Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 11572 September 22, 1916

FRANCIS A. CHURCHILL and STEWART TAIT, ET AL, plaintiffs-appellants,

vs.
VENANCIO CONCEPCION, as Acting Collector of Internal Revenue, defendant-appellee.

Aitken and De Selms for appellants.

Attorney-General Avanceña for appellee.

TRENT, J.:

Section 100 of Act No. 2339, passed February 27, 1914, effective July 1, 1914, imposed an annual
tax of P4 per square meter upon "electric signs, billboards, and spaces used for posting or displaying
temporary signs, and all signs displayed on premises not occupied by buildings." This section was
subsequently amended by Act No. 2432, effective January 1, 1915, by reducing the tax on such
signs, billboards, etc., to P2 per square meter or fraction thereof. Section 26 of Act No. 2432 was in
turn amended by Act No. 2445, but this amendment does not in any way affect the questions
involved in the case under consideration. The taxes imposed by Act No. 2432, as amended, were
ratified by the Congress of the United States on March 4, 1915. The ratifying clause reads as
follows:

The internal-revenue taxes imposed by the Philippine Legislature under the law enacted by
that body on December twenty-third, nineteen hundred and fourteen (Act No. 2432), as
amended by the law enacted by it on January sixteenth, nineteen hundred and fifteen (Act
No. 2445), are hereby legalized and ratified, and the collection of all such taxes heretofore or
hereafter is hereby legalized, ratified and confirmed as fully to all intents and purposes as if
the same had by prior Act of Congress been specifically authorized and directed.

Francis A. Churchill and Stewart Tait, copartners doing business under the firm name and style of the
Mercantile Advertising Agency, owners of a sign or billboard containing an area of 52 square meters
constructed on private property in the city of Manila and exposed to public view, were taxes thereon
P104. The tax was paid under protest and the plaintiffs having exhausted all their administrative
remedies instituted the present action under section 140 of Act No. 2339 against the Collector of
Internal Revenue to recover back the amount thus paid. From a judgment dismissing the complaint
upon the merits, with costs, the plaintiffs appealed.

It is now urged that the trial court erred:

(1) In not holding that the tax as imposed by virtue of Act No. 2339, as amended by Act No.
2432, as amended by Act No. 2445, constitutes deprivation of property without
compensation or due process of law, because it is confiscatory and unjustly discriminatory
and (2) in not holding that the said tax is void for lack of uniformity, because it is not graded
according to value; because the classification on which it is based on any reasonable
ground; and furthermore, because it constitutes double taxation.
We will first inquire whether the tax in question is confiscatory as to the business of the plaintiff Upon
this point the lower court, in accepting the testimony of the plaintiff, Churchill, to the effect that "the
billboard in question cost P300 to construct, that its annual gross earning power is P268, and that
the annual tax is P104," found "that for a five years' period the gross income from the billboard would
be P1,340, and that the expenditures for original construction and taxes would amount to P820,
leaving a balance of P520," held that "unless the tax equals or exceeds the gross income, the court
would hardly be justified in declaring the tax confiscatory." These findings of fact and conclusions of
law are attacked upon the ground that the court failed to take into-consideration the pertinent facts
that the annual depreciation of the billboard is 20 per cent; that at the end of five years the capital of
P300 would be completely lost; that the plaintiffs are entitled to receive a reasonable rate of interest
on this capital; and that there should be charged against the billboard its proportion of the overhead
charges such as labor, management, maintenance, rental of office premises, rental or purchase of
ground space for board, repair, paints, oils, etc., resulting in an actual loss per year on the business,
instead of an apparent profit of P520 for five years, or P44 for one year. If these contentions rested
upon a sound basis it might be said that the tax is, in a sense, confiscatory; but they do not, as we
will attempt to show from the evidence of record.

The plaintiff Churchill testified in part as follows:

Q. In your opinion, Mr. Churchill, state what you would think of the rates that are
charged by you for advertising purposes in connection with this board; could they be raised?
—

A. No.

Q. Why? —

A. The business wouldn't allow it; the business wouldn't afford it; and otherwise it
would mean bankruptcy to try to increase it.

Q. Who couldn't afford it? Explain it fully Mr. Churchill? —

A. The merchants couldn't afford to pay more. On cross-examination:

Q. It is a fact, it is not, Mr. Churchill, that since the passage of Act No. 2339 you have
never made any attempt to raise the advertising rates? —

A. It would be impossible to raise them.

Q. My question is: You have never made any attempt to raise them? —

A. We have talked it over with the merchants and talked over the price on the event of
a tax being put at a reasonable amount, about putting up some increase.

Q. But you have never made an actual attempt to increase your rates? —

A. I would consider that an actual attempt.

Q. You have never fixed the rate higher than it is now? —

A. No; no.
It was agreed that Tait, the other plaintiff, would testify to the same effect. The parties, plaintiffs and
defendant, further agreed "that a number of persons have voluntarily and without protest paid the
taxes imposed by section 100 of Act No. 2339, as amended by Act No. 2432, and in turn amended
by Act No. 2445."

It will thus be seen that the contention that the rates charged for advertising cannot be raised is
purely hypothetical, based entirely upon the opinion of the plaintiffs, unsupported by actual test, and
that the plaintiffs themselves admit that a number of other persons have voluntarily and without
protest paid the tax herein complained of. Under these circumstances, can it be held as a matter of
fact that the tax is confiscatory or that, as a matter of law, the tax is unconstitutional? Is the exercise
of the taxing power of the Legislature dependent upon and restricted by the opinion of two interested
witnesses? There can be but one answer to these questions, especially in view of the fact that others
are paying the tax and presumably making a reasonable profit from their business.

In Chicago and Grand Trunk Railway Co. vs. Wellman (143 U. S., 339), a question similar to the one
now under consideration was raised and decided by the Supreme Court of the United States. The
principal contention made in that case was that an Act of the Legislature of Michigan fixing the
amount per mile to be charged by railways for the transportation of a passenger was
unconstitutional, on the ground that the rate so fixed was confiscatory. It was agreed in the pleadings
that the total earnings and income of the company from all sources for a given year were less than
the expenses for the same period. In addition to this agreed statement of facts, two witnesses were
called, one the traffic manager and the other the treasurer of the company. Their testimony was to
the effect that in view of the competition prevailing at Chicago for through business, it was
impossible to increase the freight rates then charged by the company because it would throw the
volume of business into the hands of competing roads. In overruling the contention of the company
that the act in question was unconstitutional on the ground that the rate fixed thereby was
confiscatory, the court said:

Surely, before the courts are called upon to adjudge an act of the legislature fixing the
maximum passenger rates for railroad companies to be unconstitutional, on the ground that
its enforcement would prevent the stockholders from receiving any dividends on their
investments, or the bondholders any interest on their loans, they should be fully advised as
to what is done with the receipts and earnings of the company; for if so advised, it might
clearly appear that a prudent and honest management would, within the rates prescribed,
secure to the bondholders their interest, and to the stockholders reasonable dividends. While
the protection of vested rights of property is a supreme duty of the courts, it has not come to
this, that the legislative power rests subservient to the discretion of any railroad corporation
which may, by exorbitant and unreasonable salaries, or in some other improper way, transfer
its earnings into what it is pleased to call `operating expenses.'

It is further alleged that the tax in question is unconstitutional because "the law herein complained of
was enacted for the sole purpose of destroying billboards and advertising business depending on
the use of signs or billboards." If it be conceded that the Legislature has the power to impose a tax
upon signs, signboards, and billboards, then "the judicial cannot prescribed to the legislative
department of the Government limitation upon the exercise of its acknowledge powers." (Veazie
Bank vs. Fenno, 8 Wall., 533, 548.) That the Philippine Legislature has the power to impose such
taxes, we think there can be no serious doubt, because "the power to impose taxes is one so
unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is
subject to any restrictions whatever, except such as rest in the discretion of the authority which
exercises it. It reaches to every trade or occupation; to every object of industry, use, or enjoyment; to
every species of possession; and it imposes a burden which, in case of failure to discharge it, may
be followed by seizure and sale or confiscation of property. No attribute of sovereignty is more
pervading, and at no point does the power of the government affect more constantly and intimately
all the relations of life than through the exactions made under it." (Cooley's Constitutional
Limitations, 6th Edition, p. 587.)

In McCray vs. U.S. (195 U.S., 27), the court, in ruling adversely to the contention that a federal tax
on oleomargarine artificially colored was void because the real purpose of Congress was not to raise
revenue but to tax out of existence a substance not harmful of itself and one which might be lawfully
manufactured and sold, said:

Whilst, as a result of our written constitution, it is axiomatic that the judicial department of the
government is charged with the solemn duty of enforcing the Constitution, and therefore, in
cases property presented, of determining whether a given manifestation of authority has
exceeded the power conferred by that instrument, no instance is afforded from the
foundation of the government where an act which was within a power conferred, was
declared to be repugnant to the Constitution, because it appeared to the judicial mind that
the particular exertion of constitutional power was either unwise or unjust. To announce such
a principle would amount to declaring that, in our constitutional system, the judiciary was not
only charged with the duty of upholding the Constitution, but also with the responsibility of
correcting every possible abuse arising from the exercise by the other departments of their
conceded authority. So to hold would be to overthrow the entire distinction between the
legislative, judicial, and executive departments of the government, upon which our system is
founded, and would be a mere act of judicial usurpation.

If a case were presented where the abuse of the taxing power of the local legislature was to extreme
as to make it plain to the judicial mind that the power had been exercised for the sole purpose of
destroying rights which could not be rightfully destroyed consistently with the principles of freedom
and justice upon which the Philippine Government rests, then it would be the duty of the courts to
say that such an arbitrary act was not merely an abuse of the power, but was the exercise of an
authority not conferred. (McCray vs. U.S., supra.) But the instant case is not one of that character,
for the reason that the tax herein complained of falls far short of being confiscatory. Consequently, it
cannot be held that the Legislature has gone beyond the power conferred upon it by the Philippine
Bill in so far as the amount of the tax is concerned.

Is the tax void for lack of uniformity or because it is not graded according to value or constitutes
double taxation, or because the classification upon which it is based is mere arbitrary selection and
not based on any reasonable grounds? The only limitation, in so far as these questions are
concerned, placed upon the Philippine Legislature in the exercise of its taxing power is that found in
section 5 of the Philippine Bill, wherein it is declared "that the rule of taxation in said Islands shall be
uniform."

Uniformity in taxation — says Black on Constitutional Law, page 292 — means that all
taxable articles or kinds of property, of the same class, shall be taxed at the same rate. It
does not mean that lands, chattels, securities, incomes, occupations, franchises, privileges,
necessities, and luxuries, shall all be assessed at the same rate. Different articles may be
taxed at different amounts, provided the rate is uniform on the same class everywhere, with
all people, and at all times.

A tax is uniform when it operates with the same force and effect in every place where the subject of it
is found (State Railroad Tax Cases, 92 U.S., 575.) The words "uniform throughout the United
States," as required of a tax by the Constitution, do not signify an intrinsic, but simply a geographical,
uniformity, and such uniformity is therefore the only uniformity which is prescribed by the
Constitution. (Patton vs. Brady, 184 U.S., 608; 46 L. Ed., 713.) A tax is uniform, within the
constitutional requirement, when it operates with the same force and effect in every place where the
subject of it is found. (Edye vs. Robertson, 112 U.S., 580; 28 L. Ed., 798.) "Uniformity," as applied to
the constitutional provision that all taxes shall be uniform, means that all property belonging to the
same class shall be taxed alike. (Adams vs. Mississippi State Bank, 23 South, 395, citing Mississippi
Mills vs Cook, 56 Miss., 40.) The statute under consideration imposes a tax of P2 per square meter
or fraction thereof upon every electric sign, bill-board, etc., wherever found in the Philippine Islands.
Or in other words, "the rule of taxation" upon such signs is uniform throughout the Islands. The rule,
which we have just quoted from the Philippine Bill, does not require taxes to be graded according to
the value of the subject or subjects upon which they are imposed, especially those levied as
privilege or occupation taxes. We can hardly see wherein the tax in question constitutes double
taxation. The fact that the land upon which the billboards are located is taxed at so much per unit
and the billboards at so much per square meter does not constitute "double taxation." Double
taxation, within the true meaning of that expression, does not necessarily affect its validity. (1 Cooley
on Taxation, 3d ed., 389.) And again, it is not for the judiciary to say that the classification upon
which the tax is based "is mere arbitrary selection and not based upon any reasonable grounds."
The Legislature selected signs and billboards as a subject for taxation and it must be presumed that
it, in so doing, acted with a full knowledge of the situation.

For the foregoing reasons, the judgment appealed from is affirmed, with costs against the
appellants. So ordered.

Torres, Johnson, Carson, and Araullo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959. On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter
1

was stamp received on the same day in the office of the petitioner. On March 12, 1965, a warrant of
2

distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. A search of the protest
3

in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat
to BIR agent Ramon Reyes, who deferred service of the warrant. On April 7, 1965, Atty. Guevara
4

was finally informed that the BIR was not taking any action on the protest and it was only then that
he accepted the warrant of distraint and levy earlier sought to be served. Sixteen days later, on April
5

23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged. It is true
7

that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" and
8

renders hopeless a request for reconsideration," being "tantamount to an outright denial thereof
9

and makes the said request deemed rejected." But there is a special circumstance in the case at
10

bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the warrant was premature and
could therefore not be served.

As the Court of Tax Appeals correctly noted," the protest filed by private respondent was not pro
11

forma and was based on strong legal considerations. It thus had the effect of suspending on January
18, 1965, when it was filed, the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied rejection of the said protest and the warrant
was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had
seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form of promotional fees.
These were collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees
to be personal holding company income but later conformed to the decision of the respondent
12

court rejecting this assertion. In fact, as the said court found, the amount was earned through the
13

joint efforts of the persons among whom it was distributed It has been established that the Philippine
Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell
its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest in it. Ultimately, after its
14

incorporation largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties. For this sale, Algue received as agent a commission of P126,000.00, and it was
15

from this commission that the P75,000.00 promotional fees were paid to the aforenamed
individuals.
16

There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also found, after
17

examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose. It should be
19

remembered that this was a family corporation where strict business procedures were not applied
and immediate issuance of receipts was not required. Even so, at the end of the year, when the
books were to be closed, each payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. Admittedly, everything seemed to be informal. This
20

arrangement was understandable, however, in view of the close relationship among the persons in
the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00. After deducting the said fees, Algue still had a balance of P50,000.00 as clear
21

profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following provision of the
Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
 actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders.23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.

SO ORDERED.
G.R. No. 149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.

PUNO, J.:

This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March
12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable
to pay franchise tax to respondent City of Cabanatuan.

Petitioner is a government-owned and controlled corporation created under Commonwealth Act No.
120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of power
and the production of electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner
has, among others, the power to construct, operate and maintain power plants, auxiliary plants,
power stations and substations for the purpose of developing hydraulic power and supplying such
power to the inhabitants.6

For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of
1% of the latter's gross receipts for the preceding year.9

Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to
impose tax on government entities. Petitioner also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes, charges, duties or fees 11 in accordance with sec.
13 of Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from its capital investment, as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay
its indebtedness and obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, the Corporation is hereby exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in
any court or administrative proceedings in which it may be a party, restrictions and duties to
the Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees
on import of foreign goods required for its operations and projects; and
 (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power." 12

The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that
petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and
2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has been
repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code."

On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the
following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act
No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied
repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the
national government. Pertinent portion of the Order reads:

"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating
therein repealing provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified by its number or
title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160
is an implied repealing clause because it fails to identify the act or acts that are intended to
be repealed. It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored. The presumption is against inconsistency and repugnancy for the
legislative is presumed to know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law
does not repeal a special law unless it clearly appears that the legislative has intended by
the latter general act to modify or repeal the earlier special law. Thus, despite the passage of
R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the
case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:

'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. xxx 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 mere local government.'
 Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing
power of the Local Government. Corollary to this, it should be noted here that in the NPC
Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the
Philippines through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are primary objectives
of the nations which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.' (underscoring supplied). To
allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal
of this government instrumentality.

Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is
limited to that which is provided for in its charter or other statute. Any grant of taxing power is
to be construed strictly, with doubts resolved against its existence.

From the existing law and the rulings of the Supreme Court itself, it is very clear that the
plaintiff could not impose the subject tax on the defendant." 16

On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in
relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum
of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the
tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a
surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense. 19

On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision.
This was denied by the appellate court, viz:

"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the NPC
Charter which is a special law—finds the answer in Section 193 of the LGC to the effect that
'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 xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

SO ORDERED."20

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC
NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO
SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING
A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION

FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE
 LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH
IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN

EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER
THE LOCAL GOVERNMENT CODE."21

It is beyond dispute that the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)

x x x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes."

Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city
government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the
taxing power of the respondent city government to private entities that are engaged in trade or
occupation for profit.22

Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest
which is conferred upon private persons or corporations, under such terms and conditions as the
government and its political subdivisions may impose in the interest of the public welfare, security
and safety." From the phraseology of this provision, the petitioner claims that the word "private"
modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise,"
petitioner submits that it should refer specifically to franchises granted to private natural persons and
to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of
imposing the franchise tax in question.

On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its
operation; all these profits are required by law to be channeled for expansion and improvement of its
facilities and services.24

Petitioner also alleges that it is an instrumentality of the National Government, 25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26where this Court held that local governments have no power
to tax instrumentalities of the National Government, viz:

"Local governments have no power to tax instrumentalities of the National Government.

PAGCOR has a dual role, to operate and 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. (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 seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics 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 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."27

Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its
charter cannot be amended or modified impliedly by the local government code which is a general
law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its
charter subsists despite the passage of the LGC, viz:

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law.
Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the
 enactment of a later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special statute, the
special statute should prevail since it evinces the legislative intent more clearly than the
general statute."28

Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should
prevail over the LGC. It alleges that the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the
least limitable and most demanding of all powers, including the power of taxation." 29

The petition is without merit.

Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty,31 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 common good. The theory behind the exercise of the power to tax emanates from
necessity;32 without taxes, government cannot fulfill its mandate of promoting the general welfare and
well-being of the people.

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.33 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 34 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, 36 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 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 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.41

Considered as the most revolutionary piece of legislation on local autonomy, 42 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.43

One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when
specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:

"Section 133. Common Limitations on the Taxing Powers of the 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:

x x x

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation44 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,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax.46 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, viz:

"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 power of local governments 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 the item
(a) of the first paragraph of section 12.'"47

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by government authority, which does
not belong to citizens of the country generally as a matter of common right. 48 In its specific sense, a
franchise may refer to a general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the corporation. 49 The right under a
primary or general franchise is vested in the individuals who compose the corporation and not in the
corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an
existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect
poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use.52

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state." 53 It is not levied on
the corporation simply for existing as a corporation, upon its property 54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise. 56 It is within this
context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise
tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter,
defining its composition, capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as
amended, vests the petitioner the following powers which are not available to ordinary
corporations, viz:

"x x x

(e) To conduct investigations and surveys for the development of water power in any part of
the Philippines;

(f) To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters
from lands of riparian owners and from persons owning or interested in waters which are or
may be necessary for said purposes, upon payment of just compensation therefor; to alter,
straighten, obstruct or increase the flow of water in streams or water channels intersecting or
connecting therewith or contiguous to its works or any part thereof: Provided, That just
 compensation shall be paid to any person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;

(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose
of developing hydraulic power from any river, creek, lake, spring and waterfall in the
Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install,
maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers,
generators and machinery in plants and/or auxiliary plants for the production of electric
power; to establish, develop, operate, maintain and administer power and lighting systems
for the transmission and utilization of its power generation; to sell electric power in bulk to (1)
industrial enterprises, (2) city, municipal or provincial systems and other government
institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x
x x;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes
for which the Corporation was created: Provided, That in case a right of way is necessary for
its transmission lines, easement of right of way shall only be sought: Provided, however, That
in case the property itself shall be acquired by purchase, the cost thereof shall be the fair
market value at the time of the taking of such property;

(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume,
street, avenue, highway or railway of private and public ownership, as the location of said
works may require xxx;

(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided
by law for instituting condemnation proceedings by the national, provincial and municipal
governments;

x x x

(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;

(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs
of plants and/or projects constructed or proposed to be constructed by the Corporation.
Upon determination by the Corporation of the areas required for watersheds for a specific
project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands
shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the
Corporation of all areas embraced within the watersheds, subject to existing private rights,
the needs of waterworks systems, and the requirements of domestic water supply;

(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures
to prevent environmental pollution and promote the conservation, development and
maximum utilization of natural resources xxx "58

With these powers, petitioner eventually had the monopoly in the generation and distribution of
electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40, 59 nationalizing
the electric power industry. Although Exec. Order No. 215 60 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity remains the monopoly of
the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city government's
territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.

Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because
its stocks are wholly owned by the National Government, and its charter characterized it as a "non-
profit" organization.

These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and be sued under its own
name,61 and can exercise all the powers of a corporation under the Corporation Code. 62

To be sure, the ownership by the National Government of its entire capital stock does not necessarily
imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 63 classifies
government-owned or controlled corporations (GOCCs) into those performing governmental
functions and those performing proprietary functions, viz:

"A government-owned or controlled corporation is a stock or a non-stock

corporation, whether performing governmental or proprietary functions, which is directly
chartered by special law or if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a parent corporation or subsidiary
corporation, to the extent of at least a majority of its outstanding voting capital stock x x x."
(emphases supplied)

Governmental functions are those pertaining to the administration of government, and as such, are
treated as absolute obligation on the part of the state to perform while proprietary functions are those
that are undertaken only by way of advancing the general interest of society, and are merely optional
on the government.64 Included in the class of GOCCs performing proprietary functions are "business-
like" entities such as the National Steel Corporation (NSC), the National Development Corporation
(NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA),65 among others.

Petitioner was created to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of
electric power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and
sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the
government. They are purely private and commercial undertakings, albeit imbued with public
interest. The public interest involved in its activities, however, does not distract from the true nature
of the petitioner as a commercial enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water supply and irrigation companies,
gas, coal or light companies, power plants, ice plant among others; all of which are declared by this
Court as ministrant or proprietary functions of government aimed at advancing the general interest of
society.67

A closer reading of its charter reveals that even the legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68
 "(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time, may
be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the
said purpose xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its
electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for expansion" 70 while other
franchise holders have the option to distribute their profits to its stockholders by declaring dividends.
We do not see why this fact can be a source of difference in tax treatment. In both instances, the
taxable entity is the corporation, which exercises the franchise, and not the individual stockholders.

We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.

As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to
exist clearly and categorically, and supported by clear legal provisions. 71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all
income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces,
cities, municipalities and other government agencies and instrumentalities." However, section 193 of
the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by
private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions from local taxes. 72 It reads:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphases supplied)

It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-
stock and non-profit hospital or educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that
expressly grant it exemption from local taxes.

But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can
impose franchise tax "notwithstanding any exemption granted by any law or other special law." This
particular provision of the LGC does not admit any exception. In City Government of San Pablo,
Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an
issue before this Court. The same issue was involved in the subsequent case of Manila Electric
Company v. Province of Laguna.75 Ruling in favor of the local government in both instances, we ruled
that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under
special laws, viz:
 "It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC
to support their position that MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other special law' is all-encompassing
and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that
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 (1) local water districts, (2) cooperatives duly registered under
R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory construction that the express mention
of one person, thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to
the contrary, and we find no other provision in point, any existing tax exemption or incentive
enjoyed by MERALCO under existing law was clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the
local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the
gross annual receipts for the preceding calendar based on the incoming receipts realized
within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed
under existing law or charter is clearly manifested by the language used on (sic) Sections
137 and 193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to enumerate all
the existing statutes providing for special tax exemptions or privileges, the LGC provided for
an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used."76(emphases supplied).

It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs. 77 But in enacting section 37 of Ordinance No.
165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or
other special law," the respondent city government clearly did not intend to exempt the petitioner
from the coverage thereof.

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."78 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.

IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.

SO ORDERED.
G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF
APPEALS, respondent.

QUISUMBING, J.:

This petition for review assails the Resolution of the Court of Appeals dated September 22,
1

1993 affirming the Decision and a Resolution of the Court Of Tax Appeals which denied the claims
2 3

of the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due
course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED. 4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for
1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond
the reglementary period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood automatically credited
the same to the succeeding year. The petition for review is dismissed for lack of
merit.

SO ORDERED. 5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly

organized under Philippine laws, filed its quarterly income tax returns for the first and second
quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due
were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal
Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and
P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns
for the year-ended December 31, 1986, the petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees
withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a
tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of
1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their
lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted
a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition
was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs.
Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for
1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986

——— ———

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00 —

Tax Withheld at Source 282,795.50 234,077.69

———————— ———————

Excess Tax Payments P5,299,749.50* P234,077.69

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

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95.

A forty five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of
petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was
filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in
1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically
credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same
was denied due course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the
Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's
resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the

formal assurances of BIR in RMC No. 7-85 and did not immediately
file with the CTA a petition for review asking for the refund/tax credit
of its 1985-86 excess quarterly income tax payments — can be
prejudiced by the subsequent BIR rejection, applied retroactivity, of its
assurances in RMC No. 7-85 that the prescriptive period for the
refund/tax credit of excess quarterly income tax payments is not two
years but ten (10). 7

II. Whether the Court of Appeals seriously erred in affirming the CTA
decision which denied PBCom's claim for the refund of P234,077.69
income tax overpaid in 1986 on the mere speculation, without proof,
that there were taxes due in 1987 and that PBCom availed of tax-
crediting that year.8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea
for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-
85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying
on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular
states that overpaid income taxes are not covered by the two-year prescriptive period under the tax
Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the
BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular
reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX

CREDIT OF EXCESS CORPORATE INCOME TAX
RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations

Nos. 10-77 which provide;

xxx xxx xxx

 It has been observed, however, that because of the excess tax payments,
corporations file claims for recovery of overpaid income tax with the Court of Tax
Appeals within the two-year period from the date of payment, in accordance with
sections 292 and 295 of the National Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the judicial right of the corporation to claim
the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax
under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund
of the overpaid income tax or claim for automatic tax credit. To insure prompt action
on corporate annual income tax returns showing refundable amounts arising from
overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum
Order No. 32-76 dated June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-audited which consist
mainly of checking mathematical accuracy of the figures of the return. After which,
the refund or tax credit is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of
Tax Appeals in order to preserve the right to claim refund or tax credit the two year
period. As already stated, actions hereon by the Bureau are immediate after only a
cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from
the Bureau of Internal Revenue excess income tax paid under the provisions of
Section 86 of the Tax Code within 10 years from the date of payment considering that
it is an obligation created by law (Article 1144 of the Civil Code). (Emphasis
9

supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared
circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs.
Court of Tax Appeals petitioner claims that rulings or circulars promulgated by the Commissioner of
10

Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case,
the Court held that the government is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or where there has been a misrepresentation
to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this
rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any

of the rules and regulations promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or reversal will be prejudicial to
the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits

material facts from his return or in any document
required of him by the Bureau of Internal Revenue;
 b). where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different
from the facts on which the ruling is based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on
April 15 following the close of the calendar year. As precedents, respondent Commissioner cited
cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et
al., and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. Respondent Commissioner
11 12

also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year
1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief
from the court. Further, respondent Commissioner stresses that when the petitioner filed the case
before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such
failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary
to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as
it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate
funds for the State to finance the needs of the citizenry and to advance the common weal. Due 13

process of law under the Constitution does not require judicial proceedings in tax cases. This must
necessarily be so because it is upon taxation that the government chiefly relies to obtain the means
to carry on its operations and it is of utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed
by law because the BIR being an administrative body enforced to collect taxes, its functions should
not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997)
provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or
illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding

shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of
any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years
from the date of payment of the tax or penalty regardless of any supervening cause
that may arise after payment; Provided however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of
Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced.
The two-year prescriptive period provided, should be computed from the time of filing the Adjustment
Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., this Court
15

explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the
time that the refund is ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. . . . As we have earlier said in
the TMX Sales case, Sections 68. 69, and 70 on Quarterly Corporate Income
16 17 18

Tax Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did
not simply interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed
upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance administrative issuances that override, instead of
20

remaining consistent and in harmony with the law they seek to apply and implement. 21

In the case of People vs. Lim, it was held that rules and regulations issued by administrative
22

officials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No 37-1 fixed no
period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the
part of Secretary of Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to
implement a law cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the offices of
Department Heads who draft rules and regulation is called to the importance and
necessity of closely following the terms and provisions of the law which they intended
to implement, this to avoid any possible misunderstanding or confusion as in the
present case. 23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of
its officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85
24

issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is

not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.
 It is likewise argued that the Commissioner of Internal Revenue, after promulgating
RMC No. 7-85, is estopped by the principle of non-retroactively of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that a taxpayer may recover the
excess income tax paid within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a
claim for a refund or tax credit and corresponding petition fro review within the
two-year prescription period, and that the lengthening of the period of limitation on
refund from two to ten years would be adverse to public policy and run counter to the
positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals. Estoppel has no application in the case at bar because it was
not the Commissioner of Internal Revenue who denied petitioner's claim of refund or
tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of
Internal Revenue is an administrative interpretation which is out of harmony with or
contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence,
cannot be given weight for to do so would in effect amend the statute. 25

Art. 8 of the Civil Code recognizes judicial decisions, applying or interpreting statutes as part of the
26

legal system of the country. But administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against
judicial action. For there are no vested rights to speak of respecting a wrong construction of the law
by the administrative officials and such wrong interpretation could not place the Government in
estoppel to correct or overrule the same. Moreover, the non-retroactivity of rulings by the
27

Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85
was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must
be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against the taxpayer. 28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming
CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere
speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that any excess of the total
29

quarterly payments over the actual income tax computed in the adjustment or final corporate income
tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option box
provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax
credit for the succeeding taxable year. To ease the administration of tax collection, these remedies
are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to apply for automatic tax credit.
This was the basis used (vis-avis the fact that the 1987 annual corporate tax return
was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the
 succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies
of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as
specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect.
Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to
contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no
showing of gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from
is AFFIRMED, with COSTS against the petitioner. 1âwphi1.nêt

SO ORDERED.

G.R. No. 134062 April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

CORONA, J.:

This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May 29,
1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of the
Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case
No. 4715.

In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed
respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary stamp
taxes for the year 1986 in the total amount of ₱129,488,656.63:

1986 – Deficiency Percentage Tax

Deficiency percentage tax ₱ 7, 270,892.88

Add: 25% surcharge 1,817,723.22
20% interest from 1-21-87 to 10-28-88 3,215,825.03
15,000.00
Compromise penalty

TOTAL AMOUNT DUE AND COLLECTIBLE ₱12,319,441.13

1986 – Deficiency Documentary Stamp Tax

Deficiency percentage tax ₱93,723,372.40

Add: 25% surcharge 23,430,843.10
15,000.00
Compromise penalty

TOTAL AMOUNT DUE AND COLLECTIBLE ₱117,169,215.50.5

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary stamp taxes have] been assessed as
shown above. Said assessment has been based on return – (filed by you) – (as verified) – (made by
this Office) – (pending investigation) – (after investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial
Treasurer of xxx6

In a letter dated December 10, 1988, BPI, through counsel, replied as follows:

1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed,
even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a
deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can
make an intelligent decision on whether to pay or to protest the assessment. This is all the
more so when the assessment involves astronomical amounts, as in this case.

We therefore request that the examiner concerned be required to state, even in the briefest
form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and
as to the percentage tax, it is important that the taxpayer be informed also as to what
particular percentage tax the assessment refers to.

2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise
forged between your office and the Bankers Association of the Philippines [BAP] on this
issue and of BPI’s submission of its computations under this compromise. There is therefore
no basis whatsoever for this assessment, assuming it is on the subject of the BAP
compromise. On the other hand, if it relates to documentary stamp tax on some other issue,
we should like to be informed about what those issues are.

3. As to the alleged deficiency percentage tax, we are completely at a loss on how such
assessment may be protested since your letter does not even tell the taxpayer what
particular percentage tax is involved and how your examiner arrived at the deficiency. As
soon as this is explained and clarified in a proper letter of assessment, we shall inform you of
the taxpayer’s decision on whether to pay or protest the assessment. 7

On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:

… although in all respects, your letter failed to qualify as a protest under Revenue Regulations No.
12-85 and therefore not deserving of any rejoinder by this office as no valid issue was raised against
the validity of our assessment… still we obliged to explain the basis of the assessments.

xxx xxx xxx

… this constitutes the final decision of this office on the matter.8

On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIR’s May 8,
1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21,
1992.10

On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated November 16,
1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become
final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the
National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA
1125.12 It denied reconsideration in a resolution dated May 27, 1996.13

On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to the
CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases therefor. It
declared that the proper assessments were those contained in the May 8, 1991 letter which provided
the reasons for the claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the
CTA on time.17 The CIR elevated the case to this Court.

This petition raises the following issues:

1) whether or not the assessments issued to BPI for deficiency percentage and documentary
stamp taxes for 1986 had already become final and unappealable and

2) whether or not BPI was liable for the said taxes.

The former Section 27018 (now renumbered as Section 228) of the NIRC stated:

Sec. 270. Protesting of assessment. — When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the [CIR] shall issue an
assessment based on his findings.

xxx xxx xxx (emphasis supplied)

Were the October 28, 1988 Notices Valid Assessments?

The first issue for our resolution is whether or not the October 28, 1988 notices 19 were valid
assessments. If they were not, as held by the CA, then the correct assessments were in the May 8,
1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a
reconsideration of the findings which the CIR denied in his December 12, 1991 letter, received by
BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on February
18, 1992 would be well within the 30-day period provided by law.20

The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which
was designed for the precise purpose of notifying taxpayers of the assessed amounts due and
demanding payment thereof.21 He contends that there was no law or jurisprudence then that required
notices to state the reasons for assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and law upon which the assessments
were based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section
228), specifically provides that:

"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void."

According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due
process requires even under the former Section 270.

BPI’s contention has no merit. The present Section 228 of the NIRC provides:

Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not be required in the following
cases:

xxx xxx xxx

The taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.

xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of
the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the
computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.

In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270
prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997).23 In CIR v.
Reyes,24 we held that:

In the present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who
had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424,
otherwise known as the Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The
old requirement of merely notifying the taxpayer of the CIR's findings was changed in
1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment
would be made; otherwise, the assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued.
During those dates, RA 8424 was already in effect. The notice required under the old law was no
longer sufficient under the new law.25(emphasis supplied; italics in the original)

Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law
required a written statement to the taxpayer of the law and facts on which the assessments were
based. The Court cannot read into the law what obviously was not intended by Congress. That
would be judicial legislation, nothing less.

Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax
liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed
period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and jurisprudence.

The sentence

[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void

was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning. 28

Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an
affirmation of what the law required under the former Section 270. The amendment introduced by RA
8424 was an innovation and could not be reasonably inferred from the old law. 29 Clearly, the
legislature intended to insert a new provision regarding the form and substance of assessments
issued by the CIR.30

In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:

xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of
the legal and factual basis of the former’s decision to charge the latter for deficiency documentary
stamp and gross receipts taxes.31

In other words, the CA’s theory was that BPI was deprived of due process when the CIR failed to
inform it in writing of the factual and legal bases of the assessments —even if these were not called
for under the old law.

We disagree.

Indeed, the underlying reason for the law was the basic constitutional requirement that "no person
shall be deprived of his property without due process of law."32 We note, however, what the CTA had
to say:

xxx xxx xxx

From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity
to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI]
ignored) but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh]
out the issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel
honestly tell this Court that they did not know anything about the assessments?

Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,]
contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager
of the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which
contain his analysis regarding the findings of the [CIR’s] examiner, Mr. San Pedro and that the same
worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].

xxx xxx xxx

From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature
and basis of the assessments, and was given all the opportunity to contest the same but ignored it
despite the notice conspicuously written on the assessments which states that "this ASSESSMENT
becomes final and unappealable if not protested within 30 days after receipt." Counsel resorted to
dilatory tactics and dangerously played with time. Unfortunately, such strategy proved fatal to the
cause of his client.33

The CA never disputed these findings of fact by the CTA:

[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings 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]. 34

Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days from receipt of the final
decision:35

Sec. 270. Protesting of assessment. 1a\^/phi1.net

xxx xxx xxx

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation in such form and manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final
and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of
the said decision; otherwise, the decision shall become final, executory and demandable.

Implications Of A Valid Assessment

Considering that the October 28, 1988 notices were valid assessments, BPI should have protested
the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not
qualify as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a
proper letter of assessment, we shall inform you of the taxpayer’s decision on whether to pay
or protest the assessment."36 Hence, by its own declaration, BPI did not regard this letter as a
protest against the assessments. As a matter of fact, BPI never deemed this a protest since it did not
even consider the October 28, 1988 notices as valid or proper assessments.

The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA
correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then on, barred from disputing
the correctness of the assessments or invoking any defense that would reopen the question of its
liability on the merits.37 Not only that. There arose a presumption of correctness when BPI failed to
protest the assessments:

Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has
the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties,
an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior
officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 38

Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed
to have failed to appeal the CIR’s final decision regarding the disputed assessments within the 30-
day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final
decision … on the matter." BPI therefore had 30 days from the time it received the decision on June
27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal
in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must now suffer the
repercussions of its omission. We have already declared that:

… the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the
basis of his statement indubitably showing that the Commissioner's communicated action is
his final decision on the contested assessment, the aggrieved taxpayer would then be able to
take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer
would be able to determine when his right to appeal to the tax court accrues.

The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer
to continually delay the finality of the assessment — and, consequently, the collection of the
amount demanded as taxes — by repeated requests for recomputation and
reconsideration. On the part of the [CIR], this would encourage his office to conduct a careful and
thorough study of every questioned assessment and render a correct and definite decision thereon
in the first instance. This would also deter the [CIR] from unfairly making the taxpayer grope in the
dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater
import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in
administrative action.39(emphasis supplied)

Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the
subject tax assessments.

We realize that these assessments (which have been pending for almost 20 years) involve a
considerable amount of money. Be that as it may, we cannot legally presume the existence of
something which was never there. The state will be deprived of the taxes validly due it and the public
will suffer if taxpayers will not be held liable for the proper taxes assessed against them:

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, 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 common good. The theory behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being
of the people.40

WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals
in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.

G.R. No. L-75697

VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION,
CITY MAYOR and CITY TREASURER OF MANILA, respondents.

Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:

This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on
behalf of other videogram operators adversely affected. It assails the constitutionality of Presidential
Decree No. 1987 entitled "An Act Creating the Videogram Regulatory Board" with broad powers to
regulate and supervise the videogram industry (hereinafter briefly referred to as the BOARD). The
Decree was promulgated on October 5, 1985 and took effect on April 10, 1986, fifteen (15) days
after completion of its publication in the Official Gazette.

On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential
Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:

SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette,
ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers,
Importers and Distributors Association of the Philippines, and Philippine Motion Pictures Producers
Association, hereinafter collectively referred to as the Intervenors, were permitted by the Court to
intervene in the case, over petitioner's opposition, upon the allegations that intervention was
necessary for the complete protection of their rights and that their "survival and very existence is
threatened by the unregulated proliferation of film piracy." The Intervenors were thereafter allowed to
file their Comment in Intervention.

The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:

1. WHEREAS, the proliferation and unregulated circulation of videograms including, among

others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp
decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the
collection of sales, contractor's specific, amusement and other taxes, thereby resulting in
substantial losses estimated at P450 Million annually in government revenues;
 2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum
from rentals, sales and disposition of videograms, and such earnings have not been
subjected to tax, thereby depriving the Government of approximately P180 Million in taxes
each year;

3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due
to the shutdown of numerous moviehouses and theaters;

4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the

Government to create an environment conducive to growth and development of all business
industries, including the movie industry which has an accumulated investment of about P3
Billion;

5. WHEREAS, proper taxation of the activities of videogram establishments will not only
alleviate the dire financial condition of the movie industry upon which more than 75,000
families and 500,000 workers depend for their livelihood, but also provide an additional
source of revenue for the Government, and at the same time rationalize the heretofore
uncontrolled distribution of videograms;

6. WHEREAS, the rampant and unregulated showing of obscene videogram features

constitutes a clear and present danger to the moral and spiritual well-being of the youth, and
impairs the mandate of the Constitution for the State to support the rearing of the youth for
civic efficiency and the development of moral character and promote their physical,
intellectual, and social well-being;

7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb
these blatant malpractices which have flaunted our censorship and copyright laws;

8. WHEREAS, in the face of these grave emergencies corroding the moral values of the
people and betraying the national economic recovery program, bold emergency measures
must be adopted with dispatch; ... (Numbering of paragraphs supplied).

Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the vast powers
conferred upon him by Amendment No. 6;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof" is sufficiently complied with if the title be comprehensive enough to
1

include the general purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The requirement is satisfied if all
the parts of the statute are related, and are germane to the subject matter expressed in the title, or
as long as they are not inconsistent with or foreign to the general subject and title. An act having a
2

single general subject, indicated in the title, may contain any number of provisions, no matter how
diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and
may be considered in furtherance of such subject by providing for the method and means of carrying
out the general object." The rule also is that the constitutional requirement as to the title of a bill
3

should not be so narrowly construed as to cripple or impede the power of legislation. It should be
4

given practical rather than technical construction. 5

Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a
rider is without merit. That section reads, inter alia:

Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any

provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the
purchase price or rental rate, as the case may be, for every sale, lease or disposition of a
videogram containing a reproduction of any motion picture or audiovisual program. Fifty
percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other
fifty percent (50%) shall acrrue to the municipality where the tax is collected; PROVIDED,
That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the
Metropolitan Manila Commission.

xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video industry
through the Videogram Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for regulation it is simply one
6

of the regulatory and control mechanisms scattered throughout the DECREE. The express purpose
of the DECREE to include taxation of the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those
preambles explain the motives of the lawmaker in presenting the measure. The title of the DECREE,
which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to
express all those objectives in the title or that the latter be an index to the body of the DECREE. 7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the
8

courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its
9

constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. 10

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by
the realization that earnings of videogram establishments of around P600 million per annum have
not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is
an end-user tax, imposed on retailers for every videogram they make available for public viewing. It
is similar to the 30% amusement tax imposed or borne by the movie industry which the theater-
owners pay to the government, but which is passed on to the entire cost of the admission ticket, thus
shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all
videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of
intellectual property rights, and the proliferation of pornographic video tapes. And while it was also
an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which impelled the legislature
to impose the tax was to favor one industry over another. 11

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it
has been repeatedly held that "inequities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional limitation". Taxation has been
12

made the implement of the state's police power. 13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by
the former President under Amendment No. 6 of the 1973 Constitution providing that "whenever in
the judgment of the President ... , there exists a grave emergency or a threat or imminence thereof,
or whenever the interim Batasang Pambansa or the regular National Assembly fails or is unable to
act adequately on any matter for any reason that in his judgment requires immediate action, he may,
in order to meet the exigency, issue the necessary decrees, orders, or letters of instructions, which
shall form part of the law of the land."

In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of the
people and betraying the national economic recovery program necessitated bold emergency
measures to be adopted with dispatch. Whatever the reasons "in the judgment" of the then
President, considering that the issue of the validity of the exercise of legislative power under the said
Amendment still pends resolution in several other cases, we reserve resolution of the question
raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the
direct assistance of other agencies and units of the government and deputize, for a fixed and limited
period, the heads or personnel of such agencies and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but merely a conferment of authority or discretion
as to its execution, enforcement, and implementation. "The true distinction is between the delegation
of power to make the law, which necessarily involves a discretion as to what it shall be, and
conferring authority or discretion as to its execution to be exercised under and in pursuance of the
law. The first cannot be done; to the latter, no valid objection can be made." Besides, in the very
14

language of the decree, the authority of the BOARD to solicit such assistance is for a "fixed and
limited period" with the deputized agencies concerned being "subject to the direction and control of
the BOARD." That the grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the commission of the offense." It is
petitioner's position that Section 15 of the DECREE in providing that:

All videogram establishments in the Philippines are hereby given a period of forty-five (45)
days after the effectivity of this Decree within which to register with and secure a permit from
the BOARD to engage in the videogram business and to register with the BOARD all their
inventories of videograms, including videotapes, discs, cassettes or other technical
improvements or variations thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any person engaged in the
videogram business without the required proof of registration by the BOARD, shall be prima
facie evidence of violation of the Decree, whether the possession of such videogram be for
private showing and/or public exhibition.

raises immediately a prima facie evidence of violation of the DECREE when the required proof of
registration of any videogram cannot be presented and thus partakes of the nature of an ex post
facto law.

The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et
al.15

... it is now well settled that "there is no constitutional objection to the passage of a law
providing that the presumption of innocence may be overcome by a contrary presumption
founded upon the experience of human conduct, and enacting what evidence shall be
sufficient to overcome such presumption of innocence" (People vs. Mingoa 92 Phil. 856
[1953] at 858-59, citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL
LIMITATIONS, 639-641). And the "legislature may enact that when certain facts have been
proved that they shall be prima facie evidence of the existence of the guilt of the accused
and shift the burden of proof provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of the one from proof of the
others is not unreasonable and arbitrary because of lack of connection between the two in
common experience". 16

Applied to the challenged provision, there is no question that there is a rational connection between
the fact proved, which is non-registration, and the ultimate fact presumed which is violation of the
DECREE, besides the fact that the prima facie presumption of violation of the DECREE attaches
only after a forty-five-day period counted from its effectivity and is, therefore, neither retrospective in
character.

6. We do not share petitioner's fears that the video industry is being over-regulated and being eased
out of existence as if it were a nuisance. Being a relatively new industry, the need for its regulation
was apparent. While the underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair
competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought
about by the availability of unclassified and unreviewed video tapes containing pornographic films
and films with brutally violent sequences; and losses in government revenues due to the drop in
theatrical attendance, not to mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in
business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video
industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.

In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of
the DECREE. These considerations, however, are primarily and exclusively a matter of legislative
concern.

Only congressional power or competence, not the wisdom of the action taken, may be the
basis for declaring a statute invalid. This is as it ought to be. The principle of separation of
powers has in the main wisely allocated the respective authority of each department and
confined its jurisdiction to such a sphere. There would then be intrusion not allowable under
the Constitution if on a matter left to the discretion of a coordinate branch, the judiciary would
substitute its own. If there be adherence to the rule of law, as there ought to be, the last
offender should be courts of justice, to which rightly litigants submit their controversy
precisely to maintain unimpaired the supremacy of legal norms and prescriptions. The attack
on the validity of the challenged provision likewise insofar as there may be objections, even if
valid and cogent on its wisdom cannot be sustained. 18

In fine, petitioner has not overcome the presumption of validity which attaches to a challenged
statute. We find no clear violation of the Constitution which would justify us in pronouncing
Presidential Decree No. 1987 as unconstitutional and void.

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

G.R. No. 168557 February 16, 2007

FELS ENERGY, INC., Petitioner,

vs.
THE PROVINCE OF BATANGAS and

THE OFFICE OF THE PROVINCIAL ASSESSOR OF BATANGAS, Respondents.

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

G.R. No. 170628 February 16, 2007

NATIONAL POWER CORPORATION, Petitioner,

vs.
LOCAL BOARD OF ASSESSMENT APPEALS OF BATANGAS, LAURO C. ANDAYA, in his
capacity as the Assessor of the Province of Batangas, and the PROVINCE OF BATANGAS
represented by its Provincial Assessor, Respondents.

DECISION

CALLEJO, SR., J.:

Before us are two consolidated cases docketed as G.R. No. 168557 and G.R. No. 170628, which
were filed by petitioners FELS Energy, Inc. (FELS) and National Power Corporation (NPC),
respectively. The first is a petition for review on certiorari assailing the August 25, 2004 Decision 1 of
the Court of Appeals (CA) in CA-G.R. SP No. 67490 and its Resolution 2 dated June 20, 2005; the
second, also a petition for review on certiorari, challenges the February 9, 2005 Decision 3 and
November 23, 2005 Resolution4 of the CA in CA-G.R. SP No. 67491. Both petitions were dismissed
on the ground of prescription.

The pertinent facts are as follows:

On January 18, 1993, NPC entered into a lease contract with Polar Energy, Inc. over 3x30 MW
diesel engine power barges moored at Balayan Bay in Calaca, Batangas. The contract,
denominated as an Energy Conversion Agreement5 (Agreement), was for a period of five years.
Article 10 reads:

10.1 RESPONSIBILITY. NAPOCOR shall be responsible for the payment of (a) all taxes, import
duties, fees, charges and other levies imposed by the National Government of the Republic of the
Philippines or any agency or instrumentality thereof to which POLAR may be or become subject to
or in relation to the performance of their obligations under this agreement (other than (i) taxes
imposed or calculated on the basis of the net income of POLAR and Personal Income Taxes of its
employees and (ii) construction permit fees, environmental permit fees and other similar fees and
charges) and (b) all real estate taxes and assessments, rates and other charges in respect of the
Power Barges.6

Subsequently, Polar Energy, Inc. assigned its rights under the Agreement to FELS. The NPC initially
opposed the assignment of rights, citing paragraph 17.2 of Article 17 of the Agreement.

On August 7, 1995, FELS received an assessment of real property taxes on the power barges from
Provincial Assessor Lauro C. Andaya of Batangas City. The assessed tax, which likewise covered
those due for 1994, amounted to ₱56,184,088.40 per annum. FELS referred the matter to NPC,
reminding it of its obligation under the Agreement to pay all real estate taxes. It then gave NPC the
full power and authority to represent it in any conference regarding the real property assessment of
the Provincial Assessor.

In a letter7 dated September 7, 1995, NPC sought reconsideration of the Provincial Assessor’s
decision to assess real property taxes on the power barges. However, the motion was denied on
September 22, 1995, and the Provincial Assessor advised NPC to pay the assessment. 8 This
prompted NPC to file a petition with the Local Board of Assessment Appeals (LBAA) for the setting
aside of the assessment and the declaration of the barges as non-taxable items; it also prayed that
should LBAA find the barges to be taxable, the Provincial Assessor be directed to make the
necessary corrections.9
In its Answer to the petition, the Provincial Assessor averred that the barges were real property for
purposes of taxation under Section 199(c) of Republic Act (R.A.) No. 7160.

Before the case was decided by the LBAA, NPC filed a Manifestation, informing the LBAA that the
Department of Finance (DOF) had rendered an opinion10 dated May 20, 1996, where it is clearly
stated that power barges are not real property subject to real property assessment.

On August 26, 1996, the LBAA rendered a Resolution11 denying the petition. The fallo reads:

WHEREFORE, the Petition is DENIED. FELS is hereby ordered to pay the real estate tax in the
amount of ₱56,184,088.40, for the year 1994.

SO ORDERED.12

The LBAA ruled that the power plant facilities, while they may be classified as movable or personal
property, are nevertheless considered real property for taxation purposes because they are installed
at a specific location with a character of permanency. The LBAA also pointed out that the owner of
the barges–FELS, a private corporation–is the one being taxed, not NPC. A mere agreement making
NPC responsible for the payment of all real estate taxes and assessments will not justify the
exemption of FELS; such a privilege can only be granted to NPC and cannot be extended to FELS.
Finally, the LBAA also ruled that the petition was filed out of time.

Aggrieved, FELS appealed the LBAA’s ruling to the Central Board of Assessment Appeals (CBAA).

On August 28, 1996, the Provincial Treasurer of Batangas City issued a Notice of Levy and Warrant
by Distraint13over the power barges, seeking to collect real property taxes amounting to
₱232,602,125.91 as of July 31, 1996. The notice and warrant was officially served to FELS on
November 8, 1996. It then filed a Motion to Lift Levy dated November 14, 1996, praying that the
Provincial Assessor be further restrained by the CBAA from enforcing the disputed assessment
during the pendency of the appeal.

On November 15, 1996, the CBAA issued an Order 14 lifting the levy and distraint on the properties of
FELS in order not to preempt and render ineffectual, nugatory and illusory any resolution or
judgment which the Board would issue.

Meantime, the NPC filed a Motion for Intervention15 dated August 7, 1998 in the proceedings before
the CBAA. This was approved by the CBAA in an Order16 dated September 22, 1998.

During the pendency of the case, both FELS and NPC filed several motions to admit bond to
guarantee the payment of real property taxes assessed by the Provincial Assessor (in the event that
the judgment be unfavorable to them). The bonds were duly approved by the CBAA.

On April 6, 2000, the CBAA rendered a Decision17 finding the power barges exempt from real
property tax. The dispositive portion reads:

WHEREFORE, the Resolution of the Local Board of Assessment Appeals of the Province of
Batangas is hereby reversed. Respondent-appellee Provincial Assessor of the Province of Batangas
is hereby ordered to drop subject property under ARP/Tax Declaration No. 018-00958 from the List
of Taxable Properties in the Assessment Roll. The Provincial Treasurer of Batangas is hereby
directed to act accordingly.
SO ORDERED.18

Ruling in favor of FELS and NPC, the CBAA reasoned that the power barges belong to NPC; since
they are actually, directly and exclusively used by it, the power barges are covered by the
exemptions under Section 234(c) of R.A. No. 7160.19 As to the other jurisdictional issue, the CBAA
ruled that prescription did not preclude the NPC from pursuing its claim for tax exemption in
accordance with Section 206 of R.A. No. 7160. The Provincial Assessor filed a motion for
reconsideration, which was opposed by FELS and NPC.

In a complete volte face, the CBAA issued a Resolution20 on July 31, 2001 reversing its earlier
decision. The fallo of the resolution reads:

WHEREFORE, premises considered, it is the resolution of this Board that:

(a) The decision of the Board dated 6 April 2000 is hereby reversed.

(b) The petition of FELS, as well as the intervention of NPC, is dismissed.

(c) The resolution of the Local Board of Assessment Appeals of Batangas is hereby affirmed,

(d) The real property tax assessment on FELS by the Provincial Assessor of Batangas is
likewise hereby affirmed.

SO ORDERED.21

FELS and NPC filed separate motions for reconsideration, which were timely opposed by the
Provincial Assessor. The CBAA denied the said motions in a Resolution 22 dated October 19, 2001.

Dissatisfied, FELS filed a petition for review before the CA docketed as CA-G.R. SP No. 67490.
Meanwhile, NPC filed a separate petition, docketed as CA-G.R. SP No. 67491.

On January 17, 2002, NPC filed a Manifestation/Motion for Consolidation in CA-G.R. SP No. 67490
praying for the consolidation of its petition with CA-G.R. SP No. 67491. In a Resolution 23 dated
February 12, 2002, the appellate court directed NPC to re-file its motion for consolidation with CA-
G.R. SP No. 67491, since it is the ponente of the latter petition who should resolve the request for
reconsideration.

NPC failed to comply with the aforesaid resolution. On August 25, 2004, the Twelfth Division of the
appellate court rendered judgment in CA-G.R. SP No. 67490 denying the petition on the ground of
prescription. The decretal portion of the decision reads:

WHEREFORE, the petition for review is DENIED for lack of merit and the assailed Resolutions
dated July 31, 2001 and October 19, 2001 of the Central Board of Assessment Appeals are
AFFIRMED.

SO ORDERED.24
On September 20, 2004, FELS timely filed a motion for reconsideration seeking the reversal of the
appellate court’s decision in CA-G.R. SP No. 67490.

Thereafter, NPC filed a petition for review dated October 19, 2004 before this Court, docketed as
G.R. No. 165113, assailing the appellate court’s decision in CA-G.R. SP No. 67490. The petition
was, however, denied in this Court’s Resolution25 of November 8, 2004, for NPC’s failure to
sufficiently show that the CA committed any reversible error in the challenged decision. NPC filed a
motion for reconsideration, which the Court denied with finality in a Resolution 26 dated January 19,
2005.

Meantime, the appellate court dismissed the petition in CA-G.R. SP No. 67491. It held that the right
to question the assessment of the Provincial Assessor had already prescribed upon the failure of
FELS to appeal the disputed assessment to the LBAA within the period prescribed by law. Since
FELS had lost the right to question the assessment, the right of the Provincial Government to collect
the tax was already absolute.

NPC filed a motion for reconsideration dated March 8, 2005, seeking reconsideration of the February
5, 2005 ruling of the CA in CA-G.R. SP No. 67491. The motion was denied in a Resolution 27 dated
November 23, 2005.

The motion for reconsideration filed by FELS in CA-G.R. SP No. 67490 had been earlier denied for
lack of merit in a Resolution28 dated June 20, 2005.

On August 3, 2005, FELS filed the petition docketed as G.R. No. 168557 before this Court, raising
the following issues:

A.

Whether power barges, which are floating and movable, are personal properties and therefore, not
subject to real property tax.

B.

Assuming that the subject power barges are real properties, whether they are exempt from real
estate tax under Section 234 of the Local Government Code ("LGC").

C.

Assuming arguendo that the subject power barges are subject to real estate tax, whether or not it
should be NPC which should be made to pay the same under the law.

D.

Assuming arguendo that the subject power barges are real properties, whether or not the same is
subject to depreciation just like any other personal properties.

E.

Whether the right of the petitioner to question the patently null and void real property tax assessment
on the petitioner’s personal properties is imprescriptible.29
On January 13, 2006, NPC filed its own petition for review before this Court (G.R. No. 170628),
indicating the following errors committed by the CA:

THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE APPEAL TO THE LBAA
WAS FILED OUT OF TIME.

II

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE POWER BARGES
ARE NOT SUBJECT TO REAL PROPERTY TAXES.

III

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE ASSESSMENT ON
THE POWER BARGES WAS NOT MADE IN ACCORDANCE WITH LAW.30

Considering that the factual antecedents of both cases are similar, the Court ordered the
consolidation of the two cases in a Resolution31 dated March 8, 2006. 1awphi1.net

In an earlier Resolution dated February 1, 2006, the Court had required the parties to submit their
respective Memoranda within 30 days from notice. Almost a year passed but the parties had not
submitted their respective memoranda. Considering that taxes—the lifeblood of our economy—are
involved in the present controversy, the Court was prompted to dispense with the said pleadings,
with the end view of advancing the interests of justice and avoiding further delay.

In both petitions, FELS and NPC maintain that the appeal before the LBAA was not time-barred.
FELS argues that when NPC moved to have the assessment reconsidered on September 7, 1995,
the running of the period to file an appeal with the LBAA was tolled. For its part, NPC posits that the
60-day period for appealing to the LBAA should be reckoned from its receipt of the denial of its
motion for reconsideration.

Petitioners’ contentions are bereft of merit.

Section 226 of R.A. No. 7160, otherwise known as the Local Government Code of 1991, provides:

SECTION 226. Local Board of Assessment Appeals. – Any owner or person having legal interest in
the property who is not satisfied with the action of the provincial, city or municipal assessor in the
assessment of his property may, within sixty (60) days from the date of receipt of the written notice of
assessment, appeal to the Board of Assessment Appeals of the province or city by filing a petition
under oath in the form prescribed for the purpose, together with copies of the tax declarations and
such affidavits or documents submitted in support of the appeal.

We note that the notice of assessment which the Provincial Assessor sent to FELS on August 7,
1995, contained the following statement:

If you are not satisfied with this assessment, you may, within sixty (60) days from the date of receipt
hereof, appeal to the Board of Assessment Appeals of the province by filing a petition under oath on
the form prescribed for the purpose, together with copies of ARP/Tax Declaration and such affidavits
or documents submitted in support of the appeal.32

Instead of appealing to the Board of Assessment Appeals (as stated in the notice), NPC opted to file
a motion for reconsideration of the Provincial Assessor’s decision, a remedy not sanctioned by law.

The remedy of appeal to the LBAA is available from an adverse ruling or action of the provincial, city
or municipal assessor in the assessment of the property. It follows then that the determination made
by the respondent Provincial Assessor with regard to the taxability of the subject real properties falls
within its power to assess properties for taxation purposes subject to appeal before the LBAA. 33

We fully agree with the rationalization of the CA in both CA-G.R. SP No. 67490 and CA-G.R. SP No.
67491. The two divisions of the appellate court cited the case of Callanta v. Office of the
Ombudsman,34 where we ruled that under Section 226 of R.A. No 7160,35 the last action of the local
assessor on a particular assessment shall be the notice of assessment; it is this last action which
gives the owner of the property the right to appeal to the LBAA. The procedure likewise does not
permit the property owner the remedy of filing a motion for reconsideration before the local assessor.
The pertinent holding of the Court in Callanta is as follows:

x x x [T]he same Code is equally clear that the aggrieved owners should have brought their appeals
before the LBAA. Unfortunately, despite the advice to this effect contained in their respective notices
of assessment, the owners chose to bring their requests for a review/readjustment before the city
assessor, a remedy not sanctioned by the law. To allow this procedure would indeed invite corruption
in the system of appraisal and assessment. It conveniently courts a graft-prone situation where
values of real property may be initially set unreasonably high, and then subsequently reduced upon
the request of a property owner. In the latter instance, allusions of a possible covert, illicit trade-off
cannot be avoided, and in fact can conveniently take place. Such occasion for mischief must be
prevented and excised from our system.36

For its part, the appellate court declared in CA-G.R. SP No. 67491:

x x x. The Court announces: Henceforth, whenever the local assessor sends a notice to the owner or
lawful possessor of real property of its revised assessed value, the former shall no longer have any
jurisdiction to entertain any request for a review or readjustment. The appropriate forum where the
aggrieved party may bring his appeal is the LBAA as provided by law. It follows ineluctably that the
60-day period for making the appeal to the LBAA runs without interruption. This is what We held in
SP 67490 and reaffirm today in SP 67491.37

To reiterate, if the taxpayer fails to appeal in due course, the right of the local government to collect
the taxes due with respect to the taxpayer’s property becomes absolute upon the expiration of the
period to appeal.38 It also bears stressing that the taxpayer’s failure to question the assessment in
the LBAA renders the assessment of the local assessor final, executory and demandable, thus,
precluding the taxpayer from questioning the correctness of the assessment, or from invoking any
defense that would reopen the question of its liability on the merits.39

In fine, the LBAA acted correctly when it dismissed the petitioners’ appeal for having been filed out of
time; the CBAA and the appellate court were likewise correct in affirming the dismissal. Elementary
is the rule that the perfection of an appeal within the period therefor is both mandatory and
jurisdictional, and failure in this regard renders the decision final and executory. 40
In the Comment filed by the Provincial Assessor, it is asserted that the instant petition is barred by
res judicata; that the final and executory judgment in G.R. No. 165113 (where there was a final
determination on the issue of prescription), effectively precludes the claims herein; and that the filing
of the instant petition after an adverse judgment in G.R. No. 165113 constitutes forum shopping.

FELS maintains that the argument of the Provincial Assessor is completely misplaced since it was
not a party to the erroneous petition which the NPC filed in G.R. No. 165113. It avers that it did not
participate in the aforesaid proceeding, and the Supreme Court never acquired jurisdiction over it. As
to the issue of forum shopping, petitioner claims that no forum shopping could have been committed
since the elements of litis pendentia or res judicata are not present.

We do not agree.

Res judicata pervades every organized system of jurisprudence and is founded upon two grounds
embodied in various maxims of common law, namely: (1) public policy and necessity, which makes it
to the interest of the

State that there should be an end to litigation – republicae ut sit litium; and (2) the hardship on the
individual of being vexed twice for the same cause – nemo debet bis vexari et eadem causa. A
conflicting doctrine would subject the public peace and quiet to the will and dereliction of individuals
and prefer the regalement of the litigious disposition on the part of suitors to the preservation of the
public tranquility and happiness.41 As we ruled in Heirs of Trinidad De Leon Vda. de Roxas v. Court
of Appeals:42

x x x An existing final judgment or decree – rendered upon the merits, without fraud or collusion, by a
court of competent jurisdiction acting upon a matter within its authority – is conclusive on the rights
of the parties and their privies. This ruling holds in all other actions or suits, in the same or any other
judicial tribunal of concurrent jurisdiction, touching on the points or matters in issue in the first suit.

xxx

Courts will simply refuse to reopen what has been decided. They will not allow the same parties or
their privies to litigate anew a question once it has been considered and decided with finality.
Litigations must end and terminate sometime and somewhere. The effective and efficient
administration of justice requires that once a judgment has become final, the prevailing party should
not be deprived of the fruits of the verdict by subsequent suits on the same issues filed by the same
parties.

This is in accordance with the doctrine of res judicata which has the following elements: (1) the
former judgment must be final; (2) the court which rendered it had jurisdiction over the subject matter
and the parties; (3) the judgment must be on the merits; and (4) there must be between the first and
the second actions, identity of parties, subject matter and causes of action. The application of the
doctrine of res judicata does not require absolute identity of parties but merely substantial identity of
parties. There is substantial identity of parties when there is community of interest or privity of
interest between a party in the first and a party in the second case even if the first case did not
implead the latter.43

To recall, FELS gave NPC the full power and authority to represent it in any proceeding regarding
real property assessment. Therefore, when petitioner NPC filed its petition for review docketed as
G.R. No. 165113, it did so not only on its behalf but also on behalf of FELS. Moreover, the assailed
decision in the earlier petition for review filed in this Court was the decision of the appellate court in
CA-G.R. SP No. 67490, in which FELS was the petitioner. Thus, the decision in G.R. No. 165116 is
binding on petitioner FELS under the principle of privity of interest. In fine, FELS and NPC are
substantially "identical parties" as to warrant the application of res judicata. FELS’s argument that it
is not bound by the erroneous petition filed by NPC is thus unavailing.

On the issue of forum shopping, we rule for the Provincial Assessor. Forum shopping exists when,
as a result of an adverse judgment in one forum, a party seeks another and possibly favorable
judgment in another forum other than by appeal or special civil action or certiorari. There is also
forum shopping when a party institutes two or more actions or proceedings grounded on the same
cause, on the gamble that one or the other court would make a favorable disposition. 44

Petitioner FELS alleges that there is no forum shopping since the elements of res judicata are not
present in the cases at bar; however, as already discussed, res judicata may be properly applied
herein. Petitioners engaged in forum shopping when they filed G.R. Nos. 168557 and 170628 after
the petition for review in G.R. No. 165116. Indeed, petitioners went from one court to another trying
to get a favorable decision from one of the tribunals which allowed them to pursue their cases.

It must be stressed that an important factor in determining the existence of forum shopping is the
vexation caused to the courts and the parties-litigants by the filing of similar cases to claim
substantially the same reliefs.45 The rationale against forum shopping is that a party should not be
allowed to pursue simultaneous remedies in two different fora. Filing multiple petitions or complaints
constitutes abuse of court processes, which tends to degrade the administration of justice, wreaks
havoc upon orderly judicial procedure, and adds to the congestion of the heavily burdened dockets
of the courts.46

Thus, there is forum shopping when there exist: (a) identity of parties, or at least such parties as
represent the same interests in both actions, (b) identity of rights asserted and relief prayed for, the
relief being founded on the same facts, and (c) the identity of the two preceding particulars is such
that any judgment rendered in the pending case, regardless of which party is successful, would
amount to res judicata in the other.47

Having found that the elements of res judicata and forum shopping are present in the consolidated
cases, a discussion of the other issues is no longer necessary. Nevertheless, for the peace and
contentment of petitioners, we shall shed light on the merits of the case.

As found by the appellate court, the CBAA and LBAA power barges are real property and are thus
subject to real property tax. This is also the inevitable conclusion, considering that G.R. No. 165113
was dismissed for failure to sufficiently show any reversible error. Tax assessments by tax examiners
are presumed correct and made in good faith, with the taxpayer having the burden of proving
otherwise.48 Besides, factual findings of administrative bodies, which have acquired expertise in their
field, are generally binding and conclusive upon the Court; we will not assume to interfere with the
sensible exercise of the judgment of men especially trained in appraising property. Where the judicial
mind is left in doubt, it is a sound policy to leave the assessment undisturbed. 49 We find no reason to
depart from this rule in this case.

In Consolidated Edison Company of New York, Inc., et al. v. The City of New York, et al., 50 a power
company brought an action to review property tax assessment. On the city’s motion to dismiss, the
Supreme Court of New York held that the barges on which were mounted gas turbine power plants
designated to generate electrical power, the fuel oil barges which supplied fuel oil to the power plant
barges, and the accessory equipment mounted on the barges were subject to real property taxation.
Moreover, Article 415 (9) of the New Civil Code provides that "[d]ocks and structures which, though
floating, are intended by their nature and object to remain at a fixed place on a river, lake, or coast"
are considered immovable property. Thus, power barges are categorized as immovable property by
destination, being in the nature of machinery and other implements intended by the owner for an
industry or work which may be carried on in a building or on a piece of land and which tend directly
to meet the needs of said industry or work.51

Petitioners maintain nevertheless that the power barges are exempt from real estate tax under
Section 234 (c) of R.A. No. 7160 because they are actually, directly and exclusively used by
petitioner NPC, a government- owned and controlled corporation engaged in the supply, generation,
and transmission of electric power.

We affirm the findings of the LBAA and CBAA that the owner of the taxable properties is petitioner
FELS, which in fine, is the entity being taxed by the local government. As stipulated under Section
2.11, Article 2 of the Agreement:

OWNERSHIP OF POWER BARGES. POLAR shall own the Power Barges and all the fixtures,
fittings, machinery and equipment on the Site used in connection with the Power Barges which have
been supplied by it at its own cost. POLAR shall operate, manage and maintain the Power Barges
for the purpose of converting Fuel of NAPOCOR into electricity.52

It follows then that FELS cannot escape liability from the payment of realty taxes by invoking its
exemption in Section 234 (c) of R.A. No. 7160, which reads:

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

xxx

(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; x x x

Indeed, the law states that the machinery must be actually, directly and exclusively used by the
government owned or controlled corporation; nevertheless, petitioner FELS still cannot find solace in
this provision because Section 5.5, Article 5 of the Agreement provides:

OPERATION. POLAR undertakes that until the end of the Lease Period, subject to the supply of the
necessary Fuel pursuant to Article 6 and to the other provisions hereof, it will operate the Power
Barges to convert such Fuel into electricity in accordance with Part A of Article 7. 53

It is a basic rule that obligations arising from a contract have the force of law between the parties.
Not being contrary to law, morals, good customs, public order or public policy, the parties to the
contract are bound by its terms and conditions.54

Time and again, the Supreme Court has stated that taxation is the rule and exemption is the
exception.55 The law does not look with favor on tax exemptions and the entity that would seek to be
thus privileged must justify it by words too plain to be mistaken and too categorical to be
misinterpreted.56 Thus, applying the rule of strict construction of laws granting tax exemptions, and
the rule that doubts should be resolved in favor of provincial corporations, we hold that FELS is
considered a taxable entity.

The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the exemption.
The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is between
FELS and NPC and does not bind a third person not privy thereto, in this case, the Province of
Batangas.

It must be pointed out that the protracted and circuitous litigation has seriously resulted in the local
government’s deprivation of revenues. The power to tax is an incident of sovereignty and is unlimited
in its magnitude, acknowledging in its very nature no perimeter 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 for it.57 The right of local government units to collect taxes due must always be
upheld to avoid severe tax erosion. This consideration is consistent with the State policy to
guarantee the autonomy of local governments58 and the objective of the Local Government Code
that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest
development as self-reliant communities and make them effective partners in the attainment of
national goals.59

In conclusion, we reiterate that the power to tax is the most potent instrument to raise the 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.60

WHEREFORE, the Petitions are DENIED and the assailed Decisions and Resolutions AFFIRMED.

SO ORDERED.

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and
COURT OF TAX APPEALS, respondents.

PUNO, J.:

For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a refund or
tax credit for amounts representing pre-payment of income and common carrier's taxes under the
National Internal Revenue Code, section 24 (b) (2), as amended. 1
Private respondent is a foreign corporation represented in the Philippines by Soriamont Steamship
Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In December 1980,
NASUTRA chartered M/V Gardenia to load 16,500 metric tons of raw sugar in the Philippines. On
2 3

December 23, 1980, Mr. Edilberto Lising, the operations supervisor of Soriamont Agency, paid the
4

required income and common carrier's taxes in the respective sums of FIFTY-NINE THOUSAND
FIVE HUNDRED TWENTY-THREE PESOS and SEVENTY-FIVE CENTAVOS (P59,523.75) and
FORTY-SEVEN THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE
HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE
CENTAVOS (P107,142.75) based on the expected gross receipts of the vessel. Upon arriving,
5

however, at Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981,
NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan without
any cargo.

Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt was
realized from the charter agreement, private respondent instituted a claim for tax credit or refund of
the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO PESOS and
SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner of Internal Revenue on
March 23, 1981. Petitioner failed to act promptly on the claim, hence, on May 14, 1981, private
respondent filed a petition for review before public respondent Court of Tax Appeals.
6

Petitioner contested the petition. As special and affirmative defenses, it alleged the following: that
taxes are presumed to have been collected in accordance with law; that in an action for refund, the
burden of proof is upon the taxpayer to show that taxes are erroneously or illegally collected, and the
taxpayer's failure to sustain said burden is fatal to the action for refund; and that claims for refund
are construed strictly against tax claimants.7

After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the mentioned
statutory requirement by having filed a written claim for refund within the two-year
period from date of payment; 2) the respondent has not issued any deficiency
assessment nor disputed the correctness of the tax returns and the corresponding
amounts of prepaid income and percentage taxes; and 3) the chartered vessel sailed
out of the Philippine port with absolutely no cargo laden on board as cleared and
certified by the Customs authorities; nonetheless 4) respondent's apparent bit of
reluctance in validating the legal merit of the claim, by and large, is tacked upon the
"examiner who is investigating petitioner's claim for refund which is the subject
matter of this case has not yet submitted his report. Whether or not respondent will
present his evidence will depend on the said report of the examiner." (Respondent's
Manifestation and Motion dated September 7, 1982). Be that as it may the case was
submitted for decision by respondent on the basis of the pleadings and records and
by petitioner on the evidence presented by counsel sans the respective
memorandum.

An examination of the records satisfies us that the case presents no dispute as to

relatively simple material facts. The circumstances obtaining amply justify petitioner's
righteous indignation to a more expeditious action. Respondent has offered no
reason nor made effort to submit any controverting documents to bash that patina of
legitimacy over the claim. But as might well be, towards the end of some two and a
half years of seeming impotent anguish over the pendency, the respondent
Commissioner of Internal Revenue would furnish the satisfaction of ultimate solution
by manifesting that "it is now his turn to present evidence, however, the Appellate
 Division of the BIR has already recommended the approval of petitioner's claim for
refund subject matter of this petition. The examiner who examined this case has also
recommended the refund of petitioner's claim. Without prejudice to withdrawing this
case after the final approval of petitioner's claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We need not
fashion any further issue into an apparently settled legal situation as far be it from a
comedy of errors it would be too much of a stretch to hold and deny the refund of the
amount of prepaid income and common carrier's taxes for which petitioner could no
longer be made accountable.

On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence, this
petition for review on certiorari.

Petitioner now contends: (1) private respondent has the burden of proof to support its claim of
refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and (3) it
suppressed evidence when it did not present its charter agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal Revenue
Code which at that time provides as follows:

A corporation organized, authorized, or existing under the laws of any foreign

country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income derived in the
preceding taxable year from all sources within the Philippines: Provided, however,
That international carriers shall pay a tax of two and one-half per cent (2 1/2%) on
their gross Philippine billings: "Gross Philippine Billings" include gross revenue
realized from uplifts anywhere in the world by any international carrier doing business
in the Philippines of passage documents sold therein, whether for passenger, excess
baggage or mail, provided the cargo or mail originates from the Philippines. The
gross revenue realized from the said cargo or mail include the gross freight charge
up to final destination. Gross revenue from chartered flights originating from the
Philippines shall likewise form part of "Gross Philippine Billings" regardless of the
place or payment of the passage documents . . . . .

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is liable
for taxes depending on the amount of income it derives from sources within the Philippines. Thus,
before such a tax liability can be enforced the taxpayer must be shown to have earned income
sourced from the Philippines.

We agree with petitioner that a claim for refund is in the nature of a claim for exemption and should
8

be construed in strictissimi juris against the taxpayer. Likewise, there can be no disagreement with
9

petitioner's stance that private respondent has the burden of proof to establish the factual basis of its
claim for tax refund.

The pivotal issue involves a question of fact — whether or not the private respondent was able to
prove that it derived no receipts from its charter agreement, and hence is entitled to a refund of the
taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private respondent
proving that it derived no receipt from its charter agreement with NASUTRA. This finding of fact rests
on a rational basis, and hence must be sustained. Exhibits "E", "F," and "G" positively show that the
tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981 but found no raw sugar to load
and returned to Japan without any cargo laden on board. Exhibit "E" is the Clearance Vessel to a
Foreign Port issued by the District Collector of Customs, Port of Iloilo while Exhibit "F" is the
Certification by the Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The
correctness of the contents of these documents regularly issued by officials of the Bureau of
Customs cannot be doubted as indeed, they have not been contested by the petitioner. The records
also reveal that in the course of the proceedings in the court a quo, petitioner hedged and hawed
when its turn came to present evidence. At one point, its counsel manifested that the BIR examiner
and the appellate division of the BIR have both recommended the approval of private respondent's
claim for refund. The same counsel even represented that the government would withdraw its
opposition to the petition after final approval of private respondents' claim. The case dragged on but
petitioner never withdrew its opposition to the petition even if it did not present evidence at all. The
insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and for
good reason. Taxpayers owe honesty to government just as government owes fairness to taxpayers.

In its last effort to retain the money erroneously prepaid by the private respondent, petitioner
contends that private respondent suppressed evidence when it did not present its charter agreement
with NASUTRA. The contention cannot succeed. It presupposes without any basis that the charter
agreement is prejudicial evidence against the private respondent. Allegedly, it will show that private
10

respondent earned a charter fee with or without transporting its supposed cargo from Iloilo to Japan.
The allegation simply remained an allegation and no court of justice will regard it as truth. Moreover,
the charter agreement could have been presented by petitioner itself thru the proper use of
a subpoena duces tecum. It never did either because of neglect or because it knew it would be of no
help to bolster its position. For whatever reason, the petitioner cannot take to task the private
11

respondent for not presenting what it mistakenly calls "suppressed evidence."

We cannot but bewail the unyielding stance taken by the government in refusing to refund the sum
of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND SEVENTY
FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The tax was paid way
back in 1980 and despite the clear showing that it was erroneously paid, the government succeeded
in delaying its refund for fifteen (15) years. After fifteen (15) long years and the expenses of litigation,
the money that will be finally refunded to the private respondent is just worth a damaged nickel. This
is not, however, the kind of success the government, especially the BIR, needs to increase its
collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty demands that
BIR should refund without any unreasonable delay what it has erroneously collected. Our ruling
in Roxas v. Court of Tax Appeals is apropos to recall:
12

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

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated September 15,
1983, is AFFIRMED in toto. No costs.

SO ORDERED.
G.R. No. 172598 December 21, 2007

PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 assailing the April 28, 2006
Decision1 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 64, which upheld respondent’s
assessment against petitioner for deficiency excise taxes for the taxable years 1992 and 1994 to
1997. Said En Banc decision reversed and set aside the August 2, 2004 Decision 2 and January 20,
2005 Resolution3 of the CTA Division in CTA Case No. 6003 entitled Pilipinas Shell Petroleum
Corporation v. Commissioner of Internal Revenue, which ordered the withdrawal of the April 22, 1998
collection letter of respondent and enjoined him from collecting said deficiency excise taxes.

The Facts

Petitioner Pilipinas Shell Petroleum Corporation (PSPC) is the Philippine subsidiary of the
international petroleum giant Shell, and is engaged in the importation, refining and sale of petroleum
products in the country.

From 1988 to 1997, PSPC paid part of its excise tax liabilities with Tax Credit Certificates (TCCs)
which it acquired through the Department of Finance (DOF) One Stop Shop Inter-Agency Tax Credit
and Duty Drawback Center (Center) from other Board of Investment (BOI)-registered companies.
The Center is a composite body run by four government agencies, namely: the DOF, Bureau of
Internal Revenue (BIR), Bureau of Customs (BOC), and BOI.

Through the Center, PSPC acquired for value various Center-issued TCCs which were
correspondingly transferred to it by other BOI-registered companies through Center-approved Deeds
of Assignments. Subsequently, when PSPC signified its intent to use the TCCs to pay part of its
excise tax liabilities, said payments were duly approved by the Center through the issuance of Tax
Debit Memoranda (TDM), and the BIR likewise accepted as payments the TCCs by issuing its own
TDM covering said TCCs, and the corresponding Authorities to Accept Payment for Excise Taxes
(ATAPETs).

However, on April 22, 1998, the BIR sent a collection letter 4 to PSPC for alleged deficiency excise
tax liabilities of PhP 1,705,028,008.06 for the taxable years 1992 and 1994 to 1997, inclusive of
delinquency surcharges and interest. As basis for the collection letter, the BIR alleged that PSPC is
not a qualified transferee of the TCCs it acquired from other BOI-registered companies. These
alleged excise tax deficiencies covered by the collection letter were already paid by PSPC with
TCCs acquired through, and issued and duly authorized by the Center, and duly covered by TDMs of
both the Center and BIR, with the latter also issuing the corresponding ATAPETs.

PSPC protested the April 22, 1998 collection letter, but the protest was denied by the BIR through
the Regional Director of Revenue Region No. 8. PSPC filed its motion for reconsideration. However,
due to respondent’s inaction on the motion, on February 2, 1999, PSPC filed a petition for review
before the CTA, docketed as CTA Case No. 5728.

On July 23, 1999, the CTA rendered a Decision5 in CTA Case No. 5728 ruling, inter alia, that the use
by PSPC of the TCCs was legal and valid, and that respondent’s attempt to collect alleged
delinquent taxes and penalties from PSPC without an assessment constitutes denial of due process.
The dispositive portion of the July 23, 1999 CTA Decision reads:

[T]he instant petition for review is GRANTED. The collection letter issued by the Respondent dated
April 22, 1998 is considered withdrawn and he is ENJOINED from any attempts to collect from
petitioner the specific tax, surcharge and interest subject of this petition. 6

Respondent elevated the July 23, 1999 CTA Decision in CTA Case No. 5728 to the Court of Appeals
(CA) through a petition for review7 docketed as CA-G.R. SP No. 55329. This case was subsequently
consolidated with the similarly situated case of Petron Corporation under CA-G.R. SP No. 55330. To
date, these consolidated cases are still pending resolution before the CA.

Meanwhile, in late 1999, and despite the pendency of CA-G.R. SP No. 55329, the Center sent
several letters to PSPC dated August 31, 1999,8 September 1, 1999,9 and October 18, 1999.10 The
first required PSPC to submit copies of pertinent sales invoices and delivery receipts covering sale
transactions of PSPC products to the TCC assignors/transferors purportedly in connection with an
ongoing post audit. The second letter similarly required submission of the same documents covering
PSPC Industrial Fuel Oil (IFO) deliveries to Spintex International, Inc. The third letter is in reply to the
September 29, 1999 letter sent by PSPC requesting a list of the serial numbers of the TCCs
assigned or transferred to it by various BOI-registered companies, either assignors or transferors.

In its letter dated October 29, 1999 and received by the Center on November 3, 1999, PSPC
emphasized that the required submission of these documents had no legal basis, for the applicable
rules and regulations on the matter only require that both the assignor and assignee of TCCs be
BOI-registered entities.11 On November 3, 1999, the Center informed PSPC of the cancellation of the
first batch of TCCs transferred to PSPC and the TDM covering PSPC’s use of these TCCs as well as
the corresponding TCC assignments. PSPC’s motion for reconsideration was not acted upon.

On November 22, 1999, PSPC received the November 15, 1999 assessment letter 12 from
respondent for excise tax deficiencies, surcharges, and interest based on the first batch of cancelled
TCCs and TDM covering PSPC’s use of the TCCs. All these cancelled TDM and TCCs were also
part of the subject matter in CTA Case No. 5728, now pending before the CA in CA-G.R. SP No.
55329.

PSPC protested13 the assessment letter, but the protest was denied by the BIR, constraining it to file
another petition for review14 before the CTA, docketed as CTA Case No. 6003.
Parenthetically, on March 30, 2004, Republic Act No. (RA) 9282 15 was promulgated amending RA
1125,16expanding the jurisdiction of the CTA and enlarging its membership. It became effective on
April 23, 2004 after its due publication. Thus, CTA Case No. 6003 was heard and decided by a CTA
Division.

The Ruling of the Court of Tax Appeals Division

(CTA Case No. 6003)

On August 2, 2004, the CTA Division rendered a Decision17 granting the PSPC’s petition for review.
The dispositive portion reads:

[T]he instant petition is hereby GRANTED. Accordingly, the assessment issued by the respondent
dated November 15, 1999 against petitioner is hereby CANCELLED and SET ASIDE. 18

In granting PSPC’s petition for review, the CTA Division held that respondent failed to prove with
convincing evidence that the TCCs transferred to PSPC were fraudulently issued as respondent’s
finding of alleged fraud was merely speculative. The CTA Division found that neither the respondent
nor the Center could state what sales figures were used as basis for the TCCs to issue, as they
merely based their conclusions on the audited financial statements of the transferors which did not
clearly show the actual export sales of transactions from which the TCCs were issued.

In the same vein, the CTA Division held that the machinery and equipment cannot be the basis in
concluding that transferor could not have produced the volume of products indicated in its BOI
registration. It further ruled that the Center erroneously based its findings of fraud on two
possibilities: either the transferor did not declare its export sales or underdeclare them. Thus, no
specific fraudulent acts were identified or proven. The CTA Division concluded that the TCCs
transferred to PSPC were not fraudulently issued.

On the issue of whether a TCC transferee should be a supplier of either capital equipment,
materials, or supplies, the CTA Division ruled in the negative as the Memorandum of Agreement
(MOA)19 between the DOF and BOI executed on August 29, 1989 specifying such requirement was
not incorporated in the Implementing Rules and Regulations (IRR) of Executive Order No. (EO)
226.20 The CTA Division found that only the October 5, 1982 MOA between the then Ministry of
Finance (MOF) and BOI was incorporated in the IRR of EO 226. It held that while the August 29,
1989 MOA indeed amended the October 5, 1982 MOA still it was not incorporated in the IRR.
Moreover, according to the CTA Division, even if the August 29, 1989 MOA was elevated or
incorporated in the IRR of EO 226, still, it is ineffective and could not bind nor prejudice third parties
as it was never published.

Anent the affidavits of former Officers or General Managers of transferors attesting that no IFO
deliveries were made by PSPC, the CTA Division ruled that such cannot be given probative value as
the affiants were not presented during trial of the case. However, the CTA Division said that the
November 15, 1999 assessment was not precluded by the prior CTA Case No. 5728 as the latter
concerned the validity of the transfer of the TCCs, while CTA Case No. 6003 involved alleged
fraudulent procurement and transfer of the TCCs.

Respondent forthwith filed his motion for reconsideration of the above decision which was rejected
on January 20, 2005. And, pursuant to Section 1121 of RA 9282, respondent appealed the above
decision through a petition for review22 before the CTA En Banc.
 The Ruling of the Court of Tax Appeals En Banc

(CTA EB No. 64)

The CTA En Banc, however, rendered the assailed April 28, 2006 Decision23 setting aside the August
2, 2004 Decision and the January 20, 2005 Resolution of the CTA Division. The fallo reads:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. The assailed
Decision and Resolution dated August 2, 2004 and January 20, 2005, respectively, are hereby SET
ASIDE and a new one entered dismissing respondent Pilipinas Shell Petroleum Corporation’s
Petition for Review filed in C.T.A. Case No. 6003 for lack of merit. Accordingly, respondent is
ORDERED TO PAY the petitioner the amount of P570,577,401.61 as deficiency excise tax for the
taxable years 1992 and 1994 to 1997, inclusive of 25% surcharge and 20% interest, computed as
follows:

Basic Tax P285,766,987.00

Add:

Surcharge (25%) 71,441,746.75

Interest (20%) 213,368,667.86

Total Tax Due P570,577,401.61

In addition, respondent is hereby ORDERED TO PAY 20% delinquency interest thereon per annum
computed from December 4, 1999 until full payment thereof, pursuant to Sections 248 and 249 of
the NIRC of 1997.

SO ORDERED.24

The CTA En Banc resolved respondent’s appeal by holding that PSPC was liable to pay the alleged
excise tax deficiencies arising from the cancellation of the TDM issued against its TCCs which were
used to pay some of its excise tax liabilities for the years 1992 and 1994 to 1997. It ratiocinated in
this wise, to wit:

First, the finding of the DOF that the TCCs had no monetary value was undisputed. Consequently,
there was a non-payment of excise taxes corresponding to the value of the TCCs used for payment.
Since it was PSPC which acquired the subject TCCs from a third party and utilized the same to
discharge its own obligations, then it must bear the loss.

Second, the TCCs carry a suspensive condition, that is, their issuance was subject to post audit in
order to determine if the holder is indeed qualified to use it. Thus, until final determination of the
holder’s right to the issuance of the TCCs, there is no obligation on the part of the DOF or BIR to
recognize the rights of the holder or assignee. And, considering that the subject TCCs were
canceled after the DOF’s finding of fraud in its issuance, the assignees must bear the consequence
of such cancellation.

Third, PSPC was not an innocent purchaser for value of the TCCs as they contained liability clauses
expressly stipulating that the transferees are solidarily liable with the transferors for any fraudulent
act or violation of pertinent laws, rules, or regulations relating to the transfer of the TCC.
Fourth, the BIR was not barred by estoppel as it is a settled rule that in the performance of its
governmental functions, the State cannot be estopped by the neglect of its agents and officers.
Although the TCCs were confirmed to be valid in view of the TDM, the subsequent finding on post
audit by the Center declaring the TCCs to be fraudulently issued is entitled to the presumption of
regularity. Thus, the cancellation of the TCCs was legal and valid.

Fifth, the BIR’s assessment did not prescribe considering that no payment took effect as the subject
TCCs were canceled upon post audit. Consequently, the filing of the tax return sans payment due to
the cancellation of the TCCs resulted in the falsity and/or omission in the filing of the tax return which
put them in the ambit of the applicability of the 10-year prescriptive period from the discovery of
falsity, fraud, or omission.

Finally, however, the CTA En Banc applied Aznar v. Court of Tax Appeals,25 where this Court held
that without proof that the taxpayer participated in the fraud, the 50% fraud surcharge is not
imposed, but the 25% late payment and the 20% interest per annum are applicable.

Thus, PSPC filed this petition with the following issues:

WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN ORDERING

PETITIONER PSPC TO PAY THE AMOUNT OF TWO HUNDRED EIGHTY FIVE MILLION
SEVEN HUNDRED SIXTY SIX THOUSAND NINE HUNDRED EIGHTY SEVEN PESOS
(P285,766,987.00), AS ALLEGED DEFICIENCY EXCISE TAXES, FOR THE TAXABLE
YEARS, 1992 AND 1994 TO 1997.

II

WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN ISSUING THE
QUESTIONED DECISION DATED 28 APRIL 2006 UPHOLDING THE CANCELLATION OF
THE TAX CREDIT CERTIFICATES UTILIZED BY PETITIONER PSPC IN PAYING ITS
EXCISE TAX LIABILITIES.

III

WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN IMPOSING

SURCHARGES AND INTERESTS ON THE ALLEGED DEFICIENCY EXCISE TAX OF
PETITIONER PSPC.

IV

WHETHER OR NOT THE ASSESSMENT DATED 15 NOVEMBER 1999 IS VOID

CONSIDERING THAT IT FAILED TO COMPLY WITH THE STATUTORY AS WELL AS
REGULATORY REQUIREMENTS IN THE ISSUANCE OF ASSESSMENTS.26

The Court’s Ruling

The petition is meritorious.

First Issue: Assessment of excise tax deficiencies

PSPC contends that respondent had no basis in issuing the November 15, 1999 assessment as
PSPC had no pending unpaid excise tax liabilities. PSPC argues that under the IRR of EO 226, it is
allowed to use TCCs transferred from other BOI-registered entities. On one hand, relative to the
validity of the transferred TCCs, PSPC asserts that the TCCs are not subject to a suspensive
condition; that the post-audit of a transferred TCC refers only to computational discrepancy; that the
solidary liability of the transferor and transferee refers to computational discrepancy resulting from
the transfer and not from the issuance of the TCC; that a post-audit cannot affect the validity and
effectivity of a TCC after it has been utilized by the transferee; and that the BIR duly acknowledged
the use of the subject TCCs, accepting them as payment for the excise tax liabilities of PSPC. On
the other hand, PSPC maintains that if there was indeed fraud in the issuance of the subject TCCs,
of which it had no knowledge nor participation, the Center’s remedy is to go after the transferor for
the value of the TCCs the Center may have erroneously issued.

PSPC likewise assails the BIR assessment on prescription for having been issued beyond the three-
year prescriptive period under Sec. 203 of the National Internal Revenue Code (NIRC); and neither
can the BIR use the 10-year prescriptive period under Sec. 222(a) of the NIRC, as PSPC has neither
failed to file a return nor filed a false or fraudulent return with intent to evade taxes.

Respondent, on the other hand, counters that petitioner is liable for the tax liabilities adjudged by the
CTA En Bancsince PSPC, as transferee of the subject TCCs, is bound by the liability clause found at
the dorsal side of the TCCs which subjects the genuineness, validity, and value of the TCCs to the
outcome of the post-audit to be conducted by the Center. He relies on the CTA En Banc’s finding of
the presence of a suspensive condition in the issuance of the TCCs. Thus, according to him, with the
finding by the Center that the TCCs were fraudulently procured the subsequent cancellation of the
TCCs resulted in the non-payment by PSPC of its excise tax liabilities equivalent to the value of the
canceled TCCs.

Respondent likewise posits that the Center erred in approving the transfer and issuance of the TDM,
and of the TDM and ATAPETs issued by the BIR in accepting the utilization by PSPC of the subject
TCCs, as payments for excise taxes cannot prejudice the BIR from assessing the tax deficiencies of
PSPC resulting from the non-payment of the deficiencies after due cancellation by the Center of the
subject TCCs and corresponding TDM.

Respondent concludes that due to the fraudulent procurement of the subject TCCs, his right to
assess has not yet prescribed. He relies on the finding of the Center that the fraud was discovered
only after the post-audit was conducted; hence, Sec. 222(a) of the NIRC applies, reckoned from
October 24, 1999 or the date of the post-audit report. In fine, he points that what is at issue is the
resulting non-payment of PSPC’s excise tax liabilities from the cancellation of subject TCCs and not
the amount of deficiency taxes due from PSPC, as what was properly assessed on November 15,
1999 was the amount of tax declared and found in PSPC’s excise tax returns covered by the subject
TCCs.

We find for PSPC.

The CTA En Banc upheld respondent’s theory by holding that the Center has the authority to do a
post-audit on the TCCs it issued; the TCCs are subject to the results of the post-audit since their
issuance is subject to a suspensive condition; the transferees of the TCCs are solidarily liable with
the transferors on the result of the post-audit; and the cancellation of the subject TCCs resulted in
PSPC having to bear the loss anchored on its solidary liability with the transferor of the subject
TCCs.

We can neither sustain respondent’s theory nor that of the CTA En Banc.
First, in overturning the August 2, 2004 Decision of the CTA Division, the CTA En Banc applied
Article 1181 of the Civil Code in this manner:

To completely understand the matter presented before Us, it is worth emphasizing that the statement
on the subject certificate stating that it is issued subject to post-audit is in the nature of a suspensive
condition under Article 1181 of the Civil Code, which is quoted hereunder for ready reference, to wit:

‘In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition.’

The above-quoted article speaks of obligations. ‘These conditions affect obligations in diametrically
opposed ways. If the suspensive condition happens, the obligation arises; in other words, if the
condition does not happen, the obligation does not come into existence. On the other hand, the
resolutory condition extinguishes rights and obligations already existing; in other words, the
obligations and rights already exist, but under the threat of extinction upon the happening of the
resolutory condition’. (8 Manresa 130-131, cited on page 140, Civil Code of the Philippines,
Tolentino, 1962 ed., Vol. IV).

In adopting the foregoing provision of law, this Court rules that the issuance of the tax credit
certificate is subject to the condition that a post-audit will subsequently be conducted in order to
determine if the holder is indeed qualified for its issuance. As stated earlier, the holder takes the
same subject to the outcome of the post-audit. Thus, unless and until there is a final determination of
the holder’s right to the issuance of the certificate, there exists no obligation on the part of the DOF
or the BIR to recognize the rights of then holder or transferee. x x x

xxxx

The validity and propriety of the TCC to effectively constitute payment of taxes to the government
are still subject to the outcome of the post-audit. In other words, when the issuing authority (DOF)
finds, as in the case at bar, circumstances which may warrant the cancellation of the certificate, the
holder is inevitably bound by the outcome by the virtue of the express provisions of the TCCs. 27

The CTA En Banc is incorrect.

Art.1181 tells us that the condition is suspensive when the acquisition of rights or demandability of
the obligation must await the occurrence of the condition. 28 However, Art. 1181 does not apply to the
present case since the parties did NOT agree to a suspensive condition. Rather, specific laws, rules,
and regulations govern the subject TCCs, not the general provisions of the Civil Code. Among the
applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of
Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106(c) of the Tariff and Customs
Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the
aforementioned laws does the post-audit become necessary for the validity or effectivity of the
TCCs. Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a
suspensive condition.

The CTA En Banc’s holding of the presence of a suspensive condition is untenable as the subject
TCCs duly issued by the Center are immediately effective and valid. The suspensive condition as
ratiocinated by the CTA En Banc is one where the transfer contract was duly effected on the day it
was executed between the transferee and the transferor but the TCC cannot be enforced until after
the post-audit has been conducted. In short, under the ruling of the CTA En Banc, even if the TCC
has been issued, the real and true application of the tax credit happens only after the post-audit
confirms the TCC’s validity and not before the confirmation; thus, the TCC can still be canceled even
if it has already been ostensibly applied to specific internal revenue tax liabilities.

We are not convinced.

We cannot subscribe to the CTA En Banc’s holding that the suspensive condition suspends the
effectivity of the TCCs as payment until after the post-audit. This strains the very nature of a TCC.

A tax credit is not specifically defined in our Tax Code, 29 but Art. 21 of EO 226 defines a tax credit as
"any of the credits against taxes and/or duties equal to those actually paid or would have been paid
to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his
representative, or the Board (of Investments), if so delegated by the Secretary of Finance." Tax
credits were granted under EO 226 as incentives to encourage investments in certain businesses. A
tax credit generally refers to an amount that may be "subtracted directly from one’s total tax
liability."30 It is therefore an "allowance against the tax itself"31 or "a deduction from what is owed"32by
a taxpayer to the government. In RR 5-2000,33 a tax credit is defined as "the amount due to a
taxpayer resulting from an overpayment of a tax liability or erroneous payment of a tax due." 34

A TCC is

a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly
authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed
formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit,
the money value of which may be used in payment or in satisfaction of any of his internal revenue
tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be
disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the
provisions of these Regulations.35

From the above definitions, it is clear that a TCC is an undertaking by the government through the
BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount of tax credit from either an
overpayment of income taxes, a direct benefit granted by law or other sources and instances
granted by law such as on specific unused input taxes and excise taxes on certain goods. As such,
tax credit is transferable in accordance with pertinent laws, rules, and regulations.

Therefore, the TCCs are immediately valid and effective after their issuance. As aptly pointed out in
the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and
Instructions found at the back of each TCC, which provide:

1. This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes
and duties until the amount is fully utilized, in accordance with the pertinent tax and customs
laws, rules and regulations.

xxxx

4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue
the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall
accomplish the Application of Tax Credit portion at the back of the certificate and affix his signature
on the column provided. (Emphasis supplied.)
The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle
tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC
dependent on the outcome of a post-audit. In fact, if we are to sustain the appellate tax court, it
would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since
there is no contemplation of the situation wherein there is no post-audit. Does the payment made
become effective if no post-audit is conducted? Or does the so-called suspensive condition still apply
as no law, rule, or regulation specifies a period when a post-audit should or could be conducted with
a prescriptive period? Clearly, a tax payment through a TCC cannot be both effective when made
and dependent on a future event for its effectivity. Our system of laws and procedures abhors
ambiguity.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very
purpose of the TCC would be defeated as there would be no guarantee that the TCC would be
honored by the government as payment for taxes. No investor would take the risk of utilizing TCCs if
these were subject to a post-audit that may invalidate them, without prescribed grounds or limits as
to the exercise of said post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition,
and are thus valid and effective from their issuance. As such, in the present case, if the TCCs have
already been applied as partial payment for the tax liability of PSPC, a post-audit of the TCCs cannot
simply annul them and the tax payment made through said TCCs. Payment has already been made
and is as valid and effective as the issued TCCs. The subsequent post-audit cannot void the TCCs
and allow the respondent to declare that utilizing canceled TCCs results in nonpayment on the part
of PSPC. As will be discussed, respondent and the Center expressly recognize the TCCs as valid
payment of PSPC’s tax liability.

Second, the only conditions the TCCs are subjected to are those found on its face. And these are:

1. Post-audit and subsequent adjustment in the event of computational discrepancy;

2. A reduction for any outstanding account/obligation of herein claimant with the BIR and/or
BOC; and

3. Revalidation with the Center in case the TCC is not utilized or applied within one (1) year
from date of issuance/date of last utilization.

The above conditions clearly show that the post-audit contemplated in the TCCs does not pertain to
their genuineness or validity, but on computational discrepancies that may have resulted from the
transfer and utilization of the TCC.

This is shown by a close reading of the first and second conditions above; the third condition is self
explanatory. Since a tax credit partakes of what is owed by the State to a taxpayer, if the taxpayer
has an outstanding liability with the BIR or the BOC, the money value of the tax credit covered by the
TCC is primarily applied to such internal revenue liabilities of the holder as provided under condition
number two. Elsewise put, the TCC issued to a claimant is applied first and foremost to any
outstanding liability the claimant may have with the government. Thus, it may happen that upon
post-audit, a TCC of a taxpayer may be reduced for whatever liability the taxpayer may have with the
BIR which remains unpaid due to inadvertence or computational errors, and such reduction
necessarily affects the balance of the monetary value of the tax credit of the TCC.

For example, Company A has been granted a TCC in the amount of PhP 500,000 through its export
transactions, but it has an outstanding excise tax liability of PhP 250,000 which due to inadvertence
was erroneously assessed and paid at PhP 225,000. On post-audit, with the finding of a deficiency
of PhP 25,000, the utilization of the TCC is accordingly corrected and the tax credit remaining in the
TCC correspondingly reduced by PhP 25,000. This is a concrete example of a computational
discrepancy which comes to light after a post-audit is conducted on the utilization of the TCC. The
same holds true for a transferee’s use of the TCC in paying its outstanding internal revenue tax
liabilities.

Other examples of computational errors would include the utilization of a single TCC to settle several
internal revenue tax liabilities of the taxpayer or transferee, where errors committed in the reduction
of the credit tax running balance are discovered in the post-audit resulting in the adjustment of the
TCC utilization and remaining tax credit balance.

Third, the post-audit the Center conducted on the transferred TCCs, delving into their issuance and
validity on alleged violations by PSPC of the August 29, 1989 MOA between the DOF and BOI, is
completely misplaced. As may be recalled, the Center required PSPC to submit copies of pertinent
sales invoices and delivery receipts covering sale transactions of PSPC products to the TCC
assignors/transferors purportedly in connection with an ongoing post audit. As correctly protested by
PSPC but which was completely ignored by the Center, PSPC is not required by law to be a capital
equipment provider or a supplier of raw material and/or component supplier to the transferors. What
the law requires is that the transferee be a BOI-registered company similar to the BOI-registered
transferors.

The IRR of EO 226, which incorporated the October 5, 1982 MOA between the MOF and BOI,
pertinently provides for the guidelines concerning the transferability of TCCs:

[T]he MOF and the BOI, through their respective representatives, have agreed on the following
guidelines to govern the transferability of tax credit certificates:

1) All tax credit certificates issued to BOI-registered enterprises under P.D. 1789 may be
transferred under conditions provided herein;

2) The transferee should be a BOI-registered firm;

3) The transferee may apply such tax credit certificates for payment of taxes, duties, charges
or fees directly due to the national government for as long as it enjoys incentives under P.D.
1789. (Emphasis supplied.)

The above requirement has not been amended or repealed during the unfolding of the instant
controversy. Thus, it is clear from the above proviso that it is only required that a TCC transferee be
BOI-registered. In requiring PSPC to submit sales documents for its purported post-audit of the
TCCs, the Center gravely abused its discretion as these are not required of the transferee PSPC by
law and by the rules.

While the October 5, 1982 MOA appears to have been amended by the August 29, 1989 MOA
between the DOF and BOI, such may not operate to prejudice transferees like PSPC. For one, the
August 29, 1989 MOA remains only an internal agreement as it has neither been elevated to the
level of nor incorporated as an amendment in the IRR of EO 226. As aptly put by the CTA Division:

If the 1989 MOA has validly amended the 1982 MOA, it would have been incorporated either
expressly or by reference in Rule VII of the Implementing Rules and Regulations (IRRs) of E.O. 226.
To date, said Rule VII has not been repealed, amended or otherwise modified. It is noteworthy that
the 1999 edition of the official publication by the BOI of E.O. 226 and its IRRs (Exhibit R) which is the
latest version, as amended, has not mentioned expressly or by reference [sic] 1989 MOA. The MOA
mentioned therein is still the 1982 MOA.

The 1982 MOA, although executed as a mere agreement between the DOF and the BOI was
elevated to the status of a rule and regulation applicable to the general public by reason of its having
been expressly incorporated in Rule VII of the IRRs. On the other hand, the 1989 MOA which
purportedly amended the 1982 MOA, remained a mere agreement between the DOF and the BOI
because, unlike the 1982 MOA, it was never incorporated either expressly or by reference to any
amendment or revision of the said IRRs. Thus, it cannot be the basis of any invalidation of the
transfers of TCCs to petitioner nor of any other sanction against petitioner. 36

For another, even if the August 29, 1989 MOA has indeed amended the IRR, which it has not, still, it
is ineffective and cannot prejudice third parties for lack of publication as mandatorily required under
Chapter 2 of Book VII, EO 292, otherwise known as the Administrative Code of 1987, which
pertinently provides:

Section 3. Filing.––(1) Every agency shall file with the University of the Philippines Law Center three
(3) certified copies of every rule adopted by it. Rules in force on the date of effectivity of this Code
which are not filed within three (3) months from the date shall not thereafter be the basis of any
sanction against any party or person.

(2) The records officer of the agency, or his equivalent functionary, shall carry out the
requirements of this section under pain of disciplinary action.

(3) A permanent register of all rules shall be kept by the issuing agency and shall be open to
public inspection.

Section 4. Effectivity.––In addition to other rule-making requirement provided by law not inconsistent
with this Book, each rule shall become effective fifteen (15) days from the date of filing as above
provided unless a different date is fixed by law, or specified in the rule in cases of imminent danger
to public health, safety and welfare, the existence of which must be expressed in a statement
accompanying the rule. The agency shall take appropriate measures to make emergency rules
known to persons who may be affected by them.

Section 5. x x x x

(2) Every rule establishing an offense or defining an act which pursuant to law, is punishable as a
crime or subject to a penalty shall in all cases be published in full text.

It is clear that the Center or DOF cannot compel PSPC to submit sales documents for the purported
post-audit, as PSPC has duly complied with the requirements of the law and rules to be a qualified
transferee of the subject TCCs.

Fourth, we likewise fail to see the liability clause at the dorsal portion of the TCCs to be a suspensive
condition relative to the result of the post-audit. Said liability clause indicates:

LIABILITY CLAUSE
Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any
fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this
TAX CREDIT CERTIFICATE. (Emphasis supplied.)

The above clause to our mind clearly provides only for the solidary liability relative to the transfer of
the TCCs from the original grantee to a transferee. There is nothing in the above clause that
provides for the liability of the transferee in the event that the validity of the TCC issued to the
original grantee by the Center is impugned or where the TCC is declared to have been fraudulently
procured by the said original grantee. Thus, the solidary liability, if any, applies only to the sale of the
TCC to the transferee by the original grantee. Any fraud or breach of law or rule relating to the
issuance of the TCC by the Center to the transferor or the original grantee is the latter’s
responsibility and liability. The transferee in good faith and for value may not be unjustly prejudiced
by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from
the Center. It is not only unjust but well-nigh violative of the constitutional right not to be deprived of
one’s property without due process of law. Thus, a re-assessment of tax liabilities previously paid
through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when
surcharges and interests are likewise assessed.

A transferee in good faith and for value of a TCC who has relied on the Center’s representation of
the genuineness and validity of the TCC transferred to it may not be legally required to pay again the
tax covered by the TCC which has been belatedly declared null and void, that is, after the TCCs
have been fully utilized through settlement of internal revenue tax liabilities. Conversely, when the
transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has
knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud
committed as provided for by law.

In the instant case, a close review of the factual milieu and the records reveals that PSPC is a
transferee in good faith and for value. No evidence was adduced that PSPC participated in any way
in the issuance of the subject TCCs to the corporations who in turn conveyed the same to PSPC. It
has likewise been shown that PSPC was not involved in the processing for the approval of the
transfers of the subject TCCs from the various BOI-registered transferors.

Respondent, through the Center, made much of the alleged non-payment through non-delivery by
PSPC of the IFOs it purportedly sold to the transferors covered by supply agreements which were
allegedly the basis of the Center for the approval of the transfers. Respondent points to the
requirement under the August 29, 1989 MOA between the DOF and BOI, specifying the requirement
that "[t]he transferee should be a BOI-registered firm which is a domestic capital equipment supplier,
or a raw material and/or component supplier of the transferor."37

As discussed above, the above amendment to the October 5, 1982 MOA between BOI and MOF
cannot prejudice any transferee, like PSPC, as it was neither incorporated nor elevated to the IRR of
EO 226, and for lack of due publication. The pro-forma supply agreements allegedly executed by
PSPC and the transferors covering the sale of IFOs to the transferors have been specifically denied
by PSPC. Moreover, the above-quoted requirement is not required under the IRR of EO 226.
Therefore, it is incumbent for respondent to present said supply agreements to prove participation by
PSPC in the approval of the transfers of the subject TCCs. Respondent failed to do this.

PSPC claims to be a transferee in good faith of the subject TCCs. It believed that its tax obligations
for 1992 and 1994 to 1997 had in fact been paid when it applied the subject TCCs, considering that
all the necessary authorizations and approvals attendant to the transfer and utilization of the TCCs
were present. It is undisputed that the transfers of the TCCs from the original holders to PSPC were
duly approved by the Center, which is composed of a number of government agencies, including the
BIR. Such approval was annotated on the reverse side of the TCCs, and the Center even issued
TDM which is proof of its approval for PSPC to apply the TCCs as payment for the tax liabilities. The
BIR issued its own TDM, also signifying approval of the TCCs as payment for PSPC’s tax liabilities.
The BIR also issued ATAPETs covering the aforementioned BIR-issued TDM, further proving its
acceptance of the TCCs as valid tax payments, which formed part of PSPC’s total tax payments
along with checks duly acknowledged and received by BIR’s authorized agent banks.

Several approvals were secured by PSPC before it utilized the transferred TCCs, and it relied on the
verification of the various government agencies concerned of the genuineness and authenticity of
the TCCs as well as the validity of their issuances. Furthermore, the parties stipulated in open court
that the BIR-issued ATAPETs for the taxes covered by the subject TCCs confirm the correctness of
the amount of excise taxes paid by PSPC during the tax years in question.

Thus, it is clear that PSPC is a transferee in good faith and for value of the subject TCCs and may
not be prejudiced with a re-assessment of excise tax liabilities it has already settled when due with
the use of the subject TCCs. Logically, therefore, the excise tax returns filed by PSPC duly covered
by the TDM and ATAPETs issued by the BIR confirming the full payment and satisfaction of the
excise tax liabilities of PSPC, have not been fraudulently filed. Consequently, as PSPC is a
transferee in good faith and for value, Sec. 222(a) of the NIRC does not apply in the instant case as
PSPC has neither been shown nor proven to have committed any fraudulent act in the transfer and
utilization of the subject TCCs. With more reason, therefore, that the three-year prescriptive period
for assessment under Art. 203 of the NIRC has already set in and bars respondent from assessing
anew PSPC for the excise taxes already paid in 1992 and 1994 to 1997. Besides, even if the period
for assessment has not prescribed, still, there is no valid ground for the assessment as the excise
tax liabilities of PSPC have been duly settled and paid.

Fifth, PSPC cannot be blamed for relying on the Center’s approval for the transfers of the subject
TCCs and the Center’s acceptance of the TCCs for the payment of its excise tax liabilities. Likewise,
PSPC cannot be faulted in relying on the BIR’s acceptance of the subject TCCs as payment for its
excise tax liabilities. This reliance is supported by the fact that the subject TCCs have passed
through stringent reviews starting from the claims of the transferors, their issuance by the Center, the
Center’s approval for their transfer to PSPC, the Center’s acceptance of the TCCs to pay PSPC’s
excise tax liabilities through the issuance of the Center’s TDM, and finally the acceptance by the BIR
of the subject TCCs as payment through the issuance of its own TDM and ATAPETs.

Therefore, PSPC cannot be prejudiced by the Center’s turnaround in assailing the validity of the
subject TCCs which it issued in due course.

Sixth, we are of the view that the subject TCCs cannot be canceled by the Center as these had
already been canceled after their application to PSPC’s excise tax liabilities. PSPC contends they
are already functus officio, not quite in the sense of being no longer effective, but in the sense that
they have been used up. When the subject TCCs were accepted by the BIR through the latter’s
issuance of TDM and the ATAPETs, the subject TCCs were duly canceled.

The tax credit of a taxpayer evidenced by a TCC is used up or, in accounting parlance, debited when
applied to the taxpayer’s internal revenue tax liability, and the TCC canceled after the tax credit it
represented is fully debited or used up. A credit is a payable or a liability. A tax credit, therefore, is a
liability of the government evidenced by a TCC. Thus, the tax credit of a taxpayer evidenced by a
TCC is debited by the BIR through a TDM, not only evidencing the payment of the tax by the
taxpayer, but likewise deducting or debiting the existing tax credit with the amount of the tax paid.
For example, a transferee or the tax claimant has a TCC of PhP 1 million, which was used to pay
income tax liability of PhP 500,000, documentary stamp tax liability of PhP 100,000, and value-
added tax liability of PhP 350,000, for an aggregate internal revenue tax liability of PhP 950,000.
After the payments through the PhP 1 million TCC have been approved and accepted by the BIR
through the issuance of corresponding TDM, the TCC money value is reduced to only PhP 50,000,
that is, a credit balance of PhP 50,000. In this sense, the tax credit of the TCC has been canceled or
used up in the amount of PhP 950,000. Now, let us say the transferee or taxpayer has excise tax
liability of PhP 250,000, s/he only has the remaining PhP 50,000 tax credit in the TCC to pay part of
said excise tax. When the transferee or taxpayer applies such payment, the TCC is canceled as the
money value of the tax credit it represented has been fully debited or used up. In short, there is no
more tax credit available for the taxpayer to settle his/her other tax liabilities.

In the instant case, with due application, approval, and acceptance of the payment by PSPC of the
subject TCCs for its then outstanding excise tax liabilities in 1992 and 1994 to 1997, the subject
TCCs have been canceled as the money value of the tax credits these represented have been used
up. Therefore, the DOF through the Center may not now cancel the subject TCCs as these have
already been canceled and used up after their acceptance as payment for PSPC’s excise tax
liabilities. What has been used up, debited, and canceled cannot anymore be declared to be void,
ineffective, and canceled anew.

Besides, it is indubitable that with the issuance of the corresponding TDM, not only is the TCC
canceled when fully utilized, but the payment is also final subject only to a post-audit on
computational errors. Under RR 5-2000, a TDM is

a certification, duly issued by the Commissioner or his duly authorized representative, reduced in a
BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the
taxpayer named therein has duly paid his internal revenue tax liability in the form of and through the
use of a Tax Credit Certificate, duly issued and existing in accordance with the provisions of these
Regulations. The Tax Debit Memo shall serve as the official receipt from the BIR evidencing a
taxpayer’s payment or satisfaction of his tax obligation. The amount shown therein shall be
charged against and deducted from the credit balance of the aforesaid Tax Credit Certificate.

Thus, with the due issuance of TDM by the Center and TDM by the BIR, the payments made by
PSPC with the use of the subject TCCs have been effected and consummated as the TDMs serve
as the official receipts evidencing PSPC’s payment or satisfaction of its tax obligation. Moreover, the
BIR not only issued the corresponding TDM, but it also issued ATAPETs which doubly show the
payment of the subject excise taxes of PSPC.

Based on the above discussion, we hold that respondent erroneously and without factual and legal
basis levied the assessment. Consequently, the CTA En Banc erred in sustaining respondent’s
assessment.

Second Issue: Cancellation of TCCs

PSPC argues that the CTA En Banc erred in upholding the cancellation by the Center of the subject
TCCs it used in paying some of its excise tax liabilities as the subject TCCs were genuine and
authentic, having been subjected to thorough and stringent procedures, and approvals by the
Center. Moreover, PSPC posits that both the CTA’s Division and En Banc duly found that PSPC had
neither knowledge, involvement, nor participation in the alleged fraudulent issuance of the subject
TCCs, and, thus, as a transferee in good faith and for value, it cannot be held solidarily liable for any
fraud attendant to the issuance of the subject TCCs. PSPC further asserts that the Center has no
authority to cancel the subject TCCs as such authority is lodged exclusively with the BOI. Lastly,
PSPC said that the Center’s Excom Resolution No. 03-05-99 which the Center relied upon as basis
for the cancellation is defective, ineffective, and cannot prejudice third parties for lack of publication.

As we have explained above, the subject TCCs after being fully utilized in the settlement of PSPC’s
excise tax liabilities have been canceled, and thus cannot be canceled anymore. For being
immediately effective and valid when issued, the subject TCCs have been duly utilized by transferee
PSPC which is a transferee in good faith and for value.

On the issue of the fraudulent procurement of the TCCs, it has been asseverated that fraud was
committed by the TCC claimants who were the transferors of the subject TCCs. We see no need to
rule on this issue in view of our finding that the real issue in this petition does not dwell on the validity
of the TCCs procured by the transferor from the Center but on whether fraud or breach of law
attended the transfer of said TCCs by the transferor to the transferee.

The finding of the CTA En Banc that there was fraud in the procurement of the subject TCCs is,
therefore, irrelevant and immaterial to the instant petition. Moreover, there are pending criminal
cases arising from the alleged fraud. We leave the matter to the anti-graft court especially
considering the failure of the affiants to the affidavits to appear, making these hearsay evidence.

We note in passing that PSPC and its officers were not involved in any fraudulent act that may have
been undertaken by the transferors of subject TCCs, supported by the finding of the Ombudsman
Special Prosecutor Leonardo P. Tamayo that Pacifico R. Cruz, PSPC General Manager of the
Treasury and Taxation Department, who was earlier indicted as accused in OMB-0-99-2012 to 2034
for violation of Sec. 3(e) and (j) of RA 3019, as amended, otherwise known as the "Anti-Graft and
Corrupt Practices Act," for allegedly conspiring with other accused in defrauding and causing undue
injury to the government,38 did not in any way participate in alleged fraudulent activities relative to
the transfer and use of the subject TCCs.

In a Memorandum39 addressed to then Ombudsman Aniano A. Desierto, the Special Prosecutor

Leonardo P. Tamayo recommended dropping Pacifico Cruz as accused in Criminal Case Nos.
25940-25962 entitled People of the Philippines v. Antonio P. Belicena, et al., pending before the
Sandiganbayan Fifth Division for lack of probable cause. Special

Prosecutor Tamayo found that Cruz’s involvement in the transfers of the subject TCCs came after
the applications for the transfers had been duly processed and approved; and that Cruz could not
have been part of the conspiracy as he cannot be presumed to have knowledge of the irregularity,
because the 1989 MOA, which prescribed the additional requirement that the transferee of a TCC
should be a supplier of the transferor, was not yet published and made known to private parties at
the time the subject TCCs were transferred to PSPC. The Memorandum of Special Prosecutor
Tamayo was duly approved by then Ombudsman Desierto. Consequently, on May 31, 2000, the
Sandiganbayan Fifth Division, hearing Criminal Case Nos. 25940-25962, dropped Cruz as
accused.40

But even assuming that fraud attended the procurement of the subject TCCs, it cannot prejudice
PSPC’s rights as earlier explained since PSPC has not been shown or proven to have participated in
the perpetration of the fraudulent acts, nor is it shown that PSPC committed fraud in the transfer and
utilization of the subject TCCs.

On the issue of the authority to cancel duly issued TCCs, we agree with respondent that the Center
has concurrent authority with the BIR and BOC to cancel the TCCs it issued. The Center was
created under Administrative Order No. (AO) 266 in relation to EO 226. A scrutiny of said executive
issuances clearly shows that the Center was granted the authority to issue TCCs pursuant to its
mandate under AO 266. Sec. 5 of AO 266 provides:

SECTION 5. Issuance of Tax Credit Certificates and/or Duty Drawback.—The Secretary of

Finance shall designate his representatives who shall, upon the recommendation of the CENTER,
issue tax credit certificates within thirty (30) working days from acceptance of applications for the
enjoyment thereof. (Emphasis supplied.)

On the other hand, it is undisputed that the BIR under the NIRC and related statutes has the
authority to both issue and cancel TCCs it has issued and even those issued by the Center, either
upon full utilization in the settlement of internal revenue tax liabilities or upon conversion into a tax
refund of unutilized TCCs in specific cases under the conditions provided. 41 AO 266 however is
silent on whether or not the Center has authority to cancel a TCC it itself issued. Sec. 3 of AO 266
reveals:

SECTION 3. Powers, Duties and Functions.—The Center shall have the following powers, duties
and functions:

a. To promulgate the necessary rules and regulations and/or guidelines for the effective
implementation of this administrative order;

xxxx

g. To enforce compliance with tax credit/duty drawback policy and procedural guidelines;

xxxx

l. To perform such other functions/duties as may be necessary or incidental in the

furtherance of the purpose for which it has been established. (Emphasis supplied.)

Sec. 3, letter l. of AO 266, in relation to letters a. and g., does give ample authority to the Center to
cancel the TCCs it issued. Evidently, the Center cannot carry out its mandate if it cannot cancel the
TCCs it may have erroneously issued or those that were fraudulently issued. It is axiomatic that
when the law and its implementing rules are silent on the matter of cancellation while granting
explicit authority to issue, an inherent and incidental power resides on the issuing authority to cancel
that which was issued. A caveat however is required in that while the Center has authority to do so, it
must bear in mind the nature of the TCC’s immediate effectiveness and validity for which
cancellation may only be exercised before a transferred TCC has been fully utilized or canceled by
the BIR after due application of the available tax credit to the internal revenue tax liabilities of an
innocent transferee for value, unless of course the claimant or transferee was involved in the
perpetration of the fraud in the TCC’s issuance, transfer, or utilization. The utilization of the TCC will
not shield a guilty party from the consequences of the fraud committed.

While we agree with respondent that the State in the performance of governmental function is not
estopped by the neglect or omission of its agents, and nowhere is this truer than in the field of
taxation,42 yet this principle cannot be applied to work injustice against an innocent party. In the case
at bar, PSPC’s rights as an innocent transferee for value must be protected. Therefore, the remedy
for respondent is to go after the claimant companies who allegedly perpetrated the fraud. This is now
the subject of a criminal prosecution before the Sandiganbayan docketed as Criminal Case Nos.
25940-25962 for violation of RA 3019.
On the issue of the publication of the Center’s Excom Resolution No. 03-05-99 providing for the
"Guidelines and Procedures for the Cancellation, Recall and Recovery of Fraudulently Issued Tax
Credit Certificates," we find that the resolution is invalid and unenforceable. It authorizes the
cancellation of TCCs and TDM which are found to have been granted without legal basis or based
on fraudulent documents. The cancellation of the TCCs and TDM is covered by a penal provision of
the assailed resolution. Such being the case, it should have been published and filed with the
National Administrative Register of the U.P. Law Center in accordance with Secs. 3, 4, and 5,
Chapter 2 of Book VII, EO 292 or the Administrative Code of 1987.

We explained in People v. Que Po Lay43 that a rule which carries a penal sanction will bind the public
if the public is officially and specifically informed of the contents and penalties prescribed for the
breach of the rule. Since Excom Resolution No. 03-05-99 was neither registered with the U.P.

Law Center nor published, it is ineffective and unenforceable. Even if the resolution need not be
published, the punishment for any alleged fraudulent act in the procurement of the TCCs must not
be visited on PSPC, an innocent transferee for value, which has not been shown to have
participated in the fraud. Respondent must go after the perpetrators of the fraud.

Third Issue: Imposition of surcharges and interests

PSPC claims that having no deficiency excise tax liabilities, it may not be liable for the late payment
surcharges and annual interests.

This issue has been mooted by our disquisition above resolving the first issue in that PSPC has duly
settled its excise tax liabilities for 1992 and 1994 to 1997. Consequently, there is no basis for the
imposition of a late payment surcharges and for interests, and no need for further discussion on the
matter.

Fourth Issue: Non-compliance with statutory and

procedural due process

Finally, PSPC avers that its statutory and procedural right to due process was violated by respondent
in the issuance of the assessment. PSPC claims respondent violated RR 12-99 since no pre-
assessment notice was issued to PSPC before the November 15, 1999 assessment. Moreover,
PSPC argues that the November 15, 1999 assessment effectively deprived it of its statutory right to
protest the pre-assessment within 30 days from receipt of the disputed assessment letter.

While this has likewise been mooted by our discussion above, it would not be amiss to state that
PSPC’s rights to substantive and procedural due process have indeed been violated. The facts show
that PSPC was not accorded due process before the assessment was levied on it. The Center
required PSPC to submit certain sales documents relative to supposed delivery of IFOs by PSPC to
the TCC transferors. PSPC contends that it could not submit these documents as the transfer of the
subject TCCs did not require that it be a supplier of materials and/or component supplies to the
transferors in a letter dated October 29, 1999 which was received by the Center on November 3,
1999. On the same day, the Center informed PSPC of the cancellation of the subject TCCs and the
TDM covering the application of the TCCs to PSPC’s excise tax liabilities. The objections of PSPC
were brushed aside by the Center and the assessment was issued by respondent on November 15,
1999, without following the statutory and procedural requirements clearly provided under the NIRC
and applicable regulations.

What is applicable is RR 12-99, which superseded RR 12-85, pursuant to Sec. 244 in relation to
Sec. 245 of the NIRC implementing Secs. 6, 7, 204, 228, 247, 248, and 249 on the assessment of
national internal revenue taxes, fees, and charges. The procedures delineated in the said statutory
provisos and RR 12-99 were not followed by respondent, depriving PSPC of due process in
contesting the formal assessment levied against it. Respondent ignored RR 12-99 and did not issue
PSPC a notice for informal conference44 and a preliminary assessment notice, as required.45 PSPC’s
November 4, 1999 motion for reconsideration of the purported Center findings and cancellation of
the subject TCCs and the TDM was not even acted upon. 1âwphi1

PSPC was merely informed that it is liable for the amount of excise taxes it declared in its excise tax
returns for 1992 and 1994 to 1997 covered by the subject TCCs via the formal letter of demand and
assessment notice. For being formally defective, the November 15, 1999 formal letter of demand
and assessment notice is void. Paragraph 3.1.4 of Sec. 3, RR 12-99 pertinently provides:

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 taxpayer’s 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 (Emphasis supplied.)

In short, respondent merely relied on the findings of the Center which did not give PSPC ample
opportunity to air its side. While PSPC indeed protested the formal assessment, such does not
denigrate the fact that it was deprived of statutory and procedural due process to contest the
assessment before it was issued. Respondent must be more circumspect in the exercise of his
functions, as this Court aptly held in Roxas v. Court of Tax Appeals:

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in the
order to maintain the general public’s trust and confidence in the Government this power must be
used justly and not treacherously.46

WHEREFORE, the petition is GRANTED. The April 28, 2006 CTA En Banc Decision in CTA EB No.
64 is hereby REVERSED and SET ASIDE, and the August 2, 2004 CTA Decision in CTA Case No.
6003 disallowing the assessment is hereby REINSTATED. The assessment of respondent for
deficiency excise taxes against petitioner for 1992 and 1994 to 1997 inclusive contained in the April
22, 1998 letter of respondent is canceled and declared without force and effect for lack of legal
basis. No pronouncement as to costs.

SO ORDERED.

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 questioning the authority
1

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, any decision, order or ruling of the Constitutional
2

Commissions may be brought to this Court on certiorari by the aggrieved party within thirty (30)
3

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" in declaring that petitioner cannot avail of the right to offset any amount that it may be
5

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. The proposal reads: 10

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. Decision No. 921 reads: 11

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. Decision No. 1171 reads
15

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 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
17

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 providedfor 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. The function of the COA, particularly in the matter of allowing or disallowing certain
27

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, are broader
30

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 thereofprovided:

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 and Ramos vs.Aquino, are no longer controlling as the two (2) were decided in the
32 33

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 and Administrative
34

Code of 1987. Pursuant to its power to promulgate accounting and auditing rules and regulations
35

for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of

funds, the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is
36

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. A reading of subparagraphs (i) and (ii) easily discloses that they
38

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 valoremtaxes. 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. The last law cited is the Fiscal Incentives
40

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. The pertinent part of Section 2, Republic Act No. 6952
41

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;" in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
42

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." It is further stated that: "Moreover, it is evident that OPSF was not created to aid
43

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 as required by Article 2 of the
45

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 Tañada 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, ruled:
47

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. The burden of proof rests upon the party claiming exemption to prove that it
48

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. Respondents,
49

on the other hand, contend that said amount was already disallowed by the OEA for failure to
substantiate it. In fact, when OEA submitted the claims of petitioner for pre-audit, the
50

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." Petitioner also mentions
52

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, contend that there can be
53

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." The
54

reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., is that money due
55

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 . . .," and that the OPSF contributions do not go to the general fund of
56

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. There can be no
57

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. Taxes cannot be the subject of compensation because the government and taxpayer
58

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.

G.R. No. 152675 April 28, 2004

BATANGAS POWER CORPORATION, petitioner,

vs.
BATANGAS CITY and NATIONAL POWER CORPORATION, respondents.

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

G.R. No. 152771 April 28, 2004

NATIONAL POWER CORPORATION, petitioner,

vs.
HON. RICARDO R. ROSARIO, in his capacity as Presiding Judge, RTC, Br. 66, Makati City;
BATANGAS CITY GOVERNMENT; ATTY. TEODULFO DEGUITO, in his capacity as Chief Legal
Officer, Batangas City; and BENJAMIN PARGAS, in his capacity as City Treasurer, Batangas
City, respondents.

DECISION

PUNO, J.:

Before us are two (2) consolidated petitions for review under Rule 45 of the Rules of Civil Procedure,
seeking to set aside the rulings of the Regional Trial Court of Makati in its February 27, 2002
Decision in Civil Case No. 00-205.

The facts show that in the early 1990’s, the country suffered from a crippling power crisis. Power
outages lasted 8-12 hours daily and power generation was badly needed. Addressing the problem,
the government, through the National Power Corporation (NPC), sought to attract investors in power
plant operations by providing them with incentives, one of which was through the NPC’s assumption
of payment of their taxes in the Build Operate and Transfer (BOT) Agreement.

On June 29, 1992, Enron Power Development Corporation (Enron) and petitioner NPC entered into
a Fast Track BOT Project. Enron agreed to supply a power station to NPC and transfer its plant to
the latter after ten (10) years of operation. Section 11.02 of the BOT Agreement provided that NPC
shall be responsible for the payment of all taxes that may be imposed on the power station, except
income taxes and permit fees. Subsequently, Enron assigned its obligation under the BOT
Agreement to petitioner Batangas Power Corporation (BPC).
On September 13, 1992, BPC registered itself with the Board of Investments (BOI) as a pioneer
enterprise. On September 23, 1992, the BOI issued a certificate of registration 1 to BPC as a pioneer
enterprise entitled to a tax holiday for a period of six (6) years. The construction of the power station
in respondent Batangas City was then completed. BPC operated the station.

On October 12, 1998, Batangas City (the city, for brevity), thru its legal officer Teodulfo A. Deguito,
sent a letter to BPC demanding payment of business taxes and penalties, commencing from the
year 1994 as provided under Ordinance XI or the 1992 Batangas City Tax Code. 2 BPC refused to
pay, citing its tax-exempt status as a pioneer enterprise for six (6) years under Section 133 (g) of the
Local Government Code (LGC).3

On April 15, 1999, city treasurer Benjamin S. Pargas modified the city’s tax claim 4 and demanded
payment of business taxes from BPC only for the years 1998-1999. He acknowledged that BPC
enjoyed a 6-year tax holiday as a pioneer industry but its tax exemption period expired on
September 22, 1998, six (6) years after its registration with the BOI on September 23, 1992. The city
treasurer held that thereafter BPC became liable to pay its business taxes.

BPC still refused to pay the tax. It insisted that its 6-year tax holiday commenced from the date of its
commercial operation on July 16, 1993, not from the date of its BOI registration in September
1992.5 It furnished the city with a BOI letter6 wherein BOI designated July 16, 1993 as the start of
BPC’s income tax holiday as BPC was not able to immediately operate due to force majeure. BPC
claimed that the local tax holiday is concurrent with the income tax holiday. In the alternative, BPC
asserted that the city should collect the tax from the NPC as the latter assumed responsibility for its
payment under their BOT Agreement.

The matter was not put to rest. The city legal officer insisted7 that BPC’s tax holiday has already
expired, while the city argued that it directed its tax claim to BPC as it is the entity doing business in
the city and hence liable to pay the taxes. The city alleged that it was not privy to NPC’s assumption
of BPC’s tax payment under their BOT Agreement as the only parties thereto were NPC and BPC.

BPC adamantly refused to pay the tax claims and reiterated its position. 8 The city was likewise
unyielding on its stand.9 On August 26, 1999, the NPC intervened.10 While admitting assumption of
BPC’s tax obligations under their BOT Agreement, NPC refused to pay BPC’s business tax as it
allegedly constituted an indirect tax on NPC which is a tax-exempt corporation under its Charter. 11

In view of the deadlock, BPC filed a petition for declaratory relief12 with the Makati Regional Trial
Court (RTC) against Batangas City and NPC, praying for a ruling that it was not bound to pay the
business taxes imposed on it by the city. It alleged that under the BOT Agreement, NPC is
responsible for the payment of such taxes but as NPC is exempt from taxes, both the BPC and NPC
are not liable for its payment. NPC and Batangas City filed their respective answers.

On February 23, 2000, while the case was still pending, the city refused to issue a permit to BPC for
the operation of its business unless it paid the assessed business taxes amounting to close to
₱29M.

In view of this supervening event, BPC, whose principal office is in Makati City, filed a supplemental
petition13 with the Makati RTC to convert its original petition into an action for injunction to enjoin the
city from withholding the issuance of its business permit and closing its power plant. The city
opposed on the grounds of lack of jurisdiction and lack of cause of action. 14 The Supplemental
Petition was nonetheless admitted by the Makati RTC.
On February 27, 2002, the Makati RTC dismissed the petition for injunction. It held that: (1) BPC is
liable to pay business taxes to the city; (2) NPC’s tax exemption was withdrawn with the passage of
R.A. No. 7160 (The Local Government Code); and, (3) the 6-year tax holiday granted to pioneer
business enterprises starts on the date of registration with the BOI as provided in Section 133 (g) of
R.A. No. 7160, and not on the date of its actual business operations. 15

BPC and NPC filed with this Court a petition for review on certiorari16 assailing the Makati RTC
decision. The petitions were consolidated as they impugn the same decision, involve the same
parties and raise related issues.17

In G.R. No. 152771, the NPC contends:

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY RULED THAT
PETITIONER NPC HAS LOST ITS TAX EXEMPTION PRIVILEGE BECAUSE SECTION 193 OF
R.A. 7160 (LOCAL GOVERNMENT CODE) HAS WITHDRAWN SUCH PRIVILEGE DESPITE THE
SETTLED JURISPRUDENCE THAT THE ENACTMENT OF A LEGISLATION, WHICH IS A
GENERAL LAW, CANNOT REPEAL A SPECIAL LAW AND THAT SECTION 13 OF R.A. 6395 (NPC
LAW) WAS NOT SPECIFICALLY MENTIONED IN THE REPEALING CLAUSE IN SECTION 534 OF
R.A. 7160, AMONG OTHERS.

II

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND CAPRICIOUSLY OMITTED THE
CLEAR PROVISION OF SECTION 133, PARAGRAPH (O) OF R.A. 7160 WHICH EXEMPTS
"NATIONAL GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES" FROM THE
IMPOSITION OF "TAXES, FEES OR CHARGES OF ANY KIND."

III

RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK

OR EXCESS OF JURISDICTION WHEN IT ERRONEOUSLY AND CAPRICIOUSLY ADMITTED
BPC’s SUPPLEMENTAL PETITION FOR INJUNCTION NOTWITHSTANDING THAT IT HAD NO
JURISDICTION OVER THE PARTY (CITY GOVERNMENT OF BATANGAS) SOUGHT TO BE
ENJOINED.

In G.R. No. 152675, BPC also contends that the trial court erred: 1) in holding it liable for payment of
business taxes even if it is undisputed that NPC has already assumed payment thereof; and, 2) in
ruling that BPC’s 6-year tax holiday commenced on the date of its registration with the BOI as a
pioneer enterprise.

The issues for resolution are:

1. whether BPC’s 6-year tax holiday commenced on the date of its BOI registration as a
pioneer enterprise or on the date of its actual commercial operation as certified by the BOI;

2. whether the trial court had jurisdiction over the petition for injunction against Batangas
City; and,
 3. whether NPC’s tax exemption privileges under its Charter were withdrawn by Section 193
of the Local Government Code (LGC).

We find no merit in the petition.

On the first issue, petitioners BPC and NPC contend that contrary to the impugned decision, BPC’s
6-year tax holiday should commence on the date of its actual commercial operations as certified to
by the BOI, not on the date of its BOI registration.

We disagree. Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from levying
taxes on BOI-certified pioneer enterprises for a period of six years from the date of registration,
applies specifically to taxes imposed by the local government, like the business tax imposed
by Batangas City on BPC in the case at bar. Reliance of BPC on the provision of Executive
Order No. 226,18 specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year tax
holiday provided therein which commences from the date of commercial operation refers to
income taxes imposed by the national government on BOI-registered pioneer firms. Clearly, it is
the provision of the Local Government Code that should apply to the tax claim of Batangas City
against the BPC. The 6-year tax exemption of BPC should thus commence from the date of BPC’s
registration with the BOI on July 16, 1993 and end on July 15, 1999.

Anent the second issue, the records disclose that petitioner NPC did not oppose BPC’s conversion
of the petition for declaratory relief to a petition for injunction or raise the issue of the alleged lack of
jurisdiction of the Makati RTC over the petition for injunction before said court. Hence, NPC is
estopped from raising said issue before us. The fundamental rule is that a party cannot be allowed to
participate in a judicial proceeding, submit the case for decision, accept the judgment only if it is
favorable to him but attack the jurisdiction of the court when it is adverse. 19

Finally, on the third issue, petitioners insist that NPC’s exemption from all taxes under its Charter
had not been repealed by the LGC. They argue that NPC’s Charter is a special law which cannot be
impliedly repealed by a general and later legislation like the LGC. They likewise anchor their claim of
tax-exemption on Section 133 (o) of the LGC which exempts government instrumentalities, such as
the NPC, from taxes imposed by local government units (LGUs), citing in support thereof the case
of Basco v. PAGCOR.20

We find no merit in these contentions. The effect of the LGC on the tax exemption privileges of the
NPC has already been extensively discussed and settled in the recent case of National Power
Corporation v. City of Cabanatuan.21 In said case, this Court recognized the removal of the
blanket exclusion of government instrumentalities from local taxation as one of the most
significant provisions of the 1991 LGC. Specifically, we stressed that Section 193 of the
LGC,22 an express and general repeal of all statutes granting exemptions from local taxes, withdrew
the sweeping tax privileges previously enjoyed by the NPC under its Charter. We explained the
rationale for this provision, thus:

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. 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, x
x x 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 x x x."

To recall, prior to the enactment of the x x x Local Government Code x x x, various measures have
been enacted to promote local autonomy. x x x 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 x x x.

Neither can the NPC successfully rely on the Basco case23 as this was decided prior to the
effectivity of the LGC, when there was still no law empowering local government units to tax
instrumentalities of the national government.

Consequently, when NPC assumed the tax liabilities of the BPC under their 1992 BOT Agreement,
the LGC which removed NPC’s tax exemption privileges had already been in effect for six (6)
months. Thus, while BPC remains to be the entity doing business in said city, it is the NPC that is
ultimately liable to pay said taxes under the provisions of both the 1992 BOT Agreement and the
1991 Local Government Code.

IN VIEW WHEREOF, the petitions are DISMISSED. No costs.

SO ORDERED.

G.R. No. 158540. August 3, 2005

SOUTHERN CROSS CEMENT CORPORATION, Petitioners,
vs.
CEMENT MANUFACTURERS ASSOCIATION OF THE PHILIPPINES, THE SECRETARY OF THE
DEPARTMENT OF TRADE AND INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF
FINANCE and THE COMMISSIONER OF THE BUREAU OF CUSTOMS, Respondent.

RESOLUTION

TINGA, J.:

Cement is hardly an exciting subject for litigation. Still, the parties in this case have done their best to
put up a spirited advocacy of their respective positions, throwing in everything including the
proverbial kitchen sink. At present, the burden of passion, if not proof, has shifted to public
respondents Department of Trade and Industry (DTI) and private respondent Philippine Cement
Manufacturers Corporation (Philcemcor), who now seek reconsideration of our Decision dated 8 July
1

2004 (Decision), which granted the petition of petitioner Southern Cross Cement Corporation
(Southern Cross).

This case, of course, is ultimately not just about cement. For respondents, it is about love of country
and the future of the domestic industry in the face of foreign competition. For this Court, it is about
elementary statutory construction, constitutional limitations on the executive power to impose tariffs
and similar measures, and obedience to the law. Just as much was asserted in the Decision, and the
same holds true with this present Resolution.

An extensive narration of facts can be found in the Decision. As can well be recalled, the case
2

centers on the interpretation of provisions of Republic Act No. 8800, the Safeguard Measures Act
("SMA"), which was one of the laws enacted by Congress soon after the Philippines ratified the
General Agreement on Tariff and Trade (GATT) and the World Trade Organization (WTO)
Agreement. The SMA provides the structure and mechanics for the imposition of emergency
3

measures, including tariffs, to protect domestic industries and producers from increased imports
which inflict or could inflict serious injury on them.
4

A brief summary as to how the present petition came to be filed by Southern Cross. Philcemcor, an
association of at least eighteen (18) domestic cement manufacturers filed with the DTI a petition
seeking the imposition of safeguard measures on gray Portland cement, in accordance with the
5

SMA. After the DTI issued a provisional safeguard measure, the application was referred to the Tariff
6

Commission for a formal investigation pursuant to Section 9 of the SMA and its Implementing Rules
and Regulations, in order to determine whether or not to impose a definitive safeguard measure on
imports of gray Portland cement. The Tariff Commission held public hearings and conducted its own
investigation, then on 13 March 2002, issued its Formal Investigation Report ("Report"). The Report
determined as follows:

The elements of serious injury and imminent threat of serious injury not having been established, it is
hereby recommended that no definitive general safeguard measure be imposed on the importation
of gray Portland cement. 7

The DTI sought the opinion of the Secretary of Justice whether it could still impose a definitive
safeguard measure notwithstanding the negative finding of the Tariff Commission. After the
Secretary of Justice opined that the DTI could not do so under the SMA, the DTI Secretary then
8

promulgated a Decision wherein he expressed the DTI’s disagreement with the conclusions of the
9

Tariff Commission, but at the same time, ultimately denying Philcemcor’s application for safeguard
measures on the ground that the he was bound to do so in light of the Tariff Commission’s negative
findings.10

Philcemcor challenged this Decision of the DTI Secretary by filing with the Court of Appeals
a Petition for Certiorari, Prohibition and Mandamus seeking to set aside the DTI Decision, as well as
11

the Tariff Commission’s Report. It prayed that the Court of Appeals direct the DTI Secretary to
disregard the Report and to render judgment independently of the Report. Philcemcor argued that
the DTI Secretary, vested as he is under the law with the power of review, is not bound to adopt the
recommendations of the Tariff Commission; and, that the Report is void, as it is predicated on a
flawed framework, inconsistent inferences and erroneous methodology. 12

The Court of Appeals Twelfth Division, in a Decision penned by Court of Appeals Associate Justice
13

Elvi John Asuncion, partially granted Philcemcor’s petition. The appellate court ruled that it had
14

jurisdiction over the petition for certiorari since it alleged grave abuse of discretion. While it refused
to annul the findings of the Tariff Commission, it also held that the DTI Secretary was not bound by
15

the factual findings of the Tariff Commission since such findings are merely recommendatory and
they fall within the ambit of the Secretary’s discretionary review. It determined that the legislative
intent is to grant the DTI Secretary the power to make a final decision on the Tariff Commission’s
recommendation. 16

On 23 June 2003, Southern Cross filed the present petition, arguing that the Court of Appeals has no
jurisdiction over Philcemcor’s petition, as the proper remedy is a petition for review with the CTA
conformably with the SMA, and; that the factual findings of the Tariff Commission on the existence or
non-existence of conditions warranting the imposition of general safeguard measures are binding
upon the DTI Secretary.

Despite the fact that the Court of Appeals’ Decision had not yet become final, its binding force was
cited by the DTI Secretary when he issued a new Decision on 25 June 2003, wherein he ruled that
that in light of the appellate court’s Decision, there was no longer any legal impediment to his
deciding Philcemcor’s application for definitive safeguard measures. He made a determination that,
17

contrary to the findings of the Tariff Commission, the local cement industry had suffered serious
injury as a result of the import surges. Accordingly, he imposed a definitive safeguard measure on
18

the importation of gray Portland cement, in the form of a definitive safeguard duty in the amount of
₱20.60/40 kg. bag for three years on imported gray Portland Cement. 19

On 7 July 2003, Southern Cross filed with the Court a "Very Urgent Application for a Temporary
Restraining Order and/or A Writ of Preliminary Injunction" ("TRO Application"), seeking to enjoin the
DTI Secretary from enforcing his Decision of 25 June 2003 in view of the pending petition before this
Court. Philcemcor filed an opposition, claiming, among others, that it is not this Court but the CTA
that has jurisdiction over the application under the law.

On 1 August 2003, Southern Cross filed with the CTA a Petition for Review, assailing the DTI
Secretary’s 25 June 2003 Decision which imposed the definite safeguard measure. Yet Southern
Cross did not promptly inform this Court about this filing. The first time the Court would learn about
this Petition with the CTA was when Southern Cross mentioned such fact in a pleading dated 11
August 2003 and filed the next day with this Court. 20

Philcemcor argued before this Court that Southern Cross had deliberately and willfully resorted to
forum-shopping; that the CTA, being a special court of limited jurisdiction, could only review the
ruling of the DTI Secretary when a safeguard measure is imposed; and that the factual findings of
the Tariff Commission are not binding on the DTI Secretary. 21
After giving due course to Southern Cross’s Petition, the Court called the case for oral argument on
18 February 2004. At the oral argument, attended by the counsel for Philcemcor and Southern
22

Cross and the Office of the Solicitor General, the Court simplified the issues in this wise: (i) whether
the Decision of the DTI Secretary is appealable to the CTA or the Court of Appeals; (ii) assuming that
the Court of Appeals has jurisdiction, whether its Decision is in accordance with law; and, whether
a Temporary Restraining Order is warranted. 23

After the parties had filed their respective memoranda, the Court’s Second Division, to which the
case had been assigned, promulgated its Decision granting Southern
Cross’s Petition. The Decision was unanimous, without any separate or concurring opinion.
24

The Court ruled that the Court of Appeals had no jurisdiction over Philcemcor’s Petition, the proper
remedy under Section 29 of the SMA being a petition for review with the CTA; and that the Court of
Appeals erred in ruling that the DTI Secretary was not bound by the negative determination of the
Tariff Commission and could therefore impose the general safeguard measures, since Section 5 of
the SMA precisely required that the Tariff Commission make a positive final determination before the
DTI Secretary could impose these measures. Anent the argument that Southern Cross had
committed forum-shopping, the Court concluded that there was no evident malicious intent to
subvert procedural rules so as to match the standard under Section 5, Rule 7 of the Rules of Court
of willful and deliberate forum shopping. Accordingly, the Decision of the Court of Appeals dated 5
June 2003 was declared null and void.

The Court likewise found it necessary to nullify the Decision of the DTI Secretary dated 25 June
2003, rendered after the filing of this present Petition. This Decision by the DTI Secretary had cited
the obligatory force of the null and void Court of Appeals’ Decision, notwithstanding the fact that the
decision of the appellate court was not yet final and executory. Considering that the decision of the
Court of Appeals was a nullity to begin with, the inescapable conclusion was that the new decision of
the DTI Secretary, prescinding as it did from the imprimatur of the decision of the Court of Appeals,
was a nullity as well.

After the Decision was reported in the media, there was a flurry of newspaper articles citing alleged
negative reactions to the ruling by the counsel for Philcemcor, the DTI Secretary, and others. Both
25

respondents promptly filed their respective motions for reconsideration.

On 21 September 2004, the Court En Banc resolved, upon motion of respondents, to accept the
petition and resolve the Motions for Reconsideration. The case was then reheard on oral argument
26 27

on 1 March 2005. During the hearing, the Court elicited from the parties their arguments on the two
central issues as discussed in the assailed Decision, pertaining to the jurisdictional aspect and to the
substantive aspect of whether the DTI Secretary may impose a general safeguard measure despite
a negative determination by the Tariff Commission. The Court chose not to hear argumentation on
the peripheral issue of forum-shopping, although this question shall be tackled herein shortly.
28

Another point of concern emerged during oral arguments on the exercise of quasi-judicial powers by
the Tariff Commission, and the parties were required by the Court to discuss in their respective
memoranda whether the Tariff Commission could validly exercise quasi-judicial powers in the
exercise of its mandate under the SMA.

The Court has likewise been notified that subsequent to the rendition of the Court’s Decision,
Philcemcor filed a Petition for Extension of the Safeguard Measure with the DTI, which has been
referred to the Tariff Commission. In an Urgent Motion dated 21 December 2004, Southern Cross
29

prayed that Philcemcor, the DTI, the Bureau of Customs, and the Tariff Commission be directed to
"cease and desist from taking any and all actions pursuant to or under the null and void CA Decision
and DTI Decision, including proceedings to extend the safeguard measure. In a Manifestation and
30
Motion dated 23 June 2004, the Tariff Commission informed the Court that since no prohibitory
injunction or order of such nature had been issued by any court against the Tariff Commission, the
Commission proceeded to complete its investigation on the petition for extension, pursuant to
Section 9 of the SMA, but opted to defer transmittal of its report to the DTI Secretary pending
"guidance" from this Court on the propriety of such a step considering this pending Motion for
Reconsideration. In a Resolution dated 5 July 2005, the Court directed the parties to maintain the
status quo effective of even date, and until further orders from this Court. The denial of the pending
motions for reconsideration will obviously render the pending petition for extension academic.

I. Jurisdiction of the Court of Tax Appeals

Under Section 29 of the SMA

The first core issue resolved in the assailed Decision was whether the Court of Appeals had
jurisdiction over the special civil action for certiorari filed by Philcemcor assailing the 5 April
2002 Decision of the DTI Secretary. The general jurisdiction of the Court of Appeals over special civil
actions for certiorari is beyond doubt. The Constitution itself assures that judicial review avails to
determine whether or not there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the Government. At the same time, the
special civil action of certiorari is available only when there is no plain, speedy and adequate remedy
in the ordinary course of law. Philcemcor’s recourse of special civil action before the Court of
31

Appeals to challenge the Decision of the DTI Secretary not to impose the general safeguard
measures is not based on the SMA, but on the general rule on certiorari. Thus, the Court proceeded
to inquire whether indeed there was no other plain, speedy and adequate remedy in the ordinary
course of law that would warrant the allowance of Philcemcor’s special civil action.

The answer hinged on the proper interpretation of Section 29 of the SMA, which reads:

Section 29. Judicial Review. – Any interested party who is adversely affected by the ruling of the
Secretary in connection with the imposition of a safeguard measure may file with the CTA, a
petition for review of such ruling within thirty (30) days from receipt thereof. Provided, however, that
the filing of such petition for review shall not in any way stop, suspend or otherwise toll the
imposition or collection of the appropriate tariff duties or the adoption of other appropriate safeguard
measures, as the case may be.

The petition for review shall comply with the same requirements and shall follow the same rules of
procedure and shall be subject to the same disposition as in appeals in connection with adverse
rulings on tax matters to the Court of Appeals. (Emphasis supplied)
32

The matter is crucial for if the CTA properly had jurisdiction over the petition challenging the DTI
Secretary’s ruling not to impose a safeguard measure, then the special civil action of certiorari
resorted to instead by Philcemcor would not avail, owing to the existence of a plain, speedy and
adequate remedy in the ordinary course of law. The Court of Appeals, in asserting that it had
33

jurisdiction, merely cited the general rule on certiorari jurisdiction without bothering to refer to, or
possibly even study, the import of Section 29. In contrast, this Court duly considered the meaning
and ramifications of Section 29, concluding that it provided for a plain, speedy and adequate remedy
that Philcemcor could have resorted to instead of filing the special civil action before the Court of
Appeals.

Philcemcor still holds on to its hypothesis that the petition for review allowed under Section 29 lies
only if the DTI Secretary’s ruling imposes a safeguard measure. If, on the other hand, the DTI
Secretary’s ruling is not to impose a safeguard measure, judicial review under Section 29 could not
be resorted to since the provision refers to rulings "in connection with the imposition" of the
safeguard measure, as opposed to the non-imposition. Since the Decisiondated 5 April 2002
resolved against imposing a safeguard measure, Philcemcor claims that the proper remedial
recourse is a petition for certiorari with the Court of Appeals.

Interestingly, Republic Act No. 9282, promulgated on 30 March 2004, expressly vests unto the CTA
jurisdiction over "[d]ecisions of the Secretary of Trade and Industry, in case of nonagricultural
product, commodity or article . . . involving . . . safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to impose or not to impose said duties." It is clear
34

that any future attempts to advance the literalist position of the respondents would consequently fail.
However, since Republic Act No. 9282 has no retroactive effect, this Court had to decide whether
Section 29 vests jurisdiction on the CTA over rulings of the DTI Secretary not to impose a safeguard
measure. And the Court, in its assailed Decision, ruled that the CTA is endowed with such
jurisdiction.

Both respondents reiterate their fundamentalist reading that Section 29 authorizes the petition for
review before the CTA only when the DTI Secretary decides to impose a safeguard measure, but not
when he decides not to. In doing so, they fail to address what the Court earlier pointed out would be
the absurd consequences if their interpretation is followed to its logical end. But in affirming, as the
Court now does, its previous holding that the CTA has jurisdiction over petitions for review
questioning the non-imposition of safeguard measures by the DTI Secretary, the Court relies on the
plain reading that Section 29 explicitly vests jurisdiction over such petitions on the CTA.

Under Section 29, there are three requisites to enable the CTA to acquire jurisdiction over the
petition for review contemplated therein: (i) there must be a ruling by the DTI Secretary; (ii) the
petition must be filed by an interested party adversely affected by the ruling; and (iii) such ruling must
be "in connection with the imposition of a safeguard measure." Obviously, there are differences
between "a ruling for the imposition of a safeguard measure," and one issued "in connection with the
imposition of a safeguard measure." The first adverts to a singular type of ruling, namely one that
imposes a safeguard measure. The second does not contemplate only one kind of ruling, but a
myriad of rulings issued "in connection with the imposition of a safeguard measure."

Respondents argue that the Court has given an expansive interpretation to Section 29, contrary to
the established rule requiring strict construction against the existence of jurisdiction in specialized
courts. But it is the express provision of Section 29, and not this Court, that mandates CTA
35

jurisdiction to be broad enough to encompass more than just a ruling imposing the
safeguard measure.

The key phrase remains "in connection with." It has connotations that are obvious even to the
layman. A ruling issued "in connection with" the imposition of a safeguard measure would be one
that bears some relation to the imposition of a safeguard measure. Obviously, a ruling imposing a
safeguard measure is covered by the phrase "in connection with," but such ruling is by no means
exclusive. Rulings which modify, suspend or terminate a safeguard measure are necessarily in
connection with the imposition of a safeguard measure. So does a ruling allowing for a provisional
safeguard measure. So too, a ruling by the DTI Secretary refusing to refer the application for a
safeguard measure to the Tariff Commission. It is clear that there is an entire subset of rulings that
the DTI Secretary may issue in connection with the imposition of a safeguard measure, including
those that are provisional, interlocutory, or dispositive in character. By the same token, a ruling not
36

to impose a safeguard measure is also issued in connection with the imposition of a safeguard
measure.
In arriving at the proper interpretation of "in connection with," the Court referred to the U.S. Supreme
Court cases of Shaw v. Delta Air Lines, Inc. and New York State Blue Cross Plans v. Travelers
37

Ins. Both cases considered the interpretation of the phrase "relates to" as used in a federal statute,
38

the Employee Retirement Security Act of 1974. Respondents criticize the citations on the premise
that the cases are not binding in our jurisdiction and do not involve safeguard measures. The
criticisms are off-tangent considering that our ruling did not call for the application of the Employee
Retirement Security Act of 1974 in the Philippine milieu. The American cases are not relied upon as
precedents, but as guides of interpretation. Certainly, if there are applicable local precedents
pertaining to the interpretation of the phrase "in connection with," then these certainly would have
some binding force. But none avail, and neither do the respondents demonstrate a countervailing
holding in Philippine jurisprudence.

Yet we should consider the claim that an "expansive interpretation" was favored in Shaw because
the law in question was an employee’s benefit law that had to be given an interpretation favorable to
its intended beneficiaries. In the next breath, Philcemcor notes that the U.S. Supreme Court itself
39

was alarmed by the expansive interpretation in Shaw and thus in Blue Cross, the Shaw ruling was
reversed and a more restrictive interpretation was applied based on congressional intent. 40

Respondents would like to make it appear that the Court acted rashly in applying a discarded
precedent in Shaw, a non-binding foreign precedent nonetheless. But the Court did make the
following observation in its Decisionpertaining to Blue Cross:

Now, let us determine the maximum scope and reach of the phrase "in connection with" as used in
Section 29 of the SMA. A literalist reading or linguistic survey may not satisfy. Even the U.S.
Supreme Court in New York State Blue Cross Plans v. Travelers Ins. conceded that the phrases
41

"relate to" or "in connection with" may be extended to the farthest stretch of indeterminacy for,
universally, relations or connections are infinite and stop nowhere. Thus, in the case the U.S. High
42

Court, examining the same phrase of the same provision of law involved in Shaw, resorted to
looking at the statute and its objectives as the alternative to an "uncritical literalism." A
similar inquiry into the other provisions of the SMA is in order to determine the scope of
review accorded therein to the CTA. 43

In the next four paragraphs of the Decision, encompassing four pages, the Court proceeded to
inquire into the SMA and its objectives as a means to determine the scope of rulings to be deemed
as "in connection with the imposition of a safeguard measure." Certainly, this Court did not resort to
the broadest interpretation possible of the phrase "in connection with," but instead sought to bring it
into the context of the scope and objectives of the SMA. The ultimate conclusion of the Court was
that the phrase includes all rulings of the DTI Secretary which arise from the time an application
or motu proprio initiation for the imposition of a safeguard measure is taken. This conclusion was
44

derived from the observation that the imposition of a general safeguard measure is a process,
initiated motu proprioor through application, which undergoes several stages upon which the DTI
Secretary is obliged or may be called upon to issue a ruling.

It should be emphasized again that by utilizing the phrase "in connection with," it is the SMA that
expressly vests jurisdiction on the CTA over petitions questioning the non-imposition by the DTI
Secretary of safeguard measures. The Court is simply asserting, as it should, the clear intent of the
legislature in enacting the SMA. Without "in connection with" or a synonymous phrase, the Court
would be compelled to favor the respondents’ position that only rulings imposing safeguard
measures may be elevated on appeal to the CTA. But considering that the statute does make use of
the phrase, there is little sense in delving into alternate scenarios.
Respondents fail to convincingly address the absurd consequences pointed out by the Decision had
their proposed interpretation been adopted. Indeed, suffocated beneath the respondents’ legalistic
tinsel is the elemental question¾what sense is there in vesting jurisdiction on the CTA over a
decision to impose a safeguard measure, but not on one choosing not to impose. Of course, it is not
for the Court to inquire into the wisdom of legislative acts, hence the rule that jurisdiction must be
expressly vested and not presumed. Yet ultimately, respondents muddle the issue by making it
appear that the Decision has uniquely expanded the jurisdictional rules. For the respondents, the
proper statutory interpretation of the crucial phrase "in connection with" is to pretend that the phrase
did not exist at all in the statute. The Court, in taking the effort to examine the meaning and extent of
the phrase, is merely giving breath to the legislative will.

The Court likewise stated that the respondents’ position calls for split jurisdiction, which is judicially
abhorred. In rebuttal, the public respondents cite Sections 2313 and 2402 of the Tariff and Customs
Code (TCC), which allegedly provide for a splitting of jurisdiction of the CTA. According to public
respondents, under Section 2313 of the TCC, a decision of the Commissioner of Customs affirming
a decision of the Collector of Customs adverse to the government is elevated for review to the
Secretary of Finance. However, under Section 2402 of the TCC, a ruling of the Commissioner of the
Bureau of Customs against a taxpayer must be appealed to the Court of Tax Appeals, and not to the
Secretary of Finance.

Strictly speaking, the review by the Secretary of Finance of the decision of the Commissioner of
Customs is not judicial review, since the Secretary of Finance holds an executive and not a judicial
office. The contrast is apparent with the situation in this case, wherein the interpretation favored by
the respondents calls for the exercise of judicial review by two different courts over essentially the
same question¾whether the DTI Secretary should impose general safeguard measures. Moreover,
as petitioner points out, the executive department cannot appeal against itself. The Collector of
Customs, the Commissioner of Customs and the Secretary of Finance are all part of the executive
branch. If the Collector of Customs rules against the government, the executive cannot very well
bring suit in courts against itself. On the other hand, if a private person is aggrieved by the decision
of the Collector of Customs, he can have proper recourse before the courts, which now would be
called upon to exercise judicial review over the action of the executive branch.

More fundamentally, the situation involving split review of the decision of the Collector of Customs
under the TCC is not apropos to the case at bar. The TCC in that instance is quite explicit on the
divergent reviewing body or official depending on which party prevailed at the Collector of Customs’
level. On the other hand, there is no such explicit expression of bifurcated appeals in Section 29 of
the SMA.

Public respondents likewise cite Fabian v. Ombudsman as another instance wherein the Court
45

purportedly allowed split jurisdiction. It is argued that the Court, in ruling that it was the Court of
Appeals which possessed appellate authority to review decisions of the Ombudsman in
administrative cases while the Court retaining appellate jurisdiction of decisions of the Ombudsman
in non-administrative cases, effectively sanctioned split jurisdiction between the Court and the Court
of Appeals.46

Nonetheless, this argument is successfully undercut by Southern Cross, which points out the
essential differences in the power exercised by the Ombudsman in administrative cases and non-
administrative cases relating to criminal complaints. In the former, the Ombudsman may impose an
administrative penalty, while in acting upon a criminal complaint what the Ombudsman undertakes is
a preliminary investigation. Clearly, the capacity in which the Ombudsman takes on in deciding an
administrative complaint is wholly different from that in conducting a preliminary investigation. In
contrast, in ruling upon a safeguard measure, the DTI Secretary acts in one and the same role. The
variance between an order granting or denying an application for a safeguard measure is polar
though emanating from the same equator, and does not arise from the distinct character of the
putative actions involved.

Philcemcor imputes intelligent design behind the alleged intent of Congress to limit CTA review only
to impositions of the general safeguard measures. It claims that there is a necessary tax implication
in case of an imposition of a tariff where the CTA’s expertise is necessary, but there is no such tax
implication, hence no need for the assumption of jurisdiction by a specialized agency, when the
ruling rejects the imposition of a safeguard measure. But of course, whether the ruling under review
calls for the imposition or non-imposition of the safeguard measure, the common question for
resolution still is whether or not the tariff should be imposed — an issue definitely fraught with a tax
dimension. The determination of the question will call upon the same kind of expertise that a
specialized body as the CTA presumably possesses.

In response to the Court’s observation that the setup proposed by respondents was novel, unusual,
cumbersome and unwise, public respondents invoke the maxim that courts should not be concerned
with the wisdom and efficacy of legislation. But this prescinds from the bogus claim that the CTA
47

may not exercise judicial review over a decision not to impose a safeguard measure, a prohibition
that finds no statutory support. It is likewise settled in statutory construction that an interpretation that
would cause inconvenience and absurdity is not favored. Respondents do not address the particular
illogic that the Court pointed out would ensue if their position on judicial review were adopted.
According to the respondents, while a ruling by the DTI Secretary imposing a safeguard measure
may be elevated on review to the CTA and assailed on the ground of errors in fact and in law, a
ruling denying the imposition of safeguard measures may be assailed only on the ground that the
DTI Secretary committed grave abuse of discretion. As stressed in the Decision, "[c]ertiorari is a
remedy narrow in its scope and inflexible in its character. It is not a general utility tool in the legal
workshop." 48

It is incorrect to say that the Decision bars any effective remedy should the Tariff Commission act or
conclude erroneously in making its determination whether the factual conditions exist which
necessitate the imposition of the general safeguard measure. If the Tariff Commission makes a
negative final determination, the DTI Secretary, bound as he is by this negative determination, has to
render a decision denying the application for safeguard measures citing the Tariff Commission’s
findings as basis. Necessarily then, such negative determination of the Tariff Commission being an
integral part of the DTI Secretary’s ruling would be open for review before the CTA, which again is
especially qualified by reason of its expertise to examine the findings of the Tariff Commission.
Moreover, considering that the Tariff Commission is an instrumentality of the government, its actions
(as opposed to those undertaken by the DTI Secretary under the SMA) are not beyond the pale of
certiorari jurisdiction. Unfortunately for Philcemcor, it hinged its cause on the claim that the DTI
Secretary’s actions may be annulled on certiorari, notwithstanding the explicit grant of judicial review
over that cabinet member’s actions under the SMA to the CTA.

Finally on this point, Philcemcor argues that assuming this Court’s interpretation of Section 29 is
correct, such ruling should not be given retroactive effect, otherwise, a gross violation of the right to
due process would be had. This erroneously presumes that it was this Court, and not Congress,
which vested jurisdiction on the CTA over rulings of non-imposition rendered by the DTI Secretary.
We have repeatedly stressed that Section 29 expressly confers CTA jurisdiction over rulings in
connection with the imposition of the safeguard measure, and the reassertion of this point in
the Decision was a matter of emphasis, not of contrivance. The due process protection does not
shield those who remain purposely blind to the express rules that ensure the sporting play of
procedural law.
Besides, respondents’ claim would also apply every time this Court is compelled to settle a novel
question of law, or to reverse precedent. In such cases, there would always be litigants whose
causes of action might be vitiated by the application of newly formulated judicial doctrines. Adopting
their claim would unwisely force this Court to treat its dispositions in unprecedented, sometimes
landmark decisions not as resolutions to the live cases or controversies, but as legal doctrine
applicable only to future litigations.

II. Positive Final Determination

By the Tariff Commission an

Indispensable Requisite to the

Imposition of General Safeguard Measures

The second core ruling in the Decision was that contrary to the holding of the Court of Appeals, the
DTI Secretary was barred from imposing a general safeguard measure absent a positive final
determination rendered by the Tariff Commission. The fundamental premise rooted in this ruling is
based on the acknowledgment that the required positive final determination of the Tariff Commission
exists as a properly enacted constitutional limitation imposed on the delegation of the legislative
power to impose tariffs and imposts to the President under Section 28(2), Article VI of the
Constitution.

Congressional Limitations Pursuant

To Constitutional Authority on the

Delegated Power to Impose

Safeguard Measures

The safeguard measures imposable under the SMA generally involve duties on imported products,
tariff rate quotas, or quantitative restrictions on the importation of a product into the country.
Concerning as they do the foreign importation of products into the Philippines, these safeguard
measures fall within the ambit of Section 28(2), Article VI of the Constitution, which states:

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. 49

The Court acknowledges the basic postulates ingrained in the provision, and, hence, governing in
this case. They are:

(1) It is Congress which authorizes the President to impose tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts. Thus, the authority cannot
come from the Finance Department, the National Economic Development Authority, or the World
Trade Organization, no matter how insistent or persistent these bodies may be.

(2) The authorization granted to the President must be embodied in a law. Hence, the
justification cannot be supplied simply by inherent executive powers. It cannot arise from
administrative or executive orders promulgated by the executive branch or from the wisdom or whim
of the President.

(3) The authorization to the President can be exercised only within the specified limits set in
the law and is further subject to limitations and restrictions which Congress may
impose. Consequently, if Congress specifies that the tariff rates should not exceed a given amount,
the President cannot impose a tariff rate that exceeds such amount. If Congress stipulates that no
duties may be imposed on the importation of corn, the President cannot impose duties on corn, no
matter how actively the local corn producers lobby the President. Even the most picayune of limits or
restrictions imposed by Congress must be observed by the President.

There is one fundamental principle that animates these constitutional postulates. These
impositions under Section 28(2), Article VI fall within the realm of the power of taxation, a
power which is within the sole province of the legislature under the Constitution.

Without Section 28(2), Article VI, the executive branch has no authority to impose tariffs and
other similar tax levies involving the importation of foreign goods. Assuming that Section 28(2)
Article VI did not exist, the enactment of the SMA by Congress would be voided on the ground that it
would constitute an undue delegation of the legislative power to tax. The constitutional provision
shields such delegation from constitutional infirmity, and should be recognized as an exceptional
grant of legislative power to the President, rather than the affirmation of an inherent executive power.

This being the case, the qualifiers mandated by the Constitution on this presidential authority attain
primordial consideration. First, there must be a law, such as the SMA. Second, there must be
specified limits, a detail which would be filled in by the law. And further, Congress is further
empowered to impose limitations and restrictions on this presidential authority. On this last power,
the provision does not provide for specified conditions, such as that the limitations and restrictions
must conform to prior statutes, internationally accepted practices, accepted jurisprudence, or the
considered opinion of members of the executive branch.

The Court recognizes that the authority delegated to the President under Section 28(2), Article VI
may be exercised, in accordance with legislative sanction, by the alter egos of the President, such
as department secretaries. Indeed, for purposes of the President’s exercise of power to impose
tariffs under Article VI, Section 28(2), it is generally the Secretary of Finance who acts as alter ego of
the President. The SMA provides an exceptional instance wherein it is the DTI or Agriculture
Secretary who is tasked by Congress, in their capacities as alter egos of the President, to impose
such measures. Certainly, the DTI Secretary has no inherent power, even as alter ego of the
President, to levy tariffs and imports.

Concurrently, the tasking of the Tariff Commission under the SMA should be likewise construed
within the same context as part and parcel of the legislative delegation of its inherent power to
impose tariffs and imposts to the executive branch, subject to limitations and restrictions. In that
regard, both the Tariff Commission and the DTI Secretary may be regarded as agents of Congress
within their limited respective spheres, as ordained in the SMA, in the implementation of the said law
which significantly draws its strength from the plenary legislative power of taxation. Indeed, even
the President may be considered as an agent of Congress for the purpose of imposing
safeguard measures. It is Congress, not the President, which possesses inherent powers to
impose tariffs and imposts. Without legislative authorization through statute, the President
has no power, authority or right to impose such safeguard measures because taxation is
inherently legislative, not executive.
When Congress tasks the President or his/her alter egos to impose safeguard measures
under the delineated conditions, the President or the alter egos may be properly deemed as
agents of Congress to perform an act that inherently belongs as a matter of right to the
legislature. It is basic agency law that the agent may not act beyond the specifically delegated
powers or disregard the restrictions imposed by the principal. In short, Congress may establish the
procedural framework under which such safeguard measures may be imposed, and assign the
various offices in the government bureaucracy respective tasks pursuant to the imposition of such
measures, the task assignment including the factual determination of whether the necessary
conditions exists to warrant such impositions. Under the SMA, Congress assigned the DTI Secretary
and the Tariff Commission their respective functions in the legislature’s scheme of things.
50

There is only one viable ground for challenging the legality of the limitations and restrictions imposed
by Congress under Section 28(2) Article VI, and that is such limitations and restrictions are
themselves violative of the Constitution. Thus, no matter how distasteful or noxious these limitations
and restrictions may seem, the Court has no choice but to uphold their validity unless their
constitutional infirmity can be demonstrated.

What are these limitations and restrictions that are material to the present case? The entire SMA
provides for a limited framework under which the President, through the DTI and Agriculture
Secretaries, may impose safeguard measures in the form of tariffs and similar imposts. The limitation
most relevant to this case is contained in Section 5 of the SMA, captioned "Conditions for the
Application of General Safeguard Measures," and stating:

The Secretary shall apply a general safeguard measure upon a positive final determination of
the [Tariff] Commission that a product is being imported into the country in increased quantities,
whether absolute or relative to the domestic production, as to be a substantial cause of serious injury
or threat thereof to the domestic industry; however, in the case of non-agricultural products, the
Secretary shall first establish that the application of such safeguard measures will be in the public
interest.
51

Positive Final Determination

By Tariff Commission Plainly

Required by Section 5 of SMA

There is no question that Section 5 of the SMA operates as a limitation validly imposed by Congress
on the presidential authority under the SMA to impose tariffs and imposts. That the positive final
52

determination operates as an indispensable requisite to the imposition of the safeguard measure,

and that it is the Tariff Commission which makes such determination, are legal propositions plainly
expressed in Section 5 for the easy comprehension for everyone but respondents.

Philcemcor attributes this Court’s conclusion on the indispensability of the positive final
determination to flawed syllogism in that we read the proposition "if A then B" as if it stated "if A, and
only A, then B." Translated in practical terms, our conclusion, according to Philcemcor, would have
53

only been justified had Section 5 read "shall apply a general safeguard measure upon, and only
upon, a positive final determination of the Tariff Commission."

Statutes are not designed for the easy comprehension of the five-year old child. Certainly, general
propositions laid down in statutes need not be expressly qualified by clauses denoting exclusivity in
order that they gain efficacy. Indeed, applying this argument, the President would, under the
Constitution, be authorized to declare martial law despite the absence of the invasion, rebellion or
public safety requirement just because the first paragraph of Section 18, Article VII fails to state the
magic word "only." 54

But let us for the nonce pursue Philcemcor’s logic further. It claims that since Section 5 does not
allegedly limit the circumstances upon which the DTI Secretary may impose general safeguard
measures, it is a worthy pursuit to determine whether the entire context of the SMA, as discerned by
all the other familiar indicators of legislative intent supplied by norms of statutory interpretation,
would justify safeguard measures absent a positive final determination by the Tariff Commission.

The first line of attack employed is on Section 5 itself, it allegedly not being as clear as it sounds. It is
advanced that Section 5 does not relate to the legal ability of either the Tariff Commission or the DTI
Secretary to bind or foreclose review and reversal by one or the other. Such relationship should
instead be governed by domestic administrative law and remedial law. Philcemcor thus would like to
cast the proposition in this manner: Does it run contrary to our legal order to assert, as the Court did
in its Decision, that a body of relative junior competence as the Tariff Commission can bind an
administrative superior and cabinet officer, the DTI Secretary? It is easy to see why Philcemcor
would like to divorce this DTI Secretary-Tariff Commission interaction from the confines of the SMA.
Shorn of context, the notion would seem radical and unjustifiable that the lowly Tariff Commission
can bind the hands and feet of the DTI Secretary.

It can be surmised at once that respondents’ preferred interpretation is based not on the express
language of the SMA, but from implications derived in a roundabout manner. Certainly, no provision
in the SMA expressly authorizes the DTI Secretary to impose a general safeguard measure despite
the absence of a positive final recommendation of the Tariff Commission. On the other hand, Section
5 expressly states that the DTI Secretary "shall apply a general safeguard measure upon a positive
final determination of the [Tariff] Commission." The causal connection in Section 5 between the
imposition by the DTI Secretary of the general safeguard measure and the positive final
determination of the Tariff Commission is patent, and even respondents do not dispute such
connection.

As stated earlier, the Court in its Decision found Section 5 to be clear, plain and free from ambiguity
so as to render unnecessary resort to the congressional records to ascertain legislative intent. Yet
respondents, on the dubitable premise that Section 5 is not as express as it seems, again latch on to
the record of legislative deliberations in asserting that there was no legislative intent to bar the DTI
Secretary from imposing the general safeguard measure anyway despite the absence of a positive
final determination by the Tariff Commission.

Let us take the bait for a moment, and examine respondents’ commonly cited portion of the
legislative record. One would presume, given the intense advocacy for the efficacy of these citations,
that they contain a "smoking gun" ¾ express declarations from the legislators that the DTI Secretary
may impose a general safeguard measure even if the Tariff Commission refuses to render a positive
final determination. Such "smoking gun," if it exists, would characterize our Decision as
disingenuous for ignoring such contrary expression of intent from the legislators who enacted the
SMA. But as with many things, the anticipation is more dramatic than the truth.

The excerpts cited by respondents are derived from the interpellation of the late Congressman
Marcial Punzalan Jr., by then (and still is) Congressman Simeon Datumanong. Nowhere in these
55

records is the view expressed that the DTI Secretary may impose the general safeguard measures if
the Tariff Commission issues a negative final determination or otherwise is unable to make a positive
final determination. Instead, respondents hitch on the observations of Congressman Punzalan Jr.,
that "the results of the [Tariff] Commission’s findings . . . is subsequently submitted to [the DTI
Secretary] for the [DTI Secretary] to impose or not to impose;" and that "the [DTI Secretary] here is…
who would make the final decision on the recommendation that is made by a more technical body
[such as the Tariff Commission]." 56

There is nothing in the remarks of Congressman Punzalan which contradict our Decision. His
observations fall in accord with the respective roles of the Tariff Commission and the DTI Secretary
under the SMA. Under the SMA, it is the Tariff Commission that conducts an investigation as to
whether the conditions exist to warrant the imposition of the safeguard measures. These conditions
are enumerated in Section 5, namely; that a product is being imported into the country in increased
quantities, whether absolute or relative to the domestic production, as to be a substantial cause of
serious injury or threat thereof to the domestic industry. After the investigation of the Tariff
Commission, it submits a report to the DTI Secretary which states, among others, whether the
above-stated conditions for the imposition of the general safeguard measures exist. Upon a positive
final determination that these conditions are present, the Tariff Commission then is mandated to
recommend what appropriate safeguard measures should be undertaken by the DTI Secretary.
Section 13 of the SMA gives five (5) specific options on the type of safeguard measures the Tariff
Commission recommends to the DTI Secretary.

At the same time, nothing in the SMA obliges the DTI Secretary to adopt the recommendations
made by the Tariff Commission. In fact, the SMA requires that the DTI Secretary establish that the
application of such safeguard measures is in the public interest, notwithstanding the Tariff
Commission’s recommendation on the appropriate safeguard measure upon its positive final
determination. Thus, even if the Tariff Commission makes a positive final determination, the DTI
Secretary may opt not to impose a general safeguard measure, or choose a different type of
safeguard measure other than that recommended by the Tariff Commission.

Congressman Punzalan was cited as saying that the DTI Secretary makes the decision "to impose
or not to impose," which is correct since the DTI Secretary may choose not to impose a safeguard
measure in spite of a positive final determination by the Tariff Commission. Congressman Punzalan
also correctly stated that it is the DTI Secretary who makes the final decision "on the
recommendation that is made [by the Tariff Commission]," since the DTI Secretary may choose to
impose a general safeguard measure different from that recommended by the Tariff Commission or
not to impose a safeguard measure at all. Nowhere in these cited deliberations was Congressman
Punzalan, or any other member of Congress for that matter, quoted as saying that the DTI Secretary
may ignore a negative determination by the Tariff Commission as to the existence of the conditions
warranting the imposition of general safeguard measures, and thereafter proceed to impose these
measures nonetheless. It is too late in the day to ascertain from the late Congressman Punzalan
himself whether he had made these remarks in order to assure the other legislators that the DTI
Secretary may impose the general safeguard measures notwithstanding a negative determination by
the Tariff Commission. But certainly, the language of Section 5 is more resolutory to that question
than the recorded remarks of Congressman Punzalan.

Respondents employed considerable effort to becloud Section 5 with undeserved ambiguity in order
that a proper resort to the legislative deliberations may be had. Yet assuming that Section 5
deserves to be clarified through an inquiry into the legislative record, the excerpts cited by the
respondents are far more ambiguous than the language of the assailed provision regarding the key
question of whether the DTI Secretary may impose safeguard measures in the face of a negative
determination by the Tariff Commission. Moreover, even Southern Cross counters with its own
excerpts of the legislative record in support of their own view.57

It will not be difficult, especially as to heavily-debated legislation, for two sides with contrapuntal
interpretations of a statute to highlight their respective citations from the legislative debate in support
of their particular views. A futile exercise of second-guessing is happily avoided if the meaning of the
58
statute is clear on its face. It is evident from the text of Section 5 that there must be a positive
final determination by the Tariff Commission that a product is being imported into the country
in increased quantities (whether absolute or relative to domestic production), as to be a
substantial cause of serious injury or threat to the domestic industry. Any disputation to the
contrary is, at best, the product of wishful thinking.

For the same reason that Section 5 is explicit as regards the essentiality of a positive final
determination by the Tariff Commission, there is no need to refer to the Implementing Rules of the
SMA to ascertain a contrary intent. If there is indeed a provision in the Implementing Rules that
allows the DTI Secretary to impose a general safeguard measure even without the positive final
determination by the Tariff Commission, said rule is void as it cannot supplant the express language
of the legislature. Respondents essentially rehash their previous arguments on this point, and there
is no reason to consider them anew. The Decision made it clear that nothing in Rule 13.2 of the
Implementing Rules, even though captioned "Final Determination by the Secretary," authorizes the
DTI Secretary to impose a general safeguard measure in the absence of a positive final
determination by the Tariff Commission. Similarly, the "Rules and Regulations to Govern the
59

Conduct of Investigation by the Tariff Commission Pursuant to Republic Act No. 8800" now cited by
the respondent does not contain any provision that the DTI Secretary may impose the general
safeguard measures in the absence of a positive final determination by the Tariff Commission.

Section 13 of the SMA further bolsters the interpretation as argued by Southern Cross and upheld by
the Decision. The first paragraph thereof states that "[u]pon its positive determination, the [Tariff]
Commission shall recommend to the Secretary an appropriate definitive measure…", clearly
referring to the Tariff Commission as the entity that makes the positive determination. On the other
hand, the penultimate paragraph of the same provision states that "[i]n the event of a negative final
determination", the DTI Secretary is to immediately issue through the Secretary of Finance, a written
instruction to the Commissioner of Customs authorizing the return of the cash bonds previously
collected as a provisional safeguard measure. Since the first paragraph of the same provision states
that it is the Tariff Commission which makes the positive determination, it necessarily follows that it,
and not the DTI Secretary, makes the negative final determination as referred to in the penultimate
paragraph of Section 13. 60

The Separate Opinion considers as highly persuasive of former Tariff Commission Chairman Abon,
who stated that the Commission’s findings are merely recommendatory. Again, the considered
61

opinion of Chairman Abon is of no operative effect if the statute plainly states otherwise, and Section
5 bluntly does require a positive final determination by the Tariff Commission before the DTI
Secretary may impose a general safeguard measure. Certainly, the Court cannot give controlling
62

effect to the statements of any public officer in serious denial of his duties if the law otherwise
imposes the duty on the public office or officer.

Nonetheless, if we are to render persuasive effect on the considered opinion of the members of the
Executive Branch, it bears noting that the Secretary of the Department of Justice rendered an
Opinion wherein he concluded that the DTI Secretary could not impose a general safeguard
measure if the Tariff Commission made a negative final determination. Unlike Chairman Abon’s
63

impromptu remarks made during a hearing, the DOJ Opinion was rendered only after a thorough
study of the question after referral to it by the DTI. The DOJ Secretary is the alter ego of the
President with a stated mandate as the head of the principal law agency of the government. As the
64

DOJ Secretary has no denominated role in the SMA, he was able to render his Opinion from the
vantage of judicious distance. Should not his Opinion, studied and direct to the point as it is, carry
greater weight than the spontaneous remarks of the Tariff Commission’s Chairman which do not
even expressly disavow the binding power of the Commission’s positive final determination?
III. DTI Secretary has No Power of Review

Over Final Determination of the Tariff Commission

We should reemphasize that it is only because of the SMA, a legislative enactment, that the
executive branch has the power to impose safeguard measures. At the same time, by constitutional
fiat, the exercise of such power is subjected to the limitations and restrictions similarly enforced by
the SMA. In examining the relationship of the DTI and the Tariff Commission as established in the
SMA, it is essential to acknowledge and consider these predicates.

It is necessary to clarify the paradigm established by the SMA and affirmed by the Constitution under
which the Tariff Commission and the DTI operate, especially in light of the suggestions that the
Court’s rulings on the functions of quasi-judicial power find application in this case. Perhaps the
reflexive application of the quasi-judicial doctrine in this case, rooted as it is in jurisprudence, might
allow for some convenience in ruling, yet doing so ultimately betrays ignorance of the fundamental
power of Congress to reorganize the administrative structure of governance in ways it sees fit.

The Separate Opinion operates from wholly different premises which are incomplete. Its main
stance, similar to that of respondents, is that the DTI Secretary, acting as alter ego of the President,
may modify and alter the findings of the Tariff Commission, including the latter’s negative final
determination by substituting it with his own negative final determination to pave the way for his
imposition of a safeguard measure. Fatally, this conclusion is arrived at without considering the
65

fundamental constitutional precept under Section 28(2), Article VI, on the ability of Congress to
impose restrictions and limitations in its delegation to the President to impose tariffs and imposts, as
well as the express condition of Section 5 of the SMA requiring a positive final determination of the
Tariff Commission.

Absent Section 5 of the SMA, the President has no inherent, constitutional, or statutory
power to impose a general safeguard measure. Tellingly, the Separate Opinion does not directly
confront the inevitable question as to how the DTI Secretary may get away with imposing a general
safeguard measure absent a positive final determination from the Tariff Commission without violating
Section 5 of the SMA, which along with Section 13 of the same law, stands as the only direct legal
authority for the DTI Secretary to impose such measures. This is a constitutionally guaranteed
limitation of the highest order, considering that the presidential authority exercised under the SMA is
inherently legislative.

Nonetheless, the Separate Opinion brings to fore the issue of whether the DTI Secretary, acting
either as alter ego of the President or in his capacity as head of an executive department, may
review, modify or otherwise alter the final determination of the Tariff Commission under the SMA.
The succeeding discussion shall focus on that question.

Preliminarily, we should note that none of the parties question the designation of the DTI or
Agriculture secretaries under the SMA as the imposing authorities of the safeguard measures, even
though Section 28(2) Article VI states that it is the President to whom the power to impose tariffs and
imposts may be delegated by Congress. The validity of such designation under the SMA should not
be in doubt. We recognize that the authorization made by Congress in the SMA to the DTI and
Agriculture Secretaries was made in contemplation of their capacities as alter egos of the President.

Indeed, in Marc Donnelly & Associates v. Agregado the Court upheld the validity of a Cabinet
66

resolution fixing the schedule of royalty rates on metal exports and providing for their collection even
though Congress, under Commonwealth Act No. 728, had specifically empowered the President and
not any other official of the executive branch, to regulate and curtail the export of metals. In so ruling,
the Court held that the members of the Cabinet were acting as alter egos of the President. In this
67

case, Congress itself authorized the DTI Secretary as alter ego of the President to impose the
safeguard measures. If the Court was previously willing to uphold the alter ego’s tariff authority
despite the absence of explicit legislative grant of such authority on the alter ego, all the more
reason now when Congress itself expressly authorized the alter ego to exercise these powers to
impose safeguard measures.

Notwithstanding, Congress in enacting the SMA and prescribing the roles to be played therein by the
Tariff Commission and the DTI Secretary did not envision that the President, or his/her alter ego,
could exercise supervisory powers over the Tariff Commission. If truly Congress intended to allow
the traditional "alter ego" principle to come to fore in the peculiar setup established by the SMA, it
would have assigned the role now played by the DTI Secretary under the law instead to the NEDA.
The Tariff Commission is an attached agency of the National Economic Development
Authority, which in turn is the independent planning agency of the government.
68 69

The Tariff Commission does not fall under the administrative supervision of the DTI. On the other
70

hand, the administrative relationship between the NEDA and the Tariff Commission is established not
only by the Administrative Code, but similarly affirmed by the Tariff and Customs Code.

Justice Florentino Feliciano, in his ponencia in Garcia v. Executive Secretary , acknowledged the
71

interplay between the NEDA and the Tariff Commission under the Tariff and Customs Code when he
cited the relevant provisions of that law evidencing such setup. Indeed, under Section 104 of the
Tariff and Customs Code, the rates of duty fixed therein are subject to periodic investigation by the
Tariff Commission and may be revised by the President upon recommendation of the
NEDA. Moreover, under Section 401 of the same law, it is upon periodic investigations by the Tariff
72

Commission and recommendation of the NEDA that the President may cause a gradual reduction of
protection levels granted under the law. 73

At the same time, under the Tariff and Customs Code, no similar role or influence is allocated to the
DTI in the matter of imposing tariff duties. In fact, the long-standing tradition has been for the Tariff
Commission and the DTI to proceed independently in the exercise of their respective functions. Only
very recently have our statutes directed any significant interplay between the Tariff Commission and
the DTI, with the enactment in 1999 of Republic Act No. 8751 on the imposition of countervailing
duties and Republic Act No. 8752 on the imposition of anti-dumping duties, and of course the
promulgation a year later of the SMA. In all these three laws, the Tariff Commission is tasked, upon
referral of the matter by the DTI, to determine whether the factual conditions exist to warrant the
imposition by the DTI of a countervailing duty, an anti-dumping duty, or a general safeguard
measure, respectively. In all three laws, the determination by the Tariff Commission that these
required factual conditions exist is necessary before the DTI Secretary may impose the
corresponding duty or safeguard measure. And in all three laws, there is no express provision
authorizing the DTI Secretary to reverse the factual determination of the Tariff Commission. 74

In fact, the SMA indubitably establishes that the Tariff Commission is no mere flunky of the DTI
Secretary when it mandates that the positive final recommendation of the former be indispensable to
the latter’s imposition of a general safeguard measure. What the law indicates instead is a
relationship of interdependence between two bodies independent of each other under the
Administrative Code and the SMA alike. Indeed, even the ability of the DTI Secretary to disregard
the Tariff Commission’s recommendations as to the particular safeguard measures to be imposed
evinces the independence from each other of these two bodies. This is properly so for two reasons –
the DTI and the Tariff Commission are independent of each other under the Administrative Code;
and impropriety is avoided in cases wherein the DTI itself is the one seeking the imposition of the
general safeguard measures, pursuant to Section 6 of the SMA.
Thus, in ascertaining the appropriate legal milieu governing the relationship between the DTI and the
Tariff Commission, it is imperative to apply foremost, if not exclusively, the provisions of the SMA.
The argument that the usual rules on administrative control and supervision apply between the Tariff
Commission and the DTI as regards safeguard measures is severely undercut by the plain fact that
there is no long-standing tradition of administrative interplay between these two entities.

Within the administrative apparatus, the Tariff Commission appears to be a lower rank relative to the
DTI. But does this necessarily mean that the DTI has the intrinsic right, absent statutory authority, to
reverse the findings of the Tariff Commission? To insist that it does, one would have to concede for
instance that, applying the same doctrinal guide, the Secretary of the Department of Science and
Technology (DOST) has the right to reverse the rulings of the Civil Aeronautics Board (CAB) or the
issuances of the Philippine Coconut Authority (PCA). As with the Tariff Commission-DTI, there is no
statutory authority granting the DOST Secretary the right to overrule the CAB or the PCA, such right
presumably arising only from the position of subordinacy of these bodies to the DOST. To insist on
such a right would be to invite department secretaries to interfere in the exercise of functions by
administrative agencies, even in areas wherein such secretaries are bereft of specialized
competencies.

The Separate Opinion notes that notwithstanding above, the Secretary of Department of
Transportation and Communication may review the findings of the CAB, the Agriculture Secretary
may review those of the PCA, and that the Secretary of the Department of Environment and Natural
Resources may pass upon decisions of the Mines and Geosciences Board. These three officers
75

may be alter egos of the President, yet their authority to review is limited to those agencies or
bureaus which are, pursuant to statutes such as the Administrative Code of 1987, under the
administrative control and supervision of their respective departments. Thus, under the express
provision of the Administrative Code expressly provides that the CAB is an attached agency of the
DOTC , and that the PCA is an attached agency of the Department of Agriculture. The same law
76 77

establishes the Mines and Geo-Sciences Bureau as one of the Sectoral Staff Bureaus that forms
78

part of the organizational structure of the DENR. 79

As repeatedly stated, the Tariff Commission does not fall under the administrative control of the DTI,
but under the NEDA, pursuant to the Administrative Code. The reliance made by the Separate
Opinion to those three examples are thus misplaced.

Nonetheless, the Separate Opinion asserts that the SMA created a functional relationship between
the Tariff Commission and the DTI Secretary, sufficient to allow the DTI Secretary to exercise alter
ego powers to reverse the determination of the Tariff Commission. Again, considering that the power
to impose tariffs in the first place is not inherent in the President but arises only from congressional
grant, we should affirm the congressional prerogative to impose limitations and restrictions on such
powers which do not normally belong to the executive in the first place. Nowhere in the SMA does it
state that the DTI Secretary may impose general safeguard measures without a positive final
determination by the Tariff Commission, or that the DTI Secretary may reverse or even review the
factual determination made by the Tariff Commission.

Congress in enacting the SMA and prescribing the roles to be played therein by the Tariff
Commission and the DTI Secretary did not envision that the President, or his/her alter ego could
exercise supervisory powers over the Tariff Commission. If truly Congress intended to allow the
traditional alter ego principle to come to fore in the peculiar setup established by the SMA, it would
have assigned the role now played by the DTI Secretary under the law instead to the NEDA, the
body to which the Tariff Commission is attached under the Administrative Code.
The Court has no issue with upholding administrative control and supervision exercised by the head
of an executive department, but only over those subordinate offices that are attached to the
department, or which are, under statute, relegated under its supervision and control. To declare that
a department secretary, even if acting as alter ego of the President, may exercise such control or
supervision over all executive offices below cabinet rank would lead to absurd results such as those
adverted to above. As applied to this case, there is no legal justification for the DTI Secretary to
exercise control, supervision, review or amendatory powers over the Tariff Commission and its
positive final determination. In passing, we note that there is, admittedly, a feasible mode by which
administrative review of the Tariff Commission’s final determination could be had, but it is not the
procedure adopted by respondents and now suggested for affirmation. This mode shall be discussed
in a forthcoming section.

The Separate Opinion asserts that the President, or his/her alter ego cannot be made a mere rubber
stamp of the Tariff Commission since Section 17, Article VII of the Constitution denominates the
Chief Executive exercises control over all executive departments, bureaus and offices. But let us be
80

clear that such "executive control" is not absolute. The definition of the structure of the executive
branch of government, and the corresponding degrees of administrative control and supervision, is
not the exclusive preserve of the executive. It may be effectively be limited by the Constitution, by
law, or by judicial decisions.

The Separate Opinion cites the respected constitutional law authority Fr. Joaquin Bernas, in support
of the proposition that such plenary power of executive control of the President cannot be restricted
by a mere statute passed by Congress. However, the cited passage from Fr. Bernas actually states,
"Since the Constitution has given the President the power of control, with all its awesome
implications, it is the Constitution alone which can curtail such power." Does the President have
81

such tariff powers under the Constitution in the first place which may be curtailed by the executive
power of control? At the risk of redundancy, we quote Section 28(2), Article VI: "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." Clearly the power to impose tariffs belongs to Congress and not to the President.

It is within reason to assume the framers of the Constitution deemed it too onerous to spell out all
the possible limitations and restrictions on this presidential authority to impose tariffs. Hence, the
Constitution especially allowed Congress itself to prescribe such limitations and restrictions itself, a
prudent move considering that such authority inherently belongs to Congress and not the President.
Since Congress has no power to amend the Constitution, it should be taken to mean that such
limitations and restrictions should be provided "by mere statute". Then again, even the presidential
authority to impose tariffs arises only "by mere statute." Indeed, this presidential privilege is both
contingent in nature and legislative in origin. These characteristics, when weighed against
the aspect of executive control and supervision, cannot militate against Congress’s exercise
of its inherent power to tax.

The bare fact is that the administrative superstructure, for all its unwieldiness, is mere putty in the
hands of Congress. The functions and mandates of the particular executive departments and
bureaus are not created by the President, but by the legislative branch through the Administrative
Code. The President is the administrative head of the executive department, as such obliged to see
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that every government office is managed and maintained properly by the persons in charge of it in
accordance with pertinent laws and regulations, and empowered to promulgate rules and issuances
that would ensure a more efficient management of the executive branch, for so long as such
issuances are not contrary to law. Yet the legislature has the concurrent power to reclassify or
83

redefine the executive bureaucracy, including the relationship between various administrative
agencies, bureaus and departments, and ultimately, even the power to abolish executive
departments and their components, hamstrung only by constitutional limitations. The DTI itself can
be abolished with ease by Congress through deleting Title X, Book IV of the Administrative Code.
The Tariff Commission can similarly be abolished through legislative enactment. 84

At the same time, Congress can enact additional tasks or responsibilities on either the Tariff
Commission or the DTI Secretary, such as their respective roles on the imposition of general
safeguard measures under the SMA. In doing so, the same Congress, which has the putative
authority to abolish the Tariff Commission or the DTI, is similarly empowered to alter or
expand its functions through modalities which do not align with established norms in the
bureaucratic structure. The Court is bound to recognize the legislative prerogative to prescribe
such modalities, no matter how atypical they may be, in affirmation of the legislative power to
restructure the executive branch of government.

There are further limitations on the "executive control" adverted to by the Separate Opinion. The
President, in the exercise of executive control, cannot order a subordinate to disobey a final decision
of this Court or any court’s. If the subordinate chooses to disobey, invoking sole allegiance to the
President, the judicial processes can be utilized to compel obeisance. Indeed, when public officers of
the executive department take their oath of office, they swear allegiance and obedience not to the
President, but to the Constitution and the laws of the land. The invocation of executive control must
yield when under its subsumption includes an act that violates the law.

The Separate Opinion concedes that the exercise of executive control and supervision by the
President is bound by the Constitution and law. Still, just three sentences after asserting that the
85

exercise of executive control must be within the bounds of the Constitution and law, the Separate
Opinion asserts, "the control power of the Chief Executive emanates from the Constitution; no act of
Congress may validly curtail it." Laws are acts of Congress, hence valid confusion arises whether
86

the Separate Opinion truly believes the first proposition that executive control is bound by law. This is
a quagmire for the Separate Opinion to resolve for itself

The Separate Opinion unduly considers executive control as the ne plus ultra constitutional standard
which must govern in this case. But while the President may generally have the power to control,
modify or set aside the actions of a subordinate, such powers may be constricted by the
Constitution, the legislature, and the judiciary. This is one of the essences of the check-and-balance
system in our tri-partite constitutional democracy. Not one head of a branch of government may
operate as a Caesar within his/her particular fiefdom.

Assuming there is a conflict between the specific limitation in Section 28 (2), Article VI of the
Constitution and the general executive power of control and supervision, the former prevails in the
specific instance of safeguard measures such as tariffs and imposts, and would thus serve to qualify
the general grant to the President of the power to exercise control and supervision over his/her
subalterns.

Thus, if the Congress enacted the law so that the DTI Secretary is "bound" by the Tariff Commission
in the sense the former cannot impose general safeguard measures absent a final positive
determination from the latter the Court is obliged to respect such legislative prerogative, no matter
how such arrangement deviates from traditional norms as may have been enshrined in
jurisprudence. The only ground under which such legislative determination as expressed in statute
may be successfully challenged is if such legislation contravenes the Constitution. No such
argument is posed by the respondents, who do not challenge the validity or constitutionality of the
SMA.
Given these premises, it is utterly reckless to examine the interrelationship between the Tariff
Commission and the DTI Secretary beyond the context of the SMA, applying instead traditional
precepts on administrative control, review and supervision. For that reason, the Decision deemed
inapplicable respondents’ previous citations of Cariño v. Commissioner on Human Rights and Lamb
v. Phipps, since the executive power adverted to in those cases had not been limited by
constitutional restrictions such as those imposed under Section 28(2), Article VI. 87

A similar observation can be made on the case of Sharp International Marketing v. Court of
Appeals, now cited by Philcemcor, wherein the Court asserted that the Land Bank of the Philippines
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was required to exercise independent judgment and not merely rubber-stamp deeds of sale entered
into by the Department of Agrarian Reform in connection with the agrarian reform program.
Philcemcor attempts to demonstrate that the DTI Secretary, as with the Land Bank of the Philippines,
is required to exercise independent discretion and is not expected to just merely accede to DAR-
approved compensation packages. Yet again, such grant of independent discretion is expressly
called for by statute, particularly Section 18 of Rep. Act No. 6657 which specifically requires the joint
concurrence of "the landowner and the DAR and the [Land Bank of the Philippines]" on the amount
of compensation. Such power of review by the Land Bank is a consequence of clear statutory
language, as is our holding in the Decision that Section 5 explicitly requires a positive final
determination by the Tariff Commission before a general safeguard measure may be imposed.
Moreover, such limitations under the SMA are coated by the constitutional authority of Section 28(2),
Article VI of the Constitution.

Nonetheless, is this administrative setup, as envisioned by Congress and enshrined into the SMA,
truly noxious to existing legal standards? The Decision acknowledged the internal logic of the
statutory framework, considering that the DTI cannot exercise review powers over an agency such
as the Tariff Commission which is not within its administrative jurisdiction; that the mechanism
employed establishes a measure of check and balance involving two government offices with
different specializations; and that safeguard measures are the exception rather than the rule,
pursuant to our treaty obligations.89

We see no reason to deviate from these observations, and indeed can add similarly oriented
comments. Corollary to the legislative power to decree policies through legislation is the ability of the
legislature to provide for means in the statute itself to ensure that the said policy is strictly
implemented by the body or office tasked so tasked with the duty. As earlier stated, our treaty
obligations dissuade the State for now from implementing default protectionist trade measures such
as tariffs, and allow the same only under specified conditions. The conditions enumerated under the
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GATT Agreement on Safeguards for the application of safeguard measures by a member country are
the same as the requisites laid down in Section 5 of the SMA. To insulate the factual determination
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from political pressure, and to assure that it be conducted by an entity especially qualified by reason
of its general functions to undertake such investigation, Congress deemed it necessary to delegate
to the Tariff Commission the function of ascertaining whether or not the those factual conditions exist
to warrant the atypical imposition of safeguard measures. After all, the Tariff Commission retains a
degree of relative independence by virtue of its attachment to the National Economic Development
Authority, "an independent planning agency of the government," and also owing to its vaunted
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expertise and specialization.

The matter of imposing a safeguard measure almost always involves not just one industry, but the
national interest as it encompasses other industries as well. Yet in all candor, any decision to impose
a safeguard measure is susceptible to all sorts of external pressures, especially if the domestic
industry concerned is well-organized. Unwarranted impositions of safeguard measures may similarly
be detrimental to the national interest. Congress could not be blamed if it desired to insulate the
investigatory process by assigning it to a body with a putative degree of independence and
traditional expertise in ascertaining factual conditions. Affected industries would have cause to lobby
for or against the safeguard measures. The decision-maker is in the unenviable position of having to
bend an ear to listen to all concerned voices, including those which may speak softly but carry a big
stick. Had the law mandated that the decision be made on the sole discretion of an executive officer,
such as the DTI Secretary, it would be markedly easier for safeguard measures to be imposed or
withheld based solely on political considerations and not on the factual conditions that are supposed
to predicate the decision.

Reference of the binding positive final determination to the Tariff Commission is of course, not a fail-
safe means to ensure a bias-free determination. But at least the legislated involvement of the
Commission in the process assures some measure of measure of check and balance involving two
different governmental agencies with disparate specializations. There is no legal or constitutional
demand for such a setup, but its wisdom as policy should be acknowledged. As prescribed by
Congress, both the Tariff Commission and the DTI Secretary operate within limited frameworks,
under which nobody acquires an undue advantage over the other.

We recognize that Congress deemed it necessary to insulate the process in requiring that the factual
determination to be made by an ostensibly independent body of specialized competence, the Tariff
Commission. This prescribed framework, constitutionally sanctioned, is intended to prevent the
baseless, whimsical, or consideration-induced imposition of safeguard measures. It removes from
the DTI Secretary jurisdiction over a matter beyond his putative specialized aptitude, the compilation
and analysis of picayune facts and determination of their limited causal relations, and instead vests
in the Secretary the broad choice on a matter within his unquestionable competence, the selection of
what particular safeguard measure would assist the duly beleaguered local industry yet at the same
time conform to national trade policy. Indeed, the SMA recognizes, and places primary importance
on the DTI Secretary’s mandate to formulate trade policy, in his capacity as the President’s alter
ego on trade, industry and investment-related matters.

At the same time, the statutory limitations on this authorized power of the DTI Secretary must prevail
since the Constitution itself demands the enforceability of those limitations and restrictions as
imposed by Congress. Policy wisdom will not save a law from infirmity if the statutory provisions
violate the Constitution. But since the Constitution itself provides that the President shall be
constrained by the limits and restrictions imposed by Congress and since these limits and
restrictions are so clear and categorical, then the Court has no choice but to uphold the reins.

Even assuming that this prescribed setup made little sense, or seemed "uncommonly silly," the 93

Court is bound by propriety not to dispute the wisdom of the legislature as long as its acts do not
violate the Constitution. Since there is no convincing demonstration that the SMA contravenes the
Constitution, the Court is wont to respect the administrative regimen propounded by the law, even if
it allots the Tariff Commission a higher degree of puissance than normally expected. It is for this
reason that the traditional conceptions of administrative review or quasi-judicial power cannot control
in this case.

Indeed, to apply the latter concept would cause the Court to fall into a linguistic trap owing to the
multi-faceted denotations the term "quasi-judicial" has come to acquire.

Under the SMA, the Tariff Commission undertakes formal hearings, receives and evaluates
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testimony and evidence by interested parties, and renders a decision is rendered on the basis of the
95

evidence presented, in the form of the final determination. The final determination requires a
conclusion whether the importation of the product under consideration is causing serious injury or
threat to a domestic industry producing like products or directly competitive products, while
evaluating all relevant factors having a bearing on the situation of the domestic industry. This
96
process aligns conformably with definition provided by Black’s Law Dictionary of "quasi-judicial" as
the "action, discretion, etc., of public administrative officers or bodies, who are required to investigate
facts, or ascertain the existence of facts, hold hearings, weigh evidence, and draw conclusions from
them, as a basis for their official action, and to exercise discretion of a judicial nature."
97

However, the Tariff Commission is not empowered to hear actual cases or controversies lodged
directly before it by private parties. It does not have the power to issue writs of injunction or
enforcement of its determination. These considerations militate against a finding of quasi-judicial
powers attributable to the Tariff Commission, considering the pronouncement that "quasi-judicial
adjudication would mean a determination of rights privileges and duties resulting in a decision or
order which applies to a specific situation." 98

Indeed, a declaration that the Tariff Commission possesses quasi-judicial powers, even if
ascertained for the limited purpose of exercising its functions under the SMA, may have the
unfortunate effect of expanding the Commission’s powers beyond that contemplated by law. After all,
the Tariff Commission is by convention, a fact-finding body, and its role under the SMA, burdened as
it is with factual determination, is but a mere continuance of this tradition. However, Congress
through the SMA offers a significant deviation from this traditional role by tying the decision by the
DTI Secretary to impose a safeguard measure to the required positive factual determination by the
Tariff Commission. Congress is not bound by past traditions, or even by the jurisprudence of this
Court, in enacting legislation it may deem as suited for the times. The sole benchmark for judicial
substitution of congressional wisdom is constitutional transgression, a standard which the
respondents do not even attempt to match.

Respondents’ Suggested Interpretation

Of the SMA Transgresses Fair Play

Respondents have belabored the argument that the Decision’s interpretation of the SMA, particularly
of the role of the Tariff Commission vis-à-vis the DTI Secretary, is noxious to traditional notions of
administrative control and supervision. But in doing so, they have failed to acknowledge the
congressional prerogative to redefine administrative relationships, a license which falls within the
plenary province of Congress under our representative system of democracy. Moreover,
respondents’ own suggested interpretation falls wayward of expectations of practical fair play.

Adopting respondents’ suggestion that the DTI Secretary may disregard the factual findings of the
Tariff Commission and investigatory process that preceded it, it would seem that the elaborate
procedure undertaken by the Commission under the SMA, with all the attendant guarantees of due
process, is but an inutile spectacle. As Justice Garcia noted during the oral arguments, why would
the DTI Secretary bother with the Tariff Commission and instead conduct the investigation himself. 99

Certainly, nothing in the SMA authorizes the DTI Secretary, after making the preliminary
determination, to personally oversee the investigation, hear out the interested parties, or receive
evidence. In fact, the SMA does not even require the Tariff Commission, which is tasked with the
100

custody of the submitted evidence, to turn over to the DTI Secretary such evidence it had evaluated
101

in order to make its factual determination. Clearly, as Congress tasked it to be, it is the Tariff
102

Commission and not the DTI Secretary which acquires the necessary intimate acquaintance with the
factual conditions and evidence necessary for the imposition of the general safeguard measure. Why
then favor an interpretation of the SMA that leaves the findings of the Tariff Commission bereft of
operative effect and makes them subservient to the wishes of the DTI Secretary, a personage with
lesser working familiarity with the relevant factual milieu? In fact, the bare theory of the respondents
would effectively allow the DTI Secretary to adopt, under the subterfuge of his "discretion", the
factual determination of a private investigative group hired by the industry concerned, and reject the
investigative findings of the Tariff Commission as mandated by the SMA. It would be highly irregular
to substitute what the law clearly provides for a dubious setup of no statutory basis that would be
readily susceptible to rank chicanery.

Moreover, the SMA guarantees the right of all concerned parties to be heard, an elemental
requirement of due process, by the Tariff Commission in the context of its investigation. The DTI
Secretary is not similarly empowered or tasked to hear out the concerns of other interested parties,
and if he/she does so, it arises purely out of volition and not compulsion under law.

Indeed, in this case, it is essential that the position of other than that of the local cement industry
should be given due consideration, cement being an indispensable need for the operation of other
industries such as housing and construction. While the general safeguard measures may operate to
the better interests of the domestic cement industries, its deprivation of cheaper cement imports may
similarly work to the detriment of these other domestic industries and correspondingly, the national
interest. Notably, the Tariff Commission in this case heard the views on the application of
representatives of other allied industries such as the housing, construction, and cement-bag
industries, and other interested parties such as consumer groups and foreign governments. It is
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only before the Tariff Commission that their views had been heard, and this is because it is only the
Tariff Commission which is empowered to hear their positions. Since due process requires a
judicious consideration of all relevant factors, the Tariff Commission, which is in a better position to
hear these parties than the DTI Secretary, is similarly more capable to render a determination
conformably with the due process requirements than the DTI Secretary.

In a similar vein, Southern Cross aptly notes that in instances when it is the DTI Secretary who
initiates motu propriothe application for the safeguard measure pursuant to Section 6 of the SMA,
respondents’ suggested interpretation would result in the awkward situation wherein the DTI
Secretary would rule upon his own application after it had been evaluated by the Tariff Commission.
Pertinently cited is our ruling in Corona v. Court of Appeals that "no man can be at once a litigant
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and judge." Certainly, this anomalous situation is avoided if it is the Tariff Commission which is
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tasked with arriving at the final determination whether the conditions exist to warrant the general
safeguard measures. This is the setup provided for by the express provisions of the SMA, and the
problem would arise only if we adopt the interpretation urged upon by respondents.

The Possibility for Administrative Review

Of the Tariff Commission’s Determination

The Court has been emphatic that a positive final determination from the Tariff Commission is
required in order that the DTI Secretary may impose a general safeguard measure, and that the DTI
Secretary has no power to exercise control and supervision over the Tariff Commission and its final
determination. These conclusions are the necessary consequences of the applicable provisions of
the Constitution, the SMA, and laws such as the Administrative Code. However, the law is silent
though on whether this positive final determination may otherwise be subjected to administrative
review.

There is no evident legislative intent by the authors of the SMA to provide for a procedure of
administrative review. If ever there is a procedure for administrative review over the final
determination of the Tariff Commission, such procedure must be done in a manner that does not
contravene or disregard legislative prerogatives as expressed in the SMA or the Administrative
Code, or fundamental constitutional limitations.
In order that such procedure of administrative review would not contravene the law and the
constitutional scheme provided by Section 28(2), Article VI, it is essential to assert that the positive
final determination by the Tariff Commission is indispensable as a requisite for the imposition of a
general safeguard measure. The submissions of private respondents and the Separate
Opinion cannot be sustained insofar as they hold that the DTI Secretary can peremptorily ignore or
disregard the determinations made by the Tariff Commission. However, if the mode of administrative
review were in such a manner that the administrative superior of the Tariff Commission were to
modify or alter its determination, then such "reversal" may still be valid within the confines of Section
5 of the SMA, for technically it is still the Tariff Commission’s determination, administratively revised
as it may be, that would serve as the basis for the DTI Secretary’s action.

However, and fatally for the present petitions, such administrative review cannot be conducted by
the DTI Secretary. Even if conceding that the Tariff Commission’s findings may be administratively
reviewed, the DTI Secretary has no authority to review or modify the same. We have been emphatic
on the reasons — such as that there is no traditional or statutory basis placing the Commission
under the control and supervision of the DTI; that to allow such would contravene due process,
especially if the DTI itself were to apply for the safeguard measures motu proprio. To hold otherwise
would destroy the administrative hierarchy, contravene constitutional due process, and disregard the
limitations or restrictions provided in the SMA.

Instead, assuming administrative review were available, it is the NEDA that may conduct such
review following the principles of administrative law, and the NEDA’s decision in turn is reviewable by
the Office of the President. The decision of the Office of the President then effectively substitutes as
the determination of the Tariff Commission, which now forms the basis of the DTI Secretary’s
decision, which now would be ripe for judicial review by the CTA under Section 29 of the SMA. This
is the only way that administrative review of the Tariff Commission’s determination may be sustained
without violating the SMA and its constitutional restrictions and limitations, as well as administrative
law.

In bare theory, the NEDA may review, alter or modify the Tariff Commission’s final determination, the
Commission being an attached agency of the NEDA. Admittedly, there is nothing in the SMA or any
other statute that would prevent the NEDA to exercise such administrative review, and successively,
for the President to exercise in turn review over the NEDA’s decision.

Nonetheless, in acknowledging this possibility, the Court, without denigrating the bare principle that
administrative officers may exercise control and supervision over the acts of the bodies under its
jurisdiction, realizes that this comes at the expense of a speedy resolution to an application for a
safeguard measure, an application dependent on fluctuating factual conditions. The further delay
would foster uncertainty and insecurity within the industry concerned, as well as with all other allied
industries, which in turn may lead to some measure of economic damage. Delay is certain, since
judicial review authorized by law and not administrative review would have the final say. The fact that
the SMA did not expressly prohibit administrative review of the final determination of the Tariff
Commission does not negate the supreme advantages of engendering exclusive judicial review over
questions arising from the imposition of a general safeguard measure.

In any event, even if we conceded the possibility of administrative review of the Tariff Commission’s
final determination by the NEDA, such would not deny merit to the present petition. It does not
change the fact that the Court of Appeals erred in ruling that the DTI Secretary was not bound by the
negative final determination of the Tariff Commission, or that the DTI Secretary acted without
jurisdiction when he imposed general safeguard measures despite the absence of the statutory
positive final determination of the Commission.
IV. Court’s Interpretation of SMA

In Harmony with Other

Constitutional Provisions

In response to our citation of Section 28(2), Article VI, respondents elevate two arguments grounded
in constitutional law. One is based on another constitutional provision, Section 12, Article XIII, which
mandates that "[t]he State shall promote the preferential use of Filipino labor, domestic materials and
locally produced goods and adopt measures that help make them competitive." By no means does
this provision dictate that the Court favor the domestic industry in all competing claims that it may
bring before this Court. If it were so, judicial proceedings in this country would be rendered a
mockery, resolved as they would be, on the basis of the personalities of the litigants and not their
legal positions.

Moreover, the duty imposed on by Section 12, Article XIII falls primarily with Congress, which in that
regard enacted the SMA, a law designed to protect domestic industries from the possible ill-effects of
our accession to the global trade order. Inconveniently perhaps for respondents, the SMA also
happens to provide for a procedure under which such protective measures may be enacted. The
Court cannot just impose what it deems as the spirit of the law without giving due regard to its letter.

In like-minded manner, the Separate Opinion loosely states that the purpose of the SMA is to protect
or safeguard local industries from increased importation of foreign products. This inaccurately
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leaves the impression that the SMA ipso facto unravels a protective cloak that shelters all local
industries and producers, no matter the conditions. Indeed, our country has knowingly chosen to
accede to the world trade regime, as expressed in the GATT and WTO Agreements, despite the
understanding that local industries might suffer ill-effects, especially with the easier entry of
competing foreign products. At the same time, these international agreements were designed to
constrict protectionist trade policies by its member-countries. Hence, the median, as expressed by
the SMA, does allow for the application of protectionist measures such as tariffs, but only after an
elaborate process of investigation that ensures factual basis and indispensable need for such
measures. More accurately, the purpose of the SMA is to provide a process for the protection or
safeguarding of domestic industries that have duly established that there is substantial injury or
threat thereof directly caused by the increased imports. In short, domestic industries are not entitled
to safeguard measures as a matter of right or influence.

Respondents also make the astounding argument that the imposition of general safeguard
measures should not be seen as a taxation measure, but instead as an exercise of police power.
The vain hope of respondents in divorcing the safeguard measures from the concept of taxation is to
exclude from consideration Section 28(2), Article VI of the Constitution.

This argument can be debunked at length, but it deserves little attention. The motivation behind
many taxation measures is the implementation of police power goals. Progressive income taxes
alleviate the margin between rich and poor; the so-called "sin taxes" on alcohol and tobacco
manufacturers help dissuade the consumers from excessive intake of these potentially harmful
products. Taxation is distinguishable from police power as to the means employed to implement
these public good goals. Those doctrines that are unique to taxation arose from peculiar
considerations such as those especially punitive effects of taxation, and the belief that taxes are the
107

lifeblood of the state. These considerations necessitated the evolution of taxation as a distinct legal
108

concept from police power. Yet at the same time, it has been recognized that taxation may be made
the implement of the state’s police power.109
Even assuming that the SMA should be construed exclusively as a police power measure, the Court
recognizes that police power is lodged primarily in the national legislature, though it may also be
exercised by the executive branch by virtue of a valid delegation of legislative power. Considering
110

these premises, it is clear that police power, however "illimitable" in theory, is still exercised within
the confines of implementing legislation. To declare otherwise is to sanction rule by whim instead of
rule of law. The Congress, in enacting the SMA, has delegated the power to impose general
safeguard measures to the executive branch, but at the same time subjected such imposition to
limitations, such as the requirement of a positive final determination by the Tariff Commission under
Section 5. For the executive branch to ignore these boundaries imposed by Congress is to set up an
ignoble clash between the two co-equal branches of government. Considering that the exercise of
police power emanates from legislative authority, there is little question that the prerogative of the
legislative branch shall prevail in such a clash.

V. Assailed Decision Consistent

With Ruling in Tañada v. Angara

Public respondents allege that the Decision is contrary to our holding in Tañada v. Angara, since the
111

Court noted therein that the GATT itself provides built-in protection from unfair foreign competition
and trade practices, which according to the public respondents, was a reason "why the Honorable
[Court] ruled the way it did." On the other hand, the Decision "eliminates safeguard measures as a
mode of defense."

This is balderdash, as with any and all claims that the Decision allows foreign industries to ride
roughshod over our domestic enterprises. The Decision does not prohibit the imposition of general
safeguard measures to protect domestic industries in need of protection. All it affirms is that the
positive final determination of the Tariff Commission is first required before the general safeguard
measures are imposed and implemented, a neutral proposition that gives no regard to the
nationalities of the parties involved. A positive determination by the Tariff Commission is hardly the
elusive Shangri-la of administrative law. If a particular industry finds it difficult to obtain a positive
final determination from the Tariff Commission, it may be simply because the industry is still
sufficiently competitive even in the face of foreign competition. These safeguard measures are
designed to ensure salvation, not avarice.

Respondents well have the right to drape themselves in the colors of the flag. Yet these postures
hardly advance legal claims, or nationalism for that matter. The fineries of the costume pageant are
no better measure of patriotism than simple obedience to the laws of the Fatherland. And even
assuming that respondents are motivated by genuine patriotic impulses, it must be remembered that
under the setup provided by the SMA, it is the facts, and not impulse, that determine whether the
protective safeguard measures should be imposed. As once orated, facts are stubborn things; and
whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the
state of facts and evidence. 112

It is our goal as judges to enforce the law, and not what we might deem as correct economic policy.
Towards this end, we should not construe the SMA to unduly favor or disfavor domestic industries,
simply because the law itself provides for a mechanism by virtue of which the claims of these
industries are thoroughly evaluated before they are favored or disfavored. What we must do is to
simply uphold what the law says. Section 5 says that the DTI Secretary shall impose the general
safeguard measures upon the positive final determination of the Tariff Commission. Nothing in the
whereas clauses or the invisible ink provisions of the SMA can magically delete the words "positive
final determination" and "Tariff Commission" from Section 5.
VI. On Forum-Shopping

We remain convinced that there was no willful and deliberate forum-shopping in this case by
Southern Cross. The causes of action that animate this present petition for review and the petition
for review with the CTA are distinct from each other, even though they relate to similar factual
antecedents. Yet it also appears that contrary to the undertaking signed by the President of Southern
Cross, Hironobu Ryu, to inform this Court of any similar action or proceeding pending before any
court, tribunal or agency within five (5) days from knowledge thereof, Southern Cross informed this
Court only on 12 August 2003 of the petition it had filed with the CTA eleven days earlier. An
appropriate sanction is warranted for such failure, but not the dismissal of the petition.

VII. Effects of Court’s Resolution

Philcemcor argues that the granting of Southern Cross’s Petition should not necessarily lead to the
voiding of the Decision of the DTI Secretary dated 5 August 2003 imposing the general safeguard
measures. For Philcemcor, the availability of appeal to the CTA as an available and adequate
remedy would have made the Court of Appeals’ Decision merely erroneous or irregular, but not void.
Moreover, the said Decision merely required the DTI Secretary to render a decision, which could
have very well been a decision not to impose a safeguard measure; thus, it could not be said that
the annulled decision resulted from the judgment of the Court of Appeals.

The Court of Appeals’ Decision was annulled precisely because the appellate court did not have the
power to rule on the petition in the first place. Jurisdiction is necessarily the power to decide a case,
and a court which does not have the power to adjudicate a case is one that is bereft of jurisdiction.
We find no reason to disturb our earlier finding that the Court of Appeals’ Decision is null and void.

At the same time, the Court in its Decision paid particular heed to the peculiarities attaching to the 5
August 2003 Decision of the DTI Secretary. In the DTI Secretary’s Decision, he expressly stated that
as a result of the Court of Appeals’ Decision, "there is no legal impediment for the Secretary to
decide on the application." Yet the truth remained that there was a legal impediment, namely, that
the decision of the appellate court was not yet final and executory. Moreover, it was declared null
and void, and since the DTI Secretary expressly denominated the Court of Appeals’ Decision as his
basis for deciding to impose the safeguard measures, the latter decision must be voided as well.
Otherwise put, without the Court of Appeals’ Decision, the DTI Secretary’s Decision of 5 August 2003
would not have been rendered as well.

Accordingly, the Court reaffirms as a nullity the DTI Secretary’s Decision dated 5 August 2003. As a
necessary consequence, no further action can be taken on Philcemcor’s Petition for Extension of the
Safeguard Measure. Obviously, if the imposition of the general safeguard measure is void as we
declared it to be, any extension thereof should likewise be fruitless. The proper remedy instead is to
file a new application for the imposition of safeguard measures, subject to the conditions prescribed
by the SMA. Should this step be eventually availed of, it is only hoped that the parties involved would
content themselves in observing the proper procedure, instead of making a mockery of the rule of
law.

WHEREFORE, respondents’ Motions for Reconsideration are DENIED WITH FINALITY.

Respondent DTI Secretary is hereby ENJOINED from taking any further action on the
pending Petition for Extension of the Safeguard Measure.

Hironobu Ryu, President of petitioner Southern Cross Cement Corporation, and Angara Abello
Concepcion Regala & Cruz, counsel petitioner, are hereby given FIVE (5) days from receipt of
this Resolution to EXPLAIN why they should not be meted disciplinary sanction for failing to timely
inform the Court of the filing of Southern Cross’s Petition for Review with the Court of Tax Appeals,
as adverted to earlier in this Resolution.

SO ORDERED.

G.R. No. 159647 April 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,

vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.

DECISION

PANGANIBAN, J.:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely
a tax deductionfrom the gross income or gross sale of the establishment concerned. A tax credit is
used by a private establishment only after the tax has been computed; a tax deduction, before the
tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule
that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the
1

August 29, 2002 Decision and the August 11, 2003 Resolution of the Court of Appeals (CA) in CA-
2 3

GR SP No. 67439. The assailed Decision reads as follows:

"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No

costs."
4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

"Respondent is a domestic corporation primarily engaged in retailing of medicines and other

pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style
‘Mercury Drug.’
"From January to December 1996, respondent granted twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period, the amount allegedly representing
the 20% sales discount granted by respondent to qualified senior citizens totaled ₱904,769.00.

"On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring
therein that it incurred net losses from its operations.

"On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of
₱904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior
citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner,
respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for
Review.

"On February 12, 2001, the Tax Court rendered a Decision dismissing respondent’s Petition for lack
5

of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

‘x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and
collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of
the tax is made by means of a claim for refund or tax credit, before recovery is allowed[,] it must be
first established that there was an actual collection and receipt by the government of the tax sought
to be recovered. x x x.

‘x x x x x x x x x

‘Prescinding from the above, it could logically be deduced that tax credit is premised on the
existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is
not available.’

"Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution, granted 6

respondent’s motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA] in
CA G.R. SP No. 60057 entitled ‘Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue’ promulgated on May 31, 2001, to wit:

‘However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded
or credited by petitioner was not erroneously paid or illegally collected. We take exception to the
CTA’s sweeping but unfounded statement that ‘both tax refund and tax credit are modes of
recovering taxes which are either erroneously or illegally paid to the government.’ Tax refunds or
credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other
circumstances where a refund is warranted. The tax refund provided under Section 229 deals
exclusively with illegally collected or erroneously paid taxes but there are other possible situations,
such as the refund of excess estimated corporate quarterly income tax paid, or that of excess input
tax paid by a VAT-registered person, or that of excise tax paid on goods locally produced or
manufactured but actually exported. The standards and mechanics for the grant of a refund or credit
under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another
instance of a tax credit and it does not in any way refer to illegally collected or erroneously paid
taxes, x x x.’"
7

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue
a tax credit certificate in favor of respondent in the reduced amount of ₱903,038.39. It reasoned that
Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for the taking of private property for
public use.

Hence this Petition. 8

The Issues

Petitioner raises the following issues for our consideration:

"Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as
a tax credit instead of as a deduction from gross income or gross sales.

"Whether the Court of Appeals erred in holding that respondent is entitled to a refund." 9

These two issues may be summed up in only one: whether respondent, despite incurring a net loss,
may still claim the 20 percent sales discount as a tax credit.

The Court’s Ruling

The Petition is not meritorious.

Sole Issue:

Claim of 20 Percent Sales Discount

as Tax Credit Despite Net Loss

Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent discount on
10

their purchase of medicine from any private establishment in the country. The latter may then claim
11

the cost of the discount as a tax credit. But can such credit be claimed, even though an
12

establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code, tax credit generally refers to an
13

amount that is "subtracted directly from one’s total tax liability." It is an "allowance against the tax
14

itself" or "a deduction from what is owed" by a taxpayer to the government. Examples of tax
15 16

credits are withheld taxes, payments of estimated tax, and investment tax credits. 17

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction --
defined as a subtraction "from income for tax purposes," or an amount that is "allowed by law to
18

reduce income prior to [the] application of the tax rate to compute the amount of tax which is
due." An example of a tax deduction is any of the allowable deductions enumerated in Section
19

34 of the Tax Code.

20

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including
-- whenever applicable -- the income tax that is determined after applying the corresponding tax
rates to taxable income. A tax deduction, on the other, reduces the income that is subject to tax in
21 22

order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely
23

confuse, the issue. A tax credit is used only after the tax has been computed; a tax
deduction, before.

Tax Liability Required

for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax
liability before the tax creditcan be applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when there is, to begin with, no existing
obligation to the government. However, as will be presented shortly, the existence of a tax credit or
its grant by law is not the same as the availment or use of such credit. While the grant is mandatory,
the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax credit can be applied. For the
24

establishment to choose the immediate availment of a tax credit will be premature and impracticable.
Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no
tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke
of an administrative pen, simply because no reduction of taxes can instantly be effected. By its
nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it
does not have any use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not.
On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits,
even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain
limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar
provision for donor’s taxes -- again when paid to a foreign country -- in computing for the donor’s tax
due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our
government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether
or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax
not directly attributable to either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from -- not necessarily paid by -- such VAT-
registered person in the course of trade or business; or the transitional input tax determined in
accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight
percent of the value of a VAT-registered person’s beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said
items. Clearly from this provision, the tax credit refers to an input tax that is either due only or given
25

a value by mere comparison with the VAT actually paid -- then later prorated. No tax is actually paid
prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For
the purchase of primary agricultural products used as inputs -- either in the processing of sardines,
mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price
of public work contracts entered into with the government, again, no prior tax payments are needed
for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable
input taxes merely due -- again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output taxes. Where a
26

taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the
amount of creditable input taxes due that are not directly and entirely attributable to any one of these
transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in
availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned --
shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident
foreign corporation from a domestic corporation is subjected to the condition that a foreign tax
credit will be given by the domiciliary country in an amount equivalent to taxes that are merely
deemed paid. Although true, this provision actually refers to the tax credit as a condition only for the
27

imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is
not our government but the domiciliary country that credits against the income tax payable to the
latter by the foreign corporation, the tax to be foregone or spared. 28

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,

against the income tax imposable under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable year in any foreign country. Moreover,
Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be allowed,
subject to the condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned
upon payment by the taxpayer of any tax found due, upon petitioner’s redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws
that grant or allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income
that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the
former is merely allowed as a credit against the tax levied in the latter. Apparently, payment is made
29

to the state of source, not the state of residence. No tax, therefore, has been previously paid to the
latter.
Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended
by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of the net
value earned, or five or ten percent of the net local content of exports. In order to avail of such
30

credits under the said law and still achieve its objectives, no prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned. However, we do not agree with its
31

finding that the carry-over of tax credits under the said special law to succeeding taxable periods,
32

and even their application against internal revenue taxes, did not necessitate the existence of a tax
liability.

The examples above show that a tax liability is certainly important in the availment or use, not
the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net
loss in its financial statements is no different from another that presents a net income. Both are
entitled to the tax credit provided for under RA 7432, since the law itself accords that unconditional
benefit. However, for the losing establishment to immediately apply such credit, where no tax is due,
will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the
33

procedures for its availment. To deny such credit, despite the plain mandate of the law and the
34

regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing
the 20 percent discount that "shall be deducted by the said establishments from their gross
income for income tax purposes and from their gross sales for value-added tax or other percentage
tax purposes." In ordinary business language, the tax credit represents the amount of such
35

discount. However, the manner by which the discount shall be credited against taxes has not been
clarified by the revenue regulations.

By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or
value of anything." To be more precise, it is in business parlance "a deduction or lowering of an
36

amount of money;" or "a reduction from the full amount or value of something, especially a price." In
37 38

business there are many kinds of discount, the most common of which is that affecting the income
statement or financial report upon which the income tax is based.
39

Business Discounts

Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment. It is a "reduction in price offered to the purchaser if payment is made within a
40

shorter period of time than the maximum time specified." Also referred to as a sales discount on the
41

part of the seller and a purchase discounton the part of the buyer, it may be expressed in such
terms as "5/10, n/30." 42
A quantity discount, however, is a "reduction in price allowed for purchases made in large quantities,
justified by savings in packaging, shipping, and handling." It is also called a volume or bulk
43

discount.44

A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers" is known as a trade discount. No entry for it need be made in the manual or
45

computerized books of accounts, since the purchase or sale is already valued at the net price
actually charged the buyer. The purpose for the discount is to encourage trading or increase sales,
46

and the prices at which the purchased goods may be resold are also suggested. Even a chain
47

discount -- a series of discounts from one list price -- is recorded at net.

48

Finally, akin to a trade discount is a functional discount. It is "a supplier’s price discount given to a
purchaser based on the [latter’s] role in the [former’s] distribution system." This role usually involves
49

warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally
accepted accounting principles (GAAP) in the country, this type of discount is reflected in the income
statement as a line item deducted -- along with returns, allowances, rebates and other similar
50

expenses -- from gross sales to arrive at net sales. This type of presentation is resorted to, because
51

the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity,
volume or bulk discounts -- are recorded in the manual and computerized books of accounts and
reflected in the financial statements at the gross amounts of the invoices. This manner of recording
52

credit sales -- known as the gross method -- is most widely used, because it is simple, more
convenient to apply than the net method, and produces no material errors over time. 53

However, under the net method used in recording trade, chain or functional discounts, only the net
amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of
accounts and reflected in the financial statements. A separate line item cannot be shown, because
54 55

the transactions themselves involving both accounts receivable and sales have already been
entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold -- is deducted
56

from gross sales to come up with the gross income, profit or margin derived from business. In
57 58

another provision therein, sales discounts that are granted and indicated in the invoices at the time
of sale -- and that do not depend upon the happening of any future event -- may be excluded from
the gross sales within the same quarter they were given. While determinative only of the VAT, the
59

latter provision also appears as a suitable reference point for income tax purposes already
embraced in the former. After all, these two provisions affirm that sales discounts are amounts that
are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishment’s outright
deduction of the discount from the invoice price of the medicine sold to the senior citizen. It is, 60

therefore, expected that for each retail sale made under this law, the discount period lasts no more
than a day, because such discount is given -- and the net amount thereof collected -- immediately
upon perfection of the sale. Although prompt payment is made for an arm’s-length transaction by
61

the senior citizen, the real and compelling reason for the private establishment giving the discount is
that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of
the above discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be
equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities, this benefit has been erroneously
likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from
a sales discount. However, to a private establishment, the effect is different from a simple reduction
in price that results from such discount. In other words, the tax credit benefit is not the same as
a sales discount. To repeat from our earlier discourse, this benefit cannot and should not be treated
as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of its tax
credit benefit. While the former is a deduction before, the latter is a deduction after, the income tax is
computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax credit for a
simple discount privilege should not be automatically treated like a sales discount. Ubi lex non
distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statementand cannot be
deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The
option to avail of the tax creditbenefit depends upon the existence of a tax liability, but to limit the
benefit to a sales discount -- which is not even identical to the discount privilege that is granted by
law -- does not define it at all and serves no useful purpose. The definition must, therefore, be
stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to
create a rule out of harmony with
the statute is a mere nullity"; it cannot prevail.
62

It is a cardinal rule that courts "will and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to enforce it x x x." In the scheme of judicial
63

tax administration, the need for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or
64

competence to provide." The regulations these authorities issue are relied upon by taxpayers, who
65

are certain that these will be followed by the courts. Courts, however, will not uphold these
66

authorities’ interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-
94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the
intent of Congress in granting a mere discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it
administers; it cannot engraft additional requirements not contemplated by the legislature. 67

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a
68 69

regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor
the effect of law. 70

Availment of Tax

Credit Voluntary

Third, the word may in the text of the statute implies that the
71

availability of the tax credit benefit is neither unrestricted nor mandatory. There is no absolute right
72

conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever
it chooses; "neither does it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the taxpayer." For the tax
73

authorities to compel respondent to deduct the 20 percent discount from either its gross income or
its gross sales is, therefore, not only to make an imposition without basis in law, but also to blatantly
74

contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as an
act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated accordingly. If, however, the business continues to operate at a loss
75

and no other taxes are due, thus compelling it to close shop, the credit can never be applied and will
be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the
discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail
itself of the credit whenever it pleases. Neither does it allow our tax administrators to expand or
contract the legislative mandate. "The ‘plain meaning rule’ or verba legis in statutory construction is
thus applicable x x x. Where the words of a statute are clear, plain and free from ambiguity, it must
be given its literal meaning and applied without attempted interpretation." 76

Tax Credit Benefit

Deemed Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain.
Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but
rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State for
public use.77
The concept of public use is no longer confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare, and public convenience. The 78

discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general
public to which these citizens belong. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The
permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done within a reasonable
time from the grant of the discounts -- cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being immediately deprived of its revenues while
awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues. 79

Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain. Tax measures are but "enforced contributions exacted on pain of penal
80

sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed
81 82

become a most effective tool to realize social justice, public welfare, and the equitable distribution of
wealth.83

While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to
trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights
from a person and give them to another who is not entitled thereto." For this reason, a just
84

compensation for income that is taken away from respondent becomes necessary. It is in the tax
credit that our legislators find support to realize social justice, and no administrative body can alter
that fact.

To put it differently, a private establishment that merely breaks even -- without the discounts yet --
85

will surely start to incur losses because of such discounts. The same effect is expected if its mark-up
is less than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from
the observation we have already raised earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross income or its gross sales.
Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-
94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they
avail themselves of tax credits denied those that are losing, because no taxes are due from the
latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
community as a whole and to establish a program beneficial to them. These objectives are
86

consonant with the constitutional policy of making "health x x x services available to all the people at
affordable cost" and of giving "priority for the needs of the x x x elderly." Sections 2.i and 4 of RR 2-
87 88

94, however, contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In
fact, no cash outlay is required from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social
Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales
discounts as a tax credit, rather than as a deduction from gross income. We quote from those
deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable income.
I think we incorporated there a provision na - on the responsibility of the private hospitals and
drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon 'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back
to Section 4 ha?
REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A". 89

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. "x x x
[T]he rule is that on a specific matter the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former." In addition, "[w]here there are two statutes,
90

the earlier special and the later general -- the terms of the general broad enough to include the
matter provided for in the special -- the fact that one is special and the other is general creates a
presumption that the special is to be considered as remaining an exception to the general, one as a
91

general law of the land, the other as the law of a particular case." "It is a canon of statutory
92

construction that a later statute, general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special provisions of such earlier statute."
93

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax
Code -- a later law. When the former states that a tax credit may be claimed, then the requirement of
prior tax payments under certain provisions of the latter, as discussed above, cannot be made to
apply. Neither can the instances of or references to a tax deduction under the Tax Code be made to
94

restrict RA 7432. No provision of any revenue regulation can supplant or modify the acts of
Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 132527. July 29, 2005

COCONUT OIL REFINERS ASSOCIATION, INC. represented by its President, JESUS L.
ARRANZA, PHILIPPINE ASSOCIATION OF MEAT PROCESSORS, INC. (PAMPI), represented by
its Secretary, ROMEO G. HIDALGO, FEDERATION OF FREE FARMERS (FFF), represented by
its President, JEREMIAS U. MONTEMAYOR, and BUKLURAN NG MANGGAGAWANG PILIPINO
(BMP), represented by its Chairperson, FELIMON C. LAGMAN, Petitioners,
vs.
HON. RUBEN TORRES, in his capacity as Executive Secretary; BASES CONVERSION AND
DEVELOPMENT AUTHORITY, CLARK DEVELOPMENT CORPORATION, SUBIC BAY
METROPOLITAN AUTHORITY, 88 MART DUTY FREE, FREEPORT TRADERS, PX CLUB,
AMERICAN HARDWARE, ROYAL DUTY FREE SHOPS, INC., DFS SPORTS, ASIA PACIFIC, MCI
DUTY FREE DISTRIBUTOR CORP. (formerly MCI RESOURCES, CORP.), PARK & SHOP, DUTY
FREE COMMODITIES, L. FURNISHING, SHAMBURGH, SUBIC DFS, ARGAN TRADING CORP.,
ASIPINE CORP., BEST BUY, INC., PX CLUB, CLARK TRADING, DEMAGUS TRADING CORP.,
D.F.S. SPORTS UNLIMITED, INC., DUTY FREE FIRST SUPERSTORE, INC., FREEPORT, JC
MALL DUTY FREE INC. (formerly 88 Mart [Clark] Duty Free Corp.), LILLY HILL CORP.,
MARSHALL, PUREGOLD DUTY FREE, INC., ROYAL DFS and ZAXXON PHILIPPINES,
INC., Respondents.

DECISION

AZCUNA, J.:

This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive Branch,
through the public respondents Ruben Torres in his capacity as Executive Secretary, the Bases
Conversion Development Authority (BCDA), the Clark Development Corporation (CDC) and the
Subic Bay Metropolitan Authority (SBMA), from allowing, and the private respondents from
continuing with, the operation of tax and duty-free shops located at the Subic Special Economic
Zone (SSEZ) and the Clark Special Economic Zone (CSEZ), and to declare the following issuances
as unconstitutional, illegal, and void:

1. Section 5 of Executive Order No. 80,1 dated April 3, 1993, regarding the CSEZ.

2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.

3. Section 4 of BCDA Board Resolution No. 93-05-034,2 dated May 18, 1993, pertaining to the
CSEZ.

Petitioners contend that the aforecited issuances are unconstitutional and void as they constitute
executive lawmaking, and that they are contrary to Republic Act No. 72273 and in violation of the
Constitution, particularly Section 1, Article III (equal protection clause), Section 19, Article XII
(prohibition of unfair competition and combinations in restraint of trade), and Section 12, Article XII
(preferential use of Filipino labor, domestic materials and locally produced goods).

The facts are as follows:

On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among other things, the
sound and balanced conversion of the Clark and Subic military reservations and their extensions into
alternative productive uses in the form of special economic zones in order to promote the economic
and social development of Central Luzon in particular and the country in general. Among the salient
provisions are as follows:
SECTION 12. Subic Special Economic Zone. —

...

The abovementioned zone shall be subject to the following policies:

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

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations
of raw materials, capital and equipment. However, exportation or removal of goods from the territory
of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the
Philippines;4

(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes,
local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes,
three percent (3%) of the gross income earned by all businesses and enterprises within the Subic
Special Ecoomic Zone shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to their population area,
and other factors. In addition, there is hereby established a development fund of one percent (1%) of
the gross income earned by all businesses and enterprises within the Subic Special Economic Zone
to be utilized for the development of municipalities outside the City of Olangapo and the Municipality
of Subic, and other municipalities contiguous to the base areas.

...

SECTION 15. Clark and Other Special Economic Zones. — Subject to the concurrence by resolution
of the local government units directly affected, the President is hereby authorized to create by
executive proclamation a Special Economic Zone covering the lands occupied by the Clark military
reservations and its contiguous extensions as embraced, covered and defined by the 1947 Military
Bases Agreement between the Philippines and the United States of America, as amended, located
within the territorial jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province of
Pampanga and the Municipality of Capas, Province of Tarlac, in accordance with the policies as
herein provided insofar as applicable to the Clark military reservations.

The governing body of the Clark Special Economic Zone shall likewise be established by executive
proclamation with such powers and functions exercised by the Export Processing Zone Authority
pursuant to Presidential Decree No. 66 as amended.

The policies to govern and regulate the Clark Special Economic Zone shall be determined upon
consultation with the inhabitants of the local government units directly affected which shall be
conducted within six (6) months upon approval of this Act.

Similarly, subject to the concurrence by resolution of the local government units directly affected, the
President shall create other Special Economic Zones, in the base areas of Wallace Air Station in San
Fernando, La Union (excluding areas designated for communications, advance warning and radar
requirements of the Philippine Air Force to be determined by the Conversion Authority) and Camp
John Hay in the City of Baguio.

Upon recommendation of the Conversion Authority, the President is likewise authorized to create
Special Economic Zones covering the Municipalities of Morong, Hermosa, Dinalupihan, Castillejos
and San Marcelino.

On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80, which declared, among
others, that Clark shall have all the applicable incentives granted to the Subic Special Economic and
Free Port Zone under Republic Act No. 7227. The pertinent provision assailed therein is as follows:

SECTION 5. Investments Climate in the CSEZ. — Pursuant to Section 5(m) and Section 15 of RA
7227, the BCDA shall promulgate all necessary policies, rules and regulations governing the CSEZ,
including investment incentives, in consultation with the local government units and pertinent
government departments for implementation by the CDC.

Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and
Free Port Zone under RA 7227 and those applicable incentives granted in the Export Processing
Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new
investments laws which may hereinafter be enacted.

The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited investment
incentives, while the CSEZ Sub-Zone covering the rest of the CSEZ shall have limited incentives.
The full incentives in the Clark SEZ Main Zone and the limited incentives in the Clark SEZ Sub-Zone
shall be determined by the BCDA.

Pursuant to the directive under Executive Order No. 80, the BCDA passed Board Resolution No. 93-
05-034 on May 18, 1993, allowing the tax and duty-free sale at retail of consumer goods imported
via Clark for consumption outside the CSEZ. The assailed provisions of said resolution read, as
follows:

Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. – The CSEZ-registered

enterprises/businesses shall be entitled to all the incentives available under R.A. No. 7227, E.O. No.
226 and R.A. No. 7042 which shall include, but not limited to, the following:

I. As in Subic Economic and Free Port Zone:

A. Customs:

...

4. Tax and duty-free purchase and consumption of goods/articles (duty free shopping) within the
CSEZ Main Zone.

5. For individuals, duty-free consumer goods may be brought out of the CSEZ Main Zone into the
Philippine Customs territory but not to exceed US$200.00 per month per CDC-registered person,
similar to the limits imposed in the Subic SEZ. This privilege shall be enjoyed only once a month.
Any excess shall be levied taxes and duties by the Bureau of Customs.
On June 10, 1993, the President issued Executive Order No. 97, "Clarifying the Tax and Duty Free
Incentive Within the Subic Special Economic Zone Pursuant to R.A. No. 7227." Said issuance in part
states, thus:

SECTION 1. On Import Taxes and Duties – Tax and duty-free importations shall apply only to raw
materials, capital goods and equipment brought in by business enterprises into the SSEZ. Except for
these items, importations of other goods into the SSEZ, whether by business enterprises or resident
individuals, are subject to taxes and duties under relevant Philippine laws.

The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of
the Philippine territory shall be subject to duties and taxes under relevant Philippine laws.

Nine days after, on June 19, 1993, Executive Order No. 97-A was issued, "Further Clarifying the Tax
and Duty-Free Privilege Within the Subic Special Economic and Free Port Zone." The relevant
provisions read, as follows:

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

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

1.2. Residents of the SSEFPZ living outside the Secured Area can enter the Secured Area and
consume any quantity of consumption items in hotels and restaurants within the Secured Area.
However, these residents can purchase and bring out of the Secured Area to other parts of the
Philippine territory consumer items worth not exceeding US$100 per month per person. Only
residents age 15 and over are entitled to this privilege.

1.3. Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity
of consumption items in hotels and restaurants within the Secured Area. However, they can
purchase and bring out [of] the Secured Area to other parts of the Philippine territory consumer items
worth not exceeding US$200 per year per person. Only Filipinos age 15 and over are entitled to this
privilege.

Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted by the
aforecited provisions respectively to SSEZ residents living outside the Secured Area of the SSEZ
and to Filipinos aged 15 and over residing outside the SSEZ.

On February 23, 1998, petitioners thus filed the instant petition, seeking the declaration of nullity of
the assailed issuances on the following grounds:

I.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4
OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING AN
EXERCISE OF EXECUTIVE LAWMAKING.
II.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4
OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE UNCONSTITUTIONAL FOR BEING
VIOLATIVE OF THE EQUAL PROTECTION CLAUSE AND THE PROHIBITION AGAINST UNFAIR
COMPETITION AND PRACTICES IN RESTRAINT OF TRADE.

III.

EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4
OF BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING VIOLATIVE
OF REPUBLIC ACT NO. 7227.

IV.

THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT RESTRAINED

WILL CONTINUE TO CAUSE PETITIONERS TO SUFFER GRAVE AND IRREPARABLE INJURY. 5

In their Comments, respondents point out procedural issues, alleging lack of petitioners’ legal
standing, the unreasonable delay in the filing of the petition, laches, and the propriety of the remedy
of prohibition.

Anent the claim on lack of legal standing, respondents argue that petitioners, being mere suppliers
of the local retailers operating outside the special economic zones, do not stand to suffer direct injury
in the enforcement of the issuances being assailed herein. Assuming this is true, this Court has
nevertheless held that in cases of paramount importance where serious constitutional questions are
involved, the standing requirements may be relaxed and a suit may be allowed to prosper even
where there is no direct injury to the party claiming the right of judicial review. 6

In the same vein, with respect to the other alleged procedural flaws, even assuming the existence of
such defects, this Court, in the exercise of its discretion, brushes aside these technicalities and takes
cognizance of the petition considering the importance to the public of the present case and in
keeping with the duty to determine whether the other branches of the government have kept
themselves within the limits of the Constitution.7

Now, on the constitutional arguments raised:

As this Court enters upon the task of passing on the validity of an act of a co-equal and coordinate
branch of the Government, it bears emphasis that deeply ingrained in our jurisprudence is the time-
honored principle that a statute is presumed to be valid. 8 This presumption is rooted in the doctrine
of separation of powers which enjoins upon the three coordinate departments of the Government a
becoming courtesy for each other’s acts.9 Hence, to doubt is to sustain. The theory is that before the
act was done or the law was enacted, earnest studies were made by Congress, or the President, or
both, to insure that the Constitution would not be breached.10 This Court, however, may declare a
law, or portions thereof, unconstitutional where a petitioner has shown a clear and unequivocal
breach of the Constitution, not merely a doubtful or argumentative one. 11 In other words, before a
statute or a portion thereof may be declared unconstitutional, it must be shown that the statute or
issuance violates the Constitution clearly, palpably and plainly, and in such a manner as to leave no
doubt or hesitation in the mind of the Court.12

The Issue on Executive Legislation

Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section 5 of Executive
Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034) constitute executive
legislation, in violation of the rule on separation of powers. Petitioners argue that the Executive
Department, by allowing through the questioned issuances the setting up of tax and duty-free shops
and the removal of consumer goods and items from the zones without payment of corresponding
duties and taxes, arbitrarily provided additional exemptions to the limitations imposed by Republic
Act No. 7227, which limitations petitioners identify as follows:

(1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials, capital and
equipment.

(2) It provides that any exportation or removal of goods from the territory of the Subic Special
Economic Zone to other parts of the Philippine territory shall be subject to customs duties and taxes
under the Customs and Tariff Code and other relevant tax laws of the Philippines.

Anent the first alleged limitation, petitioners contend that the wording of Republic Act No. 7227
clearly limits the grant of tax incentives to the importation of raw materials, capital and equipment
only. Hence, they claim that the assailed issuances constitute executive legislation for invalidly
granting tax incentives in the importation of consumer goods such as those being sold in the duty-
free shops, in violation of the letter and intent of Republic Act No. 7227.

A careful reading of Section 12 of Republic Act No. 7227, which pertains to the SSEZ, would show
that it does not restrict the duty-free importation only to "raw materials, capital and equipment."
Section 12 of the cited law is partly reproduced, as follows:

SECTION 12. Subic Special Economic Zone. —

...

The abovementioned zone shall be subject to the following policies:

...

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations
of raw materials, capital and equipment. However, exportation or removal of goods from the territory
of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the
Philippines.13

While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials, capital and
equipment, this does not necessarily mean that the tax and duty-free buying privilege is limited to
these types of articles to the exclusion of consumer goods. It must be remembered that in construing
statutes, the proper course is to start out and follow the true intent of the Legislature and to adopt
that sense which harmonizes best with the context and promotes in the fullest manner the policy and
objects of the Legislature.14

In the present case, there appears to be no logic in following the narrow interpretation petitioners
urge. To limit the tax-free importation privilege of enterprises located inside the special economic
zone only to raw materials, capital and equipment clearly runs counter to the intention of the
Legislature to create a free port where the "free flow of goods or capital within, into, and out of the
zones" is insured.

The phrase "tax and duty-free importations of raw materials, capital and equipment" was merely
cited as an example of incentives that may be given to entities operating within the zone. Public
respondent SBMA correctly argued that the maxim expressio unius est exclusio alterius, on which
petitioners impliedly rely to support their restrictive interpretation, does not apply when words are
mentioned by way of example.15 It is obvious from the wording of Republic Act No. 7227, particularly
the use of the phrase "such as," that the enumeration only meant to illustrate incentives that the
SSEZ is authorized to grant, in line with its being a free port zone.

Furthermore, said legal maxim should be applied only as a means of discovering legislative intent
which is not otherwise manifest, and should not be permitted to defeat the plainly indicated purpose
of the Legislature.16

The records of the Senate containing the discussion of the concept of "special economic zone" in
Section 12 (a) of Republic Act No. 7227 show the legislative intent that consumer goods entering the
SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and
taxes in accordance with Philippine laws, thus:

Senator Guingona. . . . The concept of Special Economic Zone is one that really includes the
concept of a free port, but it is broader. While a free port is necessarily included in the Special
Economic Zone, the reverse is not true that a free port would include a special economic zone.

Special Economic Zone, Mr. President, would include not only the incoming and outgoing of vessels,
duty-free and tax-free, but it would involve also tourism, servicing, financing and all the
appurtenances of an investment center. So, that is the concept, Mr. President. It is broader. It
includes the free port concept and would cater to the greater needs of Olangapo City, Subic Bay and
the surrounding municipalities.

Senator Enrile. May I know then if a factory located within the jurisdiction of Morong, Bataan that
was originally a part of the Subic Naval reservation, be entitled to a free port treatment or just a
special economic zone treatment?

Senator Guingona. As far as the goods required for manufacture is concerned, Mr. President, it
would have privileges of duty-free and tax-free. But in addition, the Special Economic Zone could
embrace the needs of tourism, could embrace the needs of servicing, could embrace the needs of
financing and other investment aspects.

Senator Enrile. When a hotel is constructed, Mr. President, in this geographical unit which we call a
special economic zone, will the goods entering to be consumed by the customers or guests of the
hotel be subject to duties?

Senator Guingona. That is the concept that we are crafting, Mr. President.

Senator Enrile. No. I am asking whether those goods will be duty-free, because it is constructed
within a free port.

Senator Guingona. For as long as it services the needs of the Special Economic Zone, yes.
Senator Enrile. For as long as the goods remain within the zone, whether we call it an economic
zone or a free port, for as long as we say in this law that all goods entering this particular territory will
be duty-free and tax-free, for as long as they remain there, consumed there or reexported or
destroyed in that place, then they are not subject to the duties and taxes in accordance with the laws
of the Philippines?

Senator Guingona. Yes.17

Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc Oversight Committee on
Bases Conversion on June 26, 1995. Petitioners put emphasis on the report’s finding that the setting
up of duty-free stores never figured in the minds of the authors of Republic Act No. 7227 in attracting
foreign investors to the former military baselands. They maintain that said law aimed to attract
manufacturing and service enterprises that will employ the dislocated former military base workers,
but not investors who would buy consumer goods from duty-free stores.

The Court is not persuaded. Indeed, it is well-established that opinions expressed in the debates and
proceedings of the Legislature, steps taken in the enactment of a law, or the history of the passage
of the law through the Legislature, may be resorted to as aids in the interpretation of a statute with a
doubtful meaning.18 Petitioners’ posture, however, overlooks the fact that the 1995 Committee Report
they are referring to came into being well after the enactment of Republic Act No. 7227 in 1993.
Hence, as pointed out by respondent Executive Secretary Torres, the aforementioned report cannot
be said to form part of Republic Act No. 7227’s legislative history.

Section 12 of Republic Act No. 7227, provides in part, thus:

SEC. 12. Subic Special Economic Zone. -- . . .

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial, financial and investment center to generate
employment opportunities in and around the zone and to attract and promote productive foreign
investments. 19

The aforecited policy was mentioned as a basis for the issuance of Executive Order No. 97-A, thus:

WHEREAS, Republic Act No. 7227 provides that within the framework and subject to the mandate
and limitations of the Constitution and the pertinent provisions of the Local Government Code, the
Subic Special Economic and Free Port Zone (SSEFPZ) shall be developed into a self-sustaining
industrial, commercial, financial and investment center to generate employment opportunities in and
around the zone and to attract and promote productive foreign investments; and

WHEREAS, a special tax and duty-free privilege within a Secured Area in the SSEFPZ subject, to
existing laws has been determined necessary to attract local and foreign visitors to the zone.

Executive Order No. 97-A provides guidelines to govern the "tax and duty-free privileges within the
Secured Area of the Subic Special Economic and Free Port Zone." Paragraph 1.6 thereof states that
"(t)he sale of tax and duty-free consumer items in the Secured Area shall only be allowed in duly
authorized duty-free shops."
The Court finds that the setting up of such commercial establishments which are the only ones duly
authorized to sell consumer items tax and duty-free is still well within the policy enunciated in
Section 12 of Republic Act No. 7227 that ". . .the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial,financial and investment center to
generate employment opportunities in and around the zone and to attract and promote
productive foreign investments." (Emphasis supplied.)

However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive
Order No. 97-A, allowing tax and duty-free removal of goods to certain individuals, even in a
limited amount, from the Secured Area of the SSEZ, are null and void for being contrary to
Section 12 of Republic Act No. 7227. Said Section clearly provides that "exportation or removal of
goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine
territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other
relevant tax laws of the Philippines."

On the other hand, insofar as the CSEZ is concerned, the case for an invalid exercise of executive
legislation is tenable.

In John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al.,20 this Court resolved an issue,
very much like the one herein, concerning the legality of the tax exemption benefits given to the John
Hay Economic Zone under Presidential Proclamation No. 420, Series of 1994, "CREATING AND
DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN AS THE
JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227."

In that case, among the arguments raised was that the granting of tax exemptions to John Hay was
an invalid and illegal exercise by the President of the powers granted only to the Legislature.
Petitioners therein argued that Republic Act No. 7227 expressly granted tax exemption only to Subic
and not to the other economic zones yet to be established. Thus, the grant of tax exemption to John
Hay by Presidential Proclamation contravenes the constitutional mandate that "[n]o law granting any
tax exemption shall be passed without the concurrence of a majority of all the members of
Congress."21

This Court sustained the argument and ruled that the incentives under Republic Act No. 7227 are
exclusive only to the SSEZ. The President, therefore, had no authority to extend their application to
John Hay. To quote from the Decision:

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the
legislature, unless limited by a provision of a state constitution, that has full power to exempt any
person or corporation or class of property from taxation, its power to exempt being as broad as its
power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or
local governments may pass ordinances on exemption only from local taxes.

The challenged grant of tax exemption would circumvent the Constitution’s imposition that a law
granting any tax exemption must have the concurrence of a majority of all the members of Congress.
In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and
usage for Congress to legislate upon.

Contrary to public respondents’ suggestions, the claimed statutory exemption of the John Hay SEZ
from taxation should be manifest and unmistakable from the language of the law on which it is
based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax
exemption cannot be implied as it must be categorically and unmistakably expressed.
If it were the intent of the legislature to grant to John Hay SEZ the same tax exemption and
incentives given to the Subic SEZ, it would have so expressly provided in R.A. No. 7227. 22

In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the grant of
incentives to the SSEZ, it fails to make any similar grant in favor of other economic zones, including
the CSEZ. Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof
should be categorically and unmistakably expressed from the language of the statute. Consequently,
in the absence of any express grant of tax and duty-free privileges to the CSEZ in Republic Act No.
7227, there would be no legal basis to uphold the questioned portions of two issuances: Section 5 of
Executive Order No. 80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain
to the CSEZ.

Petitioners also contend that the questioned issuances constitute executive legislation for allowing
the removal of consumer goods and items from the zones without payment of corresponding duties
and taxes in violation of Republic Act No. 7227 as Section 12 thereof provides for the taxation of
goods that are exported or removed from the SSEZ to other parts of the Philippine territory.

On September 26, 1997, Executive Order No. 444 was issued, curtailing the duty-free shopping
privileges in the SSEZ and the CSEZ "to prevent abuse of duty-free privilege and to protect local
industries from unfair competition." The pertinent provisions of said issuance state, as follows:

SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial Anniversary
Celebration in 1998. — Upon effectivity of this Order and up to the Centennial Year 1998, in addition
to the permanent residents, locators and employees of the fenced-in areas of the Subic Special
Economic and Freeport Zone and the Clark Special Economic Zone who are allowed unlimited duty
free purchases, provided these are consumed within said fenced-in areas of the Zones, the
residents of the municipalities adjacent to Subic and Clark as respectively provided in R.A. 7227
(1992) and E.O. 97-A s. 1993 shall continue to be allowed One Hundred US Dollars (US$100)
monthly shopping privilege until 31 December 1998. Domestic tourists visiting Subic and Clark shall
be allowed a shopping privilege of US$25 for consumable goods which shall be consumed only in
the fenced-in area during their visit therein.

SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To Individuals Allowed by Law.
— Starting 1 January 1999, only the following persons shall continue to be eligible to shop in duty
free shops/outlets with their corresponding purchase limits:

a. Tourists and Filipinos traveling to or returning from foreign destinations under E.O. 97-A s. 1993 —
One Thousand US Dollars (US$1,000) but not to exceed Ten Thousand US Dollars (US$10,000) in
any given year;

b. Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A. 6768 dated 3 November
1989 — Two Thousand US Dollars (US$2,000);

c. Residents, eighteen (18) years old and above, of the fenced-in areas of the freeports under R.A.
7227 (1992) and E.O. 97-A s. 1993 — Unlimited purchase as long as these are for consumption
within these freeports.

The term "Residents" mentioned in item c above shall refer to individuals who, by virtue of domicile
or employment, reside on permanent basis within the freeport area. The term excludes (1) non-
residents who have entered into short- or long-term property lease inside the freeport, (2) outsiders
engaged in doing business within the freeport, and (3) members of private clubs (e.g., yacht and golf
clubs) based or located within the freeport. In this regard, duty free privileges granted to any of the
above individuals (e.g., unlimited shopping privilege, tax-free importation of cars, etc.) are hereby
revoked.23

A perusal of the above provisions indicates that effective January 1, 1999, the grant of duty-free
shopping privileges to domestic tourists and to residents living adjacent to SSEZ and the CSEZ had
been revoked. Residents of the fenced-in area of the free port are still allowed unlimited purchase of
consumer goods, "as long as these are for consumption within these freeports." Hence, the only
individuals allowed by law to shop in the duty-free outlets and remove consumer goods out of the
free ports tax-free are tourists and Filipinos traveling to or returning from foreign destinations, and
Overseas Filipino Workers and Balikbayans as defined under Republic Act No. 6768. 24

Subsequently, on October 20, 2000, Executive Order No. 303 was issued, amending Executive
Order No. 444. Pursuant to the limited duration of the privileges granted under the preceding
issuance, Section 2 of Executive Order No. 303 declared that "[a]ll special shopping privileges as
granted under Section 3 of Executive Order 444, s. 1997, are hereby deemed terminated. The grant
of duty free shopping privileges shall be restricted to qualified individuals as provided by law."

It bears noting at this point that the shopping privileges currently being enjoyed by Overseas Filipino
Workers, Balikbayans, and tourists traveling to and from foreign destinations, draw authority not from
the issuances being assailed herein, but from Executive Order No. 46 25 and Republic Act No. 6768,
both enacted prior to the promulgation of Republic Act No. 7227.

From the foregoing, it appears that petitioners’ objection to the allowance of tax-free removal of
goods from the special economic zones as previously authorized by the questioned issuances has
become moot and academic.

In any event, Republic Act No. 7227, specifically Section 12 (b) thereof, clearly provides that
"exportation or removal of goods from the territory of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the Philippines."

Thus, the removal of goods from the SSEZ to other parts of the Philippine territory without payment
of said customs duties and taxes is not authorized by the Act. Consequently, the following italicized
provisions found in the second sentences of paragraphs 1.2 and 1.3, Section 1 of Executive Order
No. 97-A are null and void:

1.2 Residents of the SSEFPZ living outside the Secured Area can enter and consume any quantity
of consumption items in hotels and restaurants within the Secured Area. However, these residents
can purchase and bring out of the Secured Area to other parts of the Philippine territory consumer
items worth not exceeding US $100 per month per person. Only residents age 15 and over are
entitled to this privilege.

1.3 Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity
of consumption items in hotels and restaurants within the Secured Area. However, they can
purchase and bring out of the Secured Area to other parts of the Philippine territory consumer items
worth not exceeding US $200 per year per person. Only Filipinos age 15 and over are entitled to this
privilege.26

A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05-034 is
also null and void. Said Resolution applied the incentives given to the SSEZ under Republic Act No.
7227 to the CSEZ, which, as aforestated, is without legal basis.
Having concluded earlier that the CSEZ is excluded from the tax and duty-free incentives provided
under Republic Act No. 7227, this Court will resolve the remaining arguments only with regard to the
operations of the SSEZ. Thus, the assailed issuance that will be discussed is solely Executive Order
No. 97-A, since it is the only one among the three questioned issuances which pertains to the SSEZ.

Equal Protection of the Laws

Petitioners argue that the assailed issuance (Executive Order No. 97-A) is violative of their right to
equal protection of the laws, as enshrined in Section 1, Article III of the Constitution. To support this
argument, they assert that private respondents operating inside the SSEZ are not different from the
retail establishments located outside, the products sold being essentially the same. The only
distinction, they claim, lies in the products’ variety and source, and the fact that private respondents
import their items tax-free, to the prejudice of the retailers and manufacturers located outside the
zone.

Petitioners’ contention cannot be sustained. It is an established principle of constitutional law that the
guaranty of the equal protection of the laws is not violated by a legislation based on a reasonable
classification.27 Classification, to be valid, must (1) rest on substantial distinction, (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.28

Applying the foregoing test to the present case, this Court finds no violation of the right to equal
protection of the laws. First, contrary to petitioners’ claim, substantial distinctions lie between the
establishments inside and outside the zone, justifying the difference in their treatment. In Tiu v. Court
of Appeals,29 the constitutionality of Executive Order No. 97-A was challenged for being violative of
the equal protection clause. In that case, petitioners claimed that Executive Order No. 97-A was
discriminatory in confining the application of Republic Act No. 7227 within a secured area of the
SSEZ, to the exclusion of those outside but are, nevertheless, still within the economic zone.

Upholding the constitutionality of Executive Order No. 97-A, this Court therein found substantial
differences between the retailers inside and outside the secured area, thereby justifying a valid and
reasonable classification:

Certainly, there are substantial differences between the big investors who are being lured to
establish and operate their industries in the so-called "secured area" and the present business
operators outside the area. On the one hand, we are talking of billion-peso investments and
thousands of new jobs. On the other hand, definitely none of such magnitude. In the first, the
economic impact will be national; in the second, only local. Even more important, at this time the
business activities outside the "secured area" are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive use for the benefit of the
Philippine economy. There is, then, hardly any reasonable basis to extend to them the benefits and
incentives accorded in R.A. 7227. Additionally, as the Court of Appeals pointed out, it will be easier to
manage and monitor the activities within the "secured area," which is already fenced off, to prevent
"fraudulent importation of merchandise" or smuggling.

It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As
long as there are actual and material differences between territories, there is no violation of the
constitutional clause. And of course, anyone, including the petitioners, possessing the requisite
investment capital can always avail of the same benefits by channeling his or her resources or
business operations into the fenced-off free port zone. 30
The Court in Tiu found real and substantial distinctions between residents within the secured area
and those living within the economic zone but outside the fenced-off area. Similarly, real and
substantial differences exist between the establishments herein involved. A significant distinction
between the two groups is that enterprises outside the zones maintain their businesses within
Philippine customs territory, while private respondents and the other duly-registered zone enterprises
operate within the so-called "separate customs territory." To grant the same tax incentives given to
enterprises within the zones to businesses operating outside the zones, as petitioners insist, would
clearly defeat the statute’s intent to carve a territory out of the military reservations in Subic Bay
where free flow of goods and capital is maintained.

The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the real
concern of Republic Act No. 7227 is to convert the lands formerly occupied by the US military bases
into economic or industrial areas. In furtherance of such objective, Congress deemed it necessary to
extend economic incentives to the establishments within the zone to attract and encourage foreign
and local investors. This is the very rationale behind Republic Act No. 7227 and other similar special
economic zone laws which grant a complete package of tax incentives and other benefits.

The classification, moreover, is not limited to the existing conditions when the law was promulgated,
but to future conditions as well, inasmuch as the law envisioned the former military reservation to
ultimately develop into a self-sustaining investment center.

And, lastly, the classification applies equally to all retailers found within the "secured area." As ruled
in Tiu, the individuals and businesses within the "secured area," being in like circumstances or
contributing directly to the achievement of the end purpose of the law, are not categorized further.
They are all similarly treated, both in privileges granted and in obligations required.

With all the four requisites for a reasonable classification present, there is no ground to invalidate
Executive Order No. 97-A for being violative of the equal protection clause.

Prohibition against Unfair Competition

and Practices in Restraint of Trade

Petitioners next argue that the grant of special tax exemptions and privileges gave the private
respondents undue advantage over local enterprises which do not operate inside the SSEZ, thereby
creating unfair competition in violation of the constitutional prohibition against unfair competition and
practices in restraint of trade.

The argument is without merit. Just how the assailed issuance is violative of the prohibition against
unfair competition and practices in restraint of trade is not clearly explained in the petition. Republic
Act No. 7227, and consequently Executive Order No. 97-A, cannot be said to be distinctively
arbitrary against the welfare of businesses outside the zones. The mere fact that incentives and
privileges are granted to certain enterprises to the exclusion of others does not render the issuance
unconstitutional for espousing unfair competition. Said constitutional prohibition cannot hinder the
Legislature from using tax incentives as a tool to pursue its policies.

Suffice it to say that Congress had justifiable reasons in granting incentives to the private
respondents, in accordance with Republic Act No. 7227’s policy of developing the SSEZ into a self-
sustaining entity that will generate employment and attract foreign and local investment. If petitioners
had wanted to avoid any alleged unfavorable consequences on their profits, they should upgrade
their standards of quality so as to effectively compete in the market. In the alternative, if petitioners
really wanted the preferential treatment accorded to the private respondents, they could have opted
to register with SSEZ in order to operate within the special economic zone.

Preferential Use of Filipino Labor, Domestic Materials

and Locally Produced Goods

Lastly, petitioners claim that the questioned issuance (Executive Order No. 97-A) openly violated the
State policy of promoting the preferential use of Filipino labor, domestic materials and locally
produced goods and adopting measures to help make them competitive.

Again, the argument lacks merit. This Court notes that petitioners failed to substantiate their
sweeping conclusion that the issuance has violated the State policy of giving preference to Filipino
goods and labor. The mere fact that said issuance authorizes the importation and trade of foreign
goods does not suffice to declare it unconstitutional on this ground.

Petitioners cite Manila Prince Hotel v. GSIS31 which, however, does not apply. That case dealt with
the policy enunciated under the second paragraph of Section 10, Article XII of the
Constitution,32 applicable to the grant of rights, privileges, and concessions "covering the national
economy and patrimony," which is different from the policy invoked in this petition, specifically that of
giving preference to Filipino materials and labor found under Section 12 of the same Article of the
Constitution. (Emphasis supplied).

In Tañada v. Angara,33 this Court elaborated on the meaning of Section 12, Article XII of the
Constitution in this wise:

[W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and
enterprises, at the same time, it recognizes the need for business exchange with the rest of the
world on the bases of equality and reciprocity and limits protection of Filipino enterprises only
against foreign competition and trade practices that are unfair. In other words, the Constitution did
not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and services
in the development of the Philippine economy. While the Constitution does not encourage the
unlimited entry of foreign goods, services and investments into the country, it does not prohibit them
either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign
competition that is unfair.34

This Court notes that the Executive Department, with its subsequent issuance of Executive Order
Nos. 444 and 303, has provided certain measures to prevent unfair competition. In particular,
Executive Order Nos. 444 and 303 have restricted the special shopping privileges to certain
individuals.35 Executive Order No. 303 has limited the range of items that may be sold in the duty-
free outlets,36 and imposed sanctions to curb abuses of duty-free privileges.37With these measures,
this Court finds no reason to strike down Executive Order No. 97-A for allegedly being prejudicial to
Filipino labor, domestic materials and locally produced goods.

WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and Section
4 of BCDA Board Resolution No. 93-05-034 are hereby declared NULL and VOID and are
accordingly declared of no legal force and effect. Respondents are hereby enjoined from
implementing the aforesaid void provisions. All portions of Executive Order No. 97-A are valid and
effective, except the second sentences in paragraphs 1.2 and 1.3 of said Executive Order, which are
hereby declared INVALID.
No costs.

SO ORDERED.

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 portion—about 5 per centum—of 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 functions—the 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 imposed—though called
fees—are of the category of taxes. The provision is contained in section 70, of
subsection (b), of the law, as amended by section 17 of Republic Act 587, which
reads:
 Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the ownership
of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other
competent authority may exact and collect such reasonable and
equitable toll fees for the use of such bridges and ferries, within their
respective jurisdiction, as may be authorized and approved by the
Secretary of Public Works and Communications, and also for the use
of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any toll
fee." be charged or collected until and unless the approved schedule
of tolls shall have been posted levied, in a conspicuous place at such
toll station. (at pp. 213-214)

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

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

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

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

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

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

Sec. 61. Disposal of Mortgage. Collected—Monies 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.
G.R. No. 75713 October 2, 1989

PHILIPPINE COCONUT PRODUCERS FEDERATION, INC., (COCOFED), MARIA CLARA L.

LOBREGAT, BIENVENIDO A. MARQUEZ, SR., MANUEL J. LASERNA, JR., DOMINGO P.
ESPINA, CELESTINO B. SABATE, JOSE A. GOMEZ, EDUARDO U. ESCUETA, MANUEL V. DEL
ROSARIO, SULPICIO G. GRANADA, INAKI R. MENDEZONA, JOSE R. ELEAZER, JR., JOSE
REYNALDO V. MORENTE, ELADIO I. CHATTO, COCONUT INVESTMENT COMPANY, INC.,
SERGIO R. RIGODON, SPOUSES MANUEL AND CONCEPCION UTZURRUM, represented by
MANUEL M. UTZURRUM, JR., MAXIMO M. PEREZ, RAUL ANTONIO Z. UNSON, JUSTO C.
RUBI, RODOLFO Z. SALVACION, PAZ F. ABILA, JESUS 0. SALVAN, TEODORICO R. RANERA,
CRISPULO M. PIONILLA, ROSARIO P. MERTO, ISABEL R. ALVAREZ, GREGORIO L.
ANTENOR, EDILBERTO CONTRERAS, REYNALDO R. LADLAD, VENANCIO R. PINON, LUIS A.
NEGRE, ANASTACIO S. NIERE, FRANCISCO R. BINABAY, JAMITO A. DAPULA, ROSENDO M.
ABARRENTOS, RAUL M. ALEGRE, AGUSTIN C. IBAL, ROGELIO A. DELA CRUZ, GREGORIO
V. MERCADO, and All other coconut farmers similarly situated, petitioners,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, HON. JOVITO R. SALONGA, HON.
RAMON DIAZ, HON. RAUL DAZA, HON. MARY CONCEPCION BAUTISTA and HON. QUINTIN
DOROMAL, respondents, THE PHILIPPINE COCONUT AUTHORITY, intervenor.

Jose D. Valmores, Reynaldo A. Ruiz, Manuel J. Laserna, Jr. and Ramon C. Malinao for petitioners.

Agcaoili and Associates for movant.

NARVASA, J.:

The petition for certiorari and prohibition with preliminary injunction at bar seeks the annulment of the
sequestration and other orders issued by the Presidential Commission on Good Government
PCGG) against petitioner Philippine Coconut Producers Federation, Inc. (COCOFED) and various
1

other industrial and commercial enterprises set up ostensibly for purposes concerned with the
development of the coconut industry and the welfare of those involved in or served by it. These
agencies or enterprises were organized and financed with revenues derived from coconut levies
imposed under a succession of laws of the late dictatorship and are alleged to have been thereafter
used as conduits to perpetrate "the most stupendous malversation of public funds in the annals of
our history," as the PCGG puts it, with deposed President Ferdinand Marcos and his cronies as the
2

suspected authors and chief beneficiaries of the resulting "coconut industry monopoly.

The action is denominated a class suit of the COCOFED, a private national association of coconut
producers which by legal mandate receives allocations from the coconut levy funds to finance its
operating expenses and projects; the Coconut Investment Company (CIC), the first government
corporation created to administer the coconut levy funds (as will later be explained in some detail);
and individual petitioners Maria Clara Lobregat and some 37 other persons, all claiming to be either
coconut farmers, coconut workers or stockholders of the sequestered companies, bringing suit for
themselves and in representation of "the more than one million coconut farmers who are similarly
situated" upon a claim of private interest in the sequestered assets and properties.

The COCONUT LEVY FUNDS:

The sequestration of the corporations and the other acts complained of were undertaken by the
PCGG preparatory to the filing of suit in the Sandiganbayan against Marcos and his associates for
the illicit conversion of the coconut levy funds, purportedly channeled through the COCOFED and
the other sequestered businesses, into private pelf. These funds fall into four general classes, viz.:
(a) the Coconut Investment Fund created under R.A. 6260 (effective June 19, 1971); (b) the Coconut
Consumers Stabilization Fund created under PD 276 (effective August 20, 1973); (c) the Coconut
Industry Development Fund created under PD 582 (effective November 14,1974); and (d) the
Coconut Industry Stabilization Fund created under P.D. 1841 (effective October 2, 1981).

The Coconut Investment Fund (CIF):

The Coconut Investment Fund, or CIF, was put up in 1971 by R.A. 6260 which declared it to be the
national policy to accelerate the development of the coconut industry through the provision of
adequate medium and long term financing for capital investment in the industry. A levy of P 0.55
3

was imposed on the first domestic sale of every 100 kilograms of copra or equivalent coconut
product, fifty centavos (P 0. 50) of which accrued to the CIF. The Philippine Coconut Administration
4

(or PHILCOA), received three centavos (P 0.03) of the five remaining, and the balance was placed
5 6

"at the disposition of the recognized national association of coconut producers with the largest x x
membership" - which association was declared by PHILCOA to be petitioner COCOFED.
7 8

The CIF was to be used exclusively to pay for the Philippine Government's subscription to the capital
stock of the Coconut Investment Company (CIC), a corporation with a capitalization of P
9

100,000,000.00 created by the statute to administer the Fund, as has already been stated, and to
invest its capital in financing "agricultural, industrial or other productive (coconut) enterprises"
qualified under the terms of the statute to apply for loans with the CIC. The State was to initially
10

subscribe to CIC's capital stock "for and on behalf of the coconut farmers," to whom such shares
were supposed to be transferred "upon full payment (with the collections on the levy) of the
authorized capital stock x x or upon termination of a ten-year period from the start of the collection of
the levy x x, whichever comes first." The scheme, in short, called for the use of the CIF-funds
11

collected mainly from coconut farmers-to pay for the CIC shares of stock to be subscribed by the
Government and held by it until the levy was lifted, whereupon the Government was to "convert" the
receipts issued to the farmers (as evidence of payment of the levy) "into shares of stock"-this time in
the farmers' names in the new, private corporation to be formed by them at such time, conformably
with the provisions of the law.12

The levy imposed by R.A. 6260 was collected from 1972 to 1982.

The Coconut Consumers Stabilization Fund (CCSF)

P.D. 276 established a second fund on August 20,1973, barely a year after the creation of the CIF.
The decree imposed a "Stabilization Fund Levy" of fifteen pesos (P 15.00) on the first sale of every
100 kilograms of copra resecada or equivalent product. The revenues were to be credited to the
13

Coconut Stabilization Fund (CCSF) Which was to be used to subsidize the sale of coconut-based
14

products at prices set by the Price Control Council, in order to stabilize the price of edible oil and
other coconut oil-based products for the benefit of consumers The levy was to be collected for only
15

one year. The CCSF however became a permanent fund under PD 414.
16 17
The Coconut Industry Development Fund (CIDF):

On November 14, 1974, PD 582 was promulgated setting up yet another "permanent fund ... (this
time to) finance the establishment, operation and maintenance of a hybrid coconut seednut farm ...
(and the implementation of) a nationwide coconut replanting program" "using precocious high-
yielding hybrid seednuts x x to (be) distribute(d), ... free, to coconut farmers." The fund was
18

denominated the Coconut Industry Development Fund, or the CIDF. Its initial capital of P100 million
was to be paid from the CCSF, and in addition to this, the PCA was directed to thereafter remit to the
fund "an amount equal to at least twenty centavos (PO.20) per kilogram of copra resecada or its
equivalent out of its current collections of the coconut consumers stabilization levy." The CIDF was
19

assured of continued contribution from the permanent levy in the same amount deemed to be
"automatically imposed" in the event of the lifting of the Stabilization Fund Levy.20

The Coconut Industry Investment Fund (CIIF)

The various laws relating to the coconut industry were codified in 1976; promulgated on October 21
of that year was PD 961 or the "Coconut Industry Code," which later came to be known as the
"Revised Coconut Industry Code" upon its amendment by PD 1468, effective June 11, 1978. The
Code provided for the continued enforcement of the Stabilization Fund Levy imposed by PD 276 and
for the use of the CCSF and the CIDF for substantially the same purposes specified by the
enactments ordaining their creation.

A new provision was however inserted in the Code, authorizing the use of the balance of the CIDF
not needed to finance the replanting program and other authorized projects, for the acquisition of
"shares of stock in corporations organized for the purpose of engaging in the establishment and
operation of industries, .. commercial activities and other allied business undertakings relating to
coconut and other palm oil indust(ries)." From this fund thus created, the Coconut Industry
21

Investment Fund or the CIIF, were purchased the shares of stock in what have come to be known as
the "CIIF companies the sequestered corporations into which said CIIF (Coconut Industry
Investment Fund) was heavily invested after its creation.

The Coconut Industry Stabilization Fund (CISF): (Formerly CCSF)

The collection of the CCSF and the CIDF was suspended for a time in virtue of PD 1699. However,
22

on October 2, 1981, PD 1841 was issued reviving the levies and renaming the CCSF the Coconut
Industry Stabilization Fund, or the CISF, to which accrued the new collections. The impost was in the
amount of P50.00 for every 100 kilos of copra resecada or equivalent product delivered to exporters
and other copra users. The funds collected were to be apportioned among the CIDF, the 23

COCOFED, the PCA, and the "bank acquired for the benefit of the coconut farmers under PD 755"
24 25

referring to the United Coconut Planters Bank or the UCPB. 26

The AGENCIES INVOLVED:

As may be observed, three agencies played key roles in the collection, management, investment
and use of the coconut levy funds: (a) the Philippine Coconut Authority (PCA), formerly the
Philippine Coconut Administration or the PHILCOA; (b) the COCOFED; and (c) the UCPB. Charged
with the duty to "receive and administer the funds provided by law," the Philippine Coconut Authority
27

or the PCA was created on June 30, 1973 by P.D. 232 to replace and assume the functions of (1) the
Philippine Coconut Administration or PHILCOA (which had been established in 1954), (2) the
Coconut Coordinating Council (CCC), and (3) the Philippine Coconut Research
Institute(PHILCORIN). By virtue of the Decree, the PCA took over the collection of the CIF Levy
under RA 6260 in 1973, while subsequent statutes, to wit, PD 276 (in relation to PD 414), PD 582,
and PD 1841, empowered it specifically to manage the CCSF, the CIDF, and the CISF, from the time
of their creation. Under the laws just mentioned, the PCA, as the government arm that "formulate(s)
x x (the) general program of development for the coconut x x and palm oil indust(ries)" is allotted a
28

share in the funds kept in its trust. Its governing board is composed of members coming from the
public and private sectors, among them representatives of COCOFED. 29

The Philippine Coconut Producers Federation, Inc. or the COCOFED, as the private national
association of coconut producers certified in 1971 by the PHILCOA as having the largest
membership among such producers, receives substantial portions of the coconut funds to finance
30

its operating expenses and socio-economic projects. R.A. 6260 entrusted it with the task of
maintaining "continuing liaison with the different sectors of the industry, the government and its own
mass base." Its president sits on the governing board of the PCA and on the Philippine Coconut
31

Consumers Stabilization Committee, the agency assisting the PCA in the administration of the
CCSF. It is also represented in the Board of Directors of the CIC and of two (2) CIIF companies
COCOMARK (the COCOFED Marketing Corporation) and COCOLIFE (the United Coconut Planters'
Life Insurance Co.).

The United Coconut Planters Bank (or the UCPB) is a commercial bank acquired "for the benefit of
the coconut farmers" with the use of the Coconut Consumers Stabilization Fund (CCSF) in virtue of
32

P.D. 755, promulgated on July 29,1975. The Decree authorized the Bank to provide the intended
beneficiaries with "readily available credit facilities at preferential rates." It also authorized the
33

distribution of the Bank's shares of stock, free, to the coconut farmers; and some 1,405,366
purported recipients have been listed as UCPB stockholders as of April 10, 1986. 34

The UCPB was thereafter empowered by PD 1468 to "(make) investments for the benefit of the
coconut farmers" using that part of the CIDF referred to as the CIIF. Thus were organized the "CIIF
35

companies" subject of the sequestration orders herein assailed. As in the case of the shares of
36

stock in the UCPB, the law provided for the "equitable distribution" to the coconut farmers, free, of
the investments made in the CIIF companies. Among the corporations in which the UCPB has
37

come to have substantial shareholdings are the COCOFED Marketing Corporation (COCOMARK),
United Coconut Planters' Life Insurance (COCOLIFE) GRANEX, ILICOCO, Southern Island Oil Mill,
Legaspi Oil of Davao City and of Cagayan de Oro City, Anchor Insurance Brokerage, Inc., Southern
Luzon Coconut Oil Mills, and San Pablo Oil Manufacturing Co., Inc. Some of these corporations in
turn acquired UCPB shares of stock as well as shareholdings in the San Miguel Corporation.

The SEQUESTRATION PROCEEDINGS:

On March 19, 1986, the Presidential Commission on Good Government (PCGG) sequestered CIIF
companies GRANEX, ILICOCO, Southern Island Oil Mill, Legaspi Oil of Davao City, and Legaspi Oil
of Cagayan de Oro City. Also sequestered shortly thereafter, on April 21, 1986, were Anchor
Insurance Brokerage, Inc., Southern Luzon Coconut Oil Mills and the San Pablo Oil Manufacturing
Co., Inc. Shares of stock in the UCPB registered in the names of these and other CIIF companies,
and later those issued to 1,405,366 purported coconut farmers-stockholders were likewise
sequestered, as were the 33.1 million shares of stock held by fourteen (14) CIIF companies in the
San Miguel Corporation.

Next placed under sequestration on July 8,1986 was the COCOFED. Its bank accounts as well as
those of CIIF companies COCOLIFE and COCOMARK, of COCOFED president Maria Clara
Lobregat, and of COCOFED directors Inaki Mendezona and Eladio Chatto, were frozen. On May 30,
1988, PCGG appointed a 15-man Board of Directors for COCOFED, replacing the incumbents.
Management teams for the CIC and COCOMARK were deputized the day after, relieving Maria
Clara Lobregat and Manuel Agcaoili as president and vice-president, respectively, of both
corporations, and Vicente Valmores as corporate secretary of the CIC. Various other orders
pertaining to the CIC, the CIIF companies, COCOFED, and the UCPB were also afterwards issued
and implemented, with a view to conserving their assets pending the government's investigation into
the suspected plunder of the coconut levy funds by former President Ferdinand Marcos and his
associates and cronies.

PETITIONERS' SUBMITTALS

The instant petition was filed on September 3, 1986 to assail the foregoing directives and acts. The
petitioners posit that:

1) the PCGG has no jurisdiction over the sequestered properties as the

powersconferred upon it by Executive Orders Numbered 1, 2 and 14 extend only to
ill-gotten wealth of "former President Ferdinand E. Marcos and/or his wife, Imelda
Romualdez Marcos" or "their close relatives, subordinates, business associates,
dummies, agents, or nominees," and not to the private properties of the coconut
38

farmers and the petitioners, who do not fall under any of the classes of persons
specified under the Orders;

2) the sequestered properties are not ill-gotten wealth of the petitioners whose
ownership of the shares of stock in the COCOFED, the CIIF companies, and the
UCPB resulted from lawful disbursements of the coconut levy fund; and

3) the sequestration of the petitioners' private properties is a gross abuse of

prosecutorial discretion on the part of PCGG and, corollarily, rendered enforcement
of E.O.'s 1, 2 and 14 as against them unconstitutional and violative of the Bill of
Rights.

PCA INTERVENTION

A petition-in-intervention presented by the PCA was admitted by the Court by Resolution dated May
24, 1988.

THE PCGG POSITION

The Solicitor General, for the PCGG, submits that the funds collected from the coconut levy are
public funds which no amount of pronouncements to the contrary-by decree or any other presidential
issuance can convert into private money; that in the light of the report of the Commission on Audit of
its examination of the funds made after the unceremonious deposal of President Marcos, to the
effect that the funds were misappropriated and squandered by the latter, his cronies and the leaders
of the coconut industry, it is the duty of PCGG to recover the same and, pending recovery
proceedings, to make use of its power of sequestration and other remedies conferred by Executive
Orders 1, 2 and 14. In his view, the so-called "more than one million coconut farmers" do not own
the coconut levy funds or the assets acquired therewith.

1. The question of the validity of PCGG sequestration and freeze orders as

provisional measures to collect and conserve the assets believed to be ill-gotten
wealth has been laid to rest in BASECO vs. PCGG (150 SCRA 181) where this Court
held that such orders are not confiscatory but only preservative in character, not
designed to effect a confiscation of, but only to conserve properties believed to be ill-
gotten wealth of the ex-president, his family and associates, and to prevent their
 concealment, dissipation, or transfer, pending the determination of their true
ownership.

Nor may it be gainsaid that pending the institution of the suits for the recovery of
such ill-gotten wealth as the evidence at hand may reveal, there is an obvious and
imperative need for preliminary provisional measures to prevent the concealment,
disappearance, destruction, dissipation, or loss of the assets and properties subject
of the suits, or to restrain or foil acts that may render moot and academic, or
effectively hamper, delay, or negate efforts to recover the same.

xxx

To answer this need, the law has prescribed three (3) provisional remedies. These
are: (1) sequestration; (2) freeze orders; and (3) provisional takeover. (at p. 208)

The PCGG exercised the powers conferred upon it by Executive Orders Numbered 1, 2 and 14 on
the basis of evidence in its possession which it deemed sufficient to show, prima facie, that former
President Marcos, Mr. Eduardo Cojuangco, Jr., the COCOFED and its national leaders, collaborated
with each other to perpetrate the "systematic plunder" of the funds generated by the coconut levy.
That preliminary determination finds support in the documents and evidence relative thereto.
Reports, for example, from the Commission on Audit (COA) which audited the funds after the
February 1986 Revolution tend to show that:

(1) of the funds allocated to COCOFED, some P20 million were delivered to Mrs.
Imelda R. Marcos for the Imelda Romualdez Marcos Scholarship Program of which
no accounting has been made;

(2) COCOFED purchased an aircraft at a total cost of P 11,849,071.29;

(3) a COCOFED disbursement of P 23 million for the account of the Census

Committee which undertook the survey of coconut farmers to determine other
farmers entitled to the unissued shares of UCPB, was under-reimbursed by P
3,584,826.36;

(4) cash advances in hundreds of thousands of pesos granted by COCOMARK to

COCOFED officials Jose Reynaldo Morente, Inaki Mendezona, Bienvenido Marquez
and Maria Clara Lobregat were unliquidated;

(5) COCOMARK made disbursements for cash advances for travel and
transportation expenses to its directors who are also directors of COCOFED without
supporting documents.

The investigation by the PCGG of the funds supposed to havebeen invested in the UCPB on behalf
of the coconut farmers, also reveal that UCPB shares appearing in the UCPB books as issued to
1,405,366 coconut farmers are not in fact owned by the said persons because a large number of
them sold their stock to national and local officials of COCOFED at the latter's initiative; and
documents found in Malacanang in the wake of the February 1986 people's revolution tend to show
that Eduardo Cojuangco, Jr., apart from owning his own shares in UCPB, also "fronted" for the
shares of Mr. Marcos in that bank.
As to the coconut levy funds invested in the CIIF companies for the benefit of coconut farmers, COA
findings adverted to by the PCGG disclose that said funds were invested in companies most of
which were or became vehicles to effectuate their misuse. The United Coconut Oil Mills, Inc.
(UNICOM), a CIIF funded company, for example, appears to have spent millions of pesos to acquire
non-operating and unprofitable coconut oil mills owned by persons close to the Marcoses that P840
million of the CIDF were siphoned off to Agricultural Investors, Inc., a corporation owned and
controlled by Eduardo Cojuangco, Jr., which has a paid-up capital of only P100,000; and that P41.9
million worth of seednuts equivalent to 24.48% of the total purchases of UCPB using CIDF from
1979 to 1982 had not been accounted for. Reports were also cited showing that only 75.52% of the
total seednuts purchased had been distributed to the participants of the replanting program. The
PCGG also claims to have in its possession evidence of other instances of misuse or
misappropriation of the coconut levy funds attributable to the petitioners.

The petitioners deny the PCGG's postulations and assertions.

It is of course not for this Court to pass upon the factual issues thus raised. That function pertains to
the Sandiganbayan in the first instance. For purposes of this proceeding, all that the Court needs to
determine is whether or not there is prima facie justification for the sequestration ordered by the
PCGG. The Court is satisfied that there is. The cited incidents, given the public character of the
coconut levy funds, place petitioners COCOFED and its leaders and officials, at least prima facie,
squarely within the purview of Executive Orders Nos. 1, 2 and 14, as construed and applied
in BASECO, to wit:

1. that ill-gotten properties (were) amassed by the leaders and supporters of the
previous regime;

a. more particularly, that (i)ll-gotten wealth was accumulated by former President

Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, x x located in the Philippines or abroad, x x (and) business enterprises
and entities (came to be) owned or controlled by them, during x x (the Marcos)
administration, directly or through nominees, by taking undue advantage of their
public office and using their powers, authority, influence, connections or relationships

b. otherwise stated, that 'there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents or
nominees which had been or were acquired by them directly or indirectly, through or
as a result of the improper or illegal use of funds or properties owned by the
Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their office, authority,
influence, connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the
Philippines';

c. that 'said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the Philippines
and in various countries of the world' ...
39

2. The petitioners' claim that the assets acquired with the coconut levy funds are
privately owned by the coconut farmers is founded on certain provisions of law, to
wit:
 Sec. 7. Incorporation as a private entity under Act Numbered One Thousand Four
Hundred Fifty-Nine, as amended. -Upon full payment of the authorized capital stock,
as evidenced by receipts issued for levies paid, or upon termination of a ten-year
period from the start of the collection of the levy as provided in Section eight hereof,
whichever comes first, the shares of stock held by the Philippine Government for and
in behalf of the coconut farmers shall be transferred, in accordance with such rules,
regulations and procedures as the Company shall prescribe and promulgate, to and
in the name of the coconut farmers who shall then incorporate as a private entity
under Act Numbered One Thousand Four Hundred Fifty-Nine, as amended.... (Sec.
7, Republic Act 6260)

and

The Coconut Consumers Stabilization Fund and the Coconut Industry Development
Fund as well as all disbursements of said Funds for the benefit of the coconut
farmers x x shall not be construed or interpreted .. as special and/or fiduciary funds,
or as part of the general funds of the national government within the contemplation of
P.D. 711; nor as subsidy, donation, levy government funded investment, or
government share within the contemplation of PD 898, the intention being that said
fund and the disbursements thereof as herein authorized for the benefit of the
coconut farmers shall be owned by them in their private capacities .... (Section 5,
Article III, P.D. 1468)

The proposition is open to question, to say the least. Indeed, the Solicitor General suggests quite
strongly that the laws operating or purporting to convert the coconut levy funds into private funds,
are a transgression of the basic limitations for the licit exercise of the state's taxing and police
powers, and that certain provisions of said laws are merely clever strategems to keep away
government audit in order to facilitate misappropriation of the funds in question.

The utilization and proper management of the coconut levy funds, raised as they were by the State's
police and taxing powers, are certainly the concern of the Government. It cannot be denied that it
was the welfare of the entire nation that provided the prime moving factor for the imposition of the
levy. It cannot be denied that the coconut industry is one of the major industries supporting the
national economy. It is, therefore, the State's concern to make it a strong and secure source not only
of the livelihood of a significant segment of the population but also of export earnings the sustained
growth of which is one of the imperatives of economic stability. The coconut levy funds are clearly
affected with public interest. Until it is demonstrated satisfactorily that they have legitimately become
private funds, they must prima facie and by reason of the circumstances in which they were raised
and accumulated be accounted subject to the measures prescribed in E.O. Nos. 1, 2, and 14 to
prevent their concealment, dissipation, etc., which measures include the sequestration and other
orders of the PCGG complained of.

3. The incidents concerning the voting of the sequestered shares, the COCOFED
elections, and the replacement of directors, being matters incidental to the
sequestration, should be addressed to the Sandiganbayan in accordance with the
doctrine laid down in PCGG vs. Pena, 159 SCRA 556, reiterated in G.R. No. 74910,
Andres Soriano III vs. Hon. Manuel Yuzon; G.R. No. 75075, Eduardo Cojuangco, Jr.
vs. Securities and Exchange Commission; G.R. No. 75094, Clifton Ganay vs.
Presidential Commission on Good Government; G.R. No. 76397, Board of Directors
of San Miguel Corporation vs. Securities and Exchange Commission; G.R. No.
79459, Eduardo Cojuangco, Jr. vs. Hon. Pedro N. Laggui; G.R. No. 79520, Neptunia
 Corporation, Ltd. vs. Presidential Commission on Good Government, August 10,
1988.

In view of the foregoing, the petition and the petition-in-intervention are hereby DISMISSED. Costs
against petitioners.

SO ORDERED.

G.R. No. 147062-64 December 14, 2001

REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON

GOOD GOVERNMENT (PCGG), petitioner,
vs.
COCOFED, ET AL. and BALLARES, ET AL.,1 EDUARDO M. COJUANGCO JR. and the
SANDIGANBAYAN (First Division) respondents.

PANGANIBAN, J.:

The right to vote sequestered shares of stock registered in the names of private individuals or
entitles and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the
registered owner. The PCGG may, however, be granted such voting right provided in can (1)
show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2)
demonstrate imminent danger of dissipation of the assets, thus necessitating their continued
sequestration and voting by the government until a decision, ruling with finality on their ownership, is
promulgated by the proper court. 1âwphi1.nêt

However, the foregoing "two-tiered" test does not apply when the sequestered stocks are acquired
with funds that are prima facie public in character or, at least, are affected with public interest.
Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco
levy funds which are public in character, then the right to vote them shall be exercised by the PCGG.
In sum, the "public character" test, not the "two-tiered" one, applies in the instant controversy.

The Case

Before us is a Petition for Certiorari with a prayer for the issuance of a temporary restraining order
and/or a writ of preliminary injunction under Rule 65 of the Rules of Court, seeking to set aside the
February 28, 2001 Order2 of the First Division of the Sandiganbayan3 in Civil Case Nos. 0033-A,
0033-B and 0033-F. The pertinent portions of the assailed Order read as follows:

"In view hereof, the movants COCOFED, et al. and Ballares, et al. as well as Eduardo
Cojuangco, et al., who were acknowledged to be registered stockholders of the UCPB are
authorized, as are all other registered stockholders of the United Coconut Planters Bank,
until further orders from this Court, to exercise their rights to vote their shares of stock and
themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled
 Stockholders' Meeting on March 6, 2001 or on any subsequent continuation or resetting
thereof, and to perform such acts as will normally follow in the exercise of these rights as
registered stockholders.

"Since by way of form, the pleadings herein had been labeled as praying for an injunction,
the right of the movants to exercise their right as abovementioned will be subject to the
posting of a nominal bond in the amount of FIFTY THOUSAND PESOS (P50,000.00) jointly
for the defendants COCOFED, et al. and Ballares, et al., as well as all other registered
stockholders of sequestered shares in that bank, and FIFTY THOUSAND PESOS
(P50,000.00) for Eduardo Cojuangco, Jr., et al., to answer for any undue damage or injury to
the United Coconut Planters Bank as may be attributed to their exercise of their rights as
registered stockholders."4

The Antecedents

The very roots of this case are anchored on the historic events that transpired during the change of
government in 1986. Immediately after the 1986 EDSA Revolution, then President Corazon C.
Aquino issued Executive Order (EO) Nos. 1,5 26 and 14.7

"On the explicit premise that 'vast resources of the government have been amassed by former
President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and
abroad,' the Presidential Commission on Good Government (PCGG) was created by Executive
Order No. 1 to assist the President in the recovery of the ill-gotten wealth thus accumulated whether
located in the Philippines or abroad."8

Executive Order No. 2 states that the ill-gotten assets and properties are in the form of bank
accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers, condominiums,
mansions, residences, estates, and other kinds of real and personal properties in the Philippines and
in various countries of the world.9

Executive Order No. 14, on the other hand, empowered the PCGG, with the assistance of the Office
of the Solicitor General and other government agencies, inter alia, to file and prosecute all cases
investigated by it under EO Nos. 1 and 2.

Pursuant to these laws, the PCGG issued and implemented numerous sequestrations, freeze orders
and provisional takeovers of allegedly ill-gotten companies, assets and properties, real or personal. 10

Among the properties sequestered by the Commission were shares of stock in the United Coconut
Planters Bank (UCPB) registered in the names of the alleged "one million coconut farmers," the so-
called Coconut Industry Investment Fund companies (CIIF companies) and Private Respondent
Eduardo Cojuangco Jr. (hereinafter "Cojuangco").

In connection with the sequestration of the said UCPB shares, the PCGG, on July 31, 1987,
instituted an action for reconveyance, reversion, accounting, restitution and damages docketed as
Case No. 0033 in the Sandiganbayan.

On November 15, 1990, upon Motion11 of Private Respondent COCOFED, the Sandiganbayan
issued a Resolution12 lifting the sequestration of the subject UCPB shares on the ground that herein
private respondents – in particular, COCOFED and the so-called CIIF companies – had not been
impleaded by the PCGG as parties-defendants in its July 31, 1987 Complaint for reconveyance,
reversion, accounting, restitution and damages. The Sandiganbayan ruled that the Writ of
Sequestration issued by the Commission was automatically lifted for PCGG's failure to commence
the corresponding judicial action within the six-month period ending on August 2, 1987 provided
under Section 26, Article XVIII of the 1987 Constitution. The anti-graft court noted that though these
entities were listed in an annex appended to the Complaint, they had not been named as parties-
respondents.

This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari docketed as
GR No. 96073 in this Court. Meanwhile, upon motion of Cojuangco, the anti-graft court ordered the
holding of elections for the Board of Directors of UCPB. However, the PCGG applied for and was
granted by this Court a Restraining Order enjoining the holding of the election. Subsequently, the
Court lifted the Restraining Order and ordered the UCPB to proceed with the election of its board of
directors. Furthermore, it allowed the sequestered shares to be voted by their registered owners.

The victory of the registered shareholders was fleeting because the Court, acting on the solicitor
general's Motion for Clarification/Manifestation, issued a Resolution on February 16, 1993, declaring
that "the right of petitioners [herein private respondents] to vote stock in their names at the meetings
of the UCPB cannot be conceded at this time. That right still has to be established by them before
the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB stock and
cannot be accorded the right to vote them."13 The dispositive portion of the said Resolution reads as
follows:

"IN VIEW OF THE FOREGOING, the Court recalls and sets aside the Resolution dated
March 3, 1992 and, pending resolution on the merits of the action at bar, and until further
orders, suspends the effectivity of the lifting of the sequestration decreed by the
Sandiganbayan on November 15, 1990, and directs the restoration of the status quo ante, so
as to allow the PCGG to continue voting the shares of stock under sequestration at the
meetings of the United Coconut Planters Bank."14

On January 23, 1995, the Court rendered its final Decision in GR No. 96073, nullifying and setting
aside the November 15, 1990 Resolution of the Sandiganbayan which, as earlier stated, lifted the
sequestration of the subject UCPB shares. The express impleading of herein Respondents
COCOFED et al. was deemed unnecessary because "the judgment may simply be directed against
the shares of stock shown to have been issued in consideration of ill-gotten wealth." 15 Furthermore,
the companies "are simply the res in the actions for the recovery of illegally acquires wealth, and
there is, in principle, no cause of action against them and no ground to implead them as defendants
in said case."16

A month thereafter, the PCGG – pursuant to an Order of the Sandiganbayan – subdivided Case No.
0033 into eight Complaints and docketed them as Case Nos. 0033-A to 0033-H.

Six years later, on February 13, 2001, the Board of Directors of UCPB received from the ACCRA
Law Office a letter written on behalf of the COCOFED and the alleged nameless one million coconut
farmers, demanding the holding of a stockholders' meeting for the purpose of, among others,
electing the board of directors. In response, the board approved a Resolution calling for a
stockholders' meeting on March 6, 2001 at three o'clock in the afternoon.

On February 23, 2001, "COCOFED, et al. and Ballares, et al." filed the "Class Action Omnibus
Motion"17 referred to earlier in Sandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F, asking
the court a quo:

"1. To enjoin the PCGG from voting the UCPB shares of stock registered in the respective
names of the more than one million coconut farmers; and
 "2. To enjoin the PCGG from voting the SMC shares registered in the names of the 14 CIIF
holding companies including those registered in the name of the PCGG." 18

On February 28, 2001, respondent court, after hearing the parties on oral argument, issued the
assailed Order.

Hence, this Petition by the Republic of the Philippines represented by the PCGG. 19

The case had initially been raffled to this Court's Third Division which, by a vote of 3-2, 20 issued a
Resolution21requiring the parties to maintain the status quo existing before the issuance of the
questioned Sandiganbayan Order dated February 28, 2001. On March 7, 2001, Respondent
COCOFED et al. moved that the instant Petition be heard by the Court en banc. 22 The Motion was
unanimously granted by the Third Division.

On March 13, 2001, the Court en banc resolved to accept the Third Division's referral. 23 It heard the
case on Oral Argument in Baguio City on April 17, 2001. During the hearing, it admitted the
intervention of a group of coconut farmers and farm worker organizations, the Pambansang
Koalisyon ng mga Samahang Magsasaka at Manggagawa ng Niyugan (PKSMMN). The coalition
claims that its members have been excluded from the benefits of the coconut levy fund. Inter alia, it
joined petitioner in praying for the exclusion of private respondents in voting the sequestered shares.

Issues

Petitioner submits the following issues for our consideration: 24

"A.

Despite the fact that the subject sequestered shares were purchased with coconut levy funds
(which were declared public in character) and the continuing effectivity of Resolution dated
February 16, 1993 in G.R. No. 96073 which allows the PCGG to vote said sequestered
shares, Respondent Sandiganbayan, with grave abuse of discretion, issued its Order dated
February 20, 2001 enjoining PCGG from voting the sequestered shares of stock in UCPB.

"B.

The Respondent Sandiganbayan violated petitioner's right to due process by taking

cognizance of the Class Action Omnibus Motion dated 23 February 2001 despite gross lack
of sufficient notice and by issuing the writ of preliminary injunction despite the obvious fact
that there was no actual pressing necessity or urgency to do so."

In its Resolution dated April 17, 2001, the Court defined the issue to be resolved in the instant case
simply as follows:

This Court's Ruling

The Petition is impressed with merit.

Main Issue:

Who May Vote the Sequestered Shares of Stock?

Simply stated, the gut substantive issue to be resolved in the present Petition is: "Who may vote the
sequestered UCPB shares while the main case for their reversion to the State is pending in the
Sandiganbayan?"

This Court holds that the government should be allowed to continue voting those shares inasmuch
as they were purchased with coconut levy funds – that are prima facie public in character or, at the
very least, are "clearly affected with public interest."

General Rule: Sequestered Shares

Are Voted by the Registered Holder

At the outset, it is necessary to restate the general rule that the registered owner of the shares of a
corporation exercises the right and the privilege of voting.25 This principle applies even to shares that
are sequestered by the government, over which the PCGG as a mere conservator cannot, as a
general rule, exercise acts of dominion.26On the other hand, it is authorized to vote these
sequestered shares registered in the names of private persons and acquired with allegedly ill-gotten
wealth, if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v.
Calpo27 and PCGG v. Cojuangco Jr.,28 as follows:

(1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong
to the State?

(2) Is there an imminent danger of dissipation, thus necessitating their continued

sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?

Sequestered Shares Acquired with Public Funds are an Exception

From the foregoing general principle, the Court in Baseco v. PCGG29 (hereinafter "Baseco")
and Cojuangco Jr. v. Roxas30 ("Cojuangco-Roxas") has provided two clear "public character"
exceptions under which the government is granted the authority to vote the shares:

(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow landed
in private hands.

The exceptions are based on the common-sense principle that legal fiction must yield to truth; that
public property registered in the names of non-owners is affected with trust relations; and that
the prima facie beneficial owner should be given the privilege of enjoying the rights flowing from
the prima facie fact of ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was placed
under sequestration by the PCGG. Explained the Court:

"The facts show that the corporation known as BASECO was owned and controlled by
President Marcos 'during his administration, through nominees, by taking undue advantage
of his public office and/or using his powers, authority, or influence,' and that it was by and
through the same means, that BASECO had taken over the business and/or assets of the
 National Shipyard and Engineering Co., Inc., and other government-owned or controlled
entities."31

Given this factual background, the Court discussed PCGG's right over BASECO in the following
manner:

"Now, in the special instance of a business enterprise shown by evidence to have been
'taken over by the government of the Marcos Administration or by entities or persons close to
former President Marcos,' the PCGG is given power and authority, as already adverted to, to
'provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;'
and since the term is obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody is connoted; the PCGG
may in this case exercise some measure of control in the operation, running, or management
of the business itself."32

Citing an earlier Resolution, it ruled further:

"Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of directors as
authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in this
case on behalf of BASECO have failed to show any right or even any shareholding in said
corporation."33 (Italics supplied)

The Court granted PCGG the right to vote the sequestered shares because they appeared to be
"assets belonging to the government itself." The Concurring Opinion of Justice Ameurfina A.
Melencio-Herrera, in which she was joined by Justice Florentino P. Feliciano, explained this principle
as follows:

"I have no objection to according the right to vote sequestered stock in case of a take-over of
business actually belonging to the government or whose capitalization comes from public
funds but which, somehow, landed in the hands of private persons, as in the case of
BASECO. To my mind, however, caution and prudence should be exercised in the case of
sequestered shares of an on-going private business enterprise, specially the sensitive ones,
since the true and real ownership of said shares is yet to be determined and proven more
conclusively by the Courts."34 (Italics supplied)

The exception was cited again by the Court in Cojuangco-Roxas35 in this wise:

"The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in a
corporation and elect the members of the board of directors. The only conceivable exception
is in a case of a takeover of a business belonging to the government or whose capitalization
comes from public funds, but which landed in private hands as in BASECO."36 (Italics
supplied)

The "public character" test was reiterated in many subsequent cases; most recently, in Antiporda v.
Sandiganbayan.37 Expressly citing Conjuangco-Roxas,38 this Court said that in determining the issue
of whether the PCGG should be allowed to vote sequestered shares, it was crucial to find out first
whether these were purchased with public funds, as follows:
 "It is thus important to determine first if the sequestered corporate shares came from public
funds that landed in private hands."39

In short, when sequestered shares registered in the names of private individuals or entities are
alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied. However,
when the sequestered shares in the name of private individuals or entities are shown, prima facie, to
have been (1) originally government shares, or (2) purchased with public funds or those affected
with public interest, then the two-tiered test does not apply. Rather, the public character exceptions
in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the
shares.

UCPB Shares Were Acquired With Coconut Levy Funds

In the present case before the Court, it is not disputed that the money used to purchase the
sequestered UCPB shares came from the Coconut Consumer Stabilization Fund (CCSF), otherwise
known as the coconut levy funds.

This fact was plainly admitted by private respondent's counsel, Atty. Teresita J. Herbosa, during the
Oral Arguments held on April 17, 2001 in Baguio City, as follows:

"Justice Panganiban:

"In regard to the theory of the Solicitor General that the funds used to purchase [both] the
original 28 million and the subsequent 80 million came from the CCSF, Coconut Consumers
Stabilization Fund, do you agree with that?

"Atty. Herbosa:

"Yes, Your Honor.

xxx xxx xxx

"Justice Panganiban:

"So it seems that the parties [have] agreed up to that point that the funds used to purchase
72% of the former First United Bank came from the Coconut Consumer Stabilization Fund?

"Atty. Herbosa:

"Yes, Your Honor."40

Indeed in Cocofed v. PCGG,41 this Court categorically declared that the UCPB was acquired
"with the use of the Coconut Consumers Stabilization Fund in virtue of Presidential Decree
No. 755, promulgated on July 29, 1975."

Coconut Levy Funds Are Affected With Public Interest

Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies,
we hold that these funds and shares are, at the very least, "affected with public interest."
The Resolution issued by the Court on February 16, 1993 in Republic v. Sandiganbayan42 stated that
coconut levy funds were "clearly affected with public interest"; thus, herein private respondents –
even if they are the registered shareholders – cannot be accorded the right to vote them. We quote
the said Resolution in part, as follows:

"The coconut levy funds being 'clearly affected with public interest, it follows that the
corporations formed and organized from those funds, and all assets acquired therefrom
should also be regarded as 'clearly affected with public interest.'" 43

xxx xxx xxx

"Assuming, however, for purposes of argument merely, the lifting of sequestration to be

correct, may it also be assumed that the lifting of sequestration removed the character of the
coconut levy companies of being affected with public interest, so that they and their stock
and assets may now be considered to be of private ownership? May it be assumed that the
lifting of sequestration operated to relieve the holders of stock in the coconut levy companies
– affected with public interest – of the obligation of proving how that stock had been
legitimately transferred to private ownership, or that those stockholders who had had some
part in the collection, administration, or disposition of the coconut levy funds are now
deemed qualified to acquire said stock, and freed from any doubt or suspicion that they had
taken advantage of their special or fiduciary relation with the agencies in charge of the
coconut levies and the funds thereby accumulated? The obvious answer to each of the
questions is a negative one. It seems plain that the lifting of sequestration has no relevance
to the nature of the coconut levy companies or their stock or property, or to the legality of the
acquisition by private persons of their interest therein, or to the latter's capacity or
disqualification to acquire stock in the companies or any property acquired from coconut levy
funds.

"This being so, the right of the [petitioners] to vote stock in their names at the meetings of
the UCPB cannot be conceded at this time. That right still has to be established by them
before the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of
UCPB stock and cannot be accorded the right to vote them." 44 (Italics supplied)

It is however contended by respondents that this Resolution was in the nature of a temporary
restraining order. As such, it was supposedly interlocutory in character and became functus
oficio when this Court decided GR No. 96073 on January 23, 1995.

This argument is aptly answered by petitioner in its Memorandum, which we quote:

"The ruling made in the Resolution dated 16 February 1993 confirming the public nature of
the coconut levy funds and denying claimants their purported right to vote is an affirmation of
doctrines laid down in the cases of COCOFED v. PCGG supra, Baseco v. PCGG, supra,
and Cojuangco v. Roxas, supra. Therefore it is of no moment that the Resolution dated 16
February 1993 has not been ratified. Its jurisprudential based remain."45 (Italics supplied)

To repeat, the foregoing juridical situation has not changed. It is still the truth today: "the coconut levy
funds are clearly affected with public interest." Private respondents have not "demonstrated
satisfactorily that they have legitimately become private funds."

If private respondents really and sincerely believed that the final Decision of the Court in Republic v.
Sandiganbayan(GR No. 96073, promulgated on January 23, 1995) granted them the right to vote,
why did they wait for the lapse of six long years before definitively asserting it (1) through their letter
dated February 13, 2001, addressed to the UCPB Board of Directors, demanding the holding of a
shareholders' meeting on March 6, 2001; and (2) through their Omnibus Motion dated February 23,
2001 filed in the court a quo, seeking to enjoin PCGG from voting the subject sequestered shares
during the said stockholders' meeting? Certainly, if they even half believed their submission now –
that they already had such right in 1995 – why are they suddenly and imperiously claiming it only
now?

It should be stressed at this point that the assailed Sandiganbayan Order dated February 28, 2001 –
allowing private respondents to vote the sequestered shares – is not based on any finding that the
coconut levies and the shares have "legitimately become private funds." Neither is it based on the
alleged lifting of the TRO issued by this Court on February 16, 1993. Rather, it is anchored on the
grossly mistaken application of the two-tiered test mentioned earlier in this Decision.

To stress, the two-tiered test is applied only when the sequestered asset in the hands of a private
person is alleged to have been acquired with ill-gotten wealth. Hence, in PCGG v. Cojuangco,47 we
allowed Eduardo Cojuangco Jr. to vote the sequestered shares of the San Miguel Corporation
(SMC) registered in his name but alleged to have been acquired with ill-gotten wealth. We did so on
his representation that he had acquired them with borrowed funds and upon failure of the PCGG to
satisfy the "two-tiered" test. This test was, however, not applied to sequestered SMC shares that
were purchased with coco levy funds.

In the present case, the sequestered UCPB shares are confirmed to have been acquired with coco
levies, not with alleged ill-gotten wealth. Hence, by parity of reasoning, the right to vote them is not
subject to the "two-tiered test" but to the public character of their acquisition, which per Antiporda v.
Sandiganbayan cited earlier, must first be determined.

Coconut Levy Funds Are Prima Facie Public Funds

To avoid misunderstanding and confusion, this Court will even be more categorical and positive than
its earlier pronouncements: the coconut levy funds are not only affected with public interest;
they are, in fact, prima facie public funds.

Public funds are those moneys belonging to the State or to any political subdivision of the State;
more specifically, taxes, customs duties and moneys raised by operation of law for the support of the
government or for the discharge of its obligations.48 Undeniably, coconut levy funds satisfy this
general definition of public funds, because of the following reasons:

1. Coconut levy funds are raised with the use of the police and taxing powers of the State.

2. They are levies imposed by the State for the benefit of the coconut industry and its
farmers.

3. Respondents have judicially admitted that the sequestered shares were purchased with
public funds.

4. The Commission on Audit (COA) reviews the use of coconut levy funds.

5. The Bureau of Internal Revenue (BIR), with the acquiescence of private respondents, has
treated them as public funds.

6. The very laws governing coconut levies recognize their public character.
We shall now discuss each of the foregoing reasons, any one of which is enough to show their
public character.

1. Coconut Levy Funds Are Raised Through the State's Police and Taxing Powers.

Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced
proportional contributions from persons and properties, exacted by the State by virtue of its
sovereignty for the support of government and for all public needs.49

Based on this definition, a tax has three elements, namely: a) it is an enforced proportional
contribution from persons and properties; b) it is imposed by the State by virtue of its sovereignty;
and c) it is levied for the support of the government. The coconut levy funds fall squarely into these
elements for the following reasons:

(a) They were generated by virtue of statutory enactments imposed on the coconut farmers
requiring the payment of prescribed amounts. Thus, PD No. 276, which created the Coconut
Consumer Stabilization Fund (CCSF), mandated the following:

"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in other
coconut products, shall be imposed on every first sale, in accordance with the mechanics
established under RA 6260, effective at the start of business hours on August 10, 1973.

"The proceeds from the levy shall be deposited with the Philippine National Bank or any
other government bank to the account of the Coconut Consumers Stabilization Fund, as a
separate trust fund which shall not form part of the general fund of the government." 50

The coco levies were further clarified in amendatory laws, specifically PD No. 961 51 and PD
No. 146852 – in this wise:

"The Authority (Philippine Coconut Authority) is hereby empowered to impose and collect a
levy, to be known as the Coconut Consumers Stabilization Fund Levy, on every one hundred
kilos of copra resecada, or its equivalent in other coconut products delivered to, and/or
purchased by, copra exporters, oil millers, desiccators and other end-users of copra or its
equivalent in other coconut products. The levy shall be paid by such copra exporters, oil
millers, desiccators and other end-users of copra or its equivalent in other coconut products
under such rules and regulations as the Authority may prescribe. Until otherwise prescribed
by the Authority, the current levy being collected shall be continued." 53

Like other tax measures, they were not voluntary payments or donations by the people. They
were enforced contributions exacted on pain of penal sanctions, as provided under PD No.
276:

"3. Any person or firm who violates any provision of this Decree or the rules and regulations
promulgated thereunder, shall, in addition to penalties already prescribed under existing
administrative and special law, pay a fine of not less than P2,500 or more than P10,000, or
suffer cancellation of licenses to operate, or both, at the discretion of the Court." 54

Such penalties were later amended thus:

"Whenever any person or entity willfully and deliberately violates any of the provisions of this
Act, or any rule or regulation legally promulgated hereunder by the Authority, the person or
 persons responsible for such violation shall be punished by a fine of not more than
P20,000.00 and by imprisonment of not more than five years. If the offender be a
corporation, partnership or a juridical person, the penalty shall be imposed on the officer or
officers authorizing, permitting or tolerating the violation. Aliens found guilty of any offenses
shall, after having served his sentence, be immediately deported and, in the case of a
naturalized citizen, his certificate of naturalization shall be cancelled."55

(b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative
authorities of the State. Indeed, the CCSF was collected under PD No. 276, issued by former
President Ferdinand E. Marcos who was then exercising legislative powers. 56

(c) They were clearly imposed for a public purpose. There is absolutely no question that they
were collected to advance the government's avowed policy of protecting the coconut
industry. This Court takes judicial notice of the fact that the coconut industry is one of the
great economic pillars of our nation, and coconuts and their byproducts occupy a leading
position among the country's export products; that it gives employment to thousands of
Filipinos; that it is a great source of the state's wealth; and that it is one of the important
sources of foreign exchange needed by our country and, thus, pivotal in the plans of a
government committed to a policy of currency stability.

Taxation is done not merely to raise revenues to support the government, but also to provide means
for the rehabilitation and the stabilization of a threatened industry, which is so affected with public
interest as to be within the police power of the State, as held in Caltex Philippines v.
COA57 and Osmeña v. Orbos.58

Even if the money is allocated for a special purpose and raised by special means, it is still public in
character. In the case before us, the funds were even used to organize and finance State offices.
In Cocofed v. PCGG,59 the Court observed that certain agencies or enterprises "were organized and
financed with revenues derived from coconut levies imposed under a succession of laws of the late
dictatorship x x x with deposed Ferdinand Marcos and his cronies as the suspected authors and
chief beneficiaries of the resulting coconut industry monopoly."60 The Court continued: "x x x. It
cannot be denied that the coconut industry is one of the major industries supporting the national
economy. It is, therefore, the State's concern to make it a strong and secure source not only of the
livelihood of a significant segment of the population, but also of export earnings the sustained growth
of which is one of the imperatives of economic stability. x x x." 61

2. Coconut Funds Are Levied for the Benefit of the Coconut Industry and Its Farmers.

Just like the sugar levy funds, the coconut levy funds constitute state funds even though they may
be held for a special public purpose.

In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the coconut levy funds to the
sugar levy funds, both being special public funds acquired through the taxing and police
powers of the State. The sugar levy funds, which are strikingly similar to the coconut levies in their
imposition and purpose, were declared public funds by this Court in Gaston v. Republic Planters
Bank,62 from which we quote:

"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 vs. Araneta, 98 Phil. 148). They
constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections made accrue to a 'Special
Fund,' a 'Development and Stabilization Fund,' almost identical to the 'Sugar Adjustment and
Stabilization Fund' created under Section 6 of Commonwealth Act 567. The tax collected is
 not in a pure exercise of the taxing power. It is levied with a regulatory purpose, to provide
means for the stabilization of the sugar industry. The levy is primarily in the exercise of the
police power of the State. (Lutz vs. Araneta, supra.)."63

The Court further explained:64

"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 as state funds, even though they are held for a special purpose (Lawrence
v. American Surety Co., 263 Mich 586. 294 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, Art. VI, Sec. 29[3], lifted from the 1935 Constitution, Article VI, Sec.
23[1]. (Italics supplied)

"The character of the Stabilization Fund as a special 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[1], 1973 Constitution, Article VIII, Sec. 18[1]).

"That the fees were collected from sugar producers, planters and millers, and that the funds
were channeled to the purchase of shares of stock in respondent Bank do not convert the
funds into a trust fund for their benefit nor make them the beneficial owners of the shares so
purchased. It is but rational that the fees be collected from them since it is also they who are
to be benefited from the expenditure of the funds derived from it. The investment in shares of
respondent Bank is not alien to the purpose intended because of the Bank's character as a
commodity bank for sugar conceived for the industry's growth and development.
Furthermore, of note is the fact that one-half (1/2) or P0.50 per picul, of the amount levied
under P.D. No. 388 is to be utilized for the 'payment of salaries and wages of personnel,
fringe benefits and allowances of officers and employees of PHILSUCOM' thereby
immediately negating the claim that the entire amount levied is in trust for sugar, producers,
planters and millers.

"To rule in petitioners' favor would contravene the general principle that revenues derived
from taxes cannot be used for purely private purposes or for the exclusive benefit of private
persons. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry,
'and all its components, stabilization of the domestic market including the foreign market,' the
industry being of vital importance to the country's economy and to national interest."

In the same manner, this Court has also ruled that the oil stabilization funds were public in character
and subject to audit by COA. It ruled in this wise:

"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."65

In his Concurring Opinion in Kilosbayan v. Guingona,66 Justice Florentino P. Feliciano explained that
the funds raised by the On-line Lottery System were also public in nature. In his words:

"x x x. In the case presently before the Court, the funds involved are clearly public in nature.
The funds to be generated by the proposed lottery are to be raised from the population at
large. Should the proposed operation be as successful as its proponents project, those funds
will come from well-nigh every town and barrio of Luzon. The funds here involved are public
in another very real sense: they will belong to the PCSO, a government owned or controlled
corporation and an instrumentality of the government and are destined for utilization in social
development projects which, at least in principle, are designed to benefit the general public.
x x x. The interest of a private citizen in seeing to it that public funds, from whatever source
they may have been derived, go only to the uses directed and permitted by law is as real and
personal and substantial as the interest of a private taxpayer in seeing to it that tax monies
are not intercepted on their way to the public treasury or otherwise diverted from uses
prescribed or allowed by law. It is also pertinent to note that the more successful the
government is in raising revenues by non-traditional methods such as PAGCOR operations
and privatization measures, the lesser will be the pressure upon the traditional sources of
public revenues, i.e., the pocket books of individual taxpayers and importers." 67

Thus, the coconut levy funds – like the sugar levy and the oil stabilization funds, as well as the
monies generated by the On-line Lottery System – are funds exacted by the State. Being enforced
contributions, the are prima faciepublic funds.

3. Respondents Judicially Admit That the Levies Are Government Funds.

Equally important as the fact that the coconut levy funds were raised through the taxing and police
powers of the State is respondents' effective judicial admission that these levies are government
funds. As shown by the attachments to their pleadings,68 respondents concede that the Coconut
Consumers Stabilization Fund (CCSF) and the Coconut Investment Development Fund "constitute
government funds x x x for the benefit of coconut farmers."

"Collections on both levies constitute government funds. However, unlike other taxes that the
Government levies and collects such as income tax, tariff and customs duties, etc., the
collections on the CCSF and CIDF are, by express provision of the laws imposing them, for a
definite purpose, not just for any governmental purpose. As stated above part of the
collections on the CCSF levy should be spent for the benefit of the coconut farmers. And in
respect of the collections on the CIDF levy, P.D. 582 mandatorily requires that the same
should be spent exclusively for the establishment, operation and maintenance of a hybrid
coconut seed garden and the distribution, for free, to the coconut farmers of the hybrid
coconut seednuts produced from that seed garden.

"On the other hand, the laws which impose special levies on specific industries, for example
on the mining industry, sugar industry, timber industry, etc., do not, by their terms, expressly
require that the collections on those levies be spent exclusively for the benefit of the industry
concerned. And if the enabling law thus so provide, the fact remains that the governmental
agency entrusted with the duty of implementing the purpose for which the levy is imposed is
vested with the discretionary power to determine when and how the collections should be
appropriated."69
4. The COA Audit Shows the Public Nature of the Funds.

Under COA Office Order No. 86-9470 dated April 15, 1986,70 the COA reviewed the expenditure and
use of the coconut levies allocated for the acquisition of the UCPB. The audit was aimed at
ascertaining whether these were utilized for the purpose for which they had been intended. 71 Under
the 1987 Constitution, the powers of the COA are as follows:

"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 x x x."72

Because these funds have been subjected to COA audit, there can be no other conclusion than that
are prima faciepublic in character.

5. The BIR Has Pronounced That the Coconut Levy Funds Are Taxes.

In response to a query posed by the administrator of the Philippine Coconut Authority regarding the
character of the coconut levy funds, the Bureau of Internal Revenue has affirmed that these funds
are public in character. It held as follows: "[T]he coconut levy is not a public trust fund for the benefit
of the coconut farmers, but is in the nature of a tax and, therefore, x x x public funds that are subject
to government administration and disposition."73

Furthermore, the executive branch treats the coconut levies as public funds. Thus, Executive Order
No. 277, issued on September 24, 1995, directed the mode of treatment, utilization, administration
and management of the coconut levy funds. It provided as follows:

'(a) The coconut levy funds, which include all income, interests, proceeds or profits derived
therefrom, as well as all assets, properties and shares of stocks procured or obtained with
the use of such funds, shall be treated, utilized, administered and managed as public
funds consistent with the uses and purposes under the laws which constituted them and the
development priorities of the government, including the government's coconut productivity,
rehabilitation, research extension, farmers organizations, and market promotions programs,
which are designed to advance the development of the coconut industry and the welfare of
the coconut farmers."74 (Italics supplied)

Doctrinally, acts of the executive branch are prima facie valid and binding, unless declared
unconstitutional or contrary to law.

6. Laws Governing Coconut Levies Recognize Their Public Nature.

Finally and tellingly, the very laws governing the coconut levies recognize their public character.
Thus, the third Whereas clause of PD No. 276 treats them as special funds for a specific public
purpose. Furthermore, PD No. 711 transferred to the general funds of the State all existing special
and fiduciary funds including the CCSF. On the other hand, PD No. 1234 specifically declared the
CCSF as a special fund for a special purpose, which should be treated as a special account in the
National Treasury.

Moreover, even President Marcos himself, as the sole legislative/executive authority during the
martial law years, struck off the phrase which is a private fund of the coconut farmers from the
original copy of Executive Order No. 504 dated May 31, 1978, and we quote:
 "WHEREAS, by means of the Coconut Consumers Stabilization Fund ('CCSF'), which is the
private fund of the coconut farmers (deleted), essential coconut-based products are made
available to household consumers at socialized prices." (Emphasis supplied)

The phrase in bold face -- which is the private fund of the coconut farmers – was crossed out
and duly initialed by its author, former, President Marcos. This deletion, clearly visible in "Attachment
C" of petitioner's Memorandum,75 was a categorical legislative intent to regard the CCSF as public,
not private, funds.

Having Been Acquired With Public Funds, UCPB Shares Belong, Prima Facie, to the
Government

Having shown that the coconut levy funds are not only affected with public interest, but are in
fact prima facie public funds, this Court believes that the government should be allowed to vote the
questioned shares, because they belong to it as the prima facie beneficial and true owner.

As stated at the beginning, voting is an act of dominion that should be exercised by the share owner.
One of the recognized rights of an owner is the right to vote at meetings of the corporation. The right
to vote is classified as the right to control.76 Voting rights may be for the purpose of, among others,
electing or removing directors, amending a charter, or making or amending by laws. 77 Because the
subject UCPB shares were acquired with government funds, the government becomes their prima
facie beneficial and true owner.

Ownership includes the right to enjoy, dispose of, exclude and recover a thing without limitations
other than those established by law or by the owner.78 Ownership has been aptly described as the
most comprehensive of all real rights.79 And the right to vote shares is a mere incident of ownership.
In the present case, the government has been shown to be the prima facie owner of the funds used
to purchase the shares. Hence, it should be allowed the rights and privileges flowing from such fact.

And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic should continue to vote
those shares until and unless private respondents are able to demonstrate, in the main cases
pending before the Sandiganbayan, that "they [the sequestered UCPB shares] have legitimately
become private."

Procedural and Incidental Issues:

Grave Abuse of Discretion, Improper Arguments and Intervenors' Relief

Procedurally, respondents argue that petitioner has failed to demonstrate that the Sandiganbayan
committed grave abuse of discretion, a demonstration required in every petition under Rule 65. 80

We disagree. We hold that the Sandiganbayan gravely abused its discretion when it contravened the
rulings of this Court in Baseco and Cojuangco-Roxas – thereby unlawfully, capriciously and
arbitrarily depriving the government of its right to vote sequestered shares purchased with coconut
levy funds which are prima facie public funds.

Indeed, grave abuse of discretion may arise when a lower court or tribunal violates or contravenes
the Constitution, the law or existing jurisprudence. In one case,81 this Court ruled that the lower
court's resolution was "tantamount to overruling a judicial pronouncement of the highest Court x x x
and unmistakably a very grave abuse of discretion." 82
The Public Character of Shares Is a Valid Issue

Private respondents also contend that the public nature of the coconut levy funds was not raised as
an issue before the Sandiganbayan. Hence, it could not be taken up before this Court.

Again we disagree. By ruling that the two-tiered test should be applied in evaluating private
respondents' claim of exercising voting rights over the sequestered shares, the Sandiganbayan
effectively held that the subject assets were private in character. Thus, to meet this issue, the Office
of the Solicitor General countered that the shares were not private in character, and that quite the
contrary, they were and are public in nature because they were acquired with coco levy funds which
are public in character. In short, the main issue of who may vote the shares cannot be determined
without passing upon the question of the public/private character of the shares and the funds used to
acquire them. The latter issue, although not specifically raised in the Court a quo, should still be
resolved in order to fully adjudicate the main issue.

Indeed, this Court has "the authority to waive the lack of proper assignment of errors if the
unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors refer to
matters upon which the determination of the questions raised by the errors properly assigned
depend."83

Therefore, "where the issues already raised also rest on other issues not specifically presented as
long as the latter issues bear relevance and close relation to the former and as long as they arise
from matters on record, the Court has the authority to include them in its discussion of the
controversy as well as to pass upon them."84

No Positive Relief For Intervenors

Intervenors anchor their interest in this case on an alleged right that they are trying to enforce in
another Sandiganbayan case docketed as SB Case No. 0187.85 In that case, they seek the recovery
of the subject UCPB shares from herein private respondents and the corporations controlled by
them. Therefore, the rights sought to be protected and the reliefs prayed for by intervenors are still
being litigated in the said case. The purported rights they are invoking are mere expectancies wholly
dependent on the outcome of that case in the Sandiganbayan.

Clearly, we cannot rule on intervenors' alleged right to vote at this time and in this case. That right is
dependent upon the Sandiganbayan's resolution of their action for the recovery of said sequestered
shares. Given the patent fact that intervenors are not registered stockholders of UCPB as of the
moment, their asserted rights cannot be ruled upon in the present proceedings. Hence, no positive
relief can be given them now, except insofar as they join petitioner in barring private respondents
from voting the subject shares.

Epilogue

In sum, we hold that the Sandiganbayan committed grave abuse of discretion in grossly
contradicting and effectively reversing existing jurisprudence, and in depriving the government of its
right to vote the sequestered UCPB shares which are prima facie public in character.

In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may conduct
or the final judgment it may promulgate in Civil Case Nos. 0033-A, 0033-B and 0033-F. Our
determination here is merely prima facie, and should not bar the anti-graft court from making a final
ruling, after proper trial and hearing, on the issues and prayers in the said civil cases, particularly in
reference to the ownership of the subject shares.

We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in
character, we are not ruling in any final manner on their classification – whether they are general or
trust or special funds – since such classification is not at issue here. Suffice it to say that the public
nature of the coco levy funds is decreed by the Court only for the purpose of determining the right to
vote the shares, pending the final outcome of the said civil cases.

Neither are we resolving in the present case the question of whether the shares held by Respondent
Cojuangco are, as he claims, the result of private enterprise. This factual matter should also be
taken up in the final decision in the cited cases that are pending in the court a quo. Again suffice it to
say that the only issue settled here is the right of PCGG to vote the sequestered shares, pending the
final outcome of said cases.

This matter involving the coconut levy funds and the sequestered UCPB shares has been straddling
the courts for about 15 years. What we are discussing in the present Petition, we stress, is just an
incident of the main cases which are pending in the anti-graft court – the cases for the
reconveyance, reversion and restitution to the State of these UCPB shares.

The resolution of the main cases has indeed been long overdue. Every effort, both by the parties
and the Sandiganbayan, should be exerted to finally settle this controversy.

WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET ASIDE. The PCGG
shall continue voting the sequestered shares until Sandiganbayan Civil Case Nos. 0033-A, 0033-B
and 0033-F are finally and completely resolved. Furthermore, the Sandiganbayan is ORDERED to
decide with finality the aforesaid civil cases within a period of six (6) months from notice. It shall
report to this Court on the progress of the said cases every three (3) months, on pain of contempt.
The Petition in Intervention is DISMISSED inasmuch as the reliefs prayed for are not covered by the
main issues in this case. No costs.

SO ORDERED.

G.R. No. 60714 October 4, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

vs.
JAPAN AIR LINES, INC., and THE COURT OF TAX APPEALS, Respondents.

The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for respondents

PARAS, J.:
This petition for review seeks the reversal of the decision* of the Court of Tax Appeals in CTA Case
No. 2480 promulgated on January 15, 1982 which set aside petitioner's assessment of deficiency
income tax inclusive of interest and surcharge as well as compromise penalty for violation of
bookkeeping regulations charged against respondent.

The antecedental facts of the case are as follows:

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a foreign corporation
engaged in the business of international air carriage. From 1959 to 1963, JAL did not have planes
that lifted or landed passengers and cargo in the Philippines as it had not been granted then by the
Civil Aeronautics Board (CAB) a certificate of public convenience and necessity to operate here.
However, since mid-July, 1957, JAL had maintained an officeat the Filipinas Hotel, Roxas Boulevard,
Manila. Said office did not sell tickets but was maintained merely for the promotion of the company's
public relations and to hand out brochures, literature and other information playing up the attractions
of Japan as a tourist spot and the services enjoyed in JAL planes.

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the
Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane tickets and
reservations for cargo spaces which were used by the passengers or customers on the facilities of
JAL.

On June 2, 1972, JAL received deficiency income tax assessment notices and a demand letter from
petitioner Commissioner of Internal Revenue (hereinafter referred to as Commissioner for brevity),
all dated February 28, 1972, for a total amount of P2,099,687.52 inclusive of 50% surcharge and
interest, for years 1959 through 1963, computed as follows:

1959 1960 1961

Net income per P472,025.16 P476,671.48 P734,812.77
investigation
Tax due thereon 133,608.00 135,001.00 212,444.00
Add: 50% surch. 66,804.00 67,500.50 106,222.00
1/2% mo. int.
(3 yrs.) 24,049.44 24,300.18 38,239.92

Total due P224,461.44 P226,801.68 P356,905.92

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

1962 1963 SUMMARY

Net income per P1,065,641.63 P1,550,230.48 P224,461.44
investigation
Tax due thereon 311,692.00 457,069.00 226,801.68
Add:50% surch. 155,846.00 228,534.50 356,905.92
1/2% mo. int. 523,642.56
(3 yrs.) 56,104.56 82,272.42 767,875.92
 Total due P 523,642.56 P 767,875.92 P2,099,687.52
============= ============ =============
Compromise Penalty P 1,500.00

On June 19, 1972, JAL protested said assessments alleging that as a non-resident foreign
corporation, it was taxable only on income from Philippine sources as determined under Section 37
of the Tax Code, and there being no such income during the period in question, it was not liable for
the deficiency income tax liabilities assessed (Rollo, pp. 53-55). The Commissioner resolved
otherwise and in a letter-decision dated December 21, 1972, denied JAL's request for cancellaton of
the assessment (Ibid., p. 29).

JAL therefore, elevated the case to the Court of Tax Appeals which, in turn, reversed the decision
(Ibid., pp. 51-76) and thereafter denied the motion for reconsideration filed by the Commissioner
(Ibid., p. 77). Hence, this petition.

Petitioner raises two issues in this wise:

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN AIR LINES TICKETS SOLD IN THE
PHILIPPINES ARE TAXABLE AS INCOME FROM SOURCES WITHIN THE PHILIPPINES.

2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN CORPORATION ENGAGED IN TRADE

OR BUSINESS IN THE PHILIPPINES.

The petition is impressed with merit.

The issues in the case at bar have already been laid to rest in no less than three cases resolved by
this Court. Anent the first issue, the landmark case of Commissioner of Internal Revenue vs. British
Overseas Airways Corporation (G.R. No.L-65773-74, April 30, 1987, 149 SCRA 395) has
categorically ruled:

"The Tax Code defines `gross income' thus:

`Gross income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transaction of any business carried on for
gain or profit, or gains, profits and income derived from any source whatever" (Sec.
29(3);Emphasis supplied)

"The definition is broad and comprehensive to include proceeds from sales of transport
documents. The words `income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our laws.
Income means `cash received or its equivalent'; it is the amount of money coming to a
person within a specific time x x x; it means something distinct from principal or capital. For,
while capital is a fund, income is a flow. As used in our income tax law, `income' refers to the
flow of wealth (Madrigal and Paternol vs. Rafferty and Concepcion, 38 Phil. 414 [1918]).

"x x x x x x
 "x x x x x x

"The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine currency. The situs of the source
of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting
the government.

"x x x x x x

"True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources
within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and
royalties, (5) sale of real property, and (6) sale of personal property, does not mention
income from the sale of tickets for international transportation. However, that does not render
it less an income from sources within the Philippines.

Section 37, by its language does not intend the enumeration to be exclusive. It merely directs that
the types of income listed therein be treated as income from sources within the Philippines. A
cursory reading of the section will show that it does not state that it is an all-inclusive enumeration,
and that no other kind of income may be so considered (British Traders Insurance Co., Ltd. vs.
Commissioner of Internal Revenue, 13 SCRA 719 [1965]).

"x x x x x x

"The absence of flight operations to and from the Philippines is not determinative of the
source of income or the situs of income taxation. x x x The test of taxability is the `source';
and the source of an income is that activity x x x which produced the income (Howden & Co.,
Ltd. vs. Collector of Internal Revenue, 13 SCRA 601 [1965]). Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue therefrom was
derived from a business activity regularly pursued within the Philippines. x x x The word
`source' conveys one essential Idea, that of origin, and the origin of the income herein is the
Philippines (Manila Gas Corporation vs. Collector of Internal Revenue, 62 Phil. 895 [1935])."

The above ruling was adopted en toto in the subsequent case of Commissioner of Internal Revenue
vs. Air India and the Court of Tax Appeals (G.R. No. L-72443, January 29, 1988, 157 SCRA 648)
holding that the revenue derived from the sales of airplane tickets through its agent Philippine Air
Lines, Inc., here in the Philippines, must be considered taxable income, and more recently, in the
case of Commissioner of Internal Revenue vs. American Airlines, Inc. and Court of Tax Appeals
(G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was likewise declared that for the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activities within this country regardless of the absence of flight operations within Philippine
territory.

Verily, JAL is a residentforeigncorporation under Section 84 (g) of the NationalInternalRevenue Code

of1939. Definitionofwhata resident foreign corpora-tion is was likewise reproduced under Section 20
of the 1977 Tax Code.

The BOAC Doctrine has expressed in unqualified terms:

 "Under Section 20 of the 1977 Tax Code:

"(h) the term `resident foreign corporation' applies to a foreign corporation engaged in trade
or business within the Philippines or having an office or place of business therein.

"(i) the term `non-resident foreign corporation' applies to a foreign corporation not engaged in
trade or business within the Philippines and not having any office or place of business
therein."

"x x x. There is no specific criterion as to what constitutes `doing' or `engaging in' or

`transacting' business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of commercial gain or for the
purpose and object of the business organization (The Mentholatum Co., Inc., et al. vs.
Anacleto Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A. No. 5455). In order that a
foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character (Pacific Micronesian
Line, Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol.
8, 3rd ed., pp. 844-847 and Fisher's Philippine Law of Stock Corporation, p. 415).

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be
no conclusion other than that JAL is a resident foreign corporation, doing business in the Philippines.
Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being
the paramount objective (Commissioner of Internal Revenue vs. British Overseas Airways
Corporation, supra). The case of CIR vs. American Airlines, Inc. (supra) sums it up as follows:

"x x x, foreign airline companies which sold tickets in the Philippines through their local
agents, whether called liaison offices, agencies or branches, were considered resident
foreign corporations engaged in trade or business in the country. Such activities show
continuity of commercial dealings or arrangements and performance of acts or works or the
exercise of some functions normally incident to and in progressive prosecution of commercial
gain or for the purpose and object of the business organization."

Under Section 24 of Commonwealth Act No. 466 otherwise known as the "National Internal Revenue
Code of 1939", the applicable law in the case at bar, resident foreign corporations are taxed thirty
percentum (30%) upon the amount by which their total net income exceed one hundred thousand
pesos. JAL is liable to pay 30% of its total net income for the years 1959 through 1963 as
contradistinguished from the computation arrived at by the Commissioner as shown in the
assessment. Apparently, the Commissioner failed to specify the tax base on the total net income of
JAL in figuring out the total income due, i.e., whether 25% or 30% level.

Having established the tax liability of respondent JAL, the only thing left to determine is the propriety
of the 50% surcharge imposed by petitioner. It appears that this must be answered in the negative.
As held in the case of CIR vs. Air India (supra):

"The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue
Code is imposed on a delinquent taxpayer who willfully neglects to file the required tax return
within the period prescribed by the law, or who willfully files a false or fraudulent tax return, x
x x.
 "x x x x x x

"On the other hand, the same Section provides that if the failure to file the required tax return
is not due to willful neglect, a penalty of 25% is to be added to the amount of the tax due
from the taxpayer."

Nowhere in the records of the case can be found that JAL deliberately failed to file its income tax
returns for the years covered by the assessment. There was not even an attempt by petitioner to
prove the same or justify the imposition of the 50% surcharge. All that petitioner did was to cite the
provision of law upon which the surcharge was based without explaining why it was applicable to
respondent's case. Such cannot be countenanced for mere allegations are definitely not acceptable.
The willful neglect to file the required tax return or the fraudulent intent to evade the payment of
taxes, considering that the same is accompanied by legal consequences, cannot be presumed (CIR
vs. Air India, supra). The fraud contemplated by law is actual and constructive. It must be intentional
fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another
to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to evade the tax contemplated by the law. It must amount to intentional wrongdoing with the
sole object of evading the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58
SCRA 519). This was not proven to be so in the case of JAL as it believed in good faith that it need
not file the tax return for it had no taxable income then. The element of fraud is lacking. At most, only
negligence may be imputed to JAL for not ascertaining the dispensability of filing the tax returns. As
such, JAL may be subjected only to the 25% surcharge prescribed by the aforequoted law.

As to the 1/2% interest per month, the same finds basis in Section 51(d) of the Tax Code then in
force which states:

(d) Interest on deficiency. Interest upon the amount determined as a deficiency shall be
assessed at the same time as the deficiency and shall be paid upon notice and demand from
the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate
of six per centum per annum from the date prescribed for the payment of the tax x x x;
PROVIDED, That the maximum amount that may be collected as interest on deficiency shall
in no case exceed the amount corresponding to a period of three years, the present
provisions regarding prescription to the contrary notwithstanding.

The 6% interest per annum is the same as 1/2% interest per month and petitioner correctly
computed such interest equivalent to three years which is the maximum set by the law.

On the other hand, the compromise penalty amounting to P1,500.00 for violation of bookkeeping
regulations appears to be without support. The particular provision in the said regulations allegedly
violated was not even specified. Furthermore, the term "compromise penalty" itself is not found
among the penal provisions of the Bookkeeping Regulations (Revenue Regulations No. V-1, as
amended, March 17, 1947, pp. 836-837, Revenue Regulations Updated by Prof. Eustaquio Ordono,
1984). The compromise penalty is therefore, improperly imposed.
1âwphi1

In sum, the following schedule as recomputed illustrates the total tax liability of the private
respondent for the years 1959 through 1963 -

| Net | 30% of Net | Add 25% | Add 6% interest | Summary of Total

| Income | Income as | surcharge under | per annum for a | Tax Due from the
 | | Income Tax Due | Sec. 72 NIRC of | maximum of 3 | Private
| | under Secs. 24(a) | 1939 | years under Sec. | Respondent
| | and (b) (2) NIRC | | 51(d) NIRC of |
| | of 1939 | | 1939 |
_ __ _ _ __ __ __ __ __ _ _ __ __ __ __ __ _ _ __ __ __ __ __ _ _ __ __ __ __ __ _ _ __ __ __ __ __
1959 | P 472,025.16 | P 141,607.54 | P 35,401.88 | P 25,489.35 | P 202,498.77
1960 | 476,671.48 | 143,001.44 | 35,750.36 | 25,740.25 | 204,492.05
1961 | 734,812.77 | 220,443.83 | 55,110.95 | 39,679.88 | 315,234.66
1962 | 1,065,641.63 | 319,692.48 | 79,923.12 | | 399,615.60
1963 | 1,550,230.48 | 465,069.14 | 116,267.28 | | 581,336.42
| | | | |
| | | | | P1,703,177.40
| | | | | ============

Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of ONE
MILLION SEVEN HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY SEVENAND FORTY
CENTAVOS (P1,703,177.40) The dismissal for lack of merit by this Court of the appeal in JAL v.
Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969 is not res judicata to the
present case. The Tax Court ruled in that case that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to
the common carrier's tax. The common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from one place to another. It purports to
tax the business of transportation. Being an excise tax, the same can be levied by the State only
when the acts, privileges or businesses are done or performed within the jurisdiction of the
Philippines (Commissioner of Internal Revenue v. British Overseas Airways Corporation, supra).

The subject matter of the case underconsideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever form derived from any source." Since
the two cases treat of a different subject matter, the decision in G.R. No. L-30041 cannot be res
judicata with respect to this case.

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the decision of the Court of Tax
Appeals in CTA Case No. 2480 is SET ASIDE; and (c) private respondent JAL is ordered to pay the
amount of P1,703,177.40 as deficiency taxes for the fiscal years 1959 to 1963 inclusive of interest
andsurcharges.

SO ORDERED.