIONER OF CUSTOMS, THE NATIONAL
ECONOMIC AND DEVELOPMENT AUTHORITY, THE TARIFF COMMISSION, THE
SECRETARY OF FINANCE, and THE ENERGY REGULATORY BOARD, respondents.

FELICIANO, J.:

On 27 November 1990, the President issued Executive Order No. 438 which imposed, in addition to
any other duties, taxes and charges imposed by law on all articles imported into the Philippines, an
additional duty of five percent (5%) ad valorem. This additional duty was imposed across the board
on all imported articles, including crude oil and other oil products imported into the Philippines. This
additional duty was subsequently increased from five percent (5%) ad valorem to nine percent (9%)
ad valorem by the promulgation of Executive Order No. 443, dated 3 January 1991.

On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the process
required by the Tariff and Customs Code for the imposition of a specific levy on crude oil and other
petroleum products, covered by HS Heading Nos. 27.09, 27.10 and 27.11 of Section 104 of the Tariff
and Customs Code as amended. Accordingly, the Tariff Commission, following the procedure set
forth in Section 401 of the Tariff and Customs Code, scheduled a public hearing to give interested
parties an opportunity to be heard and to present evidence in support of their respective positions.

Meantime, Executive Order No. 475 was issued by the President, on 15 August 1991 reducing the rate
of additional duty on all imported articles from nine percent (9%) to five percent (5%) ad valorem,
except in the cases of crude oil and other oil products which continued to be subject to the additional
duty of nine percent (9%) ad valorem.

Upon completion of the public hearings, the Tariff Commission submitted to the President a "Report
on Special Duty on Crude Oil and Oil Products" dated 16 August 1991, for consideration and
appropriate action. Seven (7) days later, the President issued Executive Order No. 478, dated 23
August 1991, which levied (in addition to the aforementioned additional duty of nine percent (9%) ad
valorem and all other existing ad valorem duties) a special duty of P0.95 per liter or P151.05 per
barrel of imported crude oil and P1.00 per liter of imported oil products.

In the present Petition for Certiorari, Prohibition and Mandamus, petitioner assails the validity of
Executive Orders Nos. 475 and 478. He argues that Executive Orders Nos. 475 and 478 are violative
of Section 24, Article VI of the 1987 Constitution which provides as follows:

Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in
 the House of Representatives, but the Senate may propose or concur with
amendments.

He contends that since the Constitution vests the authority to enact revenue bills in Congress,
the President may not assume such power by issuing Executive Orders Nos. 475 and 478
which are in the nature of revenue-generating measures.

Petitioner further argues that Executive Orders No. 475 and 478 contravene Section 401 of the Tariff
and Customs Code, which Section authorizes the President, according to petitioner, to increase,
reduce or remove tariff duties or to impose additional duties only when necessary to protect local
industries or products but not for the purpose of raising additional revenue for the government.

Thus, petitioner questions first the constitutionality and second the legality of Executive Orders Nos.
475 and 478, and asks us to restrain the implementation of those Executive Orders. We will examine
these questions in that order.

Before doing so, however, the Court notes that the recent promulgation of Executive Order No. 507
did not render the instant Petition moot and academic. Executive Order No. 517 which is dated 30
April 1992 provides as follows:

Sec. 1. Lifting of the Additional Duty. The additional duty in the nature of ad
valorem imposed on all imported articles prescribed by the provisions of Executive
Order No. 443, as amended, is hereby lifted; Provided, however, that the selected
articles covered by HS Heading Nos. 27.09 and 27.10 of Section 104 of the Tariff and
Customs Code, as amended, subject of Annex "A" hereof, shall continue to be subject
to the additional duty of nine (9%) percent ad valorem.

Under the above quoted provision, crude oil and other oil products continue to be subject to
the additional duty of nine percent (9%) ad valorem under Executive Order No. 475 and to
the special duty of P0.95 per liter of imported crude oil and P1.00 per liter of imported oil
products under Executive Order No. 478.

Turning first to the question of constitutionality, under Section 24, Article VI of the Constitution, the
enactment of appropriation, revenue and tariff bills, like all other bills is, of course, within the
province of the Legislative rather than the Executive Department. It does not follow, however, that
therefore Executive Orders Nos. 475 and 478, assuming they may be characterized as revenue
measures, are prohibited to the President, that they must be enacted instead by the Congress of the
Philippines. Section 28(2) of Article VI of the Constitution provides as follows:

(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, tonage and wharfage dues, and other duties or imposts within the
framework of the national development program of the Government. (Emphasis
supplied)

There is thus explicit constitutional permission 1 to Congress to authorize the President "subject to
such limitations and restrictions is [Congress] may impose" to fix "within specific limits" "tariff rates .
. . and other duties or imposts . . ."

The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections
104 and 401, the pertinent provisions thereof. These are the provisions which the President explicitly
invoked in promulgating Executive Orders Nos. 475 and 478. Section 104 of the Tariff and Customs
Code provides in relevant part:
 Sec. 104. All tariff sections, chapters, headings and subheadings and the rates of
import duty under Section 104 of Presidential Decree No. 34 and all subsequent
amendments issued under Executive Orders and Presidential Decrees are hereby
adopted and form part of this Code.

There shall be levied, collected, and paid upon all imported articles the rates of duty
indicated in the Section under this section except as otherwise specifically provided
for in this Code: Provided, that, the maximum rate shall not exceed one hundred per
cent ad valorem.

The rates of duty herein provided or subsequently fixed pursuant to Section Four
Hundred One of this Code shall be subject to periodic investigation by the Tariff
Commission and may be revised by the President upon recommendation of the
National Economic and Development Authority.

xxx xxx xxx

(Emphasis supplied)

Section 401 of the same Code needs to be quoted in full:

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: (1) to increase, reduce or remove existing protective
rates of import duty (including any necessary change in classification). The existing
rates may be increased or decreased but in no case shall the reduced rate of import
duty be lower than the basic rate of ten (10) per cent ad valorem, nor shall the
increased rate of import duty be higher than a maximum of one hundred (100) per
cent ad valorem; (2) to establish import quota or to ban imports of any commodity, as
may be necessary; and (3) to impose an additional duty on all imports not exceeding
ten (10) per cent ad valorem, whenever necessary; 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.

b. Before any recommendation is submitted to the President by the NEDA pursuant to

the provisions of this section, except in the imposition of an additional duty not
exceeding ten (10) per cent ad valorem, the Commission shall conduct an
investigation in the course of which they shall hold public hearings wherein interested
parties shall be afforded reasonable opportunity to be present, produce evidence and
to be heard. The Commission shall also hear the views and recommendations of any
government office, agency or instrumentality concerned. The Commission shall
submit their findings and recommendations to the NEDA within thirty (30) days after
the termination of the public hearings.

c. The power of the President to increase or decrease rates of import duty within the
limits fixed in subsection "a" shall include the authority to modify the form of duty.
In modifying the form of duty, the corresponding ad valorem or specific equivalents
of the duty with respect to imports from the principal competing foreign country for
the most recent representative period shall be used as bases.
 d. The Commissioner of Customs shall regularly furnish the Commission a copy of
all customs import entries as filed in the Bureau of Customs. The Commission or its
duly authorized representatives shall have access to, and the right to copy all
liquidated customs import entries and other documents appended thereto as finally
filed in the Commission on Audit.

e. The NEDA shall promulgate rules and regulations necessary to carry out the
provisions of this section.

f. Any Order issued by the President pursuant to the provisions of this section shall
take effect thirty (30) days after promulgation, except in the imposition of additional
duty not exceeding ten (10) per cent ad valorem which shall take effect at the
discretion of the President. (Emphasis supplied)

Petitioner, however, seeks to avoid the thrust of the delegated authorizations found in Sections 104
and 401 of the Tariff and Customs Code, by contending that the President is authorized to act under
the Tariff and Customs Code only "to protect local industries and products for the sake of the national
economy, general welfare and/or national security." 2 He goes on to claim that:

E.O. Nos. 478 and 475 having nothing to do whatsoever with the protection of local
industries and products for the sake of national economy, general welfare and/or
national security. On the contrary, they work in reverse, especially as to crude oil, an
essential product which we do not have to protect, since we produce only minimal
quantities and have to import the rest of what we need.

These Executive Orders are avowedly solely to enable the government to raise
government finances, contrary to Sections 24 and 28 (2) of Article VI of the
Constitution, as well as to Section 401 of the Tariff and Customs Code. 3(Emphasis in
the original)

The Court is not persuaded. In the first place, there is nothing in the language of either Section 104 or
of 401 of the Tariff and Customs Code that suggest such a sharp and absolute limitation of authority.
The entire contention of petitioner is anchored on just two (2) words, one found in Section 401 (a)(1):
"existing protective rates of import duty," and the second in the proviso found at the end of Section
401 (a): "protection levels granted in Section 104 of this Code . . . . " We believe that the words
"protective" and ''protection" are simply not enough to support the very broad and encompassing
limitation which petitioner seeks to rest on those two (2) words.

In the second place, petitioner's singular theory collides with a very practical fact of which this Court
may take judicial notice that the Bureau of Customs which administers the Tariff and Customs
Code, is one of the two (2) principal traditional generators or producers of governmental revenue, the
other being the Bureau of Internal Revenue. (There is a third agency, non-traditional in character, that
generates lower but still comparable levels of revenue for the government The Philippine
Amusement and Games Corporation [PAGCOR].)

In the third place, customs duties which are assessed at the prescribed tariff rates are very much like
taxes which are frequently imposed for both revenue-raising and for regulatory purposes. 4 Thus, it
has been held that "customs duties" is "the name given to taxes on the importation and exportation of
commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign
country." 5 The levying of customs duties on imported goods may have in some measure the effect of
protecting local industries where such local industries actually exist and are producing comparable
goods. Simultaneously, however, the very same customs duties inevitably have the effect of
producing governmental revenues. Customs duties like internal revenue taxes are rarely, if ever,
designed to achieve one policy objective only. Most commonly, customs duties, which constitute
taxes in the sense of exactions the proceeds of which become public funds 6 have either or both the
generation of revenue and the regulation of economic or social activity as their moving purposes and
frequently, it is very difficult to say which, in a particular instance, is the dominant or principal
objective. In the instant case, since the Philippines in fact produces ten (10) to fifteen percent (15%)
of the crude oil consumed here, the imposition of increased tariff rates and a special duty on imported
crude oil and imported oil products may be seen to have some "protective" impact upon indigenous oil
production. For the effective, price of imported crude oil and oil products is increased. At the same
time, it cannot be gainsaid that substantial revenues for the government are raised by the imposition of
such increased tariff rates or special duty.

In the fourth place, petitioner's concept which he urges us to build into our constitutional and customs
law, is a stiflingly narrow one. Section 401 of the Tariff and Customs Code establishes general
standards with which the exercise of the authority delegated by that provision to the President must be
consistent: that authority must be exercised in "the interest of national economy, general welfare
and/or national security." Petitioner, however, insists that the "protection of local industries" is
the only permissible objective that can be secured by the exercise of that delegated authority, and that
therefore "protection of local industries" is the sum total or the alpha and the omega of "the national
economy, general welfare and/or national security." We find it extremely difficult to take seriously
such a confined and closed view of the legislative standards and policies summed up in Section 401.
We believe, for instance, that the protection of consumers, who after all constitute the very great bulk
of our population, is at the very least as important a dimension of "the national economy, general
welfare and national security" as the protection of local industries. And so customs duties may be
reduced or even removed precisely for the purpose of protecting consumers from the high prices and
shoddy quality and inefficient service that tariff-protected and subsidized local manufacturers may
otherwise impose upon the community.

It seems also important to note that tariff rates are commonly established and the corresponding
customs duties levied and collected upon articles and goods which are not found at all
and not produced in the Philippines. The Tariff and Customs Code is replete with such articles and
commodities: among the more interesting examples are ivory (Chapter 5, 5.10); castoreum or musk
taken from the beaver (Chapter 5, 5.14); Olives (Chapter 7, Notes); truffles or European fungi
growing under the soil on tree roots (Chapter 7, Notes); dates (Chapter 8, 8.01); figs (Chapter 8,
8.03); caviar (Chapter 16, 16.01); aircraft (Chapter 88, 88.0l); special diagnostic instruments and
apparatus for human medicine and surgery (Chapter 90, Notes); X-ray generators; X-ray tubes;
X-ray screens, etc. (Chapter 90, 90.20); etc. In such cases, customs duties may be seen to be imposed
either for revenue purposes purely or perhaps, in certain cases, to discourage any importation of the
items involved. In either case, it is clear that customs duties are levied and imposed entirely apart
from whether or not there are any competing local industries to protect.

Accordingly, we believe and so hold that Executive Orders Nos. 475 and 478 which may be conceded
to be substantially moved by the desire to generate additional public revenues, are not, for that reason
alone, either constitutionally flawed, or legally infirm under Section 401 of the Tariff and Customs
Code. Petitioner has not successfully overcome the presumptions of constitutionality and legality to
which those Executive Orders are entitled. 7

The conclusion we have reached above renders it unnecessary to deal with petitioner's additional
contention that, should Executive Orders Nos. 475 and 478 be declared unconstitutional and illegal,
there should be a roll back of prices of petroleum products equivalent to the "resulting excess money
not be needed to adequately maintain the Oil Price Stabilization Fund (OPSF)." 8

WHEREFORE, premises considered, the Petition for Certiorari, Prohibition and Mandamus is hereby
DISMISSED for lack of merit. Costs against petitioner.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 99886 March 31, 1993

JOHN H. OSMEA, petitioner,

vs.
OSCAR ORBOS, in his capacity as Executive Secretary; JESUS ESTANISLAO, in his capacity
as Secretary of Finance; WENCESLAO DELA PAZ, in his capacity as Head of the Office of
Energy Affairs; REX V. TANTIONGCO, and the ENERGY REGULATORY
BOARD, respondents.

Nachura & Sarmiento for petitioner.

The Solicitor General for public respondents.

NARVASA, C.J.:

The petitioner seeks the corrective, 1 prohibitive and coercive remedies provided by Rule 65 of the
Rules of Court, 2 upon the following posited grounds, viz.: 3

1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of Energy (now,
the Office of Energy Affairs), created pursuant to 8, paragraph 1, of P.D. No. 1956, as amended,
"said creation of a trust fund being contrary to Section 29 (3), Article VI of the . . Constitution; 4

2) the unconstitutionality of 8, paragraph 1 (c) of P.D. No. 1956, as amended by Executive Order
No. 137, for "being an undue and invalid delegation of legislative power . . to the Energy Regulatory
Board;" 5

3) the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization
Fund, 6 because it contravenes 8, paragraph 2 (2) of
P. D. 1956, as amended; and

4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a rollback of the
pump prices and petroleum products to the levels prevailing prior to the said Order.

It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating a
Special Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The
OPSF was designed to reimburse oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustments and from increases in the world market prices of
crude oil.

Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024, 7 and
ordered released from the National Treasury to the Ministry of Energy. The same Executive Order
also authorized the investment of the fund in government securities, with the earnings from such
placements accruing to the fund.
President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on
February 27, 1987, expanding the grounds for reimbursement to oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic prices of petroleum products, the
amount of the underrecovery being left for determination by the Ministry of Finance.

Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a "Terminal Fund
Balance deficit" of some P12.877 billion; 8 that to abate the worsening deficit, "the Energy Regulatory
Board . . issued an Order on December 10, 1990, approving the increase in pump prices of petroleum
products," and at the rate of recoupment, the OPSF deficit should have been fully covered in a span of
six (6) months, but this notwithstanding, the respondents Oscar Orbos, in his capacity as Executive
Secretary; Jesus Estanislao, in his capacity as Secretary of Finance; Wenceslao de la Paz, in his
capacity as Head of the Office of Energy Affairs; Chairman Rex V. Tantiongco and the Energy
Regulatory Board "are poised to accept, process and pay claims not authorized under P.D. 1956." 9

The petition further avers that the creation of the trust fund violates
29(3), Article VI of the Constitution, reading as follows:

(3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purposes only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.

The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be treated
as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is collected
for a specific purpose, the revenue generated therefrom shall 'be treated as a special fund' to be used
only for the purpose indicated, and not channeled to another government objective." 10 Petitioner
further points out that since "a 'special fund' consists of monies collected through the taxing power of
a State, such amounts belong to the State, although the use thereof is limited to the special
purpose/objective for which it was created." 11

He also contends that the "delegation of legislative authority" to the ERB violates 28 (2). Article VI
of the Constitution, viz.:

(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;

and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits,
limitations and restrictions must be quantitative, that is, the law must not only specify how to
tax, who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how
much to tax." 12

The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies
collected, which form part of the OPSF, should be maintained in a special account of the general fund
for the reason that the Constitution so provides, and because they are, supposedly, taxes levied for a
special purpose. He assumes that the Fund is formed from a tax undoubtedly because a portion
thereof is taken from collections of ad valorem taxes and the increases thereon.

It thus appears that the challenge posed by the petitioner is premised primarily on the view that the
powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation power
of the State. The Solicitor General observes that the "argument rests on the assumption that the OPSF
is a form of revenue measure drawing from a special tax to be expended for a special purpose." 13 The
petitioner's perceptions are, in the Court's view, not quite correct.
To address this critical misgiving in the position of the petitioner on these issues, the Court recalls its
holding in Valmonte v. Energy Regulatory Board, et al. 14

The foregoing arguments suggest the presence of misconceptions about the nature
and functions of the OPSF. The OPSF is a "Trust Account" which was established
"for the purpose of minimizing the frequent price changes brought about by exchange
rate adjustment and/or changes in world market prices of crude oil and imported
petroleum products." 15 Under P.D. No. 1956, as amended by Executive Order No.
137 dated 27 February 1987, this Trust Account may be funded from any of the
following sources:

a) Any increase in the tax collection from ad valorem tax or customs

duty imposed on petroleum products subject to tax under this
Decree arising from exchange rate adjustment, as may be determined
by the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax

exemptions of government corporations, as may be determined by the
Minister of Finance in consultation with the Board of Energy:

c) Any additional amount to be imposed on petroleum products to

augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment of persons
or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs
paid by oil companies in the importation of crude oil and petroleum
products is less than the peso costs computed using the reference
foreign exchange rate as fixed by the Board of Energy.

xxx xxx xxx

The fact that the world market prices of oil, measured by the spot market in
Rotterdam, vary from day to day is of judicial notice. Freight rates for hauling crude
oil and petroleum products from sources of supply to the Philippines may also vary
from time to time. The exchange rate of the peso vis-a-vis the U.S. dollar and other
convertible foreign currencies also changes from day to day. These fluctuations in
world market prices and in tanker rates and foreign exchange rates would in a
completely free market translate into corresponding adjustments in domestic prices of
oil and petroleum products with sympathetic frequency. But domestic prices which
vary from day to day or even only from week to week would result in a chaotic
market with unpredictable effects upon the country's economy in general. The OPSF
was established precisely to protect local consumers from the adverse consequences
that such frequent oil price adjustments may have upon the economy. Thus, the OPSF
serves as a pocket, as it were, into which a portion of the purchase price of oil and
petroleum products paid by consumers as well as some tax revenues are inputted and
from which amounts are drawn from time to time to reimburse oil companies, when
appropriate situations arise, for increases in, as well as underrecovery of, costs of
crude importation. The OPSF is thus a buffer mechanism through which the domestic
consumer prices of oil and petroleum products are stabilized, instead of fluctuating
every so often, and oil companies are allowed to recover those portions of their costs
which they would not otherwise recover given the level of domestic prices existing at
any given time. To the extent that some tax revenues are also put into it, the OPSF is
 in effect a device through which the domestic prices of petroleum products are
subsidized in part. It appears to the Court that the establishment and maintenance of
the OPSF is well within that pervasive and non-waivable power and responsibility of
the government to secure the physical and economic survival and well-being of the
community, that comprehensive sovereign authority we designate as the police power
of the State. The stabilization, and subsidy of domestic prices of petroleum products
and fuel oil clearly critical in importance considering, among other things, the
continuing high level of dependence of the country on imported crude oil are
appropriately regarded as public purposes.

Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of which is
not far different from the OPSF. In Gaston v. Republic Planters Bank, 16 this Court upheld the legality
of the sugar stabilization fees and explained their nature and character, viz.:

The stabilization fees collected are in the nature of a tax, which is within the power of
the State to impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil.
148). . . . The tax collected is not in a pure exercise of the taxing power. It is levied
with a regulatory purpose, to provide a means for the stabilization of the sugar
industry. The levy is primarily in the exercise of the police power of the State (Lutz v.
Araneta, supra).

xxx xxx xxx

The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose that of "financing the growth and development
of the sugar industry and all its components, stabilization of the domestic market
including the foreign market." The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them state funds, even though they are held
for a special purpose (Lawrence v. American Surety Co. 263 Mich. 586, 249 ALR
535, cited in 42 Am Jur Sec. 2, p. 718). Having been levied for a special purpose, the
revenues collected are to be treated as a special fund, to be, in the language of the
statute, "administered in trust" for the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance if any, is to be transferred to the general funds of
the Government. That is the essence of the trust intended (SEE 1987 Constitution,
Article VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(1). 17

The character of the Stabilization Fund as a special kind of fund is emphasized by the
fact that the funds are deposited in the Philippine National Bank and not in the
Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987) Constitution, Article VI, Sec. 29 (3), lifted from
the 1935 Constitution, Article VI, Sec. 23(1). (Emphasis supplied).

Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the
exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the
special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in
what the law refers to as a "trust liability account," the fund nonetheless remains subject to the
scrutiny and review of the COA. The Court is satisfied that these measures comply with the
constitutional description of a "special fund." Indeed, the practice is not without precedent.

With regard to the alleged undue delegation of legislative power, the Court finds that the provision
conferring the authority upon the ERB to impose additional amounts on petroleum products provides
a sufficient standard by which the authority must be exercised. In addition to the general policy of the
law to protect the local consumer by stabilizing and subsidizing domestic pump rates, 8(c) of P.D.
1956 18 expressly authorizes the ERB to impose additional amounts to augment the resources of the
Fund.

What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific limit
on how much to tax." 19 The Court is cited to this requirement by the petitioner on the premise that
what is involved here is the power of taxation; but as already discussed, this is not the case. What is
here involved is not so much the power of taxation as police power. Although the provision
authorizing the ERB to impose additional amounts could be construed to refer to the power of
taxation, it cannot be overlooked that the overriding consideration is to enable the delegate to act with
expediency in carrying out the objectives of the law which are embraced by the police power of the
State.

The interplay and constant fluctuation of the various factors involved in the determination of the price
of oil and petroleum products, and the frequently shifting need to either augment or exhaust the Fund,
do not conveniently permit the setting of fixed or rigid parameters in the law as proposed by the
petitioner. To do so would render the ERB unable to respond effectively so as to mitigate or avoid the
undesirable consequences of such fluidity. As such, the standard as it is expressed, suffices to guide
the delegate in the exercise of the delegated power, taking account of the circumstances under which
it is to be exercised.

For a valid delegation of power, it is essential that the law delegating the power must be (1) complete
in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix a standard
limits of which
are sufficiently determinate or determinable to which the delegate must conform. 20

. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there
must be a standard, which implies at the very least that the legislature itself
determines matters of principle and lays down fundamental policy. Otherwise, the
charge of complete abdication may be hard to repel. A standard thus defines
legislative policy, marks its limits, maps out its boundaries and specifies the public
agency to apply it. It indicates the circumstances under which the legislative
command is to be effected. It is the criterion by which the legislative purpose may be
carried out. Thereafter, the executive or administrative office designated may in
pursuance of the above guidelines promulgate supplemental rules and regulations.
The standard may either be express or implied. If the former, the non-delegation
objection is easily met. The standard though does not have to be spelled out
specifically. It could be implied from the policy and purpose of the act considered as
a whole. 21

It would seem that from the above-quoted ruling, the petition for prohibition should fail.

The standard, as the Court has already stated, may even be implied. In that light, there can be no
ground upon which to sustain the petition, inasmuch as the challenged law sets forth a determinable
standard which guides the exercise of the power granted to the ERB. By the same token, the proper
exercise of the delegated power may be tested with ease. It seems obvious that what the law intended
was to permit the additional imposts for as long as there exists a need to protect the general public and
the petroleum industry from the adverse consequences of pump rate fluctuations. "Where the
standards set up for the guidance of an administrative officer and the action taken are in fact recorded
in the orders of such officer, so that Congress, the courts and the public are assured that the orders in
the judgment of such officer conform to the legislative standard, there is no failure in the performance
of the legislative functions." 22

This Court thus finds no serious impediment to sustaining the validity of the legislation; the express
purpose for which the imposts are permitted and the general objectives and purposes of the fund are
readily discernible, and they constitute a sufficient standard upon which the delegation of power may
be justified.

In relation to the third question respecting the illegality of the reimbursements to oil companies,
paid out of the Oil Price Stabilization Fund, because allegedly in contravention of 8, paragraph 2 (2)
of P.D. 1956, amended 23 the Court finds for the petitioner.

The petition assails the payment of certain items or accounts in favor of the petroleum companies (i.e.,
inventory losses, financing charges, fuel oil sales to the National Power Corporation, etc.) because not
authorized by law. Petitioner contends that "these claims are not embraced in the enumeration in 8
of P.D. 1956 . . since none of them was incurred 'as a result of the reduction of domestic prices of
petroleum products,'" 24 and since these items are reimbursements for which the OPSF should not
have responded, the amount of the P12.877 billion deficit "should be reduced by P5,277.2
million." 25 It is argued "that under the principle of ejusdem generis . . . the term 'other factors' (as
used in 8 of P.D. 1956) . . can only include such 'other factors' which necessarily result in the
reduction of domestic prices of petroleum products." 26

The Solicitor General, for his part, contends that "(t)o place said (term) within the restrictive confines
of the rule of ejusdem generis would reduce (E.O. 137) to a meaningless provision."

This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., 27 passed
upon the application of ejusdem generis to paragraph 2 of 8 of P.D. 1956, viz.:

The rule of ejusdem generis states that "[w]here words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words
are not to be construed in their widest extent, but are held to be as applying only to
persons or things of the same kind or class as those specifically mentioned." 28 A
reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
characteristic. The first relates to price reduction as directed by the Board of Energy
while the second refers to reduction in internal ad valorem taxes. Therefore,
subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What
should be considered for purposes of determining the "other factors" in subparagraph
(iii) is the first sentence of paragraph (2) of the Section which explicitly allows the
cost underrecovery only if such were incurred as a result of the reduction of domestic
prices of petroleum products.

The Court thus holds, that the reimbursement of financing charges is not authorized by paragraph 2 of
8 of P.D. 1956, for the reason that they were not incurred as a result of the reduction of domestic
prices of petroleum products. Under the same provision, however, the payment of inventory losses is
upheld as valid, being clearly a result of domestic price reduction, when oil companies incur a cost
underrecovery for yet unsold stocks of oil in inventory acquired at a higher price.

Reimbursement for cost underrecovery from the sales of oil to the National Power Corporation is
equally permissible, not as coming within the provisions of P.D. 1956, but in virtue of other laws and
regulations as held in Caltex 29 and which have been pointed to by the Solicitor General. At any rate,
doubts about the propriety of such reimbursements have been dispelled by the enactment of R.A.
6952, establishing the Petroleum Price Standby Fund, 2 of which specifically authorizes the
reimbursement of "cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation."

Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been
presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any effort
to defend the propriety of this refund. In fine, neither of the parties, beyond the mere mention of
overpayment refunds, has at all bothered to discuss the arguments for or against the legality of the so-
called overpayment refunds. To be sure, the absence of any argument for or against the validity of the
refund cannot result in its disallowance by the Court. Unless the impropriety or illegality of the
overpayment refund has been clearly and specifically shown, there can be no basis upon which to
nullify the same.

Finally, the Court finds no necessity to rule on the remaining issue, the same having been rendered
moot and academic. As of date hereof, the pump rates of gasoline have been reduced to levels below
even those prayed for in the petition.

WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the
reimbursement of financing charges, paid pursuant to E.O. 137, and DISMISSED in all other respects.

SO ORDERED.

Cruz, Feliciano, Padilla, Bidin, Grio-Aquino, Regalado, Davide, Jr., Romero, Nocon, Bellosillo,
Melo, Campos, Jr., and Quiason, JJ., concur.

Gutierrez, Jr., J., is on leave.

 SECOND DIVISION

[G.R. Nos. 62554-55. September 2, 1992.]

REPUBLIC BANK, Petitioner, v. COURT OF TAX APPEALS AND THE COMMISSIONER

OF INTERNAL REVENUE, Respondents.

Asisteo S. San Agustin for Petitioner.

SYLLABUS

1. TAXATION; DOUBLE TAXATION DEFINED; NOT PRESENT WHEN ONE IS A PENALTY

AND THE OTHER IS A TAX; CASE AT BAR. The wisdom of this is not the province of the
Court. It is clear from the statutes then in force that there was no double taxation involved one was
a penalty and the other was a tax. At any rate, We have upheld the validity of double taxation.
(Double taxation: when the same person is taxed by the same jurisdiction for the same purpose. [San
Miguel Brewery, Inc. v. City of Cebu 43 SCRA 275, 280]) The payment of 1/10 of 1% for incurring
reserve deficiencies (Section 106, Central Bank Act) is a penalty as the primary purpose involved is
regulation, while the payment of 1% for the same violation (Second Paragraph, Section 249, NIRC) is
a tax for the generation of revenue which is the primary purpose in this instance. Petitioner should not
complain that it is being asked to pay twice for incurring reserve deficiencies. It can always avoid this
predicament by not having reserve deficiencies. Petitioners case is covered by two special laws
one a banking law and the other, a tax law. These two laws should receive such construction as to
make them harmonize with each other and with the other body of pre-existing laws. (Commissioner of
Customs v. Esso Standard Eastern, Inc., 66 SCRA 113, 120)

2. ID.; RESERVE DEFICIENCY TAX; QUESTION ON THE COMPUTATION MUST BE

RAISED AT THE EARLIEST STAGE. Corollary issue raised by petitioner bank, is the question
on how the respondent Commissioner computed reserve deficiency taxes considering that Sec. 249,
NIRC, speaks of computation of what it calls penalty on a per month basis while the Central Bank Act
provides for the computation of the penalty on a per day basis. It claims that respondent
Commissioner never informed them of the details of these assessments, considering the same involve
complex and tedious computations. It is too late in the day for petitioner to raise this matter for Us to
resolve. The grounds alleged by the petitioner in its motion for reconsideration of the Commissioners
assessments are the very same grounds raised in these petitions. Petitioner did not ask the
Commissioner to explain how it arrived in computing these reserve deficiency taxes. Neither did
petitioner raise this question before the Court of Tax Appeals.

3. ID.; ID.; LETTER OF INSTRUCTION NO. 1330; CONDONATION OF PENALTIES AND

OTHER SANCTIONS; COVERAGE; NOT APPLICABLE IN CASE AT BAR. petitioner bank in
its brief mentions that in Letter of Instruction No. 1330 issued by President Marcos on June 6, 1983,
the Central Bank was ordered to assist petitioner by way of full condonation of all penalties and other
sanctions of whatever kind, nature and description, as of the date they become due, on its legal reserve
deficiencies. Consequently, petitioner insists that it is now exempted from what it claims are the
penalties imposed by the second paragraph of Section 249, NIRC. A careful study of said LOI reveals
that it was issued with respect to petitioner banks (thereafter renamed Republic Planters Bank) role in
the governments sugar production and procurement program as the financial arm of the sugar
industry when the Philippine Sugar Commission (PHILSUCOM), created by virtue of P.D. 388 1974),
bought the petitioner bank from the Roman family. The petition at bar involves the assessments for
the years 1969 and 1970. This LOI definitely does not cover the years 1969 and 1970 as it was issued
only on June 6, 1983 and covers the period when PHILSUCOM bought the then ailing Republic Bank
from the Roman family and renamed it the Philippine Planters Bank to be used as its financial conduit
for the sugar industry. Therefore, even on the thesis that the payment made (Second paragraph,
Section 249, NIRC) is a penalty, this "penalty" for 1969 and 1970 can not be condoned as said LOI
does not cover it.

DECISION

NOCON, J.:

Petitioner Republic Bank appeals the decision of public respondent Court of Tax Appeals dated
September 30, 1982 dismissing its Petition for Review, thereby affirming public respondent
Commissioner of Internal Revenues assessment for petitioners reserve deficiency taxes inclusive of
25% surcharge for the taxable years 1969 and 1970 in the amounts of P1,325,768.82 and
P1,953,132.67, respectively.

The antecedent facts as briefly summarized by the Solicitor General are as

follows:jgc:chanrobles.com.ph

"On 14 September 1971, respondent Commissioner assessed petitioner the amount of P1,060,615.06,
plus 25% surcharge in the amount of P265,153.76, or a total of P1,325,768.82, as 1% monthly bank
reserve deficiency tax for taxable year 1969.chanrobles lawlibrary : rednad

"In a letter dated 6 October 1971, petitioner requested reconsideration of the assessment which
respondent Commissioner denied in a letter dated 26 February 1973.

"On 5 April 1973, respondent Commissioner assessed petitioner the amount of P1,562,506.14, plus
25% surcharge in the amount of P390,626.53, or a total of P1,953,132.67, as 1% monthly bank
reserve deficiency tax for taxable year 1970.

"In a letter dated 16 May 1973, petitioner requested reconsideration of the assessment which
respondent Commissioner denied in a letter dated 6 May 1974.

"Petitioner contends that Section 249 of the Tax Code is no longer enforceable, because Section 126
of Act 1459, which was allegedly the basis for the imposition of the 1% reserve deficiency tax, was
repealed by Section 90 of Republic Act 337, the General Banking Act, and by Sections 100 and 101
of Republic Act 265.

"On 28 March 1973, petitioner filed a petition for review with the Tax Court, docketed as C.T.A. Case
No. 2506, contesting the assessment for the taxable year 1969. On 3 July 1974, a similar petition,
docketed as C.T.A. Case No. 2618. was filed contesting the assessment for the taxable year 1970.

"The cases, involving similar issues, were consolidated. After hearing, the Tax Court rendered a
decision dated 30 September 1982 dismissing the petitions for review and upholding the validity of
the assessments.

"Still not satisfied, petitioner filed this petition for review." 1

Petitioner urges that the issue to be resolved in this petition is:jgc:chanrobles.com.ph

"WHETHER SECTION 249 OF THE TAX CODE WHICH PROVIDES THAT THERE SHALL BE
COLLECTED UPON THE AMOUNT OF RESERVE DEFICIENCIES INCURRED BY THE
BANK . . . AS PROVIDED IN SECTION ONE HUNDRED TWENTY-SIX OF ACT NUMBERED
ONE THOUSAND FOUR HUNDRED AND FIFTY-NINE (THE CORPORATION LAW) . . . ONE
PER CENTUM PER MONTH HAS BEEN RENDERED INOPERATIVE BY THE REPEAL OF
THE AFORESAID REFERRED PROVISION, I.E., SECTION ONE HUNDRED TWENTY-SIX OF
THE CORPORATION LAW." 2

The second paragraph of Section 249 of the Tax Code of 1970 (C.A. No. 466 as amended by Rep. Act
No. 6110) invoked by the respondent Commissioner in making the assessments provides
that:jgc:chanrobles.com.ph

"There shall be collected upon the amount of reserve deficiencies incurred by the bank, and for the
period of their duration, as provided in section one hundred twenty-six of Act Numbered one
thousand four hundred and fifty-nine, as amended by Act Numbered three thousand six hundred and
ten, one per centum per month." chanrobles virtual lawlibrary

which paragraph was based on Sec. 26 of R.A. 337, the General Banking Act, and Sections 100, 101,
and 106 of R.A. 265, the Central Bank Act, all providing for the reserve requirements on banking
operations, while Section 126 of Act No. 1459 (The Corporation Law), as amended by Art. 3610,
reads:jgc:chanrobles.com.ph

"SEC. 126. Whenever the reserve as defined in the last preceding section of any commercial banking
corporation shall be below the amount required in that section such commercial banking corporation
shall not diminish the amount of such reserve by making any new loans or discounts, or declare any
dividend out of its profits until the required proportion between the aggregate amount of its deposits
and its reserve has been restored. Reserve deficiencies shall be penalized at the rate of one per centum
per month upon the amount of the deficiencies and for the periods of their duration in accordance with
the regulation to be issued by the Bank Commissioner. The penalty assessed shall be collected by the
Collector of Internal Revenue in accordance with the rules, regulations and procedure to be
determined by him. In the case of any commercial banking corporation whose reserve is continuously
deficient for a period of thirty days, the business of such corporation may be wound up by the Bank
Commissioner in accordance with section sixteen hundred and thirty-nine of Act numbered twenty-
seven hundred and eleven, as amended, known as the Administrative Code" 3

According to petitioner, Section 126 has been expressly repealed by Section 90 of the General
Banking Act (R.A. No. 337), to wit:chanrobles law library : red

"Sec. 90. Sections one hundred seventy-five to one hundred eighty-three and one hundred ninety-nine
to two hundred seventeen of the Code of Commerce, as amended, section one hundred three to one
hundred forty-six and one hundred seventy-one to one hundred ninety of Act Numbered fourteen
hundred and fifty-nine, as amended; Acts Numbered Thirty-one hundred and fifty-four and Thirty-
five hundred and twenty, and all laws or parts thereof, including those parts of special charters of the
Philippine National Bank and other banking institutions in the Philippines which are inconsistent
herewith, are hereby repealed.

Both petitioner and public respondent agree that:jgc:chanrobles.com.ph

". . . The requirement on the maintenance of bank reserves, previously found in Section 126 of Act
1459 (The Corporation Law), remained prescribed, after its repeal, in

a. Sec. 26, RA 337 4 subjecting the deposit liabilities of commercial banks including the Philippine
National Bank to the reserve requirements and other conditions prescribed by the Monetary Board in
accordance with the authority granted to 1t under the Central Bank Act.

b. Sec. 100, RA 265 5 requiring banks to maintain reserves against their deposit liabilities;

c. Sec. 101, RA 265 6 authorizing the Monetary Board to prescribe and to modify the minimum
reserved ratios applicable to each class of peso deposits;
d. Sec. 106, RA 265 7 imposing a penalty of 1/10 of 1% for violation of the Banking Law." 8

As petitioner Republic sees it, Section 249 of the Tax Code (CA 466) can no longer be enforced as the
basis for which the tax is to be computed under Section 126, Act. 1459, is no longer in force. The
Central Bank Act (R.A. 265), specifically Sections 100, 101, 105 and 106, by providing for a whole
new set of rules in regard to reserve requirements and reserve deficiencies of banks clearly show that
it was the legislative intent to remove the regulation of the operations of banks under the ambit of the
Corporation Law (Art. 1459) and to place them under the purview of Central Bank Act (R.A. No.
265) and the General Banking Act (R.A. 337).

Public respondents disagree and state that Section 249 of the then Tax Code (CA 466) is deemed to
have ipso facto incorporated by reference the new legislations on bank reserves after the repeal of
Section 126, Act. 1459.

Petitioner Republic argues then that in case of a reserve deficiency, the violating bank would be liable
at the same time for a tax of 1% a month (Second paragraph, Section 249, NIRC) payable to the
Bureau of Internal Revenue as well as a penalty of 1/10 of 1% a day (Section 106, Central Bank Act)
payable to the Central Bank. They argue that:jgc:chanrobles.com.ph

"As we examine the second paragraph of Section 249 of the Tax Code, we find nothing therein which
says that such imposition is a tax rather than a penalty. It merely states that there shall be collected . .
. as provided in Section one hundred twenty six of Act Numbered one thousand four hundred and
fifty-nine . . . one per centum per month. On the contrary, the provision referred to (Section 126 of
Act 1459) states that . . . reserve deficiencies shall be penalized at the rate of one per centum per
month . . . the penalty assessed shall be collected by the Collector of Internal Revenue. It would be
wrong, therefore, to say that the imposition in Section 249 of the Tax Code is a tax, not a penalty,
because taken in the context of the referred statute, it is really a penalty. Such imposition was
provided in the Tax Code and payable to the Collector of Internal Revenue simply because at that
time there was yet no Central Bank Act and General Banking Act nor a Monetary Board of Central
Bank to regulate the operation of banks." 9

After a careful consideration of the facts of the case and the pertinent laws involved, We vote to deny
the petition.chanrobles.com:cralaw:red

Firstly, we would like to state that We find unfortunate petitioners act of quoting out context the
questioned provision in the Tax Code. Petitioner alleged that the second paragraph of Section 249 of
the Tax Code "merely states" that there "shall be collected . . . as provided in Section one hundred
twenty one of Act numbered one thousand four hundred and fifty nine . . . one per centum per
month."cralaw virtua1aw library

If petitioner had been candid and honest enough, it would have stated under what title and chapter of
the Tax Code the second paragraph of Section 249 falls. As it then stood, the law stated:chanrob1es
virtual 1aw library

x x x

TITLE VIII MISCELLANEOUS TAXES

"Sec. 249. Tax on Banks . . .

"There shall be collected upon the amount of reserve deficiencies incurred by the bank, and for the
period of their duration, as provided in section one hundred twenty-six of Act numbered one thousand
four hundred and fifty-nine, as amended by Act Numbered Three thousand six hundred and ten, one
per centum per month, . . . (As amended by Rep. Act No. 6110)" 10
Clearly, the law states a tax is to be collected.

As the law stood during the years the petitioner was assessed for taxes on reserve deficiencies (1969
& 1970), petitioner had to pay twice the first, a penalty, to the Central Bank by virtue of Section
106 for violation of Secs. 100 and 101. all of the Central Bank Act and the second, a tax, to the
Bureau of Internal Revenue for incurring a reserve deficiency.

As correctly analyzed by the petitioner and public respondents, the new legislations on bank reserves
merely provided the basis for computation of the reserve deficiency of petitioner bank.

Petitioner submits that it was not the legislative intention that banks with reserve deficiencies would
pay twice as the Tax Code (CA 466, as amended by P.D. 69) enacted on January 1, 1973 did not
contain said questioned provision.

While petitioner might have a point, the wisdom of this legislation is not the province of the Court. 11
It is clear from the statutes then in force that there was no double taxation involved one was a
penalty and the other was a tax. At any rate, We have upheld the validity of double taxation. 12 The
payment of 1/10 of 1% for incurring reserve deficiencies (Section 106, Central Bank Act) is a penalty
as the primary purpose involved is regulation, 13 while the payment of 1% for the same violation
(Second Paragraph, Section 249, NIRC) is a tax for the generation of revenue which is the primary
purpose in this instance. 14 Petitioner should not complain that it is being asked to pay twice for
incurring reserve deficiencies. It can always avoid this predicament by not having reserve
deficiencies. Petitioners case is covered by two special laws one a banking law and the other, a tax
law. These two laws should receive such construction as to make them harmonize with each other and
with the other body of pre-existing laws. 15

Dura lex sed lex!

II

Corollary to this issue raised by petitioner bank, is the question on how the respondent Commissioner
computed reserve deficiency taxes considering that Sec. 249, NIRC, speaks of computation of what it
calls penalty on a per month basis while the Central Bank Act provides for the computation of the
penalty on a per day basis. It claims that respondent Commissioner never informed them of the details
of these assessments, considering the same involve complex and tedious computations.

It is too late in the day for petitioner to raise this matter for Us to resolve.16 The grounds alleged by
the petitioner in its motion for reconsideration of the Commissioners assessments are the very same
grounds raised in these petitions. Petitioner did not ask the Commissioner to explain how it arrived in
computing these reserve deficiency taxes. Neither did petitioner raise this question before the Court of
Tax Appeals.

Be that as it may, respondent Commissioner explained in compliance with Our Resolution of

December 17, 1984, that:chanrobles.com : virtual law library

"3. The reserve deficiency tax amounting to P1,325,768.82 and P1,953,132.67, including surcharge,
was computed on the basis of the monthly averages of reserve deficiencies using figures on daily
reserve deficiencies as appearing in DSE Form No. 1 duly accomplished by the bank, required to be
filed regularly with the Department of Supervision and Examination of the Central Bank . . ." 17

Thus, what the respondent commissioner did was just to add up all the daily reserve deficiencies as
stated by petitioner itself in DSE Form No. 1 which it submitted to the Central Bank for one
month, divide such total by the number of banking days in a month to get the average monthly reserve
deficiency. For example, for January, 1970, the total daily average of reserve deficiencies being
P175,228.031.73, the monthly average was obtained by dividing said figure by 21 banking days to get
P8,344,196.75. The tax rate applied was 1% to get the reserve deficiency tax of P83,441.97. 18
Obviously, the respondent commissioner could not apply the tax rate of 1% on the daily reserve
deficiency as the law (Second paragraph, Sec. 249, NIRC) calls only for a monthly computation.
Mathematically, this is the right procedure in obtaining the monthly average of the daily reserve
deficiencies.

As can be, seen, even if petitioner had validly raised said issue, the respondent Commissioner merely
followed the law to the letter.

III
Lastly, petitioner bank in its brief mentions that in Letter of Instruction No. 1330 issued by President
Marcos on June 6, 1983, 19 the Central Bank was ordered to assist petitioner by way of full
condonation of all penalties and other sanctions of whatever kind, nature and description, as of the
date they become due, on its legal reserve deficiencies. Consequently, petitioner insists that it is now
exempted from what it claims are the penalties imposed by the second paragraph of Section 249,
NIRC.

A careful study of said LOI reveals that it was issued with respect to petitioner banks (thereafter
renamed Republic Planters Bank) role in the governments sugar production and procurement
program as the financial arm of the sugar industry when the Philippine Sugar Commission
(PHILSUCOM), created by virtue of P.D. 388 1974), bought the petitioner bank from the Roman
family.

The LOI itself states that:chanrob1es virtual 1aw library

x x x
"WHEREAS, IN PURSUIT OF THE GOVERNMENTS SUGAR PRODUCTION AND
PROCUREMENT PROGRAM, REPUBLIC PLANTERS BANK INCURRED OVERDRAFTS IN
ITS CLEARING ACCOUNT WITH THE CENTRAL BANK IN VIEW OF THE LATTERS
INABILITY TO EFFECT SUBSTANTIAL REGULAR LOAN RELEASES THRU ITS
REDISCOUNTING WINDOW DUE TO CERTAIN CONSTRAINTS ON DOMESTIC CEILINGS
RESULTING IN THE DEPOSIT RESERVE DEFICIENCIES AND CORRESPONDING
IMPOSITION OF PENALTIES FOR RESERVE DEFICIENCIES;

"WHEREAS, CONSIDERING THE MAGNITUDE OF THE AMOUNT OF THE RESERVE

PENALTIES WHICH MAY AFFECT ITS VIABILITY AND IN ORDER TO RATIONALIZE THE
SITUATION, IT IS IMPERATIVE THAT REPUBLIC PLANTERS BANK BE GIVEN
APPROPRIATE RELIEF FROM ITS PRESENT PREDICAMENT BROUGHT ABOUT
PRIMARILY BY THE IMPLEMENTATION OF THE GOVERNMENTS SUGAR PRODUCTION
AND PROCUREMENT PROGRAM AND NOT BY REASON OF ANY MISMANAGEMENT OR
UNSOUND BANKING PRACTICE ON THE OPERATION OF THE BANK." 20

The petition at bar involves the assessments for the years 1969 and 1970. This LOI definitely does not
cover the years 1969 and 1970 as it was issued only on June 6, 1983 and covers the period when
PHILSUCOM bought the then ailing Republic Bank from the Roman family and renamed it the
Philippine Planters Bank to be used as its financial conduit for the sugar industry. Therefore, even on
the thesis that the payment made (Second paragraph, Section 249, NIRC) is a penalty, this "penalty"
for 1969 and 1970 can not be condoned as said LOI does not cover it.chanrobles law library : red

WHEREFORE, premises considered, the petition is denied with costs against petitioner.

SO ORDERED.
 FIRST DIVISION

[G.R. No. 147188. September 14, 2004]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P.

TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario
Luza Bautista, respondents.

DECISION
DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision[1] of the Court of Appeals of 31 January 2001 in
CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals (CTA)
in C.T.A. Case No. 5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is not liable
for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount
of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment
issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of
Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue,
Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which
the building stands for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million.
These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public.[5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10
million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989,
declaring, among other things, its gain from the sale of real property in the amount of P75,728.021.
After crediting withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income
of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5
million, as evidenced by a Deed of Sale of Shares of Stocks.[9] Three and a half years later, or on 16
January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice[10] and
demand letter to the CIC for deficiency income tax for the year 1989 in the amount
of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed
against the old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free
from all tax liabilities for the fiscal years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment[12] dated 9 January 1995
from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the
amount of P79,099,999.22, computed as follows:

Income Tax 1989

Net Income per return P75,987,725.00

Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation

Tax Due thereof at 35% P 61,595,703.75

Less: Payment already made

1. Per return P26,595,704.00

2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in the income structure
of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud
of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner
to assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions
actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the
buyer of the property from CIC nor the seller of the same property to RMI. The additional gain
of P100 million (the difference between the second simulated sale for P200 million and the first
simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as
capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or
fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section
223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed
within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the
separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered
in the name of the individual directors of CIC, should be held liable for the deficiency income tax,
especially because the gains realized from the sale were withdrawn by him as cash advances or paid to
him as cash dividends. Since he is already dead, his estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that
CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a
pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed on
15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA
also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself
sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that
the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and
set aside the assessment issued by the Commissioner on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property
owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that
the latter was a representative, dummy, and a close business associate of the former, having held his
office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.)
duly owned by Toda for representation services rendered. The CTA denied[20] the motion for
reconsideration, prompting the Commissioner to file a petition for review[21] with the Court of
Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise
in matters of taxation, is better situated to determine the correctness, propriety, and legality of the
income tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present
petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE
OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE
CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR
THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by
CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the
Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between
CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana
as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of
1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI,
and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as
investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda
through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax
return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year
1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion

or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other
hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment
of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown
that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith,
willfull,or deliberate and not accidental; and (3) a course of action or failure of action which is
unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May
1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC
received P40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40
million was debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show
that the real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate
and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy
Prieto, the assistant accountant of CIC and an old timer in the company. [27] But Mr. Prieto did not
testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was
unserved,[28] Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him
was part of the tax planning scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:

Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one
hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of
property for stock, changing the structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is
absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot
be faulted for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI would then subject the income to only 5%
individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of
acquiring and transferring title of the subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and
economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with
the end in view of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more
on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax
evasion.[31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.[32] The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each
step from the commencement of negotiations to the consummation of the sale is relevant. A sale by
one person cannot be transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the transaction to be disguised by
mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another
and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention
of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.[34] The
two sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as
amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or
organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 1986[35] (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.

Has the period of

assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the
case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for collection thereof .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and
(3) failure to file a return, the period within which to assess tax is ten years from discovery of the
fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion
of the BIR on the tax consequence of the two sale transactions.[36] Thus, the BIR was amply informed
of the transactions even prior to the execution of the necessary documents to effect the transfer.
Subsequently, the two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As
earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that
there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did
not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten
years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991. [37] The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable

for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer
for the liabilities of a corporation and vice versa. There are, however, certain instances in which
personal liability may arise. It has been held in a number of cases that personal liability of a corporate
director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
 2. He consents to the issuance of watered down stocks or, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he
knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer
for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically
provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those
reported in its audited financial statement as of December 31, 1989, attached hereto as Annex B and
made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and
Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.[39][Underscoring Supplied].

When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held
himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since
its obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of
Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of
the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE,
and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to
pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus
legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
 THIRD DIVISION

[G.R. No. 128315. June 29, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY AND

DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S.
DIO, respondents.

DECISION
PANGANIBAN, J.:

An assessment contains not only a computation of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the time when penalties and interests begin to accrue against
the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it
must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by
revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals.

Statement of the Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
praying for the nullification of the October 30, 1996 Decision[1] of the Court of Appeals[2] in CA-GR
SP No. 40853, which effectively affirmed the January 25, 1996 Resolution[3] of the Court of Tax
Appeals[4] in CTA Case No. 5271. The CTA disposed as follows:

WHEREFORE, finding [the herein petitioners] Motion to Dismiss as UNMERITORIOUS, the same
is hereby DENIED. [The CIR] is hereby given a period of thirty (30) days from receipt hereof to file
her answer.

Petitioner also seeks to nullify the February 13, 1997 Resolution[5] of the Court of Appeals
denying reconsideration.

The Facts

As found by the Court of Appeals, the undisputed facts of the case are as follows:

It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong
authorized Revenue Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M. Savellano to
examine the books of accounts and other accounting records of Pascor Realty and Development
Corporation. (PRDC) for the years ending 1986, 1987 and 1988. The said examination resulted in a
recommendation for the issuance of an assessment in the amounts of P7,498,434.65 and
P3,015,236.35 for the years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner of Internal Revenue filed a criminal complaint before the
Department of Justice against the PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S.
Dio, alleging evasion of taxes in the total amount of P10,513,671.00. Private respondents PRDC, et.
al. filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax
liability.

On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the
criminal complaint filed by the Commissioner of Internal Revenue (BIR) against them.

In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation
of the private respondents on the ground that no formal assessment has as yet been issued by the
Commissioner.

Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax
Appeals on a petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6,
1995, the CIR filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction
over the subject matter of the petition, as there was no formal assessment issued against the
petitioners. The CTA denied the said motion to dismiss in a Resolution dated January 25, 1996 and
ordered the CIR to file an answer within thirty (30) days from receipt of said resolution. The CIR
received the resolution on January 31, 1996 but did not file an answer nor did she move to reconsider
the resolution.

Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:

Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in
considering the affidavit/report of the revenue officer and the indorsement of said report to the
secretary of justice as assessment which may be appealed to the Court of Tax Appeals;

Respondent Court of Tax Appeals acted with grave abuse of discretion in considering the denial by
petitioner of private respondents Motion for Reconsideration as [a] final decision which may be
appealed to the Court of Tax Appeals.

In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:

We agree with petitioners contentions, that the criminal complaint for tax evasion is the assessment
issued, and that the letter denial of May 17, 1995 is the decision properly appealable to
[u]s. Respondents ground of denial, therefore, that there was no formal assessment issued, is
untenable.

It is the Courts honest belief, that the criminal case for tax evasion is already an assessment. The
complaint, more particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano
attached thereto, contains the details of the assessment like the kind and amount of tax due, and the
period covered.

Petitioners are right, in claiming that the provisions of Republic Act No. 1125, relating to exclusive
appellate jurisdiction of this Court, do not, make any mention of formal assessment. The law merely
states, that this Court has exclusive appellate jurisdiction over decisions of the Commissioner of
Internal Revenue on disputed assessments, and other matters arising under the National Internal
Revenue Code, other law or part administered by the Bureau of Internal Revenue Code.

As far as this Court is concerned, the amount and kind of tax due, and the period covered, are
sufficient details needed for an assessment. These details are more than complete, compared to the
following definitions of the term as quoted hereunder. Thus:

Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332.
(Words and Phrases, Permanent Edition, Vol. 4, p. 446)
The word assessment when used in connection with taxation, may have more than one meaning. The
ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is
to pay. More commonly, the word assessment means the official valuation of a taxpayers property for
purpose of taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid.
p. 445)

From the above, it can be gleaned that an assessment simply states how much tax is due from a
taxpayer. Thus, based on these definitions, the details of the tax as given in the Joint Affidavit of
respondents examiners, which was attached to the tax evasion complaint, more than suffice to qualify
as an assessment. Therefore, this assessment having been disputed by petitioners, and there being a
denial of their letter disputing such assessment, this Court unquestionably acquired jurisdiction over
the instant petition for review.[6]

As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition.
Hence, this recourse to this Court.[7]

Ruling of the Court of Appeals

The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling
that the Criminal Complaint for tax evasion filed by the Commissioner of Internal Revenue with the
Department of Justice constituted an assessment of the tax due, and that the said assessment could be
the subject of a protest. By definition, an assessment is simply the statement of the details and the
amount of tax due from a taxpayer. Based on this definition, the details of the tax contained in the BIR
examiners Joint Affidavit,[8] which was attached to the criminal Complaint, constituted an
assessment. Since the assailed Order of the CTA was merely interlocutory and devoid of grave abuse
of discretion, a petition for certiorari did not lie.

Issues

Petitioners submit for the consideration of this Court the following issues:

(1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax evasion may be
instituted.

(3) Whether or not the CTA can take cognizance of the case in the absence of an assessment.[9]

In the main, the Court will resolve whether the revenue officers Affidavit-Report, which was
attached to the criminal Complaint filed with the Department of Justice, constituted an assessment that
could be questioned before the Court of Tax Appeals.

The Courts Ruling

The petition is meritorious.

Main Issue: Assessment

Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot
in any way be construed as a formal assessment of private respondents tax liabilities. This position is
based on Section 205 of the National Internal Revenue Code[10] (NIRC), which provides that remedies
for the collection of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites
Section 223(a) of the same Code, which states that in case of failure to file a return, the tax may be
assessed or a proceeding in court may be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an action or proceeding for
the collection of taxes, but merely a notice that the amount stated therein is due as tax and that the
taxpayer is required to pay the same. Thus, qualifying as an assessment was the BIR examiners Joint
Affidavit, which contained the details of the supposed taxes due from respondent for taxable years
ending 1987 and 1988, and which was attached to the tax evasion Complaint filed with the
DOJ. Consequently, the denial by the BIR of private respondents request for reinvestigation of the
disputed assessment is properly appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the revenue regulations governing the protest of
assessments[11] provide a specific definition or form of an assessment. However, the NIRC defines the
specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as
a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will
prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she
has tax liabilities. But not all documents coming from the BIR containing a computation of the tax
liability can be deemed assessments.
To start with, an assessment must be sent to and received by a taxpayer, and must demand
payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent
penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum,
or such higher rate as may be prescribed by rules and regulations, is to be collected from the date
prescribed for its payment until the full payment.[12]
The issuance of an assessment is vital in determining the period of limitation regarding its proper
issuance and the period within which to protest it. Section 203[13]of the NIRC provides that internal
revenue taxes must be assessed within three years from the last day within which to file the
return. Section 222,[14] on the other hand, specifies a period of ten years in case a fraudulent return
with intent to evade was submitted or in case of failure to file a return. Also, Section 228[15] of the
same law states that said assessment may be protested only within thirty days from receipt
thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an
assessment. Otherwise, confusion would arise regarding the period within which to make an
assessment or to protest the same, or whether interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the collector of internal revenue releases, mails or sends such
notice to the taxpayer.[16]
In the present case, the revenue officers Affidavit merely contained a computation of respondents
tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice
secretary, not to the taxpayers.
Respondents maintain that an assessment, in relation to taxation, is simply understood to mean:

A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof.[17]
Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper
presentation of tax rolls.[18]

Even these definitions fail to advance private respondents case. That the BIR examiners Joint
Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private
respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely
to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a
notice of the tax due and a demand to the private respondents for payment thereof.
The fact that the Complaint itself was specifically directed and sent to the Department of Justice
and not to private respondents shows that the intent of the commissioner was to file a criminal
complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the
issuance of an assessment, the commissioner opted instead to file a criminal case for tax
evasion. What private respondents received was a notice from the DOJ that a criminal case for tax
evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an
assessment.
In addition, what private respondents sent to the commissioner was a motion for a
reconsideration of the tax evasion charges filed, not of an assessment, as shown thus:

This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty
and Development Corporation and for the same to be referred to the Appellate Division in order to
give my client the opportunity of a fair and objective hearing[19]

Additional Issues: Assessment Not Necessary Before Filing of Criminal Complaint

Private respondents maintain that the filing of a criminal complaint must be preceded by an
assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where
a false or fraudulent return is submitted or in cases of failure to file a return such as this case,
proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the
same Code clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously. In Ungab v. Cusi,[20] petitioner therein sought the dismissal of the criminal
Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court
held that such protests could not stop or suspend the criminal action which was independent of the
resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in
such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against
the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to Section 255 of the
NIRC,[21] which penalizes failure to file a return. They add that a tax assessment should precede a
criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not
necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to
show that they are entitled to an exception. Moreover, the criminal charge need only be supported by
a prima facie showing of failure to file a required return. This fact need not be proven by an
assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer
is then given a chance to submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the
taxpayer informing the latter specifically and clearly that an assessment has been made against him or
her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly
with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not
that the commissioner has issued an assessment. It must be stressed that a criminal complaint is
instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision
is REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.
SO ORDERED.
Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
Romero (Chairman), J., abroad on official business.
 THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 177279

REVENUE,
Petitioner, Present:

CARPIO MORALES, J.,

Chairperson,
- versus - BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

HON. RAUL M. GONZALEZ, Secretary of

Justice, L. M. CAMUS ENGINEERING Promulgated:
CORPORATION (represented by LUIS M.
CAMUS and LINO D. MENDOZA), October 13, 2010
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision[1] dated October 31, 2006 and Resolution[2]dated March 6, 2007 of the
Court of Appeals (CA) in CA-G.R. SP No. 93387 which affirmed the Resolution[3] dated December 13,
2005 of respondent Secretary of Justice in I.S. No. 2003-774 for violation of Sections 254 and 255 of
the National Internal Revenue Code of 1997 (NIRC).

The facts as culled from the records:

Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then
Commissioner of Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C.
Advincula, Jr., Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora
supervised by Section Chief Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National Office,
conducted a fraud investigation for all internal revenue taxes to ascertain/determine the tax liabilities
of respondent L. M. Camus Engineering Corporation (LMCEC) for the taxable years 1997, 1998 and
1999.[4] The audit and investigation against LMCEC was precipitated by the information provided by
an informer that LMCEC had substantial underdeclared income for the said period. For failure to
comply with the subpoena duces tecum issued in connection with the tax fraud investigation, a criminal
complaint was instituted by the Bureau of Internal Revenue (BIR) against LMCEC on January 19,
2001 for violation of Section 266 of the NIRC (I.S. No. 00-956 of the Office of the City Prosecutor of
Quezon City).[5]

Based on data obtained from an informer and various clients of LMCEC,[6] it was discovered
that LMCEC filed fraudulent tax returns with substantial underdeclarations of taxable income for the
years 1997, 1998 and 1999. Petitioner thus assessed the company of total deficiency taxes amounting
to P430,958,005.90 (income tax - P318,606,380.19 and value-added tax [VAT] - P112,351,625.71)
covering the said period. The Preliminary Assessment Notice (PAN) was received by LMCEC
on February 22, 2001.[7]

LMCECs alleged underdeclared income was summarized by petitioner as follows:

Year Income Income Percentage of U

Per ITR Per Investigation ndeclared Underdeclaration
I
ncome
1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%
1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%
1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%[8]

In view of the above findings, assessment notices together with a formal letter of demand
dated August 7, 2002 were sent to LMCEC through personal service on October 1, 2002.[9] Since the
company and its representatives refused to receive the said notices and demand letter, the revenue
officers resorted to constructive service[10] in accordance with Section 3, Revenue Regulations (RR)
No. 12-99[11].

On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred
to the Secretary of Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus
and Lino D. Mendoza, the latter two were sued in their capacities as President and Comptroller,
respectively. The case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the
revenue officers who conducted the tax fraud investigation, it was alleged that despite the receipt of
the final assessment notice and formal demand letter on October 1, 2002, LMCEC failed and refused
to pay the deficiency tax assessment in the total amount of P630,164,631.61, inclusive of increments,
which had become final and executory as a result of the said taxpayers failure to file a protest thereon
within the thirty (30)-day reglementary period.[12]

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held
liable whatsoever for the alleged tax deficiency which had become due and demandable. Considering
that the complaint and its annexes all showed that the suit is a simple civil action for collection and
not a tax evasion case, the Department of Justice (DOJ) is not the proper forum for BIRs complaint.
They also assail as invalid the assessment notices which bear no serial numbers and should be shown
to have been validly served by an Affidavit of Constructive Service executed and sworn to by the
revenue officers who served the same. As stated in LMCECs letter-protest dated December 12,
2002addressed to Revenue District Officer (RDO) Clavelina S. Nacar of RD No. 40, Cubao, Quezon
City, the company had already undergone a series of routine examinations for the years 1997, 1998
and 1999; under the NIRC, only one examination of the books of accounts is allowed per taxable
year.[13]

LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic
Recovery Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for
1998 and 1999; for 1997, its tax liability was terminated and closed under Letter of
Termination[14] dated June 1, 1999 issued by petitioner and signed by the Chief of the Assessment
Division.[15] LMCEC claimed it made payments of income tax, VAT and expanded withholding tax
(EWT), as follows:

TAXABLE AMOUNT OF TAXES

YEAR PAID
1997 Termination Letter Under Letter EWT - P 6,000.00
of Authority No. 174600 VAT - 540,605.02
Dated November 4, 1998 IT - 3,000.00
1998 ERAP Program pursuant WC - 38,404.55
to RR #2-99 VAT - 61,635.40
1999 VAP Program pursuant IT - 878,495.28
to RR #8-2001 VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped from further taking any action against it and
its corporate officers concerning the taxable years 1997 to 1999. With the grant of immunity from
audit from the companys availment of ERAP and VAP, which have a feature of a tax amnesty, the
element of fraud is negated the moment the Bureau accepts the offer of compromise or payment of
taxes by the taxpayer. The act of the revenue officers in finding justification under Section 6(B) of the
NIRC (Best Evidence Obtainable) is misplaced and unavailing because they were not able to open the
books of the company for the second time, after the routine examination, issuance of termination letter
and the availment of ERAP and VAP. LMCEC thus maintained that unless there is a prior
determination of fraud supported by documents not yet incorporated in the docket of the case,
petitioner cannot just issue LAs without first terminating those previously issued. It emphasized the
fact that the BIR officers who filed and signed the Affidavit-Complaint in this case were the same
ones who appeared as complainants in an earlier case filed against Camus for his alleged failure to
obey summons in violation of Section 5 punishable under Section 266 of the NIRC of 1997 (I.S. No.
00-956 of the Office of the City Prosecutor of Quezon City). After preliminary investigation, said case
was dismissed for lack of probable cause in a Resolution issued by the Investigating Prosecutor
on May 2, 2001.[17]

LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by
petitioner for having no basis in fact and law. However, until now the said protest remains
unresolved. As to the alleged informant who purportedly supplied the confidential information,
LMCEC believes that such person is fictitious and his true identity and personality could not be
produced. Hence, this case is another form of harassment against the company as what had been
found by the Office of the City Prosecutor of Quezon City in I.S. No. 00-956. Said case and the
present case both have something to do with the audit/examination of LMCEC for taxable years 1997,
1998 and 1999 pursuant to LA No. 00009361.[18]

In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed
with the contention of LMCEC that the complaint filed is not criminal in nature, pointing out that
LMCEC and its officers Camus and Mendoza were being charged for the criminal offenses defined
and penalized under Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Pay
Tax) of the NIRC. This finds support in Section 205 of the same Code which provides for
administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action)
remedies in order to enforce collection of taxes. Both remedies may be pursued either independently
or simultaneously.In this case, the BIR decided to simultaneously pursue both remedies and thus aside
from this criminal action, the Bureau also initiated administrative proceedings against LMCEC.[19]

On the lack of control number in the assessment notice, petitioner explained that such is a
mere office requirement in the Assessment Service for the purpose of internal control and monitoring;
hence, the unnumbered assessment notices should not be interpreted as irregular or
anomalous. Petitioner stressed that LMCEC already lost its right to file a protest letter after the lapse
of the thirty (30)-day reglementary period. LMCECs protest-letter dated December 12, 2002 to RDO
Clavelina S. Nacar, RD No. 40, Cubao, Quezon City was actually filed only on December 16, 2002,
which was disregarded by the petitioner for being filed out of time. Even assuming for the sake of
argument that the assessment notices were invalid, petitioner contended that such could not affect the
present criminal action,[20] citing the ruling in the landmark case of Ungab v. Cusi, Jr.[21]

As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division,
Revenue Region No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that the
undated Certification issued by RDO Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City stated
that the report of the 1997 Internal Revenue taxes of LMCEC had already been submitted for review
and approval of higher authorities. LMCEC also cannot claim as excuse from the reopening of its
books of accounts the previous investigations and examinations. Under Section 235 (a), an exception
was provided in the rule on once a year audit examination in case of fraud, irregularity or mistakes, as
determined by the Commissioner. Petitioner explained that the distinction between a Regular Audit
Examination and Tax Fraud Audit Examination lies in the fact that the former is conducted by the
district offices of the Bureaus Regional Offices, the authority emanating from the Regional Director,
while the latter is conducted by the TFD of the National Office only when instances of fraud had been
determined by the petitioner.[22]

Petitioner further asserted that LMCECs claim that it was granted immunity from audit when
it availed of the VAP and ERAP programs is misleading. LMCEC failed to state that its availment of
ERAP under RR No. 2-99 is not a grant of absolute immunity from audit and investigation, aside from
the fact that said program was only for income tax and did not cover VAT and withholding tax for the
taxable year 1998. As for LMCECS availment of VAP in 1999 under RR No. 8-2001 dated August 1,
2001 as amended by RR No. 10-2001 dated September 3, 2001, the company failed to state that it
covers only income tax and VAT, and did not include withholding tax. However, LMCEC is not
actually entitled to the benefits of VAP under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the
principle of estoppel invoked by LMCEC, estoppel clearly does not lie against the BIR as this
involved the exercise of an inherent power by the government to collect taxes.[23]

Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956
is misleading because said case involves another violation and offense (Sections 5 and 266 of the
NIRC). Said case was filed by petitioner due to the failure of LMCEC to submit or present its books
of accounts and other accounting records for examination despite the issuance of subpoena duces
tecum against Camus in his capacity as President of LMCEC. While indeed a Resolution was issued
by Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing the complaint, the same is still on
appeal and pending resolution by the DOJ. The determination of probable cause in said case is
confined to the issue of whether there was already a violation of the NIRC by Camus in not
complying with the subpoena duces tecum issued by the BIR.[24]

Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361
by the Commissioner is because the latter agreed with the findings of the investigating revenue officers
that fraud exists in this case. In the conduct of their investigation, the revenue officers observed the
proper procedure under Revenue Memorandum Order (RMO) No. 49-2000 wherein it is required that
before the issuance of a Letter of Authority against a particular taxpayer, a preliminary investigation
should first be conducted to determine if a prima facie case for tax fraud exists. As to the allegedly
unresolved protest filed on April 20, 2001 by LMCEC over the PAN, this has been disregarded by the
Bureau for being pro forma and having been filed beyond the 15-day reglementary period. A subsequent
letter dated April 20, 2001 was filed with the TFD and signed by a certain Juan Ventigan. However, this
was disregarded and considered a mere scrap of paper since the said signatory had not shown any prior
authorization to represent LMCEC. Even assuming said protest letter was validly filed on behalf of the
company, the issuance of a Formal Demand Letter and Assessment Notice through constructive service
on October 1, 2002 is deemed an implied denial of the said protest. Lastly, the details regarding the
informer being confidential, such information is entitled to some degree of protection, including the
identity of the informant against LMCEC.[25]

In their Joint Rejoinder-Affidavit,[26] Camus and Mendoza reiterated their argument that the
identity of the alleged informant is crucial to determine if he/she is qualified under Section 282 of the
NIRC. Moreover, there was no assessment that has already become final, the validity of its issuance
and service has been put in issue being anomalous, irregular and oppressive. It is contended that for
criminal prosecution to proceed before assessment, there must be a prima facie showing of a willful
attempt to evade taxes. As to LMCECs availment of the VAP and ERAP programs, the certificate of
immunity from audit issued to it by the BIR is plain and simple, but petitioner is now saying it has the
right to renege with impunity from its undertaking. Though petitioner deems LMCEC not qualified to
avail of the benefits of VAP, it must be noted that if it is true that at the time the petitioner filed I.S.
No. 00-956 sometime in January 2001 it had already in its custody that Confidential Information No.
29-2000 dated July 7, 2000, these revenue officers could have rightly filed the instant case and would
not resort to filing said criminal complaint for refusal to comply with a subpoena duces tecum.

On September 22, 2003, the Chief State Prosecutor issued a Resolution[27] finding no
sufficient evidence to establish probable cause against respondents LMCEC, Camus and Mendoza. It
was held that since the payments were made by LMCEC under ERAP and VAP pursuant to the
provisions of RR Nos. 2-99 and 8-2001 which were offered to taxpayers by the BIR itself, the latter is
now in estoppel to insist on the criminal prosecution of the respondent taxpayer. The voluntary
payments made thereunder are in the nature of a tax amnesty. The unnumbered assessment notices
were found highly irregular and thus their validity is suspect; if the amounts indicated therein were
collected, it is uncertain how these will be accounted for and if it would go to the coffers of the
government or elsewhere. On the required prior determination of fraud, the Chief State Prosecutor
declared that the Office of the City Prosecutor in I.S. No. 00-956 has already squarely ruled that (1)
there was no prior determination of fraud, (2) there was indiscriminate issuance of LAs, and (3) the
complaint was more of harassment. In view of such findings, any ensuing LA is thus defective and
allowing the collection on the assailed assessment notices would already be in the context of a fishing
expedition or witch-hunting. Consequently, there is nothing to speak of regarding the finality of
assessment notices in the aggregate amount of P630,164,631.61.

Petitioner filed a motion for reconsideration which was denied by the Chief State
Prosecutor.[28]

Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for
review under Resolution dated December 13, 2005.[29]

The Secretary of Justice found that petitioners claim that there is yet no finality as to
LMCECs payment of its 1997 taxes since the audit report was still pending review by higher
authorities, is unsubstantiated and misplaced. It was noted that the Termination Letter issued by the
Commissioner on June 1, 1999 is explicit that the matter is considered closed. As for taxable year
1998, respondent Secretary stated that the record shows that LMCEC paid VAT and withholding tax
in the amount of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the issuance of
a certificate of immunity from audit for 1998 by the Office of the Commissioner of Internal Revenue.
For taxable year 1999, respondent Secretary found that pursuant to earlier LA No. 38633 dated July 4,
2000, LMCECs 1999 tax liabilities were still pending investigation for which reason LMCEC assailed
the subsequent issuance of LA No. 00009361 dated August 25, 2000 calling for a similar investigation
of its alleged 1999 tax deficiencies when no final determination has yet been arrived on the earlier LA
No. 38633.[30]

On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the
existence of the following circumstances indicating fraud in the settlement of LMCECs tax liabilities:
(1) there must be intentional and substantial understatement of tax liability by the taxpayer; (2) there
must be intentional and substantial overstatement of deductions or exemptions; and (3) recurrence of
the foregoing circumstances. First, petitioner miserably failed to explain why the assessment notices
were unnumbered; second,the claim that the tax fraud investigation was precipitated by an alleged
informant has not been corroborated nor was it clearly established, hence there is no other conclusion
but that the Bureau engaged in a fishing expedition; and furthermore, petitioners course of action is
contrary to Section 235 of the NIRC allowing only once in a given taxable year such examination and
inspection of the taxpayers books of accounts and other accounting records. There was no convincing
proof presented by petitioner to show that the case of LMCEC falls under the exceptions provided in
Section 235. Respondent Secretary duly considered the issuance of Certificate of Immunity from
Audit and Letter of Termination dated June 1, 1999 issued to LMCEC.[31]

Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of
Justice found petitioner to have engaged in forum shopping in view of the fact that while there is still
pending an appeal from the Resolution of the City Prosecutor of Quezon City in said case, petitioner
hurriedly filed the instant case, which not only involved the same parties but also similar substantial
issues (the joint complaint-affidavit also alleged the issuance of LA No. 00009361 dated August 25,
2000). Clearly, the evidence of litis pendentia is present. Finally, respondent Secretary noted that if
indeed LMCEC committed fraud in the settlement of its tax liabilities, then at the outset, it should
have been discovered by the agents of petitioner, and consequently petitioner should not have issued
the Letter of Termination and the Certificate of Immunity From Audit. Petitioner thus should have
been more circumspect in the issuance of said documents.[32]

Its motion for reconsideration having been denied, petitioner challenged the ruling of
respondent Secretary via a certiorari petition in the CA.

On October 31, 2006, the CA rendered the assailed decision[33] denying the petition and
concurred with the findings and conclusions of respondent Secretary. Petitioners motion for
reconsideration was likewise denied by the appellate court.[34] It appears that entry of judgment was
issued by the CA stating that its October 31, 2006 Decision attained finality on March 25,
2007.[35] However, the said entry of judgment was set aside upon manifestation by the petitioner that it
has filed a petition for review before this Court subsequent to its receipt of the Resolution
dated March 6, 2007 denying petitioners motion for reconsideration on March 20, 2007.[36]

The petition is anchored on the following grounds:

I.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary
of Justice who gravely abused his discretion by dismissing the complaint based on
grounds which are not even elements of the offenses charged.

II.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary
of Justice who gravely abused his discretion by dismissing petitioners evidence,
contrary to law.

III.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary
of Justice who gravely abused his discretion by inquiring into the validity of a Final
Assessment Notice which has become final, executory and demandable pursuant to
Section 228 of the Tax Code of 1997 for failure of private respondent to file a protest
against the same.[37]

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted
for violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply
Correct and Accurate Information and Pay Tax).

Petitioner filed the criminal complaint against the private respondents for violation of the
following provisions of the NIRC, as amended:

SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully
attempts in any manner to evade or defeat any tax imposed under this Code or the
payment thereof shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Thirty thousand pesos
(P30,000) but not more than One hundred thousand pesos (P100,000) and suffer
imprisonment of not less than two (2) years but not more than four (4)
 years: Provided, That the conviction or acquittal obtained under this Section shall not
be a bar to the filing of a civil suit for the collection of taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information,
Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on
Compensation. Any person required under this Code or by rules and regulations
promulgated thereunder to pay any tax, make a return, keep any record, or supply any
correct and accurate information, who willfully fails to pay such tax, make such
return, keep such record, or supply such correct and accurate information, or
withhold or remit taxes withheld, or refund excess taxes withheld on compensations
at the time or times required by law or rules and regulations shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1)
year but not more than ten (10) years.

x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is
insufficient evidence to establish probable cause to charge private respondents under the above
provisions, based on the following findings: (1) the tax deficiencies of LMCEC for taxable years
1997, 1998 and 1999 have all been settled or terminated, as in fact LMCEC was issued a Certificate
of Immunity and Letter of Termination, and availed of the ERAP and VAP programs; (2) there was
no prior determination of the existence of fraud; (3) the assessment notices are unnumbered, hence
irregular and suspect; (4) the books of accounts and other accounting records may be subject to audit
examination only once in a given taxable year and there is no proof that the case falls under the
exceptions provided in Section 235 of the NIRC; and (5) petitioner committed forum shopping when
it filed the instant case even as the earlier criminal complaint (I.S. No. 00-956) dismissed by the City
Prosecutor of Quezon City was still pending appeal.

Petitioner argues that with the finality of the assessment due to failure of the private
respondents to challenge the same in accordance with Section 228 of the NIRC, respondent Secretary
has no jurisdiction and authority to inquire into its validity. Respondent taxpayer is thereby allowed to
do indirectly what it cannot do directly to raise a collateral attack on the assessment when even a
direct challenge of the same is legally barred. The rationale for dismissing the complaint on the
ground of lack of control number in the assessment notice likewise betrays a lack of awareness of tax
laws and jurisprudence, such circumstance not being an element of the offense. Worse, the final,
conclusive and undisputable evidence detailing a crime under our taxation laws is swept under the rug
so easily on mere conspiracy theories imputed on persons who are not even the subject of the
complaint.

We grant the petition.

There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax
fraud investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its
income tax returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99,[38] a PAN was sent to and
received by LMCEC on February 22, 2001 wherein it was notified of the proposed assessment of
deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and VAT -
 P112,351,625.71) covering taxable years 1997, 1998 and 1999.[39] In response to said PAN, LMCEC
sent a letter-protest to the TFD, which denied the same on April 12, 2001 for lack of legal and factual
basis and also for having been filed beyond the 15-day reglementary period.[40]

As mentioned in the PAN, the revenue officers were not given the opportunity to examine
LMCECs books of accounts and other accounting records because its officers failed to comply with
the subpoena duces tecum earlier issued, to verify its alleged underdeclarations of income reported by
the Bureaus informant under Section 282 of the NIRC. Hence, a criminal complaint was filed by the
Bureau against private respondents for violation of Section 266 which provides:

SEC. 266. Failure to Obey Summons. Any person who, being duly summoned
to appear to testify, or to appear and produce books of accounts, records, memoranda,
or other papers, or to furnish information as required under the pertinent provisions of
this Code, neglects to appear or to produce such books of accounts, records,
memoranda, or other papers, or to furnish such information, shall, upon conviction,
be punished by a fine of not less than Five thousand pesos (P5,000) but not more than
Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year
but not more than two (2) years.

It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present
considering that the outcome of I.S. No. 00-956 is not determinative of the issue as to whether
probable cause exists to charge the private respondents with the crimes of attempt to evade or defeat
tax and willful failure to supply correct and accurate information and pay tax defined and penalized
under Sections 254 and 255, respectively. For the crime of tax evasion in particular, compliance by
the taxpayer with such subpoena, if any had been issued, is irrelevant. As we held in Ungab v. Cusi,
Jr.,[41] [t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a]
fraudulent [return] with intent to evade and defeat x x x the tax. Thus, respondent Secretary erred in
holding that petitioner committed forum shopping when it filed the present criminal complaint during
the pendency of its appeal from the City Prosecutors dismissal of I.S. No. 00-956 involving the act of
disobedience to the summons in the course of the preliminary investigation on LMCECs correct tax
liabilities for taxable years 1997, 1998 and 1999.

In the Details of Discrepancies attached as Annex B of the PAN,[42] private respondents were already
notified that inasmuch as the revenue officers were not given the opportunity to examine LMCECs
books of accounts, accounting records and other documents, said revenue officers gathered
information from third parties. Such procedure is authorized under Section 5 of the NIRC, which
provides:

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon,

Examine, and Take Testimony of Persons. In ascertaining the correctness of any
return, or in making a return when none has been made, or in determining the liability
of any person for any internal revenue tax, or in collecting any such liability, or in
evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record or other data which may be relevant or
material to such inquiry;

(B) To obtain on a regular basis from any person other than the person
whose internal revenue tax liability is subject to audit or investigation, or from
 any office or officer of the national and local governments, government agencies and
instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned
or -controlled corporations, any information such as, but not limited to, costs and
volume of production, receipts or sales and gross incomes of taxpayers, and the
names, addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational companies,
joint accounts, associations, joint ventures or consortia and registered partnerships,
and their members;

(C) To summon the person liable for tax or required to file a return, or any
officer or employee of such person, or any person having possession, custody, or care
of the books of accounts and other accounting records containing entries relating to
the business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in
the summons and to produce such books, papers, records, or other data, and to give
testimony;

(D) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; x x x

x x x x (Emphasis supplied.)

Private respondents assertions regarding the qualifications of the informer of the Bureau
deserve scant consideration. We have held that the lack of consent of the taxpayer under investigation
does not imply that the BIR obtained the information from third parties illegally or that the
information received is false or malicious. Nor does the lack of consent preclude the BIR from
assessing deficiency taxes on the taxpayer based on the documents. [43] In the same vein, herein private
respondents cannot be allowed to escape criminal prosecution under Sections 254 and 255 of the
NIRC by mere imputation of a fictitious or disqualified informant under Section 282 simply because
other than disclosure of the official registry number of the third party informer, the Bureau insisted on
maintaining the confidentiality of the identity and personal circumstances of said informer.

Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No.
12-99, assessment notice and formal demand informing the said taxpayer of the law and the facts on
which the assessment is made, as required by Section 228 of the NIRC. Respondent Secretary,
however, fully concurred with private respondents contention that the assessment notices were invalid
for being unnumbered and the tax liabilities therein stated have already been settled and/or terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a

Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to
the PAN was found to be without merit. The Notice of Assessment shall inform the
[t]axpayer of this fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or
taxes shall state the fact, the law, rules and regulations or jurisprudence on
 which the assessment is based, otherwise the formal letter of demand and the
notice of assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a requirement for its validity
but rather the contents thereof which should inform the taxpayer of the declaration of deficiency tax
against said taxpayer. Both the formal letter of demand and the notice of assessment shall be void if
the former failed to state the fact, the law, rules and regulations or jurisprudence on which the
assessment is based, which is a mandatory requirement under Section 228 of the NIRC.

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law
and the facts on which the assessment is made. Otherwise, the assessment is void. To implement the
provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue
regulation reads:

3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayers deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery. x x
x.[45](Emphasis supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation
of LMCECs tax deficiencies but also details of the specified discrepancies, explaining the legal and
factual bases of the assessment. It also reiterated that in the absence of accounting records and other
documents necessary for the proper determination of the companys internal revenue tax liabilities, the
investigating revenue officers resorted to the Best Evidence Obtainable as provided in Section 6(B) of
the NIRC (third party information) and in accordance with the procedure laid down in RMC No. 23-
2000 dated November 27, 2000. Annex A of the Formal Letter of Demand thus stated:

Thus, to verify the validity of the information previously provided by the

informant, the assigned revenue officers resorted to third party information. Pursuant
to Section 5(B) of the NIRC of 1997, access letters requesting for information and the
submission of certain documents (i.e., Certificate of Income Tax Withheld at Source
and/or Alphabetical List showing the income payments made to L.M. Camus
Engineering Corporation for the taxable years 1997 to 1999) were sent to the various
clients of the subject corporation, including but not limited to the following:

1. Ayala Land Inc.

2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation
 From the documents gathered and the data obtained therein, the
substantial underdeclaration as defined under Section 248(B) of the NIRC of
1997 by your corporation of its income had been confirmed. x x x x[46] (Emphasis
supplied.)

In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents
that the estimated tax liabilities arising from LMCECs underdeclaration amounted to P186,773,600.84
in 1997, P150,069,323.81 in 1998 and P163,220,111.13 in 1999. These figures confirmed that the
non-declaration by LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding 30%
income[47] declared in its return is considered a substantial underdeclaration of income, which
constituted prima facie evidence of false or fraudulent return under Section 248(B)[48] of the NIRC, as
amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent
Secretary found the latters claim as meritorious on the basis of the Certificate of Immunity From
Audit issued on December 6, 1999 pursuant to RR No. 2-99 and Letter of Termination dated June 1,
1999 issued by Revenue Region No. 7 Chief of Assessment Division Ruth Vivian G.
Gandia. Petitioner, however, clarified that the certificate of immunity from audit covered only income
tax for the year 1997 and does not include VAT and withholding taxes, while the Letter of
Termination involved tax liabilities for taxable year 1997 (EWT, VAT and income taxes) but which
was submitted for review of higher authorities as per the Certification of RD No. 40 District Officer
Pablo C. Cabreros, Jr.[50] For 1999, private respondents supposedly availed of the VAP pursuant to
RR No. 8-2001.

RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering
the scarcity of financial and human resources as well as the time constraints within which the Bureau
has to clean the Bureaus backlog of unaudited tax returns in order to keep updated and be focused
with the most current accounts in preparation for the full implementation of a computerized tax
administration, the said revenue regulation was issued providing for last priority in audit and
investigation of tax returns to accomplish the said objective without, however, compromising the
revenue collection that would have been generated from audit and enforcement activities. The
program named as Economic Recovery Assistance Payment (ERAP) Program granted immunity from
audit and investigation of income tax, VAT and percentage tax returns for 1998. It expressly excluded
withholding tax returns (whether for income, VAT, or percentage tax purposes). Since such immunity
from audit and investigation does not preclude the collection of revenues generated from audit and
enforcement activities, it follows that the Bureau is likewise not barred from collecting any tax
deficiency discovered as a result of tax fraud investigations. Respondent Secretarys opinion that RR
No. 2-99 contains the feature of a tax amnesty is thus misplaced.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the
government a chance to collect uncollected tax from tax evaders without having to go through the
tedious process of a tax case.[51] Even assuming arguendo that the issuance of RR No. 2-99 is in the
nature of tax amnesty, it bears noting that a tax amnesty, much like a tax exemption, is never favored
nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption
must be construed strictly against the taxpayer and liberally in favor of the taxing authority.[52]
For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No.
10-2001, through payment supposedly made in October 29, 2001 before the said program ended on
October 31, 2001, did not amount to settlement of its assessed tax deficiencies for the period 1997 to
1999, nor immunity from prosecution for filing fraudulent return and attempt to evade or defeat
tax. As correctly asserted by petitioner, from the express terms of the aforesaid revenue regulations,
LMCEC is not qualified to avail of the VAP granting taxpayers the privilege of last priority in the
audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years under
certain conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it
was the subject of investigation as a result of verified information filed by a Tax Informer under
Section 282 of the NIRC duly recorded in the BIR Official Registry as Confidential Information (CI)
No. 29-2000[53] even prior to the issuance of the PAN.

Section 1 of RR No. 8-2001 provides:

SECTION 1. COVERAGE. x x x

Any person, natural or juridical, including estates and trusts, liable to pay any
of the above-cited internal revenue taxes for the above specified period/s who, due to
inadvertence or otherwise, erroneously paid his internal revenue tax liabilities or
failed to file tax return/pay taxes may avail of the Voluntary Assessment Program
(VAP), except those falling under any of the following instances:

1.1 Those covered by a Preliminary Assessment Notice (PAN), Final

Assessment Notice (FAN), or Collection Letter issued on or before July 31,
2001; or

1.2 Persons under investigation as a result of verified information filed by

a Tax Informer under Section 282 of the Tax Code of 1997, duly processed and
recorded in the BIR Official Registry Book on or before July 31, 2001;

1.3 Tax fraud cases already filed and pending in courts for adjudication; and

x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any
subsequent audit of its account books and other accounting records in view of the strong finding of
underdeclaration in LMCECs payment of correct income tax liability by more than 30% as supported
by the written report of the TFD detailing the facts and the law on which such finding is based,
pursuant to the tax fraud investigation authorized by petitioner under LA No. 00009361. This
conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001 provides:

SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A

taxpayer who has availed of the VAP shall not be audited except upon
authorization and approval of the Commissioner of Internal Revenue when there is
strong evidence or finding of understatement in the payment of taxpayers correct tax
liability by more than thirty percent (30%) as supported by a written report of the
appropriate office detailing the facts and the law on which such finding is based:
Provided, however, that any VAP payment should be allowed as tax credit against the
deficiency tax due, if any, in case the concerned taxpayer has been subjected to tax
audit.
 xxxx

Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR
No. 8-2001 and RR No. 10-2001, we hold that respondent Secretary gravely erred in declaring that
petitioner is now estopped from assessing any tax deficiency against LMCEC after issuance of the
aforementioned documents of immunity from audit/investigation and settlement of tax liabilities. It is
axiomatic that the State can never be in estoppel, and this is particularly true in matters involving
taxation. The errors of certain administrative officers should never be allowed to jeopardize the
governments financial position.[54]

Respondent Secretarys other ground for assailing the course of action taken by petitioner in
proceeding with the audit and investigation of LMCEC -- the alleged violation of the general rule in
Section 235 of the NIRC allowing the examination and inspection of taxpayers books of accounts and
other accounting records only once in a taxable year -- is likewise untenable. As correctly pointed out
by petitioner, the discovery of substantial underdeclarations of income by LMCEC for taxable years
1997, 1998 and 1999 upon verified information provided by an informer under Section 282 of the
NIRC, as well as the necessity of obtaining information from third parties to ascertain the correctness
of the return filed or evaluation of tax compliance in collecting taxes (as a result of the disobedience
to the summons issued by the Bureau against the private respondents), are circumstances warranting
exception from the general rule in Section 235.[55]

As already stated, the substantial underdeclared income in the returns filed by LMCEC for
1997, 1998 and 1999 in amounts equivalent to more than 30% (the computation in the final
assessment notice showed underdeclarations of almost 200%) constitutes prima facie evidence of
fraudulent return under Section 248(B) of the NIRC. Prior to the issuance of the preliminary and final
notices of assessment, the revenue officers conducted a preliminary investigation on the information
and documents showing substantial understatement of LMCECs tax liabilities which were provided
by the Informer, following the procedure under RMO No. 15-95.[56] Based on the prima facie finding
of the existence of fraud, petitioner issued LA No. 00009361 for the TFD to conduct a formal fraud
investigation of LMCEC.[57] Consequently, respondent Secretarys ruling that the filing of criminal
complaint for violation of Sections 254 and 255 of the NIRC cannot prosper because of lack of prior
determination of the existence of fraud, is bereft of factual basis and contradicted by the evidence on
record.

Tax assessments by tax examiners are presumed correct and made in good faith, and all
presumptions are in favor of the correctness of a tax assessment unless proven otherwise.[58] We have
held that a taxpayers failure to file a petition for review with the Court of Tax Appeals within the
statutory period rendered the disputed assessment final, executory and demandable, thereby
precluding it from interposing the defenses of legality or validity of the assessment and prescription of
the Governments right to assess.[59]Indeed, any objection against the assessment should have been
pursued following the avenue paved in Section 229 (now Section 228) of the NIRC on protests on
assessments of internal revenue taxes.[60]

Records bear out that the assessment notice and Formal Letter of Demand dated August 7,
2002 were duly served on LMCEC on October 1, 2002. Private respondents did not file a motion for
reconsideration of the said assessment notice and formal demand; neither did they appeal to the Court
of Tax Appeals. Section 228 of the NIRC[61] provides the remedy to dispute a tax assessment within a
certain period of time. It states that an assessment may be protested by filing a request for
reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer. No
such administrative protest was filed by private respondents seeking reconsideration of the August 7,
2002 assessment notice and formal letter of demand. Private respondents cannot belatedly assail the said
assessment, which they allowed to lapse into finality, by raising issues as to its validity and correctness
during the preliminary investigation after the BIR has referred the matter for prosecution under Sections
254 and 255 of the NIRC.

As we held in Marcos II v. Court of Appeals[62]:

It is not the Department of Justice which is the government agency tasked to
determine the amount of taxes due upon the subject estate, but the Bureau of Internal
Revenue, whose determinations and assessments are presumed correct and made in
good faith. The taxpayer has the duty of proving otherwise. In the absence of proof
of any irregularities in the performance of official duties, an assessment will not
be disturbed. Even an assessment based on estimates is prima facie valid and
lawful where it does not appear to have been arrived at arbitrarily or
capriciously. The burden of proof is upon the complaining party to show clearly that
the assessment is erroneous. Failure to present proof of error in the assessment will
justify the judicial affirmance of said assessment. x x x.
Moreover, these objections to the assessments should have been raised,
considering the ample remedies afforded the taxpayer by the Tax Code, with the
Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier,
and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse
of discretion. The course of action taken by the petitioner reflects his disregard or
even repugnance of the established institutions for governance in the scheme of a
well-ordered society. The subject tax assessments having become final, executory
and enforceable, the same can no longer be contested by means of a disguised
protest. In the main, Certiorari may not be used as a substitute for a lost appeal or
remedy. This judicial policy becomes more pronounced in view of the absence of
sufficient attack against the actuations of government. (Emphasis supplied.)

The determination of probable cause is part of the discretion granted to the investigating prosecutor
and ultimately, the Secretary of Justice. However, this Court and the CA possess the power to review
findings of prosecutors in preliminary investigations. Although policy considerations call for the
widest latitude of deference to the prosecutors findings, courts should never shirk from exercising
their power, when the circumstances warrant, to determine whether the prosecutors findings are
supported by the facts, or by the law. In so doing, courts do not act as prosecutors but as organs of the
judiciary, exercising their mandate under the Constitution, relevant statutes, and remedial rules to
settle cases and controversies.[63] Clearly, the power of the Secretary of Justice to review does not
preclude this Court and the CA from intervening and exercising our own powers of review with
respect to the DOJs findings, such as in the exceptional case in which grave abuse of discretion is
committed, as when a clear sufficiency or insufficiency of evidence to support a finding of probable
cause is ignored.[64]

WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution
dated March 6, 2007 of the Court of Appeals in CA-G.R. SP No. 93387 are
hereby REVERSED and SET ASIDE. The Secretary of Justice is hereby DIRECTED to order the
Chief State Prosecutor to file before the Regional Trial Court of Quezon City, National Capital
Judicial Region, the corresponding Information against L. M. Camus Engineering Corporation,
represented by its President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of
Sections 254 and 255 of the National Internal Revenue Code of 1997.

No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner,

vs.
HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance, Branch
1, 16TH Judicial District, Davao City, THE COMMISSIONER OF INTERNAL REVENUE,
and JESUS N. ACEBES, in his capacity as State Prosecutor, respondents.

CONCEPCION JR., J:

Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and
set aside the informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the
Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico
Ungab, accused;" and to restrain the respondent Judge from further proceeding with the hearing and
trial of the said cases.

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax
returns filed by the herein petitioner, Quirico P. Ungab, for the calendar year ending December 31,
1973. In the course of his examination, he discovered that the petitioner failed to report his income
derived from sales of banana saplings. As a result, the BIR District Revenue Officer at Davao City
sent a "Notice of Taxpayer" to the petitioner informing him that there is due from him (petitioner) the
amount of P104,980.81, representing income, business tax and forest charges for the year 1973 and
inviting petitioner to an informal conference where the petitioner, duly assisted by counsel, may
present his objections to the findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner
wrote the BIR District Revenue Officer protesting the assessment, claiming that he was only a dealer
or agent on commission basis in the banana sapling business and that his income, as reported in his
income tax returns for the said year, was accurately stated. BIR Examiner Ben Garcia, however, was
fully convinced that the petitioner had filed a fraudulent income tax return so that he submitted a
"Fraud Referral Report," to the Tax Fraud Unit of the Bureau of Internal Revenue. After examining
the records of the case, the Special Investigation Division of the Bureau of Internal Revenue found
sufficient proof that the herein petitioner is guilty of tax evasion for the taxable year 1973 and
recommended his prosecution: t.hqw

(1) For having filed a false or fraudulent income tax return for 1973 with intent to
evade his just taxes due the government under Section 45 in relation to Section 72 of
the National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total
of unpaid fixed taxes of P100.00 plus penalties of 175.00 or a total of P175.00, in
accordance with Section 183 of the National Internal Revenue Code;

(3) For failure to pay the 7% percentage tax, as a producer of banana poles or
saplings, on the total sales of P129,580.35 to the Davao Fruit Corporation, depriving
thereby the government of its due revenue in the amount of P15,872.59, inclusive of
surcharge. 2
In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the
Commissioner of Internal Revenue approved the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all Provincial and City
Fiscals throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all
violations of the National Internal Revenue Code, as amended, and other related laws, in
Administrative Order No. 116 dated December 5, 1974, and to whom the case was assigned,
conducted a preliminary investigation of the case, and finding probable cause, filed six (6)
informations against the petitioner with the Court of First Instance of Davao City, to wit: t.hqw

(1) Criminal Case No. 1960 Violation of Sec. 45, in relation to Sec. 72 of the
National Internal-Revenue Code, for filing a fraudulent income tax return for the
calendar year ending December 31, 1973; 4

(2) Criminal Case No. 1961 Violation of Sec. 182 (a), in relation to Secs. 178,
186, and 208 of the National Internal Revenue Code, for engaging in business as
producer of saplings, from January, 1973 to December, 1973, without first paying the
annual fixed or privilege tax thereof; 5

(3) Criminal Case No. 1962 Violation of Sec. 183 (a), in relation to Secs. 186 and
209 of the National Internal Revenue Code, for failure to render a true and complete
return on the gross quarterly sales, receipts and earnings in his business as producer
of banana saplings and to pay the percentage tax due thereon, for the quarter ending
December 31, 1973; 6

(4) Criminal Case No. 1963 Violation of Sec. 183 (a), in relation to Secs. 186 and
209 of the National Internal Revenue Code, for failure to render a true and complete
return on the gross quarterly sales receipts and earnings in his business as producer of
saplings, and to pay the percentage tax due thereon, for the quarter ending on March
31, 1973; 7

(5) Criminal Case No. 1964 Violation of Sec. 183 (a), in relation to Secs. 186 and
209 of the National Internal Revenue Code, for failure to render a true and complete
return on the gross quarterly sales, receipts and earnings in his business as producer
of banana saplings for the quarter ending on June 30, 1973, and to pay the percentage
tax due thereon; 8

(6) Criminal Case No. 1965 Violation of Sec. 183 (a), in relation to Secs. 186 and
209 of the National Internal Revenue Code, for failure to render a true and complete
return on the gross quarterly sales, receipts and earnings as producer of banana
saplings, for the quarter ending on September 30, 1973, and to pay the percentage tax
due thereon. 9

On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that:
(1) the informations are null and void for want of authority on the part of the State Prosecutor to
initiate and prosecute the said cases; and (2) the trial court has no jurisdiction to take cognizance of
the above-entitled cases in view of his pending protest against the assessment made by the BIR
Examiner. 10 However, the trial court denied the motion on October 22, 1975. 11 Whereupon, the
petitioner filed the instant recourse. As prayed for, a temporary restraining order was issued by the
Court, ordering the respondent Judge from further proceeding with the trial and hearing of Criminal
Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all
entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused."
The petitioner seeks the annulment of the informations filed against him on the ground that the
respondent State Prosecutor is allegedly without authority to do so. The petitioner argues that while
the respondent State Prosecutor may initiate the investigation of and prosecute crimes and violations
of penal laws when duly authorized, certain requisites, enumerated by this Court in its decision in the
case of Estrella vs. Orendain, 12should be observed before such authority may be exercised;
otherwise, the provisions of the Charter of Davao City on the functions and powers of the City Fiscal
will be meaningless because according to said charter he has charge of the prosecution of all crimes
committed within his jurisdiction; and since "appropriate circumstances are not extant to warrant the
intervention of the State Prosecution to initiate the investigation, sign the informations and prosecute
these cases, said informations are null and void." The ruling adverted to by the petitioner reads, as
follows: t.hqw

In view of all the foregoing considerations, it is the ruling of this Court that under
Sections 1679 and 1686 of the Revised Administrative Code, in any instance where a
provincial or city fiscal fails, refuses or is unable, for any reason, to investigate or
prosecute a case and, in the opinion of the Secretary of Justice it is advisable in the
public interest to take a different course of action, the Secretary of Justice may either
appoint as acting provincial or city fiscal to handle the investigation or prosecution
exclusively and only of such case, any practicing attorney or some competent officer
of the Department of Justice or office of any city or provincial fiscal, with complete
authority to act therein in all respects as if he were the provincial or city fiscal
himself, or appoint any lawyer in the government service, temporarily to assist such
city of provincial fiscal in the discharge of his duties, with the same complete
authority to act independently of and for such city or provincial fiscal provided that
no such appointment may be made without first hearing the fiscal concerned and
never after the corresponding information has already been filed with the court by the
corresponding city or provincial fiscal without the conformity of the latter, except
when it can be patently shown to the court having cognizance of the case that said
fiscal is intent on prejudicing the interests of justice. The same sphere of authority is
true with the prosecutor directed and authorized under Section 3 of Republic Act
3783, as amended and/or inserted by Republic Act 5184. The observation in Salcedo
vs. Liwag, supra, regarding the nature of the power of the Secretary of Justice over
fiscals as being purely over administrative matters only was not really necessary, as
indicated in the above relation of the facts and discussion of the legal issues of said
case, for the resolution thereof. In any event, to any extent that the opinion therein
may be inconsistent herewith the same is hereby modified.

The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not
been violated. The respondent State Prosecutor, although believing that he can proceed independently
of the City Fiscal in the investigation and prosecution of these cases, first sought permission from the
City Fiscal of Davao City before he started the preliminary investigation of these cases, and the City
Fiscal, after being shown Administrative Order No. 116, dated December 5, 1974, designating the
said State Prosecutor to assist all Provincial and City fiscals throughout the Philippines in the
investigation and prosecution of all violations of the National Internal Revenue Code, as amended,
and other related laws, graciously allowed the respondent State Prosecutor to conduct the
investigation of said cases, and in fact, said investigation was conducted in the office of the City
Fiscal. 13

The petitioner also claims that the filing of the informations was precipitate and premature since the
Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the
Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals.

The contention is without merit. What is involved here is not the collection of taxes where the
assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals,
but a criminal prosecution for violations of the National Internal Revenue Code which is within the
cognizance of courts of first instance. While there can be no civil action to enforce collection before
the assessment procedures provided in the Code have been followed, there is no requirement for the
precise computation and assessment of the tax before there can be a criminal prosecution under the
Code. t.hqw

The contention is made, and is here rejected, that an assessment of the deficiency tax
due is necessary before the taxpayer can be prosecuted criminally for the charges
preferred. The crime is complete when the violator has, as in this case, knowingly and
willfully filed fraudulent returns with intent to evade and defeat a part or all of the
tax. 14

An assessment of a deficiency is not necessary to a criminal prosecution for willful

attempt to defeat and evade the income tax. A crime is complete when the violator
has knowingly and willfuly filed a fraudulent return with intent to evade and defeat
the tax. The perpetration of the crime is grounded upon knowledge on the part of the
taxpayer that he has made an inaccurate return, and the government's failure to
discover the error and promptly to assess has no connections with the commission of
the crime. 15

Besides, it has been ruled that a petition for reconsideration of an assessment may affect the
suspension of the prescriptive period for the collection of taxes, but not the prescriptive period of a
criminal action for violation of law. 16 Obviously, the protest of the petitioner against the assessment
of the District Revenue Officer cannot stop his prosecution for violation of the National Internal
Revenue Code. Accordingly, the respondent Judge did not abuse his discretion in denying the motion
to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order
heretofore issued is hereby set aside. With costs against the petitioner.

SO ORDERED.

Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.1wph1.t

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-13203 January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates for petitioner.

Office of the Solicitor General for respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to
respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the
third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent
to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner
Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized
under the laws of the Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in
1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and
equipment. After the liberation, it resumed its business and until June of 1946 bought a number of
cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an
American corporation licensed to do business in the Philippines. As importer, GM paid sales tax
prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo.
Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the
public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in
the business of selling cars, trucks and spare parts. Its original authorized capital stock was
P1,000,000 divided into 10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into
equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip.
The first three named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders.
The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders
of Yutivo.

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of
1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn,
sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of
GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo
continued its previous arrangement of selling exclusively to SM. In the same way that GM used to
pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the
basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on
original sales, SM paid no sales tax on its sales to the public.
On November 7, 1950, after several months of investigation by revenue officers started in July, 1948,
the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter
P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of
1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the
taxable sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo
to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the
subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by
the agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November
15, 1952 countermanded his demand for sales tax deficiency on the ground that "after several
investigations conducted into the matter no sufficient evidence could be gathered to sustain the
assessment of this Office based on the theory that Southern Motors is a mere instrumentality or
subsidiary of Yutivo." The withdrawal was subject, however, to the general power of review by the
now defunct Board of Tax Appeals. The Secretary of Finance to whom the papers relative to the case
were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the
respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16,
1954, redetermined that the aforementioned tax assessment was lawfully due the government and in
addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the
respondents' last demand was in the total sum of P2,215,809.27 detailed as follows:

Deficiency 75% Total Amount

Sales Tax Surcharge Due
Assessment (First) of November 7, 1950
for deficiency sales Tax for the period
from 3rd Qrtr 1947 to 4th Qrtr 1949
inclusive P1,031,296.60 P773,473.45 P1,804,769.05
Additional Assessment for period from
1st to 4th Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.22
Total amount demanded per letter of
December 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals,
alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is
an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded,
the sales tax already paid by Yutivo should first be deducted from the selling price of SM in
computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed
by respondent. Finding against Yutivo and sustaining the respondent Collector's theory that there was
no legitimate or bona fide purpose in the organization of SM the apparent objective of its
organization being to evade the payment of taxes and that it was owned (or the majority of the
stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit,
instrumentality or alter ego of the latter, the Court of Tax Appeals with Judge Roman Umali not
taking part disregarded its separate corporate existence and on April 27, 1957, rendered the
decision now complained of. Of the two Judges who signed the decision, one voted for the
modification of the computation of the sales tax as determined by the respondent Collector in his
decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of
the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The
dispositive part of the decision, however, affirmed the assessment made by the Collector.
Reconsideration of this decision having been denied, Yutivo brought the case to this Court thru the
present petition for review.
It is an elementary and fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporation petitions to which it may be
connected. However, "when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime," the law will regard the corporation as an association of
persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77
Phil. 496, citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that, when
the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." (Koppel
[Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the present case, we are inclined to rule that the Court of
Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud
the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946
when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period
of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn
resold them to SM. During that period, it is not disputed that GM as importer, was the one solely
liable for sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of cars and
trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer
and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM
was organized purposely as a tax evasion device runs counter to the fact that there was no tax to
evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known
that GM was preparing to leave the Philippines and terminate its business of importing vehicles," the
court below speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines
in June, 1947. This observation, which was made only in the resolution on the motion for
reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of
cars in the Philippines even before the war and had but recently resumed its operation in the
Philippines in 1946 under an ambitious plan to expand its operation by establishing an assembly plant
here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning
the assembly plant project but also totally ceasing to do business as an importer. Moreover, the
newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a
rumored plan that GM would abandon the assembly plant project in the Philippines. There was no
mention of the cessation of business by GM which must not be confused with the abandonment of the
assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit
in saying that the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost a
year after SM was organized.

At this juncture, it should be stated that the intention to minimize taxes, when used in the context of
fraud, must be proved to exist by clear and convincing evidence amounting to more than mere
preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to
be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs.
Commr., 43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield
Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74
F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378; National City
Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr.,
19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities:
Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain findings
of fraud upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining
Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under circumstance that belied any intention
to evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and
forbidden devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have
always been in the open, embodied in private and public documents, constantly subject to inspection
by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for
Visayas and Mindanao, it merely continued the method of distribution that it had initiated long before
GM withdrew from the Philippines.

On the other hand, if tax saving was the only justification for the organization of SM, such
justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951,
governing payment of advance sales tax by the importer based on the landed cost of the imported
article, increased by mark-ups of 25%, 50%, and 100%, depending on whether the imported article is
taxed under sections 186, 185 and 184, respectively, of the Tax Code. Under Republic Act No. 594,
the amount at which the article is sold is immaterial to the amount of the sales tax. And yet after the
passage of that Act, SM continued to exist up to the present and operates as it did many years past in
the promotion and pursuit of the business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected
"once only on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or
importer." The use of the word "original" and the express provision that the tax was collectible "once
only" evidently has made the provisions susceptible of different interpretations. In this connection, it
should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be
his taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham 17 Wall. 496,
506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr
194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all right Benry vs. Commr. 25
T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt
him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient.
Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect
position in law had been taken by the corporation there was no suppression of the facts, and a fraud
penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing
proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or
hesitancy as to the existence of fraud. He even doubted the validity of his first assessment dated
November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to
Yutivo must be related to its filing of sales tax returns of less taxes than were legally due. The
allegation of fraud, however, cannot be sustained without the showing that Yutivo, in filing said
returns, did so fully knowing that the taxes called for therein called for therein were less than what
were legally due. Considering that respondent Collector himself with the aid of his legal staff, and
after some two years of investigation and duty of investigation and study concluded in 1952 that
Yutivo's sales tax returns were correct only to reverse himself after another two years it would
seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax
returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed
in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to
the vendee, and is usually billed separately as such in the sales invoice. As pointed out by petitioner
Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could
have been easily passed off to the consumer, especially since the period covered by the assessment
was a "seller's market" due to the post-war scarcity up to late 1948, and the imposition of controls in
the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling
price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have
been due to an inadvertent accounting omission, and could hardly be considered as proof of willful
channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove
fraud. (James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The
amount involved, moreover, is extremely small inducement for Yutivo to go thru all the trouble of
organizing SM. Besides, the non-inclusion of these small arrastre charges in the sales tax returns of
Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was actually owned and controlled
by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling
the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not
disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is
completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely
related to each other either by blood or affinity, and most of its stockholders are members of the Yu
(Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders
of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth P250,000.00
appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin,
Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of
Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are respectively sons of
Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the Articles of
Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed
subscribers, but actually the said sum was advanced by Yutivo. The additional subscriptions to the
capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The payments were
made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares.
Whether a charge was to be made against the accounts of the subscribers or said subscribers were to
subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing
that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who
undertook the subscription of shares, employing the persons named or "charged" with corresponding
account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng
Poh were manifestly aware of these subscriptions, but considering that they were the principal officers
and constituted the majority of the Board of Directors of both Yutivo and SM, their subscriptions
could readily or easily be that of Yutivo's Moreover, these persons were related to death other as
brothers or first cousins. There was every reason for them to agree in order to protect their common
interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions made by various person's
but except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or
charging the accounts of said stockholders and crediting the corresponding amounts in favor of SM,
without actually transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo,
by effected by the mere unilateral act of Yutivo a accounts of the virtue of its control over the
individual persons charged, would necessarily exercise preferential rights and control directly or
indirectly, over the shares, it being the party which really undertook to pay or underwrite payment
thereof.

The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo,
so even conceding that the original subscribers were stockholders bona fide Yutivo was at all times in
control of the majority of the stock of SM and that the latter was a mere subsidiary of the former.

True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were
made to their immediate relatives, either to their respective spouses and children or sometimes
brothers or sisters. Yutivo's shares in SM were transferred to immediate relatives of persons who
constituted its controlling stockholders, directors and officers. Despite these purported changes in
stock ownership in both corporations, the Board of Directors and officers of both corporations
remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the
Yu or Young family) continued to constitute the majority in both boards. All these, as observed by the
Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and
interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into
between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also
the controlling majority of the Board of Directors of SM. At the same time the principal officers of
both corporations are identical. In addition both corporations have a common comptroller in the
person of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore
no doubt that by virtue of such control, the business, financial and management policies of both
corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All
cash assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained
thru Yutivo. Any and all receipts of cash by SM including its branches were transmitted or transferred
immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases
or other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding
disbursement vouchers and payments in relation there, the payment being made out of the cash
deposits of SM with Yutivo, if any, or in the absence thereof which occurs generally, a corresponding
charge is made against the account of SM in Yutivo's books. The payments for and charges against
SM are made by Yutivo as a matter of course and without need of any further request, the latter would
advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers
are made on Yutivo stationery and made under authority of Yutivo's corporate officers, without any
copy thereof being furnished to SM. All detailed records such as cash disbursements, such as
expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary
record thereof on the basis of information received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its branches which are
directly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to
withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations and existence
became dependent upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo
treated SM merely as its department or adjunct. For one thing, the accounting system maintained by
Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between
Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account
maintained in their respective books of accounts and indicate the dependency of SM as branch upon
Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is a branch
or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo
Manila as their "Head Office" or "Home Office" as shown by their letters of remittances or other
correspondences. These correspondences were actually received by Yutivo and the reference to
Yutivo as the head or home office is obvious from the fact that all cash collections of the SM's
branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or
stationery of Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that
arrastre conveying, and charges paid for the "operation of receiving, loading or unloading" of
imported cars and trucks on piers and wharves, were charged against SM. Overtime charges for the
unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost
thereof, were likewise charged against and treated as expenses of SM. If Yutivo were the importer,
these arrastre and overtime charges were Yutivo's expenses in importing goods and not SM's. But
since those charges were made against SM, it plainly appears that Yutivo had sole authority to
allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or
department of the former.

Proceeding to another aspect of the relation of the parties, the management fees due from SM to
Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to be
assumed that the two organizations are separate juridical entities, the corresponding receipts or
receivables should have been treated as income on the part of Yutivo. But such management fees were
recorded as "Reserve for Bonus" and were therefore a liability reserve and not an income account.
This reserve for bonus were subsequently distributed directly to and credited in favor of the
employees and directors of Yutivo, thereby clearly showing that the management fees were paid
directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all
the credit to the latter not only in the form of starting capital but also in the form of credits extended
for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses
of the latter when the capital had been exhausted. Thus, the increases in the capital stock were made
in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were
all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it
and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals
correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax
liability of Yutivo.

Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed
assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be
noted that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to
1949. The corresponding returns filed by petitioner covering the said period was made at the earliest
on October 1, as regards the third quarter of 1947, so that it cannot be claimed that the assessment was
not made within the five-year period prescribed in section 331 of the Tax Code invoked by petitioner.
The assessment, it is admitted, was withdrawn by the Collector on insufficiency of evidence, but
November 15, 1952 due to insufficiency of evidence, but the withdrawal was made subject to the
approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of
section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous assessment of
November 7, Collector countermanding the as 1950 was forwarded to the Board of Tax Appeals
through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it
back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be considered to
have been finally withdrawn. That the assessment was subsequently reiterated in the decision of
respondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In this
connection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in
relation with this case and by virtue thereof the properties of Yutivo were placed under constructive
distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows
that the assessment of November 7, 1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on
December 16, 1954, the same was assessed well within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive
period on assessment. The argument is untenable, for, as already seen, the assessment was never
finally withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax
Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is
expressly granted such authority under section 9 of Executive Order No. 401-And under section 79 (c)
of the Revised Administrative Code, he has "direct control, direction and supervision over all bureaus
and offices under his jurisdiction and may, any provision of existing law to the contrary not
withstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in
public interest."

It should here also be stated that the assessment in question was consistently protested by petitioner,
making several requests for reinvestigation thereof. Under the circumstances, petitioner may be
considered to have waived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of limitations against
the government in certain instances in which the taxpayer has taken some affirmative action
to prevent the collection of the tax within the statutory period. It is generally held that a
taxpayer is estopped to repudiate waivers of the statute of limitations upon which the
government relied. The cases frequently involve dissolved corporations. If no waiver has been
given, the cases usually show come conduct directed to a postponement of collection, such,
for example, as some variety of request to apply an overassessment. The taxpayer has
'benefited' and 'is not in a position to contest' his tax liability. A definite representation of
implied authority may be involved, and in many cases the taxpayer has received the 'benefit'
of being saved from the inconvenience, if not hardship of immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the
revenues, but generally speaking, the cases present a strong combination of equities against
the taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel."
(Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 es involving an
original assessment of more than P5,000 refers only to compromises and refunds of taxes, but not
to total withdrawal of the assessment. The contention is without merit. A careful examination of the
provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the
procedure prescribed therein is intended as a check or control upon the powers of the Collector of
Internal Revenue in respect to assessment and refunds of taxes. If it be conceded that a decision of the
Collector of Internal Revenue on partial remission of taxes is subject to review by the Secretary of
Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to
withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the
imposition of the 5% fraud surcharge. As already shown in the early part of this decision, no element
of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to
the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales
made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing
of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-
549) is in point. The petitioner Court Holding Co. was a corporation consisting of only two
stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of third husband
and wife corporation consisted of an apartment building which had been acquired for a very low price
at a judicial sale. Louis Miller, the husband, who directed the company's business, verbally agreed to
sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of $54,000.00,
payable in various installments. He received $1,000.00 as down payment. The sale of this property for
the price mentioned would have netted the corporation a handsome profit on which a large corporate
income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the
Fines got together for the execution of the document of sale, the Millers announced that their attorney
had called their attention to the large corporate tax which would have to be paid if the sale was made
by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a
resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete
liquidation and surrender of all the outstanding corporate stock." The building, which as above stated
was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold
it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously
agreed upon between the corporation and the Fines.

The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue
reported no taxable gain as having been received from the sale of its assets. The Millers, of course,
reported a long term capital gain on the exchange of their corporate stock with the corporate property.
The Commissioner of Internal Revenue contended that the liquidating dividend to stockholders had no
purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the
corporation's property was in substance a sale by the corporation itself, for which the corporation is
subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit on account
of the sale, the Commissioner of Internal Revenue, imposed a surcharge of 25% for delinquency, plus
an additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to
avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said
corporation should be liable for the assessed taxable profit thereon. The Court of Tax Appeals also
sustained the Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the
Court of Tax Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax does not
necessarily establish fraud; that it is a settled principle that a taxpayer may diminish his tax liability by
means which the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the
method by which it attempted to effect the sale in question was legally sufficient to avoid the
imposition of a tax upon it, its adoption of that methods not subject to censure; and that in taking a
position with respect to a question of law, the substance of which was disclosed by the statement
indorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the
pertinent portion of the decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report as income the
taxable profit on the real estate sale was fraudulent and with intent to evade the tax. The
petitioner filed a reply denying fraud and averring that the loss reported on its return was
correct to the best of its knowledge and belief. We think the respondent has not sustained the
burden of proving a fraudulent intent. We have concluded that the sale of the petitioner's
property was in substance a sale by the petitioner, and that the liquidating dividend to
stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax
does not necessarily establish fraud. It is a settled principle that a taxpayer may diminish his
liability by any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory
v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of
the opinion that the method by which it attempted to effect the sale in question was legally
sufficient to avoid the imposition of tax upon it, its adoption of that method is not subject to
censure. Petitioner took a position with respect to a question of law, the substance of which
was disclosed by the statement endorsed on its return. We can not say, under the record
before us, that that position was taken fraudulently. The determination of the fraud penalties
is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid
only once and on the original sales by the former and neither the latter nor SM paid taxes on their
subsequent sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer,
of the sales tax was enough as in the case of GM Consequently, in filing its return on the basis of its
sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made
a false return for the purpose of defrauding the government of its revenues which will justify the
imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax Court erred in computing the alleged
deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax
due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax on original sales
measured by "gross selling price" or "gross value in money". These terms, as interpreted by the
respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus, General
Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections
184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged,
transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the
National Internal Revenue Code, is the total amount of money or its equivalent which the
purchaser pays to the vendor to receive or get the goods. However, if a manufacturer,
producer, or importer, in fixing the gross selling price of an article sold by him has included
an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax
shall be based on the gross selling price less the amount intended to cover the tax, if the same
is billed to the purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the
tax. On sales made after he third quarter of 1939, the amount intended to cover the sales
tax must be billed to the purchaser as separate items in the, invoices in order that the
reduction thereof from the gross ailing price may be allowed in the computation of the
merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the
invoice, the amounts intended to cover the sales tax shall be considered as part of the gross
selling price of the articles sold, and deductions thereof will not be allowed, (Cited in
Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes
did not form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously
billed the sales tax separately in its sales invoices to SM General Circulars Nos. 431 and 440 should
be deemed to have been complied. Respondent Collector's method of computation, as opined by
Judge Nable in the decision complained of

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the
adoption of the procedure would in certain cases elevate the bracket under which the tax is
based. The late payment is already penalized, thru the imposition of surcharges, by adopting
the theory of the Collector, we will be creating an additional penalty not contemplated by
law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and
440 the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and
for fraud, would amount only to P820,549.91 as shown in the following computation:

Sales Taxes Due Total Gross

Gross Sales of
Rates of and Computed Selling Price
Vehicles Exclusive
Sales Tax under Gen. Cir Charged to the
of Sales Tax
Nos. 431 & 400 Public
5% P11,912,219.57 P595,610.98 P12,507,83055
7% 909,559.50 63,669.16 973,228.66
10% 2,618,695.28 261,869.53 2,880,564.81
15% 3,602,397.65 540,359.65 4,142,757.30
 20% 267,150.50 53,430.10 320,580.60
30% 837,146.97 251,114.09 1,088,291.06
50% 74,244.30 37,122.16 111,366.46
75% 8,000.00 6,000.00 14,000.00
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by

Yutivo 988,655.76
Deficiency Tax still due P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals,
Yutivo would pay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in
promulgating judgment for the affirmance of the decision of respondent Collector by less than the
statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic
Act No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax
Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to
promulgate decision thereof. . . . " It is on record that the present case was heard by two judges of the
lower court. And while Judge Nable expressed his opinion on the issue of whether or not the amount
of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax
due from the petitioner, the opinion, apparently, is merely an expression of his general or "private
sentiment" on the particular issue, for he concurred the dispositive part of the decision. At any rate,
assuming that there is no valid decision for lack of concurrence of two judges, the case was submitted
for decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases
brought before said court hall be decided within 30 days after submission thereof. "If no decision is
rendered by the Court within thirty days from the date a case is submitted for decision, the party
adversely affected by said ruling, order or decision, may file with said Court a notice of his intention
to appeal to the Supreme Court, and if no decision has as yet been rendered by the Court, the
aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or
decision, notwithstanding the foregoing provisions of this section." The case having been brought
before us on appeal, the question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby
modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25%
surcharge thereon for late payment.

So ordered without costs.

Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.
Padilla, J., took no part.
 EN BANC

[G.R. No. 144707. July 13, 2004]

PEOPLE OF THE PHILIPPINES, petitioner, vs. LUCIO C. TAN, FORTUNE TOBACCO

CORPORATION, ANTONIO P. ABAYA, HARRY C. TAN, CARMEN KHAO TAN,
FLORENCIO C. SANTOS, SALVADOR F. MISON, ROXAS CHUA, MARIANO
TANENGLIAN and JUANITA TAN LEE (c/o Fortune Tobacco Corporation, Parang,
Marikina City).
TOWNSMAN COMMERCIAL, INC., WILLIAM YU, LETICIA LIM, GLORIA LOPEZ,
ROBERT TANTAMPO, JOSE TIU, FELIPE LOY, LUIS SEE (c/o 4th Floor,
Allied Bank Center, Ayala Avenue, Makati City)
LANDMARK SALES AND MARKETING INC., ROLANDO CHUA, HONORINA TAN,
MILLIE TANTAMCO, HENRY WECHEE, JESUS LIM, TEODORO TAN,
ANTONIO APOSTOL, DOMINGO TENG (c/o 4th Floor, Allied Bank Center, Ayala
Avenue, Makati City)
CRIMSON CROKER DISTRIBUTORS, INC., CANDELARIO LI, TEODORO TAN,
ERLINDA CRUZ, CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG,
WILFREDO MACROHON (4th Floor, Allied Bank Center, Ayala Avenue, Makati City)
DAGUPAN COMBINED COMMODITIES, INC., NEMESIO TAN, QUINTIN CALALEJA,
YOLANDA MANALILI, CARLOS CHAN, ROMEO TAN, JOHN UY, VICENTE CO
(4th Floor, Allied Bank Center, Ayala Avenue, Makati City)
FIRST UNION TRADING CORPORATION, HENRY CHOA, LOPE LIM GUAN, EMILIO
TAN, FELIPE TAN SHE CHUAN, ANDRES CO (4th Floor, Allied Bank Center, Ayala
Avenue, Makati City)
CARLSBURG & SONS, INC., FELIPE KEE, HENRY GO CO, NARCISO GO, ADOLFO
LIM, MAXIMO TAN, CO SHU, DANIEL YAO (c/o 112 Aguirre
Street, Legaspi Village, Makati City)
OMAR ALI DISTRIBUTORS, INC., GABRIEL QUIENTELLA, NELSON TE, EMILIO GO,
EDWIN LEE, CESAR LEDESMA, JR., JAO CHEP SENG (c/o 112 Aguirre Street,
Legaspi Village, Makati City
ORIEL & CO., INC., FRANCISCO J. ORIEL, JR., BENJAMIN T. HONG, PHILIP P. JAO,
JOSE P. YU and EDISON M. QUE (c/o 112 Aguirre Street, Legaspi Village, Makati
City)
MT. MATUTUM MARKETING CORPORATION, ANTONIO TIU, FELIPE LOY, ROSARIO
LESTOR, WILFREDO ONG, ROLANDO CHUA, BONIFACIO CHUA, GO CHING
CHUAN (4th Floor, Becogan Bldg., 112 Aguirre Street, Legaspi Village, Makati
City), respondents.

DECISION
AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court which seeks to set
aside the Decision[1] of the Court of Appeals dated August 29, 2000 in C.A.-G.R. SP No. 56077,
which dismissed petitioners appeal from the Orders of the Regional Trial Court of Marikina City,
Branch 273 (RTC-Marikina) dated August 25, 1999[2] and October 13, 1999[3] in SCA Case No. 95-
340-MK. RTC-Marikina dismissed the petition for certiorari filed by the Department of Justice Panel
of State Prosecutors, for being filed out of time.
The petition for certiorari before the RTC sought to annul and set aside (a) the Order dated
March 22, 1999[4] of the Metropolitan Trial Court, Branch 75, Marikina City (MeTC), dismissing the
criminal informations filed by the DOJ Panel against herein respondents; and (b) the Order dated May
17, 1999[5] of said MeTC denying the DOJ Panels Motion for Reconsideration.

ANTECEDENT FACTS

On September 7, 1993, the Commissioner of Internal Revenue filed a Complaint with the
Department of Justice (DOJ), charging Fortune Tobacco Corporation (hereafter Fortune), its corporate
officers, nine (9) other corporations and their respective corporate officers, with fraudulent tax
evasion for supposed non-payment of the correct ad valorem, income and value-added taxes for the
year 1992.
The complaint was docketed as I.S. No. 93-508 and referred to the DOJ Task Force on Revenue
Cases.
The next day, on September 8, 1993, the DOJ Task Force, through a designated panel of
prosecutors (DOJ Panel) issued a Subpoena directing respondents to submit their counter-affidavits
not later than September 20, 1993.
On October 15, 1993, Fortune filed a Verified Motion to Dismiss; Alternatively Motion to
Suspend.[6]
At the scheduled preliminary investigation on October 15, 1993, the DOJ Panel denied the
motion to dismiss and treated the same as respondents counter-affidavits.
On October 26, 1993, Commissioner Liwayway Vinzons-Chato filed with the DOJ, the
2nd Criminal Complaint against respondents, alleging the same acts of tax evasion, this time for
taxable year 1991. The same was docketed as I.S. No. 93-584.
On December 21, 1993, the BIR Commissioner filed the 3rd Criminal Complaint against
respondents, this time with the Office of the City Prosecutor of Quezon City, alleging tax evasion for
taxable year 1990. The complaint was docketed as I.S. No. 93-17942.
On January 4, 1994, respondents filed a Petition for Certiorari and Prohibition with the Regional
Trial Court of Quezon City (RTC-Quezon City), Branch 88, with prayer for preliminary injunction,
which was docketed as Civil Case No. Q-94-18790.
On January 25, 1994, RTC-Quezon City granted respondents prayer and issued a writ of
preliminary injunction, enjoining the conduct of further proceedings before the DOJ Panel in I.S. No.
93-508.
On January 26, 1994 and January 28, 1994, respondents filed two Supplemental Petitions
before RTC-Quezon City, also seeking to stay the preliminary investigations of the two other
complaints before the DOJ Panel and the Quezon City Prosecutors Office, respectively.
On February 14, 1994, RTC-Quezon City issued an Order granting respondents supplemental
petitions, thereby also enjoining the preliminary investigations in the two other complaints, I.S. No.
93-584 and I.S. No. 93-17942.
Thus, preliminary investigations for the following three complaints were enjoined:

I.S. No. 93-508 DOJ Task Force Taxable Year 1992

I.S. No. 93-584 DOJ Task Force Taxable Year 1991

I.S. No. 93-17942 Quezon City Prosecutors Office Taxable Year 1990

G.R. No. 119322

Subsequently,[7] the Commissioner of Internal Revenue filed a Petition for Review before this
Court, docketed as G.R. No. 119322.
In a Decision dated June 4, 1996,[8] this Court[9] pronounced:

xxx

The trial court and the Court of Appeals maintained that at that stage of the preliminary investigation,
where the complaint and the accompanying affidavits and supporting documents did not show any
violation of the Tax Code providing penal sanctions, the prosecutors should have dismissed the
complaint outright because of total lack of evidence, instead of requiring private respondents to
submit their counter affidavits under Section 3(b) of Rule 112.

We believe that the trial court in issuing its questioned orders, which are interlocutory in nature,
committed no grave abuse of discretion amounting to lack of jurisdiction. There are factual and legal
bases for the assailed orders. On the other hand, the burden is upon the petitioners to demonstrate that
the questioned orders constitute a whimsical and capricious exercise of judgment, which they have
not. For certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of
law or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise
of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by
timely appeal and not by a special civil action of certiorari. Consequently, the Regional Trial Court
acted correctly and judiciously, and as demanded by the facts and the law, in issuing the orders
granting the writs of preliminary injunction, in denying petitioners motion to dismiss and in admitting
the supplemental petitions. What petitioners should have done was to file an answer to the petition
filed in the trial court, proceed to the hearing and appeal the decision of the court if adverse to them.

WHEREFORE, the instant petition is hereby DISMISSED.

SO ORDERED.

On a subsequent motion for reconsideration, however, this Court En Banc issued a

Resolution[10] dated February 6, 1997, thus:

The Court further Resolved to DENY the motion for reconsideration of the decision dated 4 June
1996, the basic issues raised therein having already been passed upon in said decision and there being
no substantial arguments to support said motion.

However, in order to avoid undue delay in the disposition of Civil Case No. Q-94-18790 and the
preliminary investigation of the complaints against private respondents, the Court Resolved to:

1. REMAND Civil Case No. Q-94-18790 to the Regional Trial Court, Branch 88, Quezon City;

2. SET ASIDE the orders of the panel of prosecutors declaring private respondents Motion to
Dismiss, Alternatively, Motion to Suspend as private respondents counter-affidavits, and denying
their motions to require petitioner Commissioner of Internal Revenue to submit documents and to
inhibit the members of the panel of prosecutors;
3. DIRECT the Secretary of Justice to designate as early as possible, a new panel of prosecutors to
investigate the complaints against private respondents;

4. ORDER the new panel of prosecutors designated by the Secretary of Justice to grant private
respondents motion for the submission by petitioner Commissioner of Internal Revenue to private
respondents, thru their counsel of record, of the documents supporting the complaints, and to give
private respondents reasonable time to examine the documents and to submit their counter-affidavits;

5. ORDER the preliminary investigation to proceed with all reasonable dispatch; and

6. DIRECT respondent Judge Tirso Velasco to dismiss Civil Case No. Q-94-18790 on the ground that
it has become moot in light of the foregoing dispositions.[11] (Emphasis ours)

FACTS SUBSEQUENT TO THE G.R. NO. 119322 RESOLUTION

In compliance with this Courts resolution, a New Panel (New DOJ Panel) of prosecutors was
created.[12] The BIR was directed to furnish respondents the documents supporting the complaints and
to give respondents time to examine the same and, thereafter, for respondents to submit their counter-
affidavits.
On March 20, 1998, the BIR submitted a Manifestation/ Compliance, submitting the required
documents with the explanation that it did not produce the other documents (i.e. the Daily
Manufacturers Sworn Statements of other cigarette companies) because to do so would be
inappropriate as the same do not, in any manner, bear any relevance to the preliminary investigation
proceedings against Fortune.[13]
On April 13, 1998, respondents filed a Counter-Manifestation With Motion to produce allegedly
lacking or missing documents.
The BIR filed a Comment/Manifestation, reiterating its stand.
Respondents then filed a Motion to Resolve its Motion to Dismiss previously filed with the Old
DOJ Panel, prior to the Decision and Resolution in G.R. No. 119322.
Subsequently, on July 24, 1998, the New DOJ Panel ruled that: 1) There was substantial
compliance by the BIR with the order to produce documents; 2) on the basis of the evidence
submitted by the BIR, the panel finds sufficient ground to proceed with the preliminary investigation
of the cases; and 3) in view of the foregoing findings, the respondents were directed to file their
counter-affidavits within 15 days from receipt of the order.
Instead of filing counter-affidavits, the respondents filed a Supplement[14] to its previous Verified
Motion to Dismiss; Alternatively Motion to Suspend. Thus, the 15-day period to file counter-
affidavits was deemed by the New DOJ Panel to have lapsed, hence, the case was submitted for
resolution.
Respondents, thereafter, filed, with the New DOJ Panel, motions to suspend the ongoing
preliminary investigation, on the ground that the BIR Legal Service Appellate Division has given due
course to Fortunes request for reconsideration/protest of the deficiency tax assessment on Fortunes
1992 tax liabilities.
On November 19, 1998, the New DOJ Panel issued its Resolution[15] stating that as to the Urgent
Motion to Suspend, the same is denied since the preliminary investigation was not on the issue of the
correctness of the computation of Fortunes tax liabilities and assessment but the determination of
whether the acts complained of violate certain provisions of the Tax Code.[16]
 The New DOJ Panel resolved the main complaints in favor of the BIR. It found reasonable
ground to believe that respondents were probably guilty thereof and should be held for trial.

PROCEEDINGS BEFORE THE MeTC

On December 1, 1998, Informations[17] for nine (9) counts of tax evasion (Taxable Years 1990,
1991 and 1992) were filed by the New DOJ Panel with the Metropolitan Trial Court
(MeTC), Marikina City, Branch 75, docketed as Criminal Cases Nos. 98-38181 to 98-38189. The
indictments were signed and certified by the New DOJ Panel of state prosecutors.[18]
Said Informations read, as follows:

INFORMATION

The undersigned State Prosecutors of the department of Justice, hereby accuse:

a) LUCIO TAN, Chairman; ANTONIO P. ABAYA, President and General Manager; HARRY C.
TAN, CARMEN KHAO TAN and FLORENCIO C. SANTOS, Directors; CHUNG POE KEE,
Director/Executive Vice-President; ROXAS CHUA, Vice-President/Finance; MARIANO
TANENGLIAN, Director/Treasurer; JUANITA TAN LEE, Corporate Secretary; and DAVID R.
CORTEZ, External Auditor, all being corporate officers of FORTUNE TOBACCO CORPORATION
(FTC);

b) WILLIAM YU, Director/President; LETICIA LIM, Treasurer; GLORIA LOPEZ, Corporate

Secretary; ROBERT TANTAMCO, JOSE TIU and FELIPE LOY, Directors, all being corporate
officers of TOWNSMAN COMMERCIAL, INC., a dummy corporation of FTC;

c) ROLANDO CHUA, President; HONORINA TAN, Treasurer; MILLIE TANTAMCO, Corporate

Secretary; HENRY WEECHEE, JESUS LIM, TEODORO TAN, ANTONIO APOSTOL, and
DOMINGO TENG, Directors, all being corporate officers of LANDMARK SALES and
MARKETING, INC., a dummy corporation of FTC;

d) CANDELARIA LI, Director/President; TEODORO TAN, Treasurer; ERLINDA CRUZ, Corporate

Secretary; CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG and WOLFREDO
MACROHON, Directors, all being corporate officers of CRIMSON CROKER DISTRIBUTORS,
INC., a dummy corporation of FTC;

e) NEMESIO TAN, President/Director; QUINTIN CALLEJA, Treasurer; YOLANDA MANALILI,

Corporate Secretary; CARLOS CHAN, ROMEO TAN, JOHN UY, and VICENTE CO, Directors; all
being corporate officers of DAGUPAN COMBINED COMMODITIES, INC., a dummy corporation
of FTC;

f) ANTONIO TIU, Director/President; FELIPE LOY, Treasurer; ROSARIO LESTOR, Corporate

Secretary; WILFREDO ONG, ROLANDO CHUA, BONIFACIO CHUA, and GO CHING CHUAN,
Directors; all being corporate officers of MT. MATUTUM MARKETING CORPORATION, a
dummy corporation of FTC;

g) HENRY CHAO, Director/President; LOPE LIM GUAN, Director/Treasurer; EMILIO TAN,

Director/Corporate Secretary; FELIPE TAN SHE CHUAN and ANDRES CO, Directors, all corporate
officers of FIRST UNION TRADING CORPORATION, a dummy corporation of FTC;
h) FELIPE KEE, Director/President; HENRY GO CO, Treasurer; NARCISO GO; Secretary;
ADOLFO LIM, MAXIMO TAN, CO SHU, and DANIEL YAO, Directors; all being corporate
officers of CARLSBERG and SONS, INC., a dummy corporation of FTC;

i) GABRIEL QUINTELA, President; NELSON TE; Director/Treasurer; EMILIO GO,

Director/Corporate Secretary; EDWIN LEE, CESAR LEDESMA, JR., and JAO CHENG SENG,
Directors; all being corporate officers of OMAR ALI DISTRIBUTORS, INC., a dummy corporation
of FTC;

j) FRANCISCO J, ORIEL, JR., BENJAMIN T. HONG, PHILIP P. JAO, JOSE P. YU and EDISON
M. QUE, all corporate directors of ORIEL and CO., INC., a dummy corporation of FTC.

for violation of Section 127[b] (now Section 130[b]), in relation to Section 253 (now Section 254) and
Section 252[b] (now Section 253[b]) and Section 255 (now Section 256), of the National Internal
Revenue Code (NIRC), as amended, committed as follows:

That during the taxable year 1991, in Marikina City, Metro Manila, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, as the respective officers of Fortune
Tobacco Corporation (FTC) and its nine (9) dummy corporations, conspiring with, and mutually
helping each other, with willful intent to evade and defeat payment of the tax due the government, did
then and there, unlawfully, feloniously, file with the Bureau of Internal Revenue (BIR) a false and
fraudulent ad valorem tax returns for the taxable year 1991, by then and there purposely and
maliciously creating, organizing and incorporating the said dummy corporations and employing
individual ghost buyers to effect/perpetrate fictitious and simulated sales of FTCs cigarette products at
a price higher than that of the wholesale price registered with the BIR, thereby facilitating the
commission of tax evasion by willfully suppressing the true and accurate sales of FTC and as a
consequence of which the FTC, through the above-named accused, fraudulently declared and filed
with the BIR for ad valorem tax purposes gross sales of P10,879,999,950.00 and paid only the ad
valorem tax in the amount of P4,457,692,647.05 instead of the true aggregate ad valorem tax
of P7,154,036,171.00 if the true and accurate gross sales subject to ad valorem tax is declared, thereby
defrauding and causing damage and prejudice to the government in undeclared ad valorem taxes in
the amount of P6,370,111,575.34 inclusive of increments.

CONTRARY TO LAW.

Manila for Marikina City, Philippines, November 19, 1998.

INFORMATION

The undersigned State Prosecutors of the department of Justice, hereby accuse:

a) LUCIO TAN, Chairman; ANTONIO P. ABAYA, President and General Manager; HARRY C.
TAN, CARMEN KHAO TAN and FLORENCIO C. SANTOS, Directors; CHUNG POE KEE,
Director/Executive Vice-President; ROXAS CHUA, Vice-President/Finance; MARIANO
TANENGLIAN, Director/Treasurer; JUANITA TAN LEE, Corporate Secretary; and DAVID R.
CORTEZ, External Auditor, all being corporate officers of FORTUNE TOBACCO CORPORATION
(FTC);

b) WILLIAM YU, Director/President; LETICIA LIM, Treasurer; GLORIA LOPEZ, Corporate

Secretary; ROBERT TANTAMCO, JOSE TIU and FELIPE LOY, Directors, all being corporate
officers of TOWNSMAN COMMERCIAL, INC., a dummy corporation of FTC;
c) ROLANDO CHUA, President; HONORINA TAN, Treasurer; MILLIE TANTAMCO, Corporate
Secretary; HENRY WEECHEE, JESUS LIM, TEODORO TAN, ANTONIO APOSTOL, and
DOMINGO TENG, Directors, all being corporate officers of LANDMARK SALES and
MARKETING, INC., a dummy corporation of FTC;

d) CANDELARIA LI, Director/President; TEODORO TAN, Treasurer; ERLINDA CRUZ, Corporate

Secretary; CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG and WOLFREDO
MACROHON, Directors, all being corporate officers of CRIMSON CROKER DISTRIBUTORS,
INC., a dummy corporation of FTC;

e) NEMESIO TAN, President/Director; QUINTIN CALLEJA, Treasurer; YOLANDA MANALILI,

Corporate Secretary; CARLOS CHAN, ROMEO TAN, JOHN UY, and VICENTE CO, Directors; all
being corporate officers of DAGUPAN COMBINED COMMODITIES, INC., a dummy corporation
of FTC;

f) ANTONIO TIU, Director/President; FELIPE LOY, Treasurer; ROSARIO LESTOR, Corporate

Secretary; WILFREDO ONG, ROLANDO CHUA, BONIFACIO CHUA, and GO CHING CHUAN,
Directors; all being corporate officers of MT. MATUTUM MARKETING CORPORATION, a
dummy corporation of FTC;

g) HENRY CHAO, Director/President; LOPE LIM GUAN, Director/Treasurer; EMILIO TAN,

Director/Corporate Secretary; FELIPE TAN SHE CHUAN and ANDRES CO, Directors, all corporate
officers of FIRST UNION TRADING CORPORATION, a dummy corporation of FTC;

h) FELIPE KEE, Director/President; HENRY GO CO, Treasurer; NARCISO GO; Secretary;

ADOLFO LIM, MAXIMO TAN, CO SHU, and DANIEL YAO, Directors; all being corporate
officers of CARLSBERG and SONS, INC., a dummy corporation of FTC;

i) GABRIEL QUINTELA, President; NELSON TE; Director/Treasurer; EMILIO GO,

Director/Corporate Secretary; EDWIN LEE, CESAR LEDESMA, JR., and JAO CHENG SENG,
Directors; all being corporate officers of OMAR ALI DISTRIBUTORS, INC., a dummy corporation
of FTC;

j) FRANCISCO J, ORIEL, JR., BENJAMIN T. HONG, PHILIP P. JAO, JOSE P. YU and EDISON
M. QUE, all corporate directors of ORIEL and CO., INC., a dummy corporation of FTC.

for violation of Section 127[b] (now Section 130[b]), in relation to Section 253 (now Section 254) and
Section 252[b] (now Section 253[b]) and Section 255 (now Section 256), of the National Internal
Revenue Code (NIRC), as amended, committed as follows:

That during the taxable year 1990, in Marikina City, Metro Manila, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, as the respective officers of Fortune
Tobacco Corporation (FTC) and its nine (9) dummy corporations, conspiring with, and mutually
helping each other, with willful intent to evade and defeat payment of the tax due the government, did
then and there, unlawfully, feloniously, file with the Bureau of Internal Revenue (BIR) a false and
fraudulent ad valorem tax returns for the taxable year 1990, by then and there purposely and
maliciously creating, organizing and incorporating the said dummy corporations and employing
individual ghost buyers to effect/perpetrate fictitious and simulated sales of FTCs cigarette products at
a price higher than that of the wholesale price registered with the BIR, thereby facilitating the
commission of tax evasion by willfully suppressing the true and accurate sales of FTC and as a
consequence of which the FTC, through the above-named accused, fraudulently declared and filed
with the BIR for ad valorem tax purposes gross sales of P10,581,522,160.00 and paid only the ad
valorem tax in the amount of P3,806,272,068.75 instead of the true aggregate ad valorem tax
of P6,574,331,124.35 if the true and accurate gross sales subject to ad valorem tax is declared, thereby
defrauding and causing damage and prejudice to the government in undeclared ad valorem taxes in
the amount of P7,508,360,188.31 inclusive of increments.

CONTRARY TO LAW.

Manila for Marikina City, Philippines, November 19, 1998.

INFORMATION

The undersigned State Prosecutors of the department of Justice, hereby accuse:

a) LUCIO TAN, Chairman; ANTONIO P. ABAYA, President and General Manager; HARRY C.
TAN, CARMEN KHAO TAN and FLORENCIO C. SANTOS, Directors; CHUNG POE KEE,
Director/Executive Vice-President; ROXAS CHUA, Vice-President/Finance; MARIANO
TANENGLIAN, Director/Treasurer; JUANITA TAN LEE, Corporate Secretary; and DAVID R.
CORTEZ, External Auditor, all being corporate officers of FORTUNE TOBACCO CORPORATION
(FTC);

b) WILLIAM YU, Director/President; LETICIA LIM, Treasurer; GLORIA LOPEZ, Corporate

Secretary; ROBERT TANTAMCO, JOSE TIU and FELIPE LOY, Directors, all being corporate
officers of TOWNSMAN COMMERCIAL, INC., a dummy corporation of FTC;

c) ROLANDO CHUA, President; HONORINA TAN, Treasurer; MILLIE TANTAMCO, Corporate

Secretary; HENRY WEECHEE, JESUS LIM, TEODORO TAN, ANTONIO APOSTOL, and
DOMINGO TENG, Directors, all being corporate officers of LANDMARK SALES and
MARKETING, INC., a dummy corporation of FTC;

d) CANDELARIA LI, Director/President; TEODORO TAN, Treasurer; ERLINDA CRUZ, Corporate

Secretary; CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG and WOLFREDO
MACROHON, Directors, all being corporate officers of CRIMSON CROKER DISTRIBUTORS,
INC., a dummy corporation of FTC;

e) NEMESIO TAN, President/Director; QUINTIN CALLEJA, Treasurer; YOLANDA MANALILI,

Corporate Secretary; CARLOS CHAN, ROMEO TAN, JOHN UY, and VICENTE CO, Directors; all
being corporate officers of DAGUPAN COMBINED COMMODITIES, INC., a dummy corporation
of FTC;

f) ANTONIO TIU, Director/President; FELIPE LOY, Treasurer; ROSARIO LESTOR, Corporate

Secretary; WILFREDO ONG, ROLANDO CHUA, BONIFACIO CHUA, and GO CHING CHUAN,
Directors; all being corporate officers of MT. MATUTUM MARKETING CORPORATION, a
dummy corporation of FTC;

g) HENRY CHAO, Director/President; LOPE LIM GUAN, Director/Treasurer; EMILIO TAN,

Director/Corporate Secretary; FELIPE TAN SHE CHUAN and ANDRES CO, Directors, all corporate
officers of FIRST UNION TRADING CORPORATION, a dummy corporation of FTC;

h) FELIPE KEE, Director/President; HENRY GO CO, Treasurer; NARCISO GO; Secretary;

ADOLFO LIM, MAXIMO TAN, CO SHU, and DANIEL YAO, Directors; all being corporate
officers of CARLSBERG and SONS, INC., a dummy corporation of FTC;

i) GABRIEL QUINTELA, President; NELSON TE; Director/Treasurer; EMILIO GO,

Director/Corporate Secretary; EDWIN LEE, CESAR LEDESMA, JR., and JAO CHENG SENG,
Directors; all being corporate officers of OMAR ALI DISTRIBUTORS, INC., a dummy corporation
of FTC;

j) FRANCISCO J, ORIEL, JR., BENJAMIN T. HONG, PHILIP P. JAO, JOSE P. YU and EDISON
M. QUE, all corporate directors of ORIEL and CO., INC., a dummy corporation of FTC.

for violation of Section 127[b] (now Section 130[b]), in relation to Section 253 (now Section 254) and
Section 252[b] (now Section 253[b]) and Section 255 (now Section 256), of the National Internal
Revenue Code (NIRC), as amended, committed as follows:

That during the taxable year 1992, in Marikina City, Metro Manila, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, as the respective officers of Fortune
Tobacco Corporation (FTC) and its nine (9) dummy corporations, conspiring with, and mutually
helping each other, with willful intent to evade and defeat payment of the tax due the government, did
then and there, unlawfully, feloniously, file with the Bureau of Internal Revenue (BIR) a false and
fraudulent ad valorem tax returns for the taxable year 1992, by then and there purposely and
maliciously creating, organizing and incorporating the said dummy corporations and employing
individual ghost buyers to effect/perpetrate fictitious and simulated sales of FTCs cigarette products at
a price higher than that of the wholesale price registered with the BIR, thereby facilitating the
commission of tax evasion by willfully suppressing the true and accurate sales of FTC and as a
consequence of which the FTC, through the above-named accused, fraudulently declared and filed
with the BIR for ad valorem tax purposes gross sales of P11,736,658,580.00 and paid only the ad
valorem tax in the amount of P4,805,254,523.00 instead of the true aggregate ad valorem tax
of P7,725,832,581.75 if the true and accurate gross sales subject to ad valorem tax is declared, thereby
defrauding and causing damage and prejudice to the government in undeclared ad valorem taxes in
the amount of P5,792,479,816.24 inclusive of increments.

CONTRARY TO LAW.

Manila for Marikina City, Philippines, November 19, 1998.

On December 3, 1998, respondents filed an Urgent Opposition to Issuance of Warrants of

Arrest.[19] They insist that: (1) Neither law nor evidence justified the filing of the Informations;[20] (2)
there was before the New DOJ Panel thousands of documents submitted by the Commissioner of
Internal Revenue which negated unequivocally the factual basis of the BIR complaint; [21] (3) there
was no evidence of probable cause before the court;[22] (4) the New DOJ Panel should, have acted first
on their Motion to Dismiss dated October 14, 1993 and supplemented on July 28, 1998, before
proceeding with the preliminary investigation.[23]
In addition, respondents argued that the filing of the Informations was without the approval of
the Commissioner of Internal Revenue, a fatal defect, per Section 220, of the National Internal
Revenue Code of 1997.[24]
On December 10, 1998, the New DOJ Panel countered by filing a Manifestation with Motion for
the Immediate Issuance of Warrants of Arrest.
On December 18, 1998, a Manifestation and Motion[25] was filed before the MeTC by
officers[26] of the Litigation and Prosecution Division of the BIR, verified by then incumbent BIR
Commissioner Beethoven L. Rualo, praying for the withdrawal of the Informations, stating:

The legal officers of the Bureau of Internal Revenue, particularly the Chief, Litigation & Prosecution
Division and the Assistant Chief for Prosecution, conducted a reevaluation of the criminal action
subject of the cases under consideration on the basis of a recommendation contained in the
memorandum report dated November 11, 1998 of a panel of hearing officers of the Appellate
Division duly approved by the Commissioner of Internal Revenue in connection with the
administrative hearing of the protested assessment issued by the Bureau of Internal Revenue against
Fortune Tobacco Corporation for taxable year 1992, certified true copy of the memorandum report is
attached as Annex A and is an integral part of this manifestation and motion.

The aforesaid recommendation states:

1. x x x x x x x x x

2. That the Litigation and Prosecution Division, Legal Service, this Bureau, be directed to conduct a
thorough study whether there is still wisdom of proceeding with the criminal complaint.

As a result, the aforementioned officials of the Bureau have recommended the deinstitutionalization
or withdrawal of the criminal complaint filed by then Commissioner Liwayway Vinzons-Chato, a
certified true copy of the memorandum recommendation is attached hereto as Annex B and is an
integral part of this Manifestation and Motion.

This memorandum recommendation has been approved by the Commissioner of Internal Revenue.

On January 15, 1999, MeTC Presiding Judge Alex E. Ruiz ordered the filing of parties
memoranda.
On March 22, 1999, Judge Ruiz issued an Order[27] dismissing the criminal cases. Citing the
provisions of Section 220 of the Tax Reform Act of 1997, Republic Act No. 8424, the trial court
ruled:

The Court agrees with the Bureau of Internal Revenue that in view of the aforecited Section of the
Tax Reform Act of 1997, a substantive law and the fact that it is evident that the Commissioner of
Internal Revenue has not approved the filing of the instant cases, this Court, thus, has no other
recourse but to obey the law and dismiss the cases at bar.

xxx

According to the Memorandum dated February 11, 1999 filed by the Bureau of Internal Revenue in
connection with its Manifestation and Motion, the Bureau of Internal Revenue in fact conducted
several hearings on the tax liability of the accused relative to the protest filed by Fortune Tobacco
Corporation regarding its tax liabilities connected with the filing of the instant cases against Lucio C.
Tan et al., and that thereafter the Bureau of Internal Revenue found no fraud committed by the
Fortune Tobacco Corporation and, that, therefore, there is no legal justification to further pursue the
three tax evasion cases against Lucio C. Tan, et al.

This finding of non-fraud was approved by the Commissioner of Internal Revenue.

Again, in view of the Bureau of Internal Revenues finding that Fortune Tobacco Corporation has not
committed any tax violation relative to these cases now before this Court by the panel of state
prosecutors, this Court, xxx has, therefore, no other recourse but to dismiss these cases also for lack of
probable cause as found by the Bureau of Internal Revenue itself.[28]

On April 7, 1999, one day before the lapse of the 15-day period to file a Motion for
Reconsideration, the New DOJ Panel filed its Motion for Reconsideration.
On May 17, 1999,[29] the motion for reconsideration was denied by the MeTC. A copy of the
order denying reconsideration was received by the New DOJ Panel on MAY 18, 1999.
PROCEEDINGS BEFORE THE RTC

On July 14, 1999, the New Panel filed a Petition for Certiorari before
the Regional Trial Court of Marikina City, Branch 273 (RTC-Marikina), seeking to nullify the MeTC
Orders dated March 22, 1999 and May 17, 1999, alleging grave abuse of discretion on the part of the
court a quo.
On August 25, 1999, RTC-Marikina Presiding Judge Olga Palanca Enriquez dismissed the
petition, for being filed out of time, thus:

After examining the petition, the Court finds that the petition was filed eleven (11) days late, in
violation of Section 4, Rule 65 of the 1997 Rules of Criminal Procedure, as amended by the resolution
of the Supreme Court En Banc dated July 21, 1998, Bar Matter No. 803, which provides as follows:

xxx

The Panel of Prosecutors of the Department of Justice (DOJ Panel) admittedly received a copy of the
assailed Order dated March 22, 1999 on March 24, 1999 and filed a Motion for Reconsideration on
April 7, 1999. Thus, a period of fourteen (14) days had elapsed.

According to Section 4 of Rule 65, as amended, this period of fourteen (14) days should be deducted
from the total period of sixty (60) days prescribed therein. Hence, the DOJ Panel had the remaining
period of forty-six (46) days within which to file the petition for certiorari. The DOJ Panel received a
copy of the Order dated May 17, 1999 which denied its Motion for Reconsideration on May 18,
1999. It had until July 3, 1999 within which to file the petition for certiorari, and not July 17, 1999, as
it claims. Apparently, the DOJ Panel overlooked the aforequoted amendment to Section 4 of Rule 65,
thus arriving at the wrong premise that it had the total period of sixty (60) days from notice of denial
of the motion for reconsideration, and not the remaining period only, within which to file the petition
for certiorari.

It was only on July 14, 1999, eleven days after the lapse of its last day within which to file the petition
for certiorari that the DOJ Panel filed the present petition.

Clearly, therefore, the present petition was filed eleven (11) days late.

WHEREFORE, the instant petition for certiorari is hereby DENIED DUE COURSE and is thus
DISMISSED.

SO ORDERED.

On August 27, 1999, the New Panel filed a Motion for Reconsideration. On September 2, 1999, a
Supplement to the Motion for Reconsideration was also filed.
Respondents filed their Comment to the Motion for Reconsideration. Oral arguments were
conducted and Memoranda thereafter submitted.
On October 13, 1999, the Motion for Reconsideration was denied.
On October 18, 1999, the DOJ endorsed the case to the Office of the Solicitor General (OSG).

PROCEEDINGS BEFORE THE COURT OF APPEALS

 On October 20, 1999, the OSG appealed the RTC-Marikina Orders dated August 28,
1999 and October 13, 1999, to the Court of Appeals.
On December 13, 1999 the Court of Appeals ordered the parties to file Memoranda.
On August 29, 2000, the Court of Appeals dismissed the petition for lack of merit. A copy of the
Court of Appeals decision was received by the OSG on September 6, 2000.

THE PRESENT PETITION

The People of the Philippines, through the Office of the Solicitor General, filed this Petition for
Review on Certiorari, as earlier stated, submitting the following assignment of errors:
I. THE COURT A QUO SERIOUSLY ERRED WHEN IT AFFIRMED THE MeTCS
DISMISSAL OF THE CRIMINAL CASES AGAINST RESPONDENTS WITHOUT
THEIR HAVING BEEN PLACED FIRST UNDER THE CUSTODY OF THE LAW.
II. THE COURT A QUO GROSSLY ERRED WHEN IT SANCTIONED THE MeTCS
ACT OF GIVING THE BIR, A MERE WITNESS TO THE CASE, THE
PREROGATIVE TO CONTROL AND CAUSE THE DISMISSAL OF THE CASES,
THE CRIMINAL ASPECTS OF WHICH THE BIR HAD ITSELF [E]NDORSED TO
THE DOJ FOR PROSECUTION.
III. THE COURT A QUO SERIOUSLY ERRED IN MAKING THE TAX REFORM ACT
OF 1997 RETROACTIVELY APPLY TO CASES PREVIOUSLY ENDORSED TO
THE DOJ BY THE BIR LONG BEFORE THE EFFECTIVITY OF SAID LAW.
IV. THE COURT A QUO GROSSLY ERRED IN SANCTIONING THE MeTCS ACT OF
DELEGATING THE TASK OF DETERMINING PROBABLE CAUSE TO THE BIR,
WHICH WAS BUT A WITNESS.
V. THE COURT A QUO ERRED WHEN IT IGNORED THE SERIOUS INFIRMITIES
COMMITTED IN THE PROCEEDINGS BELOW WHICH SHOULD HAVE
WARRANTED A MEASURE OF LIBERALITY TO PAVE THE WAY FOR A
THOROUGH DETERMINATION OF THE MERITS OF THE CASES AGAINST THE
RESPONDENTS.[30]

ISSUES

A reading of the parties arguments shows that the resolution of the numerous issues presented
hinges upon the issue of whether or not the Metropolitan Trial Court (MeTC) erred in dismissing the
criminal cases before it, on the basis of the Manifestation and Motion of the BIR to withdraw the said
cases.

First Issue: TIMELINESS

After the MeTC dismissed the criminal cases on March 22, 1999, which Order was received by
the New DOJ Panel on March 24, 1999, it filed a Motion for Reconsideration on May 7, 1999, one
day before the lapse of the 15-day period to file the Motion for Reconsideration.[31]
The Motion for Reconsideration was thereafter denied on May 17, 1999 and the denial was
received by petitioner on May 18, 1999.
 Instead of filing an appeal, petitioner filed before RTC-Marikina a Petition for Certiorari,
on July 14, 1999.
Respondents argue that: (1) This was the wrong remedy; and (2) even assuming this was the
correct mode, the 60-day period to file the petition had also already lapsed.
This Court has allowed resort to the extraordinary remedy of certiorari although the remedy
appeal was available. In Metropolitan Manila Development Authority v. JANCOM Environmental
Corporation,[32] citing Ruiz, Jr. v. Court of Appeals,[33] this Court stated the significant exceptions to
be, as follows:

xxx when public welfare and the advancement of public policy dictate; or when the broader
interests of justice so require, or when the writs issued are nullor when the questioned order
amounts to an oppressive exercise of judicial authority.

There can be no question as to the public interest involved in this case.

For the case of the prosecution, if proved, would mean that a fraudulent scheme to evade taxes
has been resorted to by respondents, and the amount involved, at the time of the investigation, is
nearly P20 billion pesos.
The principle is well established that taxes are the lifeblood of government and every citizen is
duty bound to pay taxes and to pay taxes in the right amount.
Technicalities, therefore, will have to yield to the paramount interest of the nation to enforce its
laws against tax evasion, especially where the amounts involved are huge. As aptly put by petitioner
in its Consolidated Reply, procedural rules should not be applied with rigidity especially when to do
so would result in manifest failure or miscarriage of justice.
Furthermore, the petition for certiorari filed by the prosecution is not late. For the provision
under which it can be considered late was subsequently amended and under the amended rules the
petition is on time. Said amendment should be retroactively applied since it is a procedural rule and it
is also remedial in character , i.e., it is intended precisely to correct the unjust effect of the amended
rule. As correctly argued by the petitioner, also in its Consolidated Reply:

The eleven (11)-day delay in the filing of the petition for certiorari before the Regional Trial Court
was brought about y the DOJ New Panels failure to consider the period it had utilized in filing its
Motion for Reconsideration. It should be recalled that when the 1997 Rules of Civil Procedure first
took effect, the period for filing a petition for certiorari was originally set at sixty (60) days from the
time the questioned order or the order denying the motion for reconsideration was received. Section 4,
Rule 65 of the 1997 Rules of Civil Procedure was originally couched as follows:

Sec. 4 Where petition filed. - The petition may be filed not later than sixty (60) days from notice of the
judgment, order or resolution sought to assailed in the Supreme Court or, if it relates to the acts or
omissions of a lower court or of a corporation, board, officer or person, in the Regional Trial Court
exercising jurisdiction over the territorial area as defined by the Supreme Court. It may also be filed in
the Court of Appeals whether or not the same is in aid of its jurisdiction. If it involves the acts or
omission of a quasi-judicial agency and unless otherwise provided by law or these Rules, the petition
shall be filed in and cognizable by the Court of Appeals.

Subsequently, the aforequoted provision was amended by Bar Matter No. 803 dated July 21,
1998. Under this amendment, the period used up in filing a motion for reconsideration shall be
deducted from the sixty (60)-day period for filing a petition for certiorari.

Recently, however, Section 4, Rule 65 of the 1997 Rules of Civil Procedure was again revised, and
the present policy on the matter, effective September 1, 2000, is that [t]he petition shall be filed not
later than sixty (60) days from notice of the judgment, order or resolution. In case a motion for
reconsideration or new trial is timely filed, whether such motion is required or not, the sixty (60) day
period shall be counted from notice of the denial of said motion.(SC. A.M. 00-2-03)

Private respondents, nevertheless, contend that such amendment may only apply to cases filed after,
or at least pending as of, September 1, 2000. Private respondents sorely missed the point. The recent
amendment to Section 4, Rule 65 of the 1997 Rules of Civil Procedure clearly shows that the
Honorable Court had realized that the original prescribed period is inadequate; accordingly, to
give the aggrieved party sufficient time, a new 60-day period is given from the time the order denying
a motion for reconsideration is received, within which to file a petition for certiorari. In the light of
this recent amendment, therefore, there is more reason to relax the rigid application of the old rule and
excuse the procedural lapse in the case below.

This Court has consistently held that rules of procedure should not be applied in a very technical
sense, for they are adopted to help secure, not override, substantial justice.[34] Besides, if the issuances
involved are a nullity, the same can be assailed at any time.
After a thorough review of the orders of the MeTC dismissing the criminal cases, this Court
finds, that said orders were null and void and were a result of a gravely injudicious exercise of judicial
authority.

Second Issue: DID THE MeTC GRAVELY ABUSE ITS

DISCRETION OR EXCEED ITS JURISDICTION IN DISMISSING THE CRIMINAL CASES?

Petitioner rightly disputes the dismissal of the cases. In the same case of Martinez v. Court of
Appeals, et al.,[35] this Court, citing the case of Crespo v. Mogul, held:

The rule therefore in this jurisdiction is that once a complaint or information is filed in Court any
disposition of the case as its dismissal or the conviction or acquittal of the accused rests in the sound
discretion of the Court. Although the fiscal retains the direction and control of the prosecution of
criminal cases even while the case is already in Court he cannot impose his opinion on the trial court.
The Court is the best and sole judge on what to do with the case before it. The determination of the
case is within its exclusive jurisdiction and competence. A motion to dismiss the case filed by the
fiscal should be addressed to the Court who has the option to grant or deny the same. It does not
matter if this is done before or after the arraignment of the accused or that the motion was filed after a
reinvestigation or upon instructions of the Secretary of Justice who reviewed the records of the
investigation.

In another case,[36] this Court affirmed the power conferred upon trial courts, reiterating:

This argument is untenable. The court could have denied the public prosecutor's motion for the
withdrawal of the information against petitioner, and there would have been no question of its power
to do so. If it could do that, so could it reconsider what it had ordered. Every court has the power and
indeed the duty to review and amend or reverse its findings and conclusions when its attention is
timely called to any error or defect therein.

Jurisprudence mandates that the grant of a motion to dismiss must be based upon the judges own
personal conviction that there was no case against the accused. [37] The trial judge must himself be
convinced that there was indeed no sufficient evidence against the accused, and this conclusion can be
arrived at only after an assessment of the evidence in the possession of the prosecution. What was
imperatively required was the trial judge's own assessment of such evidence, it not being sufficient for
the valid and proper exercise of judicial discretion merely to accept the prosecution's word for its
supposed insufficiency.[38]
 In the present case, the record clearly shows that the MeTC failed to discharge its duty to
judiciously and independently rule upon the motion to withdraw.
In the Order dated March 22, 1999, the trial court stated:

The Court agrees with the Bureau of Internal Revenue that in view of the aforecited Section of the
Tax Reform Act of 1997, a substantive law, and the fact that it is evident that the Commissioner of
Internal Revenue has not approved the filing of the instant cases, this Court, thus, has no other
recourse but to obey the law and dismiss the cases at bar.

Moreover, pursuant to the ruling of the Supreme Court in the case of Commissioner of Internal
Revenue et al. vs. The Honorable Court of Appeals, et al., G.R. No. 119322, promulgated June 4,
1996 (257 SCRA 200, 225) said Court held that:

xxx

According to the Memorandum dated February 11, 1999 filed by the Bureau of Internal Revenue in
connection with its Manifestation and Motion, the Bureau of Internal Revenue in fact conducted
several hearings on the tax liability of the accused relative to the protest filed by Fortune Tobacco
Corporation regarding its tax liabilities connected with the filing of the instant cases against Lucio C.
Tan, et al., and that thereafter the Bureau of Internal Revenue found no fraud committed by the
Fortune Tobacco Corporation and, that, therefore, there is no legal justification to further pursue the
three tax evasion cases against Lucio C. Tan, et al.

This finding of non-fraud was approved by the Commissioner of Internal Revenue.

Again, in view of the Bureau of Internal Revenues finding that Fortune Tobacco Corporation has not
committed any tax violation relative to these cases now before this Court by the panel of state
prosecutors, this Court, pursuant to the above-mentioned ruling of the Supreme Court, that there must
first be a finding of tax fraud by the Bureau of Internal Revenue before a criminal case may be filed
against a taxpayer has, therefore, no other recourse but to dismiss these cases also for lack of
probable cause as found by the Bureau of Internal Revenue itself.

xxx

As the Court finds it, the government, that is to say, more accurately, the People, by statute has
ordained the government prosecutors not to come to Court and file a criminal case involving
violations of the National Internal Revenue Code without first getting the nod and approval of the
Commissioner of Internal Revenue. No such Commissioner of Internal Revenue certification has been
submitted to this Court against any of the accused in these cases. As to such a primordial statutory
requirement, this Court believes that the statute rather than the Rules of Court, applies and governs.

Accordingly, these cases, namely, Criminal Cases Nos. 98-38181 to 98-38189, are hereby dismissed.
No costs.

SO ORDERED.

A reading of the MeTC order thus shows that the same was basically anchored only on the
Manifestation and Motion of the BIR, praying for the withdrawal of the complaints.
Contrary to its mandate, the trial court abandoned its duty to evaluate the submissions before it.
By relying on the manifestation and motion of the BIR alone, it ignored the positive findings of the
panel of state prosecutors, which had, themselves, painstakingly conducted the preliminary
investigation on the subject criminal liability of the respondents.
 Furthermore, it is not quite correct that, as respondents claim, BIR Commissioner Liwayway
Vinzons-Chato referred the matter to the Department of Justice for preliminary investigation
only. The three letters of referral/complaints she wrote and filed with the Department of Justice and
the Office of the City Prosecutor, dated September 6, 1993, October 22, 1993 and December 21,
1993, all stated I hereby recommend the prosecution of the following for violations of the provisions
of the National Internal Revenue Code, as amended, to wit: xxx[39]
Hence, the same clearly constituted approval of the filing of the cases in court.
The fact, moreover, is that the cases had been filed in court and were already under the courts
control.
By merely echoing the findings of the BIR, the MeTC abdicated its duty as a court of law, and
subjugated itself to the administrative agency. In failing to make an independent finding of the merits
of the case and merely anchoring the dismissal on the position of the BIR, the trial court relinquished
the discretion it was obliged to exercise, in violation of the ruling in Crespo v. Mogul.[40]
For this reason, this Court is constrained to annul and set aside the Orders of the MeTC.
WHEREFORE, the Petition is GRANTED and the Decision of the Court of Appeals dated
August 29, 2000 in CA-G.R. SP No. 56077 and the Orders of the Regional Trial Court of Marikina
City dated August 25, 1999 and October 13, 1999 in SCA Case No. 95-340-MK are
hereby REVERSED, and the Orders dated March 22, 1999 and May 17, 1999 of the Metropolitan
Trial Court (MeTC), Branch 75, Marikina City, dismissing the criminal informations filed by the DOJ
Panel against herein respondents, and denying the DOJ Panels Motion for Reconsideration, are hereby
declared NULL and VOID and SET ASIDE, and the criminal informations are reinstated.
Criminal Cases Nos. 98-38181 to 98-38189 are hereby REMANDED to the Metropolitan Trial
Court (MeTC), Branch 75, Marikina City,[41] for appropriate proceedings. Costs de oficio.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. Nos. L-18169, L-18262 & L-21434 July 31, 1964

COMMISSIONER OF INTERNAL REVENUES, petitioner,

vs.
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.

Office of the Solicitor General for petitioner.

Ozaeta, Gibbs and Ozaeta for respondents.

REYES, J.B.L., J.:

The above-captioned cases were elevated to this Court under separate petitions by the Commissioner
for review of the corresponding decisions of the Court of Tax Appeals. Since these cases involve the
same parties and issues akin to each case presented, they are herein decided jointly.

The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, respectively,
both American citizens residing in the Philippines, and have derived all their income from Philippine
sources for the taxable years in question.

In compliance with local law, the aforesaid respondents, on 27 March 1957, filed their income tax
return for 1956, reporting therein a gross income of P1,017,287. 65 and a net income of P733,809.44
on which the amount of P317,395.4 was assessed after deducting P4,805.59 as withholding tax.
Pursuant to the petitioner's assessment notice, the respondents paid the total amount of P326,247.41,
inclusive of the withheld taxes, on 15 April 1957.

On 17 March 1959, the respondents Lednickys filed an amended income tax return for 1956. The
amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the United States
government as federal income tax for 1956. Simultaneously with the filing of the amended return, the
respondents requested the refund of P112,437.90.

When the petitioner Commissioner of Internal Revenue failed to answer the claim for refund, the
respondents filed their petition with the Tax Court on 11 April 1959 as CTA Case No. 646, which is
now G. R. No. L-18286 in the Supreme Court.

G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount of
P150,269.00, as alleged overpaid income tax for 1955, the facts of which are as follows:

On 28 February 1956, the same respondents-spouses filed their domestic income tax return for 1955,
reporting a gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April 1956,
they filed an amended income tax return, the amendment upon the original being a lesser net income
of P1,012,554.51, and, on the basis of this amended return, they paid P570,252.00, inclusive of
withholding taxes. After audit, the petitioner determined a deficiency of P16,116.00, which amount,
the respondents paid on 5 December 1956.

Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in Manila their
federal income tax return for the years 1947, 1951, 1952, 1953, and 1954 on income from Philippine
sources on a cash basis. Payment of these federal income taxes, including penalties and delinquency
interest in the amount of P264,588.82, were made in 1955 to the U.S. Director of Internal Revenue,
Baltimore, Maryland, through the National City Bank of New York, Manila Branch. Exchange and
bank charges in remitting payment totaled P4,143.91.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1wph1.t

On 11 August 1958, the said respondents amended their Philippine income tax return for 1955 to
include the following deductions:

U.S. Federal income taxes P471,867.32

Interest accrued up to May 15, 1955 40,333.92
Exchange and bank charges 4,143.91

Total P516,345.15

and therewith filed a claim for refund of the sum of P166,384.00, which was later reduced to
P150,269.00.

The respondents Lednicky brought suit in the Tax Court, which was docketed therein as CTA Case
No. 570.

In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to respondents Lednickys'
income tax return for 1957, filed on 28 February 1958, and for which respondents paid a total sum of
P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80,
representing taxes paid to the U.S. Government on income derived wholly from Philippine sources.
On the strength thereof, respondents seek refund of P90 520.75 as overpayment. The Tax Court again
decided for respondents.

The common issue in all three cases, and one that is of first impression in this jurisdiction, is whether
a citizen of the United States residing in the Philippines, who derives income wholly from sources
within the Republic of the Philippines, may deduct from his gross income the income taxes he has
paid to the United States government for the taxable year on the strength of section 30 (C-1) of the
Philippine Internal Revenue Code, reading as follows:

SEC. 30. Deduction from gross income. In computing net income there shall be allowed as
deductions

(a) ...

(b) ...

(c) Taxes:

(1) In general. Taxes paid or accrued within the taxable year, except

(A) The income tax provided for under this Title;

 (B) Income, war-profits, and excess profits taxes imposed by the
authority of any foreign country; but this deduction shall be allowed
in the case of a taxpayer who does not signify in his return his desire
to have to any extent the benefits of paragraph (3) of this subsection
(relating to credit for foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind tending to

increase the value of the property assessed. (Emphasis supplied)

The Tax Court held that they may be deducted because of the undenied fact that the
respondent spouses did not "signify" in their income tax return a desire to avail themselves of
the benefits of paragraph 3 (B) of the subsection, which reads:

Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer
signifies in his return his desire to have the benefits of this paragraph, the tax imposed
by this Title shall be credited with

(A) ...;

(B) Alien resident of the Philippines. In the case of an alien resident of the
Philippines, the amount of any such taxes paid or accrued during the taxable
year to any foreign country, if the foreign country of which such alien
resident is a citizen or subject, in imposing such taxes, allows a similar credit
to citizens of the Philippines residing in such country;

It is well to note that the tax credit so authorized is limited under paragraph 4 (A and B) of the
same subsection, in the following terms:

Par. (c) (4) Limitation on credit. The amount of the credit taken under this section
shall be subject to each of the following limitations:

(A) The amount of the credit in respect to the tax paid or accrued to any
country shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's net income from sources within such
country taxable under this Title bears to his entire net income for the same
taxable year; and

(B) The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the taxpayer's net income from
sources without the Philippines taxable under this Title bears to his entire net
income for the same taxable year.

We agree with appellant Commissioner that the Construction and wording of Section
30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to
deduct income taxes paid to foreign government from the taxpayer's gross income is
given only as an alternative or substitute to his right to claim a tax credit for such
foreign income taxes under section 30 (c) (3) and (4); so that unless the alien resident
has a right to claim such tax credit if he so chooses, he is precluded from deducting
the foreign income taxes from his gross income. For it is obvious that in prescribing
that such deduction shall be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of paragraph (3) (relating to
 credits for taxes paid to foreign countries), the statute assumes that the taxpayer in
question also may signify his desire to claim a tax credit and waive the deduction;
otherwise, the foreign taxes would always be deductible, and their mention in the list
of non-deductible items in Section 30(c) might as well have been omitted, or at least
expressly limited to taxes on income from sources outside the Philippine Islands.

Had the law intended that foreign income taxes could be deducted from gross income
in any event, regardless of the taxpayer's right to claim a tax credit, it is the latter
right that should be conditioned upon the taxpayer's waiving the deduction; in which
Case the right to reduction under subsection (c-1-B) would have been made absolute
or unconditional (by omitting foreign taxes from the enumeration of non-deductions),
while the right to a tax credit under subsection (c-3) would have been expressly
conditioned upon the taxpayer's not claiming any deduction under subsection (c-1). In
other words, if the law had been intended to operate as contended by the respondent
taxpayers and by the Court of Tax Appeals section 30 (subsection (c-1) instead of
providing as at present:

SEC. 30. Deduction from gross income. In computing net income there shall be allowed as
deductions

(a) ...

(b) ...

(c) Taxes:

(1) In general. Taxes paid or accrued within the taxable year, except

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes imposed by the

authority of any foreign country; but this deduction shall be allowed
in the case of a taxpayer who does not signify in his return his desire
to have to any extent the benefits of paragraph (3) of this subsection
(relating to credit for taxes of foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind tending to

increase the value of the property assessed.

would have merely provided:

SEC. 30. Decision from grow income. In computing net income there shall be allowed as
deductions:

(a) ...

(b) ...

(c) Taxes paid or accrued within the taxable year, EXCEPT

(A) The income tax provided for in this Title;

 (B) Omitted or else worded as follows:

Income, war profits and excess profits taxes imposed by authority of any foreign
country on income earned within the Philippines if the taxpayer does not claim the
benefits under paragraph 3 of this subsection;

(C) Estate, inheritance or gift taxes;

(D) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.

while subsection (c-3) would have been made conditional in the following or equivalent terms:

(3) Credits against tax for taxes of foreign countries. If the taxpayer has not deducted such
taxes from his gross income but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ... (etc.).

Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from claiming
twice the benefits of his payment of foreign taxes, by deduction from gross income (subs. c-1) and by
tax credit (subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim
benefit under either of these headings at his option, so that he must be entitled to a tax credit
(respondent taxpayers admittedly are not so entitled because all their income is derived from
Philippine sources), or the option to deduct from gross income disappears altogether.

Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the income
taxes they are required to pay to the government of the United States in their return for Philippine
income tax, they would be subjected to double taxation. What respondents fail to observe is that
double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co.
vs. Meer, 89 Phil. 357). In the present case, while the taxpayers would have to pay two taxes on the
same income, the Philippine government only receives the proceeds of one tax. As between the
Philippines, where the income was earned and where the taxpayer is domiciled, and the United States,
where that income was not earned and where the taxpayer did not reside, it is indisputable that justice
and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any
relief from the alleged double taxation should come from the United States, and not from the
Philippines, since the former's right to burden the taxpayer is solely predicated on his citizenship,
without contributing to the production of the wealth that is being taxed.

Aside from not conforming to the fundamental doctrine of income taxation that the right of a
government to tax income emanates from its partnership in the production of income, by providing
the protection, resources, incentive, and proper climate for such production, the interpretation given
by the respondents to the revenue law provision in question operates, in its application, to place a
resident alien with only domestic sources of income in an equal, if not in a better, position than one
who has both domestic and foreign sources of income, a situation which is manifestly unfair and short
of logic.

Finally, to allow an alien resident to deduct from his gross income whatever taxes he pays to his own
government amounts to conferring on the latter the power to reduce the tax income of the Philippine
government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation
imposed upon an alien resident is increased by his own government, his deduction from Philippine
taxes would correspondingly increase, and the proceeds for the Philippines diminished, thereby
subordinating our own taxes to those levied by a foreign government. Such a result is incompatible
with the status of the Philippines as an independent and sovereign state.
IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals are reversed, and, the
disallowance of the refunds claimed by the respondents Lednicky is affirmed, with costs against said
respondents-appellees.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes, Regala and Makalintal, JJ.,
concur.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the
Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices for
deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR)
against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding
tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December
31, 1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and
1985.5

(c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6

(2) The alleged understatement of ICCs interest income on the three promissory notes due
from Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the said
notices. Hence, it brought the case to the CTA which held that the petition is premature because the
final notice of assessment cannot be considered as a final decision appealable to the tax court. This
was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment
of deficiency tax, amounts to a final decision on the protested assessment and may therefore be
questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No.
135210.8 The case was thus remanded to the CTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security services
were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC in
1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTAs Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.

SO ORDERED.9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered
to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it could
be considered as deductible expenses only in 1986 when ICC received the billing statements for said
services. It further ruled that ICC did not understate its interest income from the promissory notes of
Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for
security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said years
and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year
1986. As to the alleged deficiency interest income and failure to withhold expanded withholding tax
assessment, petitioner invoked the presumption that the assessment notices issued by the BIR are
valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICCs gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and
necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or
incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts,
records or other pertinent papers.11

The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided
for in this Title shall be taken for the taxable year in which paid or accrued or paid or incurred,
dependent upon the method of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual
method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are
incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who
is authorized to deduct certain expenses and other allowable deductions for the current year but failed
to do so cannot deduct the same for the next year.13

The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount
of income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.[15]

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction.17

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.18

In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960s.19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method of accounting.
For another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears
the burden of establishing the accrual of an expense or income. However, ICC failed to discharge this
burden. As to when the firms performance of its services in connection with the 1984 tax problems
were completed, or whether ICC exercised reasonable diligence to inquire about the amount of its
liability, or whether it does or does not possess the information necessary to compute the amount of
said liability with reasonable accuracy, are questions of fact which ICC never established. It simply
relied on the defense of delayed billing by the firm and the company, which under the circumstances,
is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the
expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for
the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed
to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company
would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC in
198620and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one should
have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts. 22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for
professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-
000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela
Cultural Corporation for professional and security services, is declared valid only insofar as the
expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under
Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21551 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-21557 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-24972 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-24978 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT
OF TAX APPEALS, respondents.

L-21551:

Rafael Dinglasan for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney
Virgilio G. Saldajeno for respondent.

L-21557:

Office of the Solicitor General for petitioner.

Rafael Dinglasan for respondent Fernandez Hermanos, Inc.

L-24972:

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorney Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.
 L-24978:

Rafael Dinglasan for petitioner.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and
Special Attorney Virgilio G. Saldajeno for respondent.

TEEHANKEE, J.:

These four appears involve two decisions of the Court of Tax Appeals determining the taxpayer's
income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the
Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively,
appealed from the Tax Court's decisions, insofar as their respective contentions on particular tax items
were therein resolved against them. Since the issues raised are interrelated, the Court resolves the four
appeals in this joint decision.

Cases L-21551 and L-21557

The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal
purpose of engaging in business as an "investment company" with main office at Manila. Upon
verification of the taxpayer's income tax returns for the period in question, the Commissioner of
Internal Revenue assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00,
P6,887.00 and P14,451.00 as alleged deficiency income taxes for the years 1950, 1951, 1952, 1953
and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the
examination and verification of the taxpayer's income tax returns for the said years, summarized by
the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:

1. Losses

a. Losses in Mati Lumber Co. (1950) P 8,050.00

b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) 353,134.25

c. Losses in Balamban Coal Mines

1950 8,989.76
1951 27,732.66

d. Losses in Hacienda Dalupiri

1950 17,418.95
1951 29,125.82
1952 26,744.81
1953 21,932.62
1954 42,938.56

e. Losses in Hacienda Samal

1951 8,380.25
1952 7,621.73
 2. Excessive depreciation of Houses

1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98

3. Taxable increase in net worth

1950 P 30,050.00
1951 1,382.85

4. Gain realized from sale of real property in 1950 P 11,147.2611

The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (e)
and Item 2 of the above summary, but overruled the Commissioner's disallowances of all the
remaining items. It therefore modified the deficiency assessments accordingly, found the total
deficiency income taxes due from the taxpayer for the years under review to amount to
P123,436.00 instead of P166,063.00 as originally assessed by the Commissioner, and
rendered the following judgment:

RESUME

1950 P2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501.00
1954 5,863.00

Total P123,436.00

WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to
pay the sum of P123,436.00 within 30 days from the date this decision becomes final. If the
said amount, or any part thereof, is not paid within said period, there shall be added to the
unpaid amount as surcharge of 5%, plus interest as provided in Section 51 of the National
Internal Revenue Code, as amended. With costs against petitioner. (Pp. 75, 76, Taxpayer's
Brief as appellant)

Both parties have appealed from the respective adverse rulings against them in the Tax Court's
decision. Two main issues are raised by the parties: first, the correctness of the Tax Court's rulings
with respect to the disputed items of disallowances enumerated in the Tax Court's summary
reproduced above, and second, whether or not the government's right to collect the deficiency income
taxes in question has already prescribed.

On the first issue, we will discuss the disputed items of disallowances seriatim.

1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). The Commissioner of Internal Revenue
questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950
return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by
the taxpayer on January 1, 1948, on the ground that the worthlessness of said stock in the year 1950
had not been clearly established. The Commissioner contends that although the said Company was no
longer in operation in 1950, it still had its sawmill and equipment which must be of considerable
value. The Court, however, found that "the company ceased operations in 1949 when its Manager and
owner, a certain Mr. Rocamora, left for Spain ,where he subsequently died. When the company eased
to operate, it had no assets, in other words, completely insolvent. This information as to the
insolvency of the Company reached (the taxpayer) in 1950," when it properly claimed the loss as a
deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the National
Internal Revenue Code. 2

We find no reason to disturb this finding of the Tax Court. There was adequate basis for the writing
off of the stock as worthless securities. Assuming that the Company would later somehow realize
some proceeds from its sawmill and equipment, which were still existing as claimed by the
Commissioner, and that such proceeds would later be distributed to its stockholders such as the
taxpayer, the amount so received by the taxpayer would then properly be reportable as income of the
taxpayer in the year it is received.

(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). The
taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the
sum of P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax
Court's findings on this item follow:

Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are
also the controlling stockholders of petitioner corporation, requested financial help from
petitioner to enable it to resume it mining operations in Coron, Palawan. The request for
financial assistance was readily and unanimously approved by the Board of Directors of
petitioner, and thereafter a memorandum agreement was executed on August 12, 1945,
embodying the terms and conditions under which the financial assistance was to be extended,
the pertinent provisions of which are as follows:

"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10,
1945, has agreed to extend to the SECOND PARTY the requested financial help by
way of accommodation advances and for this purpose has authorized its President,
Mr. Ramon J. Fernandez to cause the release of funds to the SECOND PARTY.

"WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to
extend to the SECOND PARTY, the latter has agreed to pay to the former fifteen per
centum (15%) of its net profits.

"NOW THEREFORE, for and in consideration of the above premises, the parties
hereto have agreed and covenanted that in consideration of the financial help to be
extended by the FIRST PARTY to the SECOND PARTY to enable the latter to
resume its mining operations in Coron, Palawan, the SECOND PARTY has agreed
and undertaken as it hereby agrees and undertakes to pay to the FIRST PARTY
fifteen per centum (15%) of its net profits." (Exh. H-2)

Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite
these advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to
suffer losses. By 1951, petitioner became convinced that those advances could no longer be
recovered. While it continued to give advances, it decided to write off as worthless the sum of
P353,134.25. This amount "was arrived at on the basis of the total of advances made from 1945 to
1949 in the sum of P438,981.39, from which amount the sum of P85,647.14 had to be deducted, the
latter sum representing its pre-war assets. (t.s.n., pp. 136-139, Id)." (Page 4, Memorandum for
Petitioner.) Petitioner decided to maintain the advances given in 1950 and 1951 in the hope that it
might be able to recover the same, as in fact it continued to give advances up to 1952. From these
facts, and as admitted by petitioner itself, Palawan Manganese Mines, Inc., was still in operation when
the advances corresponding to the years 1945 to 1949 were written off the books of petitioner. Under
the circumstances, was the sum of P353,134.25 properly claimed by petitioner as deduction in its
income tax return for 1951, either as losses or bad debts?

It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to
be repaid. It is true that some testimonial evidence was presented to show that there was some
agreement that the advances would be repaid, but no documentary evidence was presented to this
effect. The memorandum agreement signed by the parties appears to be very clear that the
consideration for the advances made by petitioner was 15% of the net profits of Palawan Manganese
Mines, Inc. In other words, if there were no earnings or profits, there was no obligation to repay those
advances. It has been held that the voluntary advances made without expectation of repayment do not
result in deductible losses. 1955 PH Fed. Taxes, Par. 13, 329, citing W. F. Young, Inc. v. Comm., 120
F 2d. 159, 27 AFTR 395; George B. Markle, 17 TC. 1593.

Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan
Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for recovery under
the memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay
petitioner 15% of its net profits, not the advances. No bad debt could arise where there is no valid and
subsisting debt.

Again, assuming that in this case there was a valid and subsisting debt and that the debtor was
incapable of paying the debt in 1951, when petitioner wrote off the advances and deducted the amount
in its return for said year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the
debtor was still in operation in 1951 and 1952, as petitioner continued to give advances in those years.
It has been held that if the debtor corporation, although losing money or insolvent, was still operating
at the end of the taxable year, the debt is not considered worthless and therefore not deductible. 3

The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed
out that the taxpayer has taken an "ambiguous position " and "has not definitely taken a stand on
whether the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a
bad debt." 4 We sustain the government's position that the advances made by the taxpayer to its 100%
subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments
and not loans. 5 The evidence on record shows that the board of directors of the two companies since
August, 1945, were identical and that the only capital of Palawan Manganese Mines, Inc. is the
amount of P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary
company. 6 This fact explains the liberality with which the taxpayer made such large advances to the
subsidiary, despite the latter's admittedly poor financial condition.

The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's
finding that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the
subsidiary had no earnings, there was no obligation to repay those advances, becomes immaterial, in
the light of our resolution of the question. The Tax Court correctly held that the subsidiary company
was still in operation in 1951 and 1952 and the taxpayer continued to give it advances in those years,
and, therefore, the alleged debt or investment could not properly be considered worthless and
deductible in 1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d) (2) of our
Tax Code providing for deduction by corporations of losses actually sustained and charged off during
the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually
ascertained to be worthless and charged off within the taxable year, can there be a partial writing off
of a loss or bad debt, as was sought to be done here by the taxpayer. For such losses or bad debts must
be ascertained to be so and written off during the taxable year, are therefore deductible in full or not at
all, in the absence of any express provision in the Tax Code authorizing partial deductions.

The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted
for the year 1951, as the subsidiary was still in operation in 1951 and 1952. The taxpayer, on the other
hand, claims that its advances were irretrievably lost because of the staggering losses suffered by its
subsidiary in 1951 and that its advances after 1949 were "only limited to the purpose of salvaging
whatever ore was already available, and for the purpose of paying the wages of the laborers who
needed help." 7 The correctness of the Tax Court's ruling in sustaining the disallowance of the write-
off in 1951 of the taxpayer's claimed losses is borne out by subsequent events shown in Cases L-
24972 and L-24978 involving the taxpayer's 1957 income tax liability. (Infra, paragraph 6.) It will
there be seen that by 1956, the obligation of the taxpayer's subsidiary to it had been reduced from
P587,398.97 in 1951 to P442,885.23 in 1956, and that it was only on January 1, 1956 that the
subsidiary decided to cease operations. 8

(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains the Tax
Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the operation
of its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the
taxpayer's returns for said years. The Tax Court correctly held that the losses "are deductible in 1952,
when the mines were abandoned, and not in 1950 and 1951, when they were still in operation." 9 The
taxpayer's claim that these expeditions should be allowed as losses for the corresponding years that
they were incurred, because it made no sales of coal during said years, since the promised road or
outlet through which the coal could be transported from the mines to the provincial road was not
constructed, cannot be sustained. Some definite event must fix the time when the loss is sustained, and
here it was the event of actual abandonment of the mines in 1952. The Tax Court held that the losses,
totalling P36,722.42 were properly deductible in 1952, but the appealed judgment does not show that
the taxpayer was credited therefor in the determination of its tax liability for said year. This additional
deduction of P36,722.42 from the taxpayer's taxable income in 1952 would result in the elimination of
the deficiency tax liability for said year in the sum of P3,600.00 as determined by the Tax Court in the
appealed judgment.

(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-
1952). The Tax Court overruled the Commissioner's disallowance of these items of losses thus:

Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in
1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954.
These deductions were disallowed by respondent on the ground that the farm was operated
solely for pleasure or as a hobby and not for profit. This conclusion is based on the fact that
the farm was operated continuously at a loss.1awphl.nt

From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner
for business and not pleasure. It was mainly a cattle farm, although a few race horses were
also raised. It does not appear that the farm was used by petitioner for entertainment, social
activities, or other non-business purposes. Therefore, it is entitled to deduct expenses and
losses in connection with the operation of said farm. (See 1955 PH Fed. Taxes, Par. 13, 63,
citing G.C.M. 21103, CB 1939-1, p.164)

Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations,
authorizes farmers to determine their gross income on the basis of inventories. Said
regulations provide:

"If gross income is ascertained by inventories, no deduction can be made for livestock
or products lost during the year, whether purchased for resale, produced on the farm,
 as such losses will be reflected in the inventory by reducing the amount of livestock
or products on hand at the close of the year."

Evidently, petitioner determined its income or losses in the operation of said farm on the basis
of inventories. We quote from the memorandum of counsel for petitioner:

"The Taxpayer deducted from its income tax returns for the years from 1950 to 1954
inclusive, the corresponding yearly losses sustained in the operation of Hacienda
Dalupiri, which losses represent the excess of its yearly expenditures over the
receipts; that is, the losses represent the difference between the sales of livestock and
the actual cash disbursements or expenses." (Pages 21-22, Memorandum for
Petitioner.)

As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses
in its operation, which losses were determined by means of inventories authorized under
Section 100 of Revenue Regulations No. 2, it was error for respondent to have disallowed the
deduction of said losses. The same is true with respect to loss sustained in the operation of the
Hacienda Samal for the years 1951 and 1952. 10

The Commissioner questions that the losses sustained by the taxpayer were properly based on the
inventory method of accounting. He concedes, however, "that the regulations referred to does not
specify how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence
presented by the taxpayer ... which merely consisted of an alleged physical count of the number of the
livestock in Hacienda Dalupiri for the years involved." 11 The Tax Court was satisfied with the method
adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and
disbursements. We find no Compelling reason to disturb its findings.

2. Disallowance of excessive depreciation of buildings (1950-1954). During the years 1950 to

1954, the taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The
Commissioner claimed that the reasonable depreciation rate is only 3% per annum, and, hence,
disallowed as excessive the amount claimed as depreciation allowance in excess of 3% annually. We
sustain the Tax Court's finding that the taxpayer did not submit adequate proof of the correctness of
the taxpayer's claim that the depreciable assets or buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per annum claim, such finding being supported by the
record. The taxpayer's contention that it has many zero or one-peso assets, 12representing very old and
fully depreciated assets serves but to support the Commissioner's position that a 10% annual
depreciation rate was excessive.

3. Taxable increase in net worth (1950-1951). The Tax Court set aside the Commissioner's
treatment as taxable income of certain increases in the taxpayer's net worth. It found that:

For the year 1950, respondent determined that petitioner had an increase in net worth in the
sum of P30,050.00, and for the year 1951, the sum of P1,382.85. These amounts were treated
by respondent as taxable income of petitioner for said years.

It appears that petitioner had an account with the Manila Insurance Company, the records
bearing on which were lost. When its records were reconstituted the amount of P349,800.00
was set up as its liability to the Manila Insurance Company. It was discovered later that the
correct liability was only 319,750.00, or a difference of P30,050.00, so that the records were
adjusted so as to show the correct liability. The correction or adjustment was made in 1950.
Respondent contends that the reduction of petitioner's liability to Manila Insurance Company
resulted in the increase of petitioner's net worth to the extent of P30,050.00 which is taxable.
This is erroneous. The principle underlying the taxability of an increase in the net worth of a
taxpayer rests on the theory that such an increase in net worth, if unreported and not explained
 by the taxpayer, comes from income derived from a taxable source. (See Perez v. Araneta,
G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25,
1958.) In this case, the increase in the net worth of petitioner for 1950 to the extent of
P30,050.00 was not the result of the receipt by it of taxable income. It was merely the
outcome of the correction of an error in the entry in its books relating to its indebtedness to
the Manila Insurance Company. The Income Tax Law imposes a tax on income; it does not
tax any or every increase in net worth whether or not derived from income. Surely, the said
sum of P30,050.00 was not income to petitioner, and it was error for respondent to assess a
deficiency income tax on said amount.

The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in
the sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in
petitioner's books as outstanding liabilities of trade creditors. These accounts were discovered in 1951
as having been paid in prior years, so that the necessary adjustments were made to correct the errors.
If there was an increase in net worth of the petitioner, the increase in net worth was not the result of
receipt by petitioner of taxable income." 13 The Commissioner advances no valid grounds in his brief
for contesting the Tax Court's findings. Certainly, these increases in the taxpayer's net worth were not
taxable increases in net worth, as they were not the result of the receipt by it of unreported or
unexplained taxable income, but were shown to be merely the result of the correction of errors in its
entries in its books relating to its indebtednesses to certain creditors, which had been erroneously
overstated or listed as outstanding when they had in fact been duly paid. The Tax Court's action must
be affirmed.

4. Gain realized from sale of real property (1950). We likewise sustain as being in accordance
with the evidence the Tax Court's reversal of the Commissioner's assessment on all alleged unreported
gain in the sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found
by the Tax Court, the evidence shows that this property was acquired in 1926 for P11,852.74, and was
sold in 1950 for P60,000.00, apparently, resulting in a gain of P48,147.26. 14 The taxpayer reported in
its return a gain of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved from the
taxpayer's books that after acquiring the property, the taxpayer had made improvements totalling
P11,147.26, 16 accounting for the apparent discrepancy in the reported gain. In other words, this figure
added to the original acquisition cost of P11,852.74 results in a total cost of P23,000.00, and the gain
derived from the sale of the property for P60,000.00 was correctly reported by the taxpayer at
P37,000.00.

On the second issue of prescription, the taxpayer's contention that the Commissioner's action to
recover its tax liability should be deemed to have prescribed for failure on the part of the
Commissioner to file a complaint for collection against it in an appropriate civil action, as
contradistinguished from the answer filed by the Commissioner to its petition for review of the
questioned assessments in the case a quo has long been rejected by this Court. This Court has
consistently held that "a judicial action for the collection of a tax is begun by the filing of a complaint
with the proper court of first instance, or where the assessment is appealed to the Court of Tax
Appeals, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed
for." 17 This is but logical for where the taxpayer avails of the right to appeal the tax assessment to the
Court of Tax Appeals, the said Court is vested with the authority to pronounce judgment as to the
taxpayer's liability to the exclusion of any other court. In the present case, regardless of whether the
assessments were made on February 24 and 27, 1956, as claimed by the Commissioner, or on
December 27, 1955 as claimed by the taxpayer, the government's right to collect the taxes due has
clearly not prescribed, as the taxpayer's appeal or petition for review was filed with the Tax Court on
May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer with a prayer for payment of
the taxes due, long before the expiration of the five-year period to effect collection by judicial action
counted from the date of assessment.

Cases L-24972 and L-24978

These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its
corresponding income tax return, the Commissioner assessed it for deficiency income tax in the
amount of P38,918.76, computed as follows:

Net income per return P29,178.70

Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right claimed as an
expense under Mines Operations 48,481.62

Net income per investigation P167,297.65

Tax due thereon 38,818.00

Less: Amount already assessed 5,836.00

Balance P32,982.00
Add: 1/2% monthly interest from 6-20-59 to 6-
20-62 5,936.76

TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76 18

The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of
its Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance of the sum of
P48,481.62, which allegedly represented 1/5 of the cost of the "contractual right" over the mines of its
subsidiary, Palawan Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer
liable for deficiency income tax for the year 1957 in the amount of P9,696.00, instead of P32,982.00
as originally assessed, and rendered the following judgment:

WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby

ordered to pay to respondent the amount of P9,696.00 as deficiency income tax for the year
1957, plus the corresponding interest provided in Section 51 of the Revenue Code. If the
deficiency tax is not paid in full within thirty (30) days from the date this decision becomes
final and executory, petitioner shall pay a surcharge of five per cent (5%) of the unpaid
amount, plus interest at the rate of one per cent (1%) a month, computed from the date this
decision becomes final until paid, provided that the maximum amount that may be collected
as interest shall not exceed the amount corresponding to a period of three (3) years. Without
pronouncement as to costs. 19

Both parties again appealed from the respective adverse rulings against them in the Tax Court's
decision.

5. Allowance of losses in Hacienda Dalupiri (1957). The Tax Court cited its previous decision
overruling the Commissioner's disallowance of losses suffered by the taxpayer in the operation of its
Hacienda Dalupiri, since it was convinced that the hacienda was operated for business and not for
pleasure. And in this appeal, the Commissioner cites his arguments in his appellant's brief in Case No.
L-21557. The Tax Court, in setting aside the Commissioner's principal objections, which were
directed to the accounting method used by the taxpayer found that:

It is true that petitioner followed the cash basis method of reporting income and expenses in
the operation of the Hacienda Dalupiri and used the accrual method with respect to its mine
operations. This method of accounting, otherwise known as the hybrid method, followed by
petitioner is not without justification.
 ... A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954
Code provisions permit, however, the use of a hybrid method of accounting,
combining a cash and accrual method, under circumstances and requirements to be
set out in Regulations to be issued. Also, if a taxpayer is engaged in more than one
trade or business he may use a different method of accounting for each trade or
business. And a taxpayer may report income from a business on accrual basis and his
personal income on the cash basis.' (See Mertens, Law of Federal Income Taxation,
Zimet & Stanley Revision, Vol. 2, Sec. 12.08, p. 26.) 20

The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method
and procedure as properly reflecting the taxpayer's income or losses, and the Commissioner
having failed to show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that
we find no compelling reason to disturb its findings.

6. Disallowance of amortization of alleged "contractual rights." The reasons for sustaining this
disallowance are thus given by the Tax Court:

It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of
Directors on January 19, 1956, approved a resolution, the pertinent portions of which read as
follows:

"RESOLVED, as it is hereby resolved, that the corporation's current assets composed

of ores, fuel, and oil, materials and supplies, spare parts and canteen supplies
appearing in the inventory and balance sheet of the Corporation as of December 31,
1955, with an aggregate value of P97,636.98, contractual rights for the operation of
various mining claims in Palawan with a value of P100,000.00, its title on various
mining claims in Palawan with a value of P142,408.10 or a total value of
P340,045.02 be, as they are hereby ceded and transferred to Fernandez Hermanos,
Inc., as partial settlement of the indebtedness of the corporation to said Fernandez
Hermanos Inc. in the amount of P442,895.23." (Exh. E, p. 17, CTA rec.)

On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus:

"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial losses
has decided to cease operation on January 1, 1956 and in order to satisfy at least a
part of its indebtedness to the Corporation, it has proposed to transfer its current
assets in the amount of NINETY SEVEN THOUSAND SIX HUNDRED THIRTY
SIX PESOS & 98/100 (P97,636.98) as per its balance sheet as of December 31, 1955,
its contractual rights valued at ONE HUNDRED THOUSAND PESOS (P100,000.00)
and its title over various mining claims valued at ONE HUNDRED FORTY TWO
THOUSAND FOUR HUNDRED EIGHT PESOS & 10/100 (P142,408.10) or a total
evaluation of THREE HUNDRED FORTY THOUSAND FORTY FIVE PESOS &
08/100 (P340,045.08) which shall be applied in partial settlement of its obligation to
the Corporation in the amount of FOUR HUNDRED FORTY TWO THOUSAND
EIGHT HUNDRED EIGHTY FIVE PESOS & 23/100 (P442,885.23)," (Exh. E-1, p.
18, CTA rec.)

Petitioner determined the cost of the mines at P242,408.10 by adding the value of the
contractual rights (P100,000.00) and the value of its mining claims (P142,408.10).
Respondent disallowed the deduction on the following grounds: (1) that the Palawan
Manganese Mines, Inc. could not transfer P242,408.10 worth of assets to petitioner because
the balance sheet of the said corporation for 1955 shows that it had only current as worth
P97,636.96; and (2) that the alleged amortization of "contractual rights" is not allowed by the
Revenue Code.
 The law in point is Section 30(g) (1) (B) of the Revenue Code, before its amendment by
Republic Act No. 2698, which provided in part:

"(g) Depletion of oil and gas wells and mines.:

"(1) In general. ... (B) in the case of mines, a reasonable allowance for depletion
thereof not to exceed the market value in the mine of the product thereof, which has
been mined and sold during the year for which the return and computation are made.
The allowances shall be made under rules and regulations to be prescribed by the
Secretary of Finance: Provided, That when the allowances shall equal the capital
invested, ... no further allowance shall be made."

Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10
which it actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth
(1/5) of said amount from its gross income for the year 1957 because such deduction in the
form of depletion charge was not sanctioned by Section 30(g) (1) (B) of the Revenue Code, as
above-quoted.

xxx xxx xxx

The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the
memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that the ore
reserves of the Busuange Mines (Mines transferred by the Palawan Manganese Mines, Inc. to
the petitioner) would be exhausted in five (5) years, hence, the claim for P48,481.62 or one-
fifth (1/5) of the alleged cost of the mines corresponding to the year 1957 and every year
thereafter for a period of 5 years. The said memorandum merely showed the estimated ore
reserves of the mines and it probable selling price. No evidence whatsoever was presented to
show the produced mine and for how much they were sold during the year for which the
return and computation were made. This is necessary in order to determine the amount of
depletion that can be legally deducted from petitioner's gross income. The method employed
by petitioner in making an outright deduction of 1/5 of the cost of the mines is not authorized
under Section 30(g) (1) (B) of the Revenue Code. Respondent's disallowance of the alleged
"contractual rights" amounting to P48,481.62 must therefore be sustained. 21

The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent
provision of the Tax Code its "capital investment," representing the alleged value of its contractual
rights and titles to mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of
this "capital investment" every year. regardless of whether it had actually mined the product and sold
the products. The very authorities cited in its brief give the correct concept of depletion charges that
they "allow for the exhaustion of the capital value of the deposits by production"; thus, "as the cost of
the raw materials must be deducted from the gross income before the net income can be determined,
so the estimated cost of the reserve used up is allowed." 22 The alleged "capital investment" method
invoked by the taxpayer is not a method of depletion, but the Tax Code provision, prior to its
amendment by Section 1, of Republic Act No. 2698, which took effect on June 18, 1960, expressly
provided that "when the allowances shall equal the capital invested ... no further allowances shall be
made;" in other words, the "capital investment" was but the limitation of the amount of depletion that
could be claimed. The outright deduction by the taxpayer of 1/5 of the cost of the mines, as if it were a
"straight line" rate of depreciation, was correctly held by the Tax Court not to be authorized by the
Tax Code.

ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-
21551 and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and
1952 to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby
affirmed. The judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L-
24978 is affirmed in toto. No costs. So ordered.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and Barredo,
JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21570 July 26, 1966

LIMPAN INVESTMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Vicente L. San Luis for petitioner.

Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete, Solicitor A. B.
Afurong and Atty. V. G. Saldajeno for respondents.

REYES, J.B.L., J.:

Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of
Tax Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent
Commissioner of Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency
income taxes, plus 50% surcharge and 1% monthly interest from June 30, 1959 to the date of
payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of
leasing real properties. It commenced actual business operations on July 1, 1955. Its principal
stockholders are the spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who own and control
ninety-nine per cent (99%) of its total paid-up capital. Its president and chairman of the board is the
same Isabelo P. Lim.1wph1.t

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all
of which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes
of P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the
sums of P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they
discovered and ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and
P81,690.00 during these taxable years and had claimed excessive depreciation of its buildings in the
sums of P4,260.00 and P16,336.00 covering the same period. On the basis of these findings,
respondent Commissioner of Internal Revenue issued its letter-assessment and demand for payment of
deficiency income tax and surcharge against petitioner corporation, computed as follows:

90-AR-C-348-58/56
Net income per audited return P 3,287.81
Add: Unallowable deductions:
 Undeclared Rental Receipt
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00
Net income per investigation P27,746.00
Tax due thereon P5,549.00
Less: Amount already assessed 657.00
Balance P4,892.00
Add: 50% Surcharge 2,446.00
DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57
Net income per audited return P11,098.00
Add: Unallowable deductions:
Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00
Net income per investigation P109,126.00
Tax due thereon P22,555.00
Less: Amount already assessed 2,220.00
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the

above assessment but the latter denied said request and reiterated its original assessment and demand,
plus 5% surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the
corporation filed its petition for review before the Tax Appeals court, questioning the correctness and
validity of the above assessment of respondent Commissioner of Internal Revenue. It disclaimed
having received or collected the amount of P20,199.00, as unreported rental income for 1956, or any
part thereof, reasoning out that 'the previous owners of the leased building has (have) to collect part of
the total rentals in 1956 to apply to their payment of rental in the land in the amount of P21,630.00"
(par. 11, petition). It also denied having received or collected the amount of P81,690.00, as unreported
rental income for 1957, or any part thereof, explaining that part of said amount totalling P31,380.00
was not declared as income in its 1957 tax return because its president, Isabelo P. Lim, who collected
and received P13,500.00 from certain tenants, did not turn the same over to petitioner corporation in
said year but did so only in 1959; that a certain tenant (Go Tong) deposited in court his rentals
amounting to P10,800.00, over which the corporation had no actual or constructive control; and that a
sub-tenant paid P4,200.00 which ought not be declared as rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent
Commissioner of its buildings in the above assessment are unfair and inaccurate.
Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis,
who admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax
return and also the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect
to the difference between this omitted income (P12,100.00) and the sum (P20,199.00) found by
respondent Commissioner as undeclared in 1956, petitioner corporation, through the same witness
(Solis), tried to establish that it did not collect or receive the same because, in view of the refusal of
some tenants to recognize the new owner, Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the
former owners, on one hand, and the same Isabelo P. Lim, as president of petitioner corporation, on
the other, had verbally agreed in 1956 to turn over to petitioner corporation six per cent (6%) of the
value of all its properties, computed at P21,630.00, in exchange for whatever rentals the Lims may
collect from the tenants. And, with respect to the difference between the admittedly undeclared sum of
P29,350.00 and that found by respondent Commissioner as unreported rental income, (P81,690.00) in
1957, the same witness Solis also tried to establish that petitioner corporation did not receive or
collect the same but that its president, Isabelo P. Lim, collected part thereof and may have reported
the same in his own personal income tax return; that same Isabelo P. Lim collected P13,500.00, which
he turned over to petitioner in 1959 only; that a certain tenant (Go Tong deposited in court his rentals
(P10,800.00), over which the corporation had no actual or constructive control and which were
withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought not be declared as rental
income in 1957.

With regard to the depreciation which respondent disallowed and deducted from the returns filed by
petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence,
they are entitled to higher rates of depreciation than those adopted by respondent in his assessment.

Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the
respondent that he personally interviewed the tenants of petitioner and found that these tenants had
been regularly paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim,
but these payments were not declared in the corresponding returns; and that in applying rates of
depreciation to petitioner's buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue
Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and
demand for deficiency income tax which, as above stated in the beginning of this opinion, petitioner
has appealed to this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the
following alleged errors of the trial court in its brief, to wit:

I. The respondent Court erred in holding that the petitioner had an unreported rental income
of P20,199.00 for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental income
of P81,690.00 for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00
claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente
G. Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of
P20,199.00) found by the BIR examiners as unreported rental income for the year 1956 and more than
one-third (1/3) of the amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as
unreported rental income for the year 1957, contrary to its original claim to the revenue authorities, it
was incumbent upon it to establish the remainder of its pretensions by clear and convincing evidence,
that in the case is lacking.

With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the
excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and
only later transferred or disposed of the ownership of the buildings existing thereon to petitioner
corporation, so as to justify the alleged verbal agreement whereby they would turn over to petitioner
corporation six percent (6%) of the value of its properties to be applied to the rentals of the land and
in exchange for whatever rentals they may collect from the tenants who refused to recognize the new
owner or vendee of the buildings, is not only unusual but uncorroborated by the alleged transferors, or
by any document or unbiased evidence. Hence, the first assigned error is without merit.

As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining
unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo
P. Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income
tax return submitted in court to establish that the rental income which he allegedly collected and
received in 1957 were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957, since the deposit was resorted to due to
the refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is
deemed to have constructively received such rentals in 1957. The payment by the sub-tenant in 1957
should have been reported as rental income in said year, since it is income just the same regardless of
its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is a
question of fact and is not measured by theoretical yardstick, but should be determined by a
consideration of actual facts", and the findings of the Tax Court in this respect should not be disturbed
when not shown to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs.
Priscila Estate, Inc., et al., L-18282, May 29, 1964), and petitioner has not shown any arbitrariness or
abuse of discretion in the part of the Tax Court in finding that petitioner claimed excessive
depreciation in its returns. It appearing that the Tax Court applied rates of depreciation in accordance
with Bulletin "F" of the U.S. Federal Internal Revenue Service, which this Court pronounced as
having strong persuasive effect in this jurisdiction, for having been the result of scientific studies and
observation for a long period in the United States, after whose Income Tax Law ours is patterned (M.
Zamora vs. Collector of internal Revenue & Collector of Internal Revenue vs. M. Zamora; E. Zamora
vs. Collector of Internal Revenue and Collector of Internal Revenue vs. E. Zamora, Nos. L-15280, L-
15290, L-15289 and L-15281, May 31, 1963), the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-
appellant, Limpan Investment Corporation.

Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro,
JJ., concur.