G.R. No.

194561, September 14, 2016

DRUGSTORES ASSOCIATION OF THE PHILIPPINES, INC. AND NORTHERN LUZON DRUG

CORPORATION, Petitioners, v. NATIONAL COUNCIL ON DISABILITY AFFAIRS; DEPARTMENT OF
HEALTH; DEPARTMENT OF FINANCE; BUREAU OF INTERNAL REVENUE; DEPARTMENT OF THE
INTERIOR AND LOCAL GOVERNMENT; AND DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT, Respondent.

DECISION

PERALTA, J.:

Before us is a Petition for Review on Certiorari1 with a Prayer for a Temporary Restraining Order
and/or Writ of Preliminary Injunction which seeks to annul and set aside the Decision2 dated
July 26, 2010, and the Resolution3 dated November 19, 2010 of the Court of Appeals (CA) in CA-
G.R. SP No. 109903. The CA dismissed petitioners' Petition for Prohibition4 and upheld the
constitutionality of the mandatory twenty percent (20%) discount on the purchase of medicine
by persons with disability (PWD).

The antecedents are as follows:

chanRoblesvirtualLawlibraryOn March 24, 1992, Republic Act (R.A.) No. 7277, entitled "An Act
Providing for the Rehabilitation, Self-Development and Self-Reliance of Disabled Persons and
their Integration into the Mainstream of Society and for Other Purposes," otherwise known as
the "Magna Carta for Disabled Persons," was passed into law. 5 The law defines "disabled
persons", "impairment" and "disability" as follows:ChanRoblesVirtualawlibrary

SECTION 4. Definition of Terms. - For purposes of this Act, these terms are defined as follows:

chanRoblesvirtualLawlibrary(a) Disabled Persons are those suffering from restriction of different

abilities, as a result of a mental, physical or sensory impairment, to perform an activity in the
manner or within the range considered normal for a human being;

(b) Impairment is any loss, diminution or aberration of psychological, physiological, or

anatomical structure of function;

(c) Disability shall mean (1) a physical or mental impairment that substantially limits one or
more psychological, physiological or anatomical function of an individual or activities of such
individual; (2) a record of such an impairment; or (3) being regarded as having such an
impairment.6chanroblesvirtuallawlibrary
On April 30, 2007, Republic Act No. 94427 was enacted amending R.A. No. 7277. The Title of
R.A. No. 7277 was amended to read as "Magna Carta for Persons with Disability" and all
references on the law to "disabled persons" were amended to read as "persons with disability"
(PWD).8 Specifically, R.A. No. 9442 granted the PWDs a twenty (20) percent discount on the
purchase of medicine, and a tax deduction scheme was adopted wherein covered
establishments may deduct the discount granted from gross income based on the net cost of
goods sold or services rendered:ChanRoblesVirtualawlibrary
CHAPTER 8. Other Privileges and Incentives. SEC. 32. Persons with disability shall be entitled to
the following:

chanRoblesvirtualLawlibraryx x x x
 
(d) At least twenty percent (20%) discount for the purchase of medicines in all drugstores
for the exclusive use or enjoyment of persons with disability;

x x x x

The abovementioned privileges are available only to persons with disability who are Filipino
citizens upon submission of any of the following as proof of his/her entitlement thereto:

chanRoblesvirtualLawlibrary
(i) An identification card issued by the city or municipal mayor or the barangay captain of
the place where the person with disability resides;
(ii) The passport of the person with disability concerned; or
(ii) Transportation discount fare Identification Card (ID) issued by the National Council for
the Welfare of Disabled Persons (NCWDP).

x x x x

The establishments may claim the discounts granted in subsections (a), (b), (c), (f) and (g) as tax
deductions based on the net cost of the goods sold or services rendered: Provided,
however, That the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted: Provided, further, That the total amount of the
claimed tax deduction net of value-added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of
the National Internal Revenue Code (NIRC), as amended.9chanroblesvirtuallawlibrary
The Implementing Rules and Regulations (IRR) of R.A. No. 944210 was jointly promulgated by the
Department of Social Welfare and Development (DSWD), Department of Education,
Department of Finance (DOF), Department of Tourism, Department of Transportation and
Communication, Department of the Interior and Local Government (DILG) and Department of
Agriculture. Insofar as pertinent to this petition, the salient portions of the IRR are hereunder
quoted:11
RULE III. DEFINITION OF TERMS

Section 5. Definition of Terms. For purposes of these Rules and Regulations, these terms are
defined as follows:

chanRoblesvirtualLawlibrary5.1. Persons with Disability - are those individuals defined under

Section 4 of RA 7277 "An Act Providing for the Rehabilitation, Self-Development and Self-
Reliance of Persons with Disability as amended and their integration into the Mainstream of
Society and for Other Purposes". This is defined as a person suffering from restriction or
different abilities, as a result of a mental, physical or sensory impairment, to perform an activity
in a manner or within the range considered normal for human being. Disability shall mean (1) a
physical or mental impairment that substantially limits one or more psychological, physiological
or anatomical function of an individual or activities of such individual; (2) a record of such an
impairment; or (3) being regarded as having such an impairment.

x x x x

RULE IV. PRIVILEGES AND INCENTIVES FOR THE PERSONS WITH DISABILITY

Section 6. Other Privileges and Incentives. Persons with disability shall be entitled to the
following:

chanRoblesvirtualLawlibraryx x x x

6.1.d. Purchase of Medicine - at least twenty percent (20%) discount on the purchase of

medicine for the exclusive use and enjoyment of persons with disability. All drugstores,
hospital, pharmacies, clinics and other similar establishments selling medicines are required to
provide at least twenty percent (20%) discount subject to the guidelines issued by DOH and
PHILHEALTH.12chanrobleslaw

x x x x

6.11 The abovementioned privileges are available only to persons with disability who are
Filipino citizens upon submission of any of the following as proof of his/her entitlement thereto
subject to the guidelines issued by the NCWDP in coordination with DSWD, DOH and DILG.
6.11.1 An identification card issued by the city or municipal mayor or the barangay captain of
the place where the person with disability resides;

6.11.2 The passport of the persons with disability concerned; or

6.11.3 Transportation discount fare Identification Card (ID) issued by the National Council for
the Welfare of Disabled Persons (NCWDP). However, upon effectivity of this Implementing
Rules and Regulations, NCWDP will already adopt the Identification Card issued by the Local
Government Unit for purposes of uniformity in the implementation. NCWDP will provide the
design and specification of the identification card that will be issued by the Local Government
Units.13chanroblesvirtuallawlibrary
6.14. Availmenl of Tax Deductions by Establishment Granting Twenty Percent. 20% Discount -
The establishments may claim the discounts granted in sub-sections (6.1), (6.2), (6.4), (6.5) and
(6.6) as tax deductions based on the net cost of the goods sold or services rendered: Provided,
however, that the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted: Provided, further, That the total amount of the
claimed tax deduction net of value-added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of
the National Internal Revenue Code, as amended.
On April 23, 2008, the National Council on Disability Affairs (NCDA)14 issued Administrative
Order (A.O.) No. 1, Series of 2008,15 prescribing guidelines which should serve as a mechanism
for the issuance of a PWD Identification Card (IDC) which shall be the basis for providing
privileges and discounts to bona fide PWDs in accordance with R.A.
9442:ChanRoblesVirtualawlibrary
IV. INSTITUTIONAL ARRANGEMENTS

A. The Local Government Unit of the City or Municipal Office shall implement these
guidelines in the issuance of the PWD-IDC

x x x x

D. Issuance of the appropriate document to confirm the medical condition of the applicant is as
follows:ChanRoblesVirtualawlibrary
Disability Document Issuing Entity
Apparent Disability Medical Certificate Licensed Private or Government Physician
  School Assessment Licensed Teacher duly signed by the School Principal
Certificate of Head of the Business Establishment or Head of Non-
 
Disability Government Organization
Non-Apparent
Medical Certificate Licensed Private or Government Physician
Disability
E. PWD Registration Forms and ID Cards shall be issued and signed by the City or Municipal
Mayor, or Barangay Captain.

xxxx
V. IMPLEMENTING GUIDELINES AND PROCEDURES
Any bonafide person with permanent disability can apply for the issuance of the PWD-IDC.
His/her caregiver can assist in the application process. Procedures for the issuance of the ID
Cards are as follows:

chanRoblesvirtualLawlibraryA. Completion of the Requirements. Complete and/or make

available the following requirements:ChanRoblesVirtualawlibrary
 1. Two "1x1" recent ID pictures with the names, and signatures or
thumbmarks at the back of the picture

2. One (1) Valid ID

3. Document to confirm the medical or disability condition (See Section IV,

D for the required document).

On December 9, 2008, the DOF issued Revenue Regulations No. 1-200916 prescribing rules and
regulations to implement R.A. 9442 relative to the tax privileges of PWDs and tax incentives for
establishments granting the discount. Section 4 of Revenue Regulations No. 001-09 states that
drugstores can only deduct the 20% discount from their gross income subject to some
conditions.17chanrobleslaw

On May 20, 2009, the DOH issued A.O. No. 2009-001118 specifically stating that the grant of 20%
discount shall be provided in the purchase of branded medicines and unbranded generic
medicines from all establishments dispensing medicines for the exclusive use of the PWDs. 19 It
also detailed the guidelines for the provision of medical and related discounts and special
privileges to PWDs pursuant to R.A. 9442.20chanrobleslaw

On July 28, 2009, petitioners filed a Petition for Prohibition with application for a Temporary
Restraining Order and/or a Writ of Preliminary Injunction21 before the Court of Appeals to annul
and enjoin the implementation of the following laws:ChanRoblesVirtualawlibrary
1) Section 32 of R.A. No. 7277 as amended by R.A. No. 9442;

2) Section 6, Rule IV of the Implementing Rules and Regulations of R.A. No. 9442;

3) NCDA A.O. No. 1;

4) DOF Revenue Regulation No. 1-2009;

5) DOH A.O. No. 2009-0011.

On July 26, 2010, the CA rendered a Decision upholding the constitutionality of R.A. 7277 as
amended, as well as the assailed administrative issuances. However, the CA suspended the
effectivity of NCDA A.O. No. 1 pending proof of respondent NCDA's compliance with filing of
said administrative order with the Office of the National Administrative Register (ONAR) and its
publication in a newspaper of general circulation. The dispositive portion of the Decision
states:ChanRoblesVirtualawlibrary
WHEREFORE, the petition is PARTLY GRANTED. The effectivity of NCDA Administrative Order
No. 1 is hereby SUSPENDED pending Respondent's compliance with the proof of filing of NCDA
Administrative Order No. 1 with the Office of the National Administrative Register and its
publication in a newspaper of general circulation.
Respondent NCDA filed a motion for reconsideration before the CA to lift the suspension of the
implementation of NCDA A.O. No. 1 attaching thereto proof of its publication in the Philippine
Star and Daily Tribune on August 12, 2010, as well as a certification from the ONAR showing
that the same was filed with the said office on October 22, 2009.22 Likewise, petitioners filed a
motion for reconsideration of the CA Decision.

In a Resolution dated November 19, 2010, the CA dismissed petitioners' motion for
reconsideration and lifted the suspension of the effectivity of NCDA A.O. No. 1 considering the
filing of the same with ONAR and its publication in a newspaper of general circulation.

Hence, the instant petition raising the following issues:ChanRoblesVirtualawlibrary

I. THE CA SERIOUSLY ERRED ON A QUESTION OF SUBSTANCE WHEN IT RULED THAT THE
MANDATED PWD DISCOUNT IS A VALID EXERCISE OF POLICE POWER. ON THE CONTRARY, IT IS
AN INVALID EXERCISE OF THE POWER OF EMINENT DOMAIN BECAUSE IT FAILS TO PROVIDE
JUST COMPENSATION TO PETITIONERS AND OTHER SIMILARLY SITUATED DRUGSTORES;

II. THE CA SERIOUSLY ERRED WHEN IT RULED THAT SECTION 32 OF RA 7277 AS AMENDED BY RA
9442, NCDA AO 1 AND THE OTHER IMPLEMENTING REGULATIONS DID NOT VIOLATE THE DUE
PROCESS CLAUSE;

III. THE CA SERIOUSLY ERRED WHEN IT RULED THAT THE DEFINITIONS OF DISABILITIES UNDER
SECTION 4(A), SECTION 4(B) AND SECTION 4(C) OF RA 7277 AS AMENDED BY RA 9442, RULE 1
OF THE IMPLEMENTING RULES AND REGULATIONS23 OF RA 7277, SECTION 5.1 OF THE
IMPLEMENTING RULES AND REGULATIONS OF RA 9442, NCDA AO 1 AND DOH AO 2009-11 ARE
NOT VAGUE, AMBIGUOUS AND UNCONSTITUTIONAL;

IV. THE CA SERIOUSLY ERRED WHEN IT RULED THAT THE MANDATED PWD DISCOUNT DOES
NOT VIOLATE THE EQUAL PROTECTION CLAUSE.
We deny the petition.

The CA is correct when it applied by analogy the case of Carlos Superdrug Corporation et al. v.
DSWD, et al.24 wherein We pronouced that Section 4 of R.A. No. 9257 which grants 20%
discount on the purchase of medicine of senior citizens is a legitimate exercise of police
power:ChanRoblesVirtualawlibrary
The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. Police power is not capable of an exact definition, but has
been purposely veiled in general terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits.25cralawred Accordingly, it has been
described as the most essential, insistent and the least limitable of powers, extending as it does
to all the great public needs.26 It is [t]he power vested in the legislature by the constitution to
make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the constitution, as they shall
judge to be for the good and welfare of the commonwealth, and of the subjects of the
same.27chanrobleslaw

For this reason, when the conditions so demand as determined by the legislature, property
rights must bow to the primacy of police power because property rights, though sheltered by
due process, must yield to general welfare.28chanrobleslaw

Police power as an attribute to promote the common good would be diluted considerably if on
the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of
the presumption of validity which every law has in its favor.29chanroblesvirtuallawlibrary
Police power is the power of the state to promote public welfare by restraining and regulating
the use of liberty and property. On the other hand, the power of eminent domain is the
inherent right of the state (and of those entities to which the power has been lawfully
delegated) to condemn private property to public use upon payment of just compensation. In
the exercise of police power, property rights of private individuals are subjected to restraints
and burdens in order to secure the general comfort, health, and prosperity of the state. 30 A
legislative act based on the police power requires the concurrence of a lawful subject and a
lawful method. In more familiar words, (a) the interests of the public generally, as distinguished
from those of a particular class, should justify the interference of the state; and (b) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals.31chanrobleslaw

R.A. No. 7277 was enacted primarily to provide full support to the improvement of the total
well-being of PWDs and their integration into the mainstream of society. The priority given to
PWDs finds its basis in the Constitution:ChanRoblesVirtualawlibrary
ARTICLE XII

NATIONAL ECONOMY AND PATRIMONY

xxxx

Section 6. The use of property bears a social function, and all economic agents shall contribute
to the common good. Individuals and private groups, including corporations, cooperatives, and
similar collective organizations, shall have the right to own, establish, and operate economic
enterprises, subject to the duty of the State to promote distributive justice and to intervene
when the common good so demands.32chanrobleslaw

ARTICLE XIII

SOCIAL JUSTICE AND HUMAN RIGHTS

xxxx
Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority for the needs of the
underprivileged, sick, elderly, disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.33chanroblesvirtuallawlibrary
Thus, R.A. No. 7277 provides:ChanRoblesVirtualawlibrary
SECTION 2. Declaration of Policy. The grant of the rights and privileges for disabled persons
shall be guided by the following principles:

chanRoblesvirtualLawlibrary(a). Disabled persons are part of the Philippine society, thus the

Senate shall give full support to the improvement of the total well-being of disabled persons
and their integration into the mainstream of society.

Toward this end, the State shall adopt policies ensuring the rehabilitation, self-development
and self-reliance of disabled persons.

It shall develop their skills and potentials to enable them to compete favorably for available
opportunities.

(b). Disabled persons have the same rights as other people to take their proper place in society.
They should be able to live freely and as independently as possible. This must be the concern of
everyone - the family, community and all government and non-government organizations.

Disabled person's rights must never be perceived as welfare services by the Government.
x x x x

(d). The State also recognizes the role of the private sector in promoting the welfare of disabled
persons and shall encourage partnership in programs that address their needs and
concerns.34chanroblesvirtuallawlibrary
To implement the above policies, R.A. No. 9442 which amended R.A. No. 7277 grants incentives
and benefits including a twenty percent (20%) discount to PWDs in the purchase of medicines;
fares for domestic air, sea and land travels including public railways and skyways; recreation
and amusement centers including theaters, food chains and restaurants.35 This is specifically
stated in Section 4 of the IRR of R.A. No. 9442:ChanRoblesVirtualawlibrary
Section 4. Policies and Objectives - It is the objective of Republic Act No. 9442 to provide
persons with disability, the opportunity to participate fully into the mainstream of society by
granting them at least twenty percent (20%) discount in all basic services. It is a declared
policy of RA 7277 that persons with disability are part of Philippine society, and thus the State
shall give full support to the improvement of their total wellbeing and their integration into
the mainstream of society. They have the same rights as other people to take their proper
place in society. They should be able to live freely and as independently as possible. This must
be the concern of everyone the family, community and all government and non-government
organizations. Rights of persons with disability must never be perceived as welfare services.
Prohibitions on verbal, non-verbal ridicule and vilification against persons with disability shall
always be observed at all times.36chanroblesvirtuallawlibrary
Hence, the PWD mandatory discount on the purchase of medicine is supported by a valid
objective or purpose as aforementioned. It has a valid subject considering that 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. As in
the case of senior citizens,37 the discount privilege to which the PWDs are entitled is actually a
benefit enjoyed by the general public to which these citizens belong. The means employed in
invoking the active participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. 38 Also, the means employed to provide a
fair, just and quality health care to PWDs are reasonably related to its accomplishment, and are
not oppressive, considering that as a form of reimbursement, the discount extended to PWDs in
the purchase of medicine can be claimed by the establishments as allowable tax deductions
pursuant to Section 32 of R.A. No. 9442 as implemented in Section 4 of DOF Revenue
Regulations No. 1-2009. Otherwise stated, the discount reduces taxable income upon which the
tax liability of the establishments is computed.

Further, petitioners aver that Section 32 of R.A. No. 7277 as amended by R.A. No. 9442 is
unconstitutional and void for violating the due process clause of the Constitution since
entitlement to the 20% discount is allegedly merely based on any of the three documents
mentioned in the provision, namely: (i) an identification card issued by the city or municipal
mayor or the barangay captain of the place where the PWD resides; (ii) the passport of the
PWD; or (iii) transportation discount fare identification card issued by NCDA. Petitioners, thus,
maintain that none of the said documents has any relation to a medical finding of disability, and
the grant of the discount is allegedly without any process for the determination of a PWD in
accordance with law.

Section 32 of R.A. No. 7277, as amended by R.A. No. 9442, must be read with its IRR which
stated that upon its effectivity, NCWDP (which is the government agency tasked to ensure the
implementation of RA 7277), would adopt the IDC issued by the local government units for
purposes of uniformity in the implementation.39 Thus, NCDA A.O. No. 1 provides the reasonable
guidelines in the issuance of IDCs to PWDs as proof of their entitlement to the privileges and
incentives under the law40 and fills the details in the implementation of the law.

As stated in NCDA A.O. No. 1, before an IDC is issued by the city or municipal mayor or the
barangay captain,41 or the Chairman of the NCDA,42 the applicant must first secure a medical
certificate issued by a licensed private or government physician that will confirm his medical or
disability condition. If an applicant is an employee with apparent disability, a "certificate of
disability" issued by the head of the business establishment or the head of the non-
governmental organization is needed for him to be issued a PWD-IDC. For a student with
apparent disability, the "school assessment" issued by the teacher and signed by the school
principal should be presented to avail of a PWD-ID.
Petitioners' insistence that Part IV (D) of NCDA Administrative Order No. 1 is void because it
allows allegedly non-competent persons like teachers, head of establishments and heads of
Non-Governmental Organizations (NGOs) to confirm the medical condition of the applicant is
misplaced. It must be stressed that only for apparent disabilities can the teacher or head of a
business establishment validly issue the mentioned required document because, obviously, the
disability is easily seen or clearly visible. It is, therefore, not an unqualified grant of authority for
the said non-medical persons as it is simply limited to apparent disabilities. For a non-apparent
disability or a disability condition that is not easily seen or clearly visible, the disability can only
be validated by a licensed private or government physician, and a medical certificate has to be
presented in the procurement of an IDC. Relative to this issue, the CA validly ruled,
thus:ChanRoblesVirtualawlibrary
We agree with the Office of the Solicitor General's (OSG) ratiocination that teachers, heads of
business establishments and heads of NGOs can validly confirm the medical condition of their
students/employees with apparent disability for obvious reasons as compared to non-apparent
disability which can only be determined by licensed physicians. Under the Labor Code, disabled
persons are eligible as apprentices or learners provided that their handicap are not as much as
to effectively impede the performance of their job. We find that heads of business
establishments can validly issue certificates of disability of their employees because aside from
the fact that they can obviously validate the disability, they also have medical records of the
employees as a pre-requisite in the hiring of employees. Hence, Part IV (D) of NCDA AO No. 1 is
logical and valid.43chanroblesvirtuallawlibrary
Furthermore, DOH A.O. No. 2009-11 prescribes additional guidelines for the 20% discount in
the purchase of all medicines for the exclusive use of PWD.44 To avail of the discount, the PWD
must not only present his I.D. but also the doctor's prescription stating, among others, the
generic name of the medicine, the physician's address, contact number and professional license
number, professional tax receipt number and narcotic license number, if applicable. A purchase
booklet issued by the local social/health office is also required in the purchase of over-the-
counter medicines. Likewise, any single dispensing of medicine must be in accordance with the
prescription issued by the physician and should not exceed a one (1) month supply. Therefore,
as correctly argued by the respondents, Section 32 of R.A. No. 7277 as amended by R.A. No.
9442 complies with the standards of substantive due process.

We are likewise not persuaded by the argument of petitioners that the definition of
"disabilities" under the subject laws is vague and ambiguous because it is allegedly so general
and broad that the person tasked with implementing the law will undoubtedly arrive at
different interpretations and applications of the law. Aside from the definitions of a "person
with disability" or "disabled persons" under Section 4 of R.A. No. 7277 as amended by R.A. No.
9442 and in the IRR of RA 9442, NCDA A.O. No. 1 also provides:ChanRoblesVirtualawlibrary

4. Identification Cards shall be issued to any bonafide PWD with permanent

disabilities due to any one or more of the following conditions: psychosocial,
chronic illness, learning, mental, visual, orthopedic, speech and hearing
 conditions. This includes persons suffering from disabling diseases resulting to
the person's limitations to do day to day activities as normally as possible such as
but not limited to those undergoing dialysis, heart disorders, severe cancer cases
and such other similar cases resulting to temporary or permanent disability.45

Similarly, DOH A.O. No. 2009-0011 defines the different categories of disability as
follows:ChanRoblesVirtualawlibrary
Rule IV, Section 4, Paragraph B of the Implementing Rules and Regulations (IRR) of this Act
required the Department of Health to address the health concerns of seven (7) different
categories of disability, which include the following: (1) Psychological and behavioral disabilities
(2) Chronic illness with disabilities (3)Learning(cognitive or intellectual) disabilities (4) Mental
disabilities (5) Visual/seeing disabilities (6) Orthopedic/moving, and (7) communication
deficits.46chanroblesvirtuallawlibrary
Elementary is the rule that when laws or rules are clear, when the law is unambiguous and
unequivocal, application not interpretation thereof is imperative. However, where the language
of a statute is vague and ambiguous, an interpretation thereof is resorted to. A law is deemed
ambiguous when it is capable of being understood by reasonably well-informed persons in
either of two or more senses. The fact that a law admits of different interpretations is the best
evidence that it is vague and ambiguous.47chanrobleslaw

In the instant case, We do not find the aforestated definition of terms as vague and ambiguous.
Settled is the rule that courts will not interfere in matters which are addressed to the sound
discretion of the government agency entrusted with the regulation of activities coming under
the special and technical training and knowledge of such agency.48 As a matter of policy, We
accord great respect to the decisions and/or actions of administrative authorities not only
because of the doctrine of separation of powers but also for their presumed knowledge, ability,
and expertise in the enforcement of laws and regulations entrusted to their jurisdiction. The
rationale for this rule relates not only to the emergence of the multifarious needs of a modern
or modernizing society and the establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to the accumulation of experience and growth of
specialized capabilities by the administrative agency charged with implementing a particular
statute.49chanrobleslaw

Lastly, petitioners contend that R.A. No. 7227, as amended by R.A. No. 9442, violates the equal
protection clause of the Constitution because it fairly singles out drugstores to bear the burden
of the discount, and that it can hardly be said to "rationally" meet a legitimate government
objective which is the purpose of the law. The law allegedly targets only retailers such as
petitioners, and that the other enterprises in the drug industry are not imposed with similar
burden. This same argument had been raised in the case of Carlos Superdrug Corp., et al. v.
DSWD, et al.,50 and We reaffirm and apply the ruling therein in the case at
bar:ChanRoblesVirtualawlibrary
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights, petitioners
must accept the realities of business and the State, in the exercise of police power, can
intervene in the operations of a business which may result in an impairment of property rights
in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence, particularly
on agrarian reform and the regulation of contracts and public utilities, continuously serve as a
reminder that the right to property can be relinquished upon the command of the State for the
promotion of public good.51chanroblesvirtuallawlibrary
Under the equal protection clause, all persons or things similarly situated must be treated alike,
both in the privileges conferred and the obligations imposed. Conversely, all persons or things
differently situated should be treated differently.52 In the case of ABAKADA Guro Party List, et
al. v. Hon. Purisima, et al.,53 We held:ChanRoblesVirtualawlibrary
Equality guaranteed under the equal protection clause is equality under the same conditions
and among persons similarly situated; it is equality among equals, not similarity of treatment of
persons who are classified based on substantial differences in relation to the object to be
accomplished. When things or persons are different in fact or circumstance, they may be
treated in law differently. In Victoriano v. Elizalde Rope Workers' Union, this Court
declared:ChanRoblesVirtualawlibrary
The guaranty of equal protection of the laws is not a guaranty of equality in the application of
the laws upon all citizens of the State. It is not, therefore, a requirement, in order to avoid the
constitutional prohibition against inequality, that every man, woman and child should be
affected alike by a statute. Equality of operation of statutes does not mean indiscriminate
operation on persons merely as such, but on persons according to the circumstances
surrounding them. It guarantees equality, not identity of rights. The Constitution does not
require that things which are different in fact be treated in law as though they were the
same. The equal protection clause does not forbid discrimination as to things that are
different. It does not prohibit legislation which is limited either in the object to which it is
directed or by the territory within which it is to operate.

The equal protection of the laws clause of the Constitution allows classification. Classification in
law, as in the other departments of knowledge or practice, is the grouping of things in
speculation or practice because they agree with one another in certain particulars. A law is not
invalid because of simple inequality. The very idea of classification is that of inequality, so that it
goes without saying that the mere fact of inequality in no manner determines the matter of
constitutionality. All that is required of a valid classification is that it be reasonable, which
means that the classification should be based on substantial distinctions which make for real
differences, that it must be germane to the purpose of the law; that it must not be limited to
existing conditions only; and that it must apply equally to each member of the class. This
Court has held that the standard is satisfied if the classification or distinction is based on a
reasonable foundation or rational basis and is not palpably arbitrary.

In the exercise of its power to make classifications for the purpose of enacting laws over
matters within its jurisdiction, the state is recognized as enjoying a wide range of discretion. It is
not necessary that the classification be based on scientific or marked differences of things or in
their relation. Neither is it necessary that the classification be made with mathematical nicety.
Hence, legislative classification may in many cases properly rest on narrow distinctions, for the
equal protection guaranty does not preclude the legislature from recognizing degrees of evil or
harm, and legislation is addressed to evils as they may appear.
The equal protection clause recognizes a valid classification, that is, a classification that has a
reasonable foundation or rational basis and not arbitrary.54 With respect to R.A. No. 9442, its
expressed public policy is the rehabilitation, self-development and self-reliance of PWDs.
Persons with disability form a class separate and distinct from the other citizens of the country.
Indubitably, such substantial distinction is germane and intimately related to the purpose of the
law. Hence, the classification and treatment accorded to the PWDs fully satisfy the demands of
equal protection. Thus, Congress may pass a law providing for a different treatment to persons
with disability apart from the other citizens of the country.

Subject to the determination of the courts as to what is a proper exercise of police power using
the due process clause and the equal protection clause as yardsticks, the State may interfere
wherever the public interests demand it, and in this particular, a large discretion is necessarily
vested in the legislature to determine, not only what interests of the public require, but what
measures are necessary for the protection of such interests.55 Thus, We are mindful of the
fundamental criteria in cases of this nature that all reasonable doubts should be resolved in
favor of the constitutionality of a statute.56 The burden of proof is on him who claims that a
statute is unconstitutional. Petitioners failed to discharge such burden of proof.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated July 26, 2010,
and the Resolution dated November 19, 2010, in CA-G.R. SP No. 109903 are AFFIRMED.

SO ORDERED.chanRoblesvirtualLawlibrary

Velasco, Jr., (Chairperson), Perez, Reyes, and Jardeleza, JJ., concur.

G.R. No. 215383

HON. KIM S. JACINTO-HENARES, in her official capacity as COMMISSIONER OF THE BUREAU

OF INTERNAL REVENUE, Petitioner
vs
ST. PAUL COLLEGE OF MAKATI, Respondent
RESOLUTION

CARPIO, J.:

The Case

This petition for review1 assails the Decision dated 25 July 20142 and Joint Resolution dated 29
October 20143 of the Regional Trial Court, Branch 143, Makati City (RTC), in Civil Case No. 13-
1405, declaring Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional.

The Facts

On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then Commissioner
of Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the Policies and Guidelines in
the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and
Associations under Section 30 of the National Internal Revenue Code of 1997, as Amended."

On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, non-profit
educational institution organized and existing under Philippine laws, filed a Civil Action to
Declare Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with Prayer for
Issuance of Temporary Restraining Order and Writ of Preliminary Injunction 4 before the RTC.
SPCM alleged that "RMO No. 20-2013 imposes as a prerequisite to the enjoyment by non-stock,
non-profit educational institutions of the privilege of tax exemption under Sec. 4(3) of Article
XIV of the Constitution both a registration and approval requirement, i.e., that they submit an
application for tax exemption to the BIR subject to approval by CIR in the form of a
Tax[]Exemption Ruling (TER) which is valid for a period of [three] years and subject to
renewal."5 According to SPCM, RMO No. 20-2013 adds a prerequisite to the requirement under
Department of Finance Order No. 137-87,6 and makes failure to file an annual information
return a ground for a non-stock, nonprofit educational institution to "automatically lose its
income tax-exempt status."7

In a Resolution dated 27 December 2013,8 the RTC issued a temporary restraining order against
the implementation of RMO No. 20- 2013. It found that failure of SPCM to comply with RMO
No. 20-2013 would necessarily result to losing its tax-exempt status and cause irreparable
injury.

In a Resolution dated 22 January 2014,9 the RTC granted the writ of preliminary injunction after
finding that RMO No. 20-2013 appears to divest non-stock, non-profit educational institutions
of their tax exemption privilege. Thereafter, the RTC denied the CIR's motion for
reconsideration. On 29 April 2014, SPCM filed a Motion for Judgment on the Pleadings under
Rule 34 of the Rules of Court.

The Ruling of the RTC

In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and declared RMO No. 20-2013
unconstitutional.1âwphi1 It held that "by imposing the x x x [prerequisites alleged by SPCM,]
and if not complied with by nonstock, non-profit educational institutions, [RMO No. 20-2013
serves] as diminution of the constitutional privilege, which even Congress cannot diminish by
legislation, and thus more so by the [CIR] who merely exercise[s] quasi-legislative function."10

The dispositive portion of the Decision reads:

WHEREFORE, in view of all the foregoing, the Court hereby declares BIR RMO No. 20-2013 as
UNCONSTITUTIONAL for being violative of Article XIV, Section 4, paragraph 3. Consequently, all
Revenue Memorandum Orders subsequently issued to implement BIR RMO No. 20-2013 are
declared null and void.

The writ of preliminary injunction issued on 03 February 2014 is hereby made permanent.

SO ORDERED.11

On 18 September 2014, the CIR issued RMO No. 34-2014,12 which clarified certain provisions of
RMO No. 20-2013, as amended by RMO No. 28-2013.13

In a Joint Resolution dated 29 October 2014, the RTC denied the CIR's motion for
reconsideration, to wit:

WHEREFORE, viewed in the light of the foregoing premises, the Motion for Reconsideration
filed by the respondent is hereby DENIED for lack of merit.

Meanwhile, this Court clarifies that the phrase "Revenue Memorandum Order" referred to in
the second sentence of its decision dated July 25, 2014 refers to "issuance/s" of the respondent
which tends to implement RMO 20-2013 for if it is otherwise, said decision would be useless
and would be rendered nugatory.

SO ORDERED.14

Hence, this present petition.

The Issues

The CIR raises the following issues for resolution:

WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO [NO.] 20-2013 IMPOSES A
PREREQUISITE BEFORE A NONSTOCK, NON-PROFIT EDUCATIONAL INSTITUTION MAY AVAIL OF
THE TAX EXEMPTION UNDER SECTION 4(3), ARTICLE XIV OF THE CONSTITUTION.
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO NO. 20-2013 ADDS TO THE
REQUIREMENT UNDER DEPARTMENT OF FINANCE ORDER NO. 137-87.15

The Ruline of the Court

We deny the petition on the ground of mootness.

We take judicial notice that on 25 July 2016, the present CIR Caesar R. Dulay issued RMO No.
44-2016, which provides that:

SUBJECT: Amending Revenue Memorandum Order No. 20- 2013, as amended (Prescribing the
Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-
Profit Corporations and Associations under Section 30 of the National Internal Revenue Code of
1997, as Amended)

In line with the Bureau's commitment to put in proper context the nature and tax status of non-
profit, non-stock educational institutions, this Order is being issued to exclude non-stock, non-
profit educational institutions from the coverage of Revenue Memorandum Order No. 20-2013,
as amended.

SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-stock, non-profit educational
institutions is directly conferred by paragraph 3, Section 4, Article XIV of the 1987 Constitution,
the pertinent portion of which reads:

"All revenues and assets of non-stock, non-profit educational institutions used actually, directly
and exclusively (or educational purposes shall be exempt from taxes and duties."

This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended,
which provides as follows:

"Sec. 30. Exempt from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

x x x           x x x          x x x

(H) A non-stock and non-profit educational institution; x x x."

It is clear and unmistakable from the aforequoted constitutional provision that non-stock, non-
profit educational institutions are constitutionally exempt from tax on all revenues derived in
pursuance of its purpose as an educational institution and used actually, directly and exclusively
for educational purposes. This constitutional exemption gives the non-stock, non-profit
educational institutions a distinct character. And for the constitutional exemption to be
enjoyed, jurisprudence and tax rulings affirm the doctrinal rule that there are only two
requisites: (1) The school must be non-stock and non-profit; and (2) The income is actually,
directly and exclusively used for educational purposes. There are no other conditions and
limitations.

In this light, the constitutional conferral of tax exemption upon non-stock and non-profit
educational institutions should not be implemented or interpreted in such a manner that will
defeat or diminish the intent and language of the Constitution.

SECTION 2. Application for Tax Exemption. --- Non-stock, nonprofit educational institutions shall
file their respective Applications for Tax Exemption with the Office of the Assistant
Commissioner, Legal Service, Attention: Law Division.

SECTION 3. Documentary Requirements. --- The non-stock, nonprofit educational institution

shall submit the following documents:

a. Original copy of the application letter for issuance of Tax Exemption Ruling;

b. Certified true copy of the Certificate of Good Standing issued by the Securities and
Exchange Commission;

c. Original copy of the Certification under Oath of the Treasurer as to the amount of the
income, compensation, salaries or any emoluments paid to its trustees, officers and
other executive officers;

d. Certified true copy of the Financial Statements of the corporation for the last three (3)
years;

e. Certified true copy of government recognition/permit/accreditation to operate as an

educational institution issued by the Commission on Higher Education (CHED),
Department of Education (DepEd), or Technical Education and Skills Development
Authority (TESDA); Provided, that if the government recognition/permit/accreditation to
operate as an educational institution was issued five (5) years prior to the application for
tax exemption, an original copy of a current Certificate of Operation/Good Standing, or
other equivalent document issued by the appropriate government agency (i.e., CHED,
DepEd, or TESDA) shall be submitted as proof that the non-stock and non-profit
education is currently operating as such; and

f. Original copy of the Certificate of utilization of annual revenues and assets by the
Treasurer or his equivalent of the non-stock and nonprofit educational institution.

SECTION 4. Request for Additional Documents. --- In the course of review of the application for
tax exemption, the Bureau may require additional information or documents as the
circumstances may warrant.
SECTION 5. Validity of the Tax Exemption Ruling. --- Tax Exemption Rulings or Certificates of Tax
Exemption of non-stock, nonprofit educational institutions shall remain valid and effective,
unless recalled for valid grounds. They are not required to renew or revalidate the Tax
exemption rulings previously issued to them.

The Tax Exemption Ruling shall be subject to revocation if there are material changes in the
character, purpose or method of operation of the corporation which are inconsistent with the
basis for its income tax exemption.

SECTION 6. Transitory Provisions. --- To update the records of the Bureau and for purposes of a
better system of monitoring, non-stock, nonprofit educational institutions with Tax Exemption
Rulings or Certificates of Exemption issued prior to June 30, 2012 are required to apply for new
Tax Exemption Rulings.

SECTION 7. Repealing Clause. --- Any revenue issuance which is inconsistent with this Order is
deemed revoked, repealed, or modified accordingly.

SECTION 8. Effectivity. --- This Order shall take effect immediately. (Emphases supplied)

A moot and academic case is one that ceases to present a justiciable controversy by virtue of
supervening events, so that an adjudication of the case or a declaration on the issue would be
of no practical value or use.16 Courts generally decline jurisdiction over such case or dismiss it
on the ground of mootness.17

With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered this
petition moot and academic, and subject to denial.1âwphi1 The CIR, in her petition, assails the
RTC Decision finding RMO No. 20-2013 unconstitutional because it violated the non-stock, non-
profit educational institutions' tax exemption privilege under the Constitution. However,
subsequently, RMO No. 44-2016 clarified that non-stock, nonprofit educational institutions are
excluded from the coverage of RMO No. 20-2013. Consequently, the RTC Decision no longer
stands, and there is no longer any practical value in resolving the issues raised in this petition.

WHEREFORE, we DENY the petition on the ground of mootness. We SET ASIDE the Decision

dated 25 July 2014 and Joint Resolution dated 29 October 2014 of the Regional Trial Court,
Branch 143, Makati City, declaring Revenue Memorandum Order No. 20-2013 unconstitutional.
The writ of preliminary injunction is superseded by this Resolution.

SO ORDERED.

G.R. No. 144104             June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of
the Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned by
the petitioner and its hospital building constructed thereon are subject to assessment for
purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on
January 16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a
parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at
Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of
121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the
Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known
as the Lung Center of the Philippines. A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or professional practitioners who
use the same as their private clinics for their patients whom they charge for their professional
services. Almost one-half of the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue
and Elliptical Road, is being leased for commercial purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-
patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of ₱4,554,860 by the City Assessor of Quezon City.3 Accordingly,
Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the
land and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for
Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioner’s request was denied, and a petition was, thereafter, filed
before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the
reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28,
paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It
averred that a minimum of 60% of its hospital beds are exclusively used for charity patients and
that the major thrust of its hospital operation is to serve charity patients. The petitioner
contends that it is a charitable institution and, as such, is exempt from real property taxes. The
QC-LBAA rendered judgment dismissing the petition and holding the petitioner liable for real
property taxes.6

The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of Assessment
Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable
institution and that its real properties were not actually, directly and exclusively used for
charitable purposes; hence, it was not entitled to real property tax exemption under the
constitution and the law. The petitioner sought relief from the Court of Appeals, which
rendered judgment affirming the decision of the CBAA.8

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY

TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS,
SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED
FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER
APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article
VI of the 1987 Constitution. It asserts that its character as a charitable institution is not altered
by the fact that it admits paying patients and renders medical services to them, leases portions
of the land to private parties, and rents out portions of the hospital to private medical
practitioners from which it derives income to be used for operational expenses. The petitioner
points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and of
the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies from the government attests to its character as a
charitable institution. It contends that the "exclusivity" required in the Constitution does not
necessarily mean "solely." Hence, even if a portion of its real estate is leased out to private
individuals from whom it derives income, it does not lose its character as a charitable
institution, and its exemption from the payment of real estate taxes on its real property. The
petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner further
contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it
is not precluded from seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable
entity. The petitioner’s real property is not exempt from the payment of real estate taxes under
P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that it is a
charitable institution and that the said property is actually, directly and exclusively used for
charitable purposes. The respondents noted that in a newspaper report, it appears that graft
charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden
Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990
for only ₱20,000 a month, when the monthly rental should be ₱357,000 a month as determined
by the Commission on Audit; and that instead of complying with the directive of the COA for
the cancellation of the contract for being grossly prejudicial to the government, the petitioner
renewed the same on March 13, 1995 for a monthly rental of only ₱24,000. They assert that
the petitioner uses the subsidies granted by the government for charity patients and uses the
rest of its income from the property for the benefit of paying patients, among other purposes.
They aver that the petitioner failed to adduce substantial evidence that 100% of its out-patients
and 170 beds in the hospital are reserved for indigent patients. The respondents further assert,
thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is
that it is pay-patient and required to pay a certain amount as deposit. That even if a
patient is living below the poverty line, he is charged with high hospital bills. And,
without these bills being first settled, the poor patient cannot be allowed to leave the
hospital or be discharged without first paying the hospital bills or issue a promissory
note guaranteed and indorsed by an influential agency or person known only to the
Center; that even the remains of deceased poor patients suffered the same fate.
Moreover, before a patient is admitted for treatment as free or charity patient, one
must undergo a series of interviews and must submit all the requirements needed by
the Center, usually accompanied by endorsement by an influential agency or person
known only to the Center. These facts were heard and admitted by the Petitioner LCP
during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with the Center, they prefer
to be treated at the Quezon Institute. Can such practice by the Center be called
charitable?10

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution
within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and
Section 234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner
are exempt from real property taxes.

The Court’s Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the
1973 and 1987 Constitutions. To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be considered include the statute creating
the enterprise, its corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the
properties.11

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of government.12 It may be applied to
almost anything that tend to promote the well-doing and well-being of social man. It embraces
the improvement and promotion of the happiness of man. 13 The word "charitable" is not
restricted to relief of the poor or sick.14 The test of a charity and a charitable organization are in
law the same. The test whether an enterprise is charitable or not is whether it exists to carry
out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or
private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to
the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized
for the welfare and benefit of the Filipino people principally to help combat the high incidence
of lung and pulmonary diseases in the Philippines. The raison d’etre for the creation of the
petitioner is stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been
the leading cause of illness and death in the Philippines, comprising more than 45% of
the total annual deaths from all causes, thus, exacting a tremendous toll on human
resources, which ailments are likely to increase and degenerate into serious lung
diseases on account of unabated pollution, industrialization and unchecked cigarette
smoking in the country;lavvph!l.net

Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt and
intensive prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs,

strategies and efforts at preventing, treating and rehabilitating people affected by lung
diseases, and to undertake research and training on the cure and prevention of lung
diseases, through a Lung Center which will house and nurture the above and related
activities and provide tertiary-level care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for the
welfare and benefit of the Filipino people.15
The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated

medical institution which shall specialize in the treatment, care, rehabilitation
and/or relief of lung and allied diseases in line with the concern of the
government to assist and provide material and financial support in the
establishment and maintenance of a lung center primarily to benefit the people
of the Philippines and in pursuance of the policy of the State to secure the well-
being of the people by providing them specialized health and medical services
and by minimizing the incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the

prevention of lung or pulmonary ailments and the care of lung patients, including
the holding of a series of relevant congresses, conventions, seminars and
conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to collect and publish the
findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information

on lung consciousness or awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the general purposes or
objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers

and medical and technical personnel in the practical and scientific
implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung

diseases, to encourage advanced training in matters of the lung and related
fields and to support educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial

and/or city and local levels; and to coordinate their various efforts and activities
for the purpose of achieving a more effective programmatic approach on the
common problems relative to the objectives enumerated herein;
 8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;

9. To extend, whenever possible and expedient, medical services to the public

and, in general, to promote and protect the health of the masses of our people,
which has long been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor
and needy, all without regard to or discrimination, because of race, creed, color
or political belief of the persons helped; and to enable them to obtain treatment
when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and

carried on to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment,
educational materials and supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner, and, on such basis as the
Center shall, from time to time, deem proper and best, under the particular
circumstances, to serve its general and non-profit purposes and
objectives;lavvphil.net

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and
dispose of properties, whether real or personal, for purposes herein mentioned;
and

14. To do everything necessary, proper, advisable or convenient for the

accomplishment of any of the powers herein set forth and to do every other act
and thing incidental thereto or connected therewith.16

Hence, the medical services of the petitioner are to be rendered to the public in general in any
and all walks of life including those who are poor and the needy without discrimination. After
all, any person, the rich as well as the poor, may fall sick or be injured or wounded and become
a subject of charity.17

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the State Supreme
Court of Illinois held, thus:
 … [A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are able to
pay are required to do so, where no profit is made by the institution and the amounts so
received are applied in furthering its charitable purposes, and those benefits are refused
to none on account of inability to pay therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon
the public by them, and a consequent relief, to some extent, of the burden upon the
state to care for and advance the interests of its citizens.20

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of
South Dakota v. Baker:21

… [T]he fact that paying patients are taken, the profits derived from attendance upon
these patients being exclusively devoted to the maintenance of the charity, seems
rather to enhance the usefulness of the institution to the poor; for it is a matter of
common observation amongst those who have gone about at all amongst the suffering
classes, that the deserving poor can with difficulty be persuaded to enter an asylum of
any kind confined to the reception of objects of charity; and that their honest pride is
much less wounded by being placed in an institution in which paying patients are also
received. The fact of receiving money from some of the patients does not, we think, at
all impair the character of the charity, so long as the money thus received is devoted
altogether to the charitable object which the institution is intended to further.22

The money received by the petitioner becomes a part of the trust fund and must be devoted to
public trust purposes and cannot be diverted to private profit or benefit.23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not
lose its character as a charitable institution simply because the gift or donation is in the form of
subsidies granted by the government. As held by the State Supreme Court of Utah in Yorgason
v. County Board of Equalization of Salt Lake County:24

Second, the … government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they come from the
government. In both Intermountain Health Care and the present case, the crux is the
presence or absence of material reciprocity. It is entirely irrelevant to this analysis that
the government, rather than a private benefactor, chose to make up the deficit resulting
from the exchange between St. Mark’s Tower and the tenants by making a contribution
to the landlord, just as it would have been irrelevant in Intermountain Health Care if the
patients’ income supplements had come from private individuals rather than the
government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by
the government rather than private charitable contributions does not dictate the denial
 of a charitable exemption if the facts otherwise support such an exemption, as they do
here.25

In this case, the petitioner adduced substantial evidence that it spent its income, including the
subsidies from the government for 1991 and 1992 for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue,
that those portions of its real property that are leased to private entities are not exempt from
real property taxes as these are not actually, directly and exclusively used for charitable
purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to
an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken.26 As held in Salvation Army v. Hoehn:27

An intention on the part of the legislature to grant an exemption from the taxing power
of the state will never be implied from language which will admit of any other
reasonable construction. Such an intention must be expressed in clear and unmistakable
terms, or must appear by necessary implication from the language used, for it is a well
settled principle that, when a special privilege or exemption is claimed under a statute,
charter or act of incorporation, it is to be construed strictly against the property owner
and in favor of the public. This principle applies with peculiar force to a claim of
exemption from taxation . …28

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides
that the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation

organized primarily to help combat the high incidence of lung and pulmonary diseases in
the Philippines, all donations, contributions, endowments and equipment and supplies
to be imported by authorized entities or persons and by the Board of Trustees of the
Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung
Center, shall be exempt from income and gift taxes, the same further deductible in full
for the purpose of determining the maximum deductible amount under Section 30,
paragraph (h), of the National Internal Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges
and fees imposed by the Government or any political subdivision or instrumentality
thereof with respect to equipment purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax exempt
privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One
variation of the rule is the principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or construction, be
extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural workings
of the human mind. They are predicated upon one’s own voluntary act and not upon
that of others. They proceed from the premise that the legislature would not have made
specified enumeration in a statute had the intention been not to restrict its meaning
and confine its terms to those expressly mentioned.30

The exemption must not be so enlarged by construction since the reasonable presumption is
that the State has granted in express terms all it intended to grant at all, and that unless the
privilege is limited to the very terms of the statute the favor would be intended beyond what
was meant.31

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.32

The tax exemption under this constitutional provision covers property taxes only.33 As Chief
Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained:
". . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes."34

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act

No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
 SECTION 234. Exemptions from Real Property Tax. – The following are exempted from
payment of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant

thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.35

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used
‘exclusively’ for … charitable … purposes shall be exempt from taxation." 36 However, under the
1973 and the present Constitutions, for "lands, buildings, and improvements" of the charitable
institution to be considered exempt, the same should not only be "exclusively" used for
charitable purposes; it is required that such property be used "actually" and "directly" for such
purposes.37

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on
our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on
September 30, 1961 before the 1973 and 1987 Constitutions took effect. 38 As this Court held
in Province of Abra v. Hernando:39

… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents

appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be exempt from taxation." The
present Constitution added "charitable institutions, mosques, and non-profit
cemeteries" and required that for the exemption of "lands, buildings, and
improvements," they should not only be "exclusively" but also "actually" and "directly"
used for religious or charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into consideration. Reliance on past
decisions would have sufficed were the words "actually" as well as "directly" not added.
There must be proof therefore of the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to be exempt from taxation. …

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined
as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment;
and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." 40 If
real property is used for one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.41 The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively" without doing violence to the
Constitutions and the law.42 Solely is synonymous with exclusively.43
What is meant by actual, direct and exclusive use of the property for charitable purposes is the
direct and immediate and actual application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt purposes.44

The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital are
used for the treatment of patients and the dispensation of medical services to them, whether
paying or non-paying, other portions thereof are being leased to private individuals for their
clinics and a canteen. Further, a portion of the land is being leased to a private individual for her
business enterprise under the business name "Elliptical Orchids and Garden Center." Indeed,
the petitioner’s evidence shows that it collected ₱1,136,483.45 as rentals in 1991 and
₱1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes.45 On the
other hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non-paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent

Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions
of the land and the area thereof which are leased to private persons, and to compute the real
property taxes due thereon as provided for by law.

SO ORDERED.

Davide, Jr., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio,

Austria-Martinez, Corona, Carpio Morales, Azcuna, and Tinga, JJ., concur.

G.R. No. 203514

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent

DECISION

DEL CASTILLO, J.:

The doctrine of stare decisis dictates that "absent any powerful countervailing considerations,
like cases ought to be decided alike."1
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the May 9,
2012 Decision3 and the September 17, 2012 Resolution4 of the Court of Tax Appeals (CTA) in
CTA EB Case No. 716.

Factual Antecedents

On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received from the
Large Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau of
Internal Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-0000965 and QA-07-
000097,6 assessing respondent SLMC deficiency income tax under Section 27(B) 7 of the 1997
National Internal Revenue Code (NIRC), as amended, for taxable year 2005 in the amount of
₱78,617,434.54 and for taxable year 2006 in the amount of ₱57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR) an
administrative protest8 assailing the assessments. SLMC claimed that as a non-stock, non-profit
charitable and social welfare organization under Section 30(E) and (G)9 of the 1997 NIRC, as
amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable year 2005 tax
to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, computed as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS AMOUNT
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
Less: Cost of Sales/Services 2,643,049, 769.00
Gross Income From Operation 980,461,847.00
Add: Non-Operating & Other Income -
Total Gross Income 980,461,847.00
Less: Deductions 481,266,883 .00
Net Income Subject to Tax 499, 194,964.00
XTaxRate 10%
Tax Due 49,919,496.40
Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
 Add: Increments  
25% Surcharge 12,479,874.10
20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments 32,500,025.81
Total Amount Due ?82,419,522.21

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
Less: Deductions 640,147,719.00
Net Income Subject to Tax 415,256,084.00
XTaxRate 10%
Tax.Due 41,525,608.40
Less: Tax Credits -
Deficiency Income Tax 41,525,608.40
Add: Increments -
25% Surcharge 10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments 18,734,277.54
Total Amount Due ?60,259,885.9411

Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed as CTA
Case No. 7789.
Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable for
deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is exempt
from paying income tax under Section 30(E) and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly,
Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097, assessing petitioner
for alleged deficiency income taxes for the taxable years 2005 and 2006, respectively, are
hereby CANCELLED and SET ASIDE.

SO ORDERED.14

CIR moved for reconsideration but the CTA Division denied the same in its December 28, 2010
Resolution.15

This prompted CIR to file a Petition for Review16 before the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA Division
that SLMC complies with all the requisites under Section 30(E) and (G) of the 1997 NIRC and
thus, entitled to the tax exemption provided therein.17

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that the
CTA erred in exempting SLMC from the payment of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and
195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc., 18 finding
SLMC not entitled to the tax exemption under Section 30(E) and (G) of the NIRC of 1997 as it
does not operate exclusively for charitable or social welfare purposes insofar as its revenues
from paying patients are concerned. Thus, the Court disposed of the case in this manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909is
PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010
and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10%
preferential income tax rate under Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such deficiency income tax under
Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision and
Resolution of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section
I, Rule 45 of the Rules of Court.

SO ORDERED.19

Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the Court
that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable years 1998,
2000-2002, and 2004-2007, as evidenced by the payment confirmation21 from the BIR, and that
it did not pay any surcharge, interest, and compromise penalty in accordance with the above-
mentioned Decision of the Court. In view of the payment it made, SLMC moved for the
dismissal of the instant case on the ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is not a
competent proof of payment as it is a mere photocopy and does not even indicate the
quarter/sand/or year/s said payment covers.22

In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers Service of

the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency income tax for
taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed, this Office considers
the cases closed due to the payment made on April 30, 2013." SLMC likewise submitted a
letter25 from the BIR dated November 26, 2013 with attached Certification of Payment26 and
application for abatement,27 which it earlier submitted to the Court in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.28

Thereafter, the parties submitted their respective memorandum.

CIR 's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax under
Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to pay compromise
penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing to file its quarterly income tax
returns.31

As to the alleged payment of the basic tax, CIR contends that this does not render the instant
case moot as the payment confirmation submitted by SLMC is not a competent proof of
payment of its tax liabilities.32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.)33 positing that earning a profit by a charitable, benevolent hospital or educational
institution does not result in the withdrawal of its tax exempt privilege.34 SLMC further claims
that the income it derives from operating a hospital is not income from "activities conducted
for profit."35 Also, it maintains that in accordance with the ruling of the Court in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), 36 it is
not liable for compromise penalties.37

In any case, SLMC insists that the instant case should be dismissed in view of its payment of the
basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on April 30,
2013.38

Our Ruling

SLMC is liable for income tax under

Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are concerned has been settled in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), 39 where the Court
ruled that:

x x x We hold that Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the removal of
such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable
income of two specific institutions, namely, proprietary non-profit educational institutions and
proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10%
preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(l).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary and non-profit. 'Proprietary'
means private, following the definition of a 'proprietary educational institution' as 'any private
school maintained and administered by private individuals or groups' with a government
permit. 'Non-profit' means no net income or asset accrues to or benefits any member or
specific person, with all the net income or asset devoted to the institution's purposes and all its
activities conducted not for profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v. Club
Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized for recreation
and entertainment of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for overhead expenses and
improving its golf course. The club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable. Tue
Court defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of education or religion, by assisting them
to establish themselves in life or [by] otherwise lessening the burden of government.' A
nonprofit club for the benefit of its members fails this test. An organization may be considered
as non-profit if it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such institution earns from
activities conducted for profit is taxable, as expressly provided in the last paragraph of Section
30.

To be a charitable institution, however, an organization must meet the substantive test of

charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and
not income tax. However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the burden of government. In
other words, charitable institutions provide for free goods and services to the public which
would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations from the
Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The

requirements for a tax exemption are specified by the law granting it. The power of Congress to
tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the
constitutional provision that '[n]o law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of Congress.' The requirements for a tax
exemption are strictly construed against the taxpayer because an exemption restricts the
collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the same
premise as Hospital de San Juan and Jesus Sacred Heart College which says that receiving
income from paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is intended
to achieve; and no money inures to the private benefit of the persons managing or operating
the institution.

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that '[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries,
and all lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.' The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The test requires
that the institution use property in a certain way, i.e., for a charitable purpose. Thus, the Court
held that the Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use requirement is
simply to remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or association that is exempt
from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the institution 'actually, directly and exclusively'
use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its corporate
form, as shown by its articles of incorporation, by-laws and other constitutive documents.
Section 30(E) of the NIRC specifically requires that the corporation or association be non-stock,
which is defined by the Corporation Code as 'one where no part of its income is distributable as
dividends to its members, trustees, or officers' and that any profit 'obtain[ed] as an incident to
its operations shall, whenever necessary or proper, be used for the furtherance of the purpose
or purposes for which the corporation was organized.' However, under Lung Center, any profit
by a charitable institution must not only be plowed back 'whenever necessary or proper,' but
must be 'devoted or used altogether to the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section 30(E)
of the NIRC requires that these operations be exclusive to charity. There is also a specific
requirement that 'no part of [the] net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.' The use of lands, buildings and
improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution use the property 'actually,
directly and exclusively' for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be 'organized and operated exclusively'
for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be 'operated exclusively' for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and
operated exclusively' by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts 'any' activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the
'[n]on-stock corporation or association [must be] organized and operated exclusively for . . .
charitable . . . purposes . . . . ' It likewise qualifies the requirement in Section 30(G) that the civic
organization must be 'operated exclusively' for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit'
without losing its tax exempt status for its not-for-profit activities. The only consequence is that
the 'income of whatever kind and character' of a charitable institution 'from any of its activities
conducted for profit, regardless of the disposition made of such income, shall be subject to tax.'
Prior to the introduction of Section 27(B), the tax rate on such income from for-profit activities
was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B),
the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients. It
cannot be disputed that a hospital which receives approximately ₱l.73 billion from paying
patients is not an institution 'operated exclusively' for charitable purposes. Clearly, revenues
from paying patients are income received from 'activities conducted for profit.' Indeed, St.
Luke's admits that it derived profits from its paying patients. St. Luke's declared ₱l,730,367,965
as 'Revenues from Services to Patients' in contrast to its 'Free Services' expenditure of
₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following 'calculation'
to support its claim that 65.20% of its 'income after expenses was allocated to free or charitable
services' in 1998.

x x xx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a
privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot be substituted for
the words 'used exclusively' without doing violence to the Constitution and thelaw. Solely is
synonymous with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered
any other way. There is a 'purpose to make profit over and above the cost' of services. The
₱l.73 billion total revenues from paying patients is not even incidental to St. Luke's charity
expenditure of ₱2l8,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income
in 1998. However, if a part of the remaining 34.80% of the operating income is reinvested in
property, equipment or facilities used for services to paying and non-paying patients, then it
cannot be said that the income is 'devoted or used altogether to the charitable object which it
is intended to achieve.' The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC
expressly qualifies that income from activities for profit is taxable 'regardless of the disposition
made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record explaining the
phrase 'any activity conducted for profit.' However, it quoted a deposition of Senator Mariano
Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which
introduced the phrase 'or from any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree V d que
es una actividad esencial dicho hospital para el funcionamiento def colegio de medicina

de dicha universidad?

x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos
de buena posicion social economica, lo que se paga por estos enfermos debe estar sujeto a
'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase
'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like the
College of Medicine of the University of Santo Tomas.1awp++i1 Senator Cuenco answered that
if the hospital has paid rooms generally occupied by people of good economic standing, then it
should be subject to income tax. He said that this was one of the reasons Congress inserted the
phrase 'or any activity conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution. However, it is

applicable to charitable institutions because Senator Cuenco's response shows an intent to
focus on the activities of charitable institutions. Activities for profit should not escape the reach
of taxation. Being a non-stock and non-profit corporation does not, by this reason alone,
completely exempt an institution from tax. An institution cannot use its corporate form to
prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling
is based not only on a strict interpretation of a provision granting tax exemption, but also on
the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that
an institution be 'operated exclusively' for charitable or social welfare purposes to be
completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its
tax exemption if it earns income from its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from them.
Tax exemptions for charitable institutions should therefore be lin1ited to institutions beneficial
to the public and those which improve social welfare. A profit-making entity should not be
allowed to exploit this subsidy to the detriment of the government and other taxpayers.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its
members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income
from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is 'a corporation for purely charitable and social welfare purposes' and
thus exempt from income tax. In Michael J Lhuillier, Inc. v. Commissioner of Internal
Revenue, the Court said that 'good faith and honest belief that one is not subject to tax on the
basis of previous interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest.'40

A careful review of the pleadings reveals that there is no countervailing consideration for the
Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare decisis,
which states that "[o]nce a case has been decided in one way, any other case involving exactly
the same point at issue x x x should be decided in the same manner," 41 the Court finds that
SLMC is subject to 10% income tax insofar as its revenues from paying patients are concerned.

To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G)
of the 1997 NIRC requires said institution to operate exclusively for charitable or social welfare
purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code earns
income from its for-profit activities, it will not lose its tax exemption. However, its income from
for-profit activities will be subject to income tax at the preferential 10% rate pursuant to
Section 27(B) thereof.

SLMC is not liable for Compromise

Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997 NIRC for
its alleged failure to file its quarterly income tax returns, this has also been resolved in G.R Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),42 where the imposition of surcharges and interest under Sections 24843 and 24944 of the
1997 NIRC were deleted on the basis of good faith and honest belief on the part of SLMC that it
is not subject to tax. Thus, following the ruling of the Court in the said case, SLMC is not liable
to pay compromise penalty under Section 248(A) of the 1997 NIRC.

The Petition is rendered moot by the

payment made by SLMC on April 30,
2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the
instant Petition has become moot.1avvphi1

While the Court agrees with the CIR that the payment confirmation from the BIR presented by
SLMC is not a competent proof of payment as it does not indicate the specific taxable period
the said payment covers, the Court finds that the Certification issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, and the letter from the BIR dated November 26, 2013
with attached Certification of Payment and application for abatement are sufficient to prove
payment especially since CIR never questioned the authenticity of these documents. In fact, in a
related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical
Center, lnc.,45 the Court dismissed the petition based on a letter issued by CIR confirming SLMC's
payment of taxes, which is the same letter submitted by SLMC in the instant case.

In fine, the Court resolves to dismiss the instant Petition as the same has been rendered moot
by the payment made by SLMC of the basic taxes for the taxable years 2005 and 2006, in the
amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively.46

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

G.R. No. L-47421 May 14, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
HON. COURT OF TAX APPEALS and MANILA GOLF & COUNTRY CLUB, INC., respondents.
Bito, Misa & Lozada for private respondent.

MEDIALDEA, J.:

In Commissioner of Internal Revenue v. Manila Hotel Corporation, et al., G.R. No. 83250,
September 26, 1989, We overruled a decision of the Court of Tax Appeals which declared the
collection of caterer's tax under Section 191-A of Republic Act No. 6110 illegal because Sec. 42
of House Bill No. 17839, which carries that proviso, was vetoed by then President Ferdinand E.
Marcos when the bill was presented to him and Congress had not taken any step to override
the presidential veto. We held thus:

The power of the State to impose the 3% caterer's tax is not debatable. The Court of Tax
Appeals erred, however, in holding that the tax was abolished as a result of the presidential
veto of August 4, 1969. It failed to examine the law then, and up to now, existing on the subject
which has always imposed a 3% caterer's tax on operators of restaurants. Since the Manila
Hotel operates restaurants in its premises, it is liable to pay the tax provided in paragraph (1),
Section 206 of the Tax Code. (Commissioner of Internal Revenue v. Manila Hotel Corporation
and the Court of Tax Appeals, G.R. No. 83250, September 26, 1989)

The petition now before Us presents an identical question: whether the presidential veto
referred to the entire section or merely to the imposition of 20% tax on gross receipts of
operators or proprietors of restaurants, refreshment parlors, bars and other eating places
which are maintained within the premises or compound of a hotel, motel or resthouses.
Reference to the Manila Hotel case, therefore, might have been sufficient to dispose of this
petition were it not for the position of the CTA that a chief executive has no power to veto part
of an item in a bill; either he vetoes an entire section or approves it but not a fraction thereof.

Herein private respondent, Manila Golf & Country Club, Inc. is a non-stock corporation. True, it
maintains a golf course and operates a clubhouse with a lounge, bar and dining room, but these
facilities are for the exclusive use of its members and accompanied guests, and it charges on
cost-plus-expense basis. As such, it claims it should have been exempt from payment of
privilege taxes were it not for the last paragraph of Section 191-A of R.A. No. 6110, otherwise
known as the "Omnibus Tax Law." Section 191-A reads:

Sec. 191-A. Caterer. — A caterer's tax is hereby imposed as follows:

(1) On proprietors or operators of restaurants, refreshment parlors and other eating places,
including clubs, and caterers, three per cent of their gross receipts.

(2) On proprietors or operators of restaurants, bars, cafes and other eating places, including
clubs, where distilled spirits, fermented liquors, or wines are served, three per cent of their
gross receipts from sale of food or refreshments and seven per cent of their gross receipts from
sale of distilled spirits, fermented liquors or wines. Two sets of commercial invoices or receipts
serially numbered in duplicate shall be separately prepared and issued, one for sale of
refreshments served, and another for each sale of distilled spirits, fermented liquors or wines
served, the originals of the invoices or receipts to be issued to the purchaser or customer.

(3) On proprietors or operators of restaurants, refreshment parlors, bars, cafes and other eating
places which are maintained within the preferences or compound of a hotel, motel, resthouse,
cockpit, race track, jai-alai, cabaret, night or day club by means of a connecting door or passage
twenty per cent of their gross receipts.

Where the establishments are operated or maintained by clubs of any kind or nature
(irrespective of the disposition of their net income and whether or not they cater exclusively to
members or their guests) the keepers of the establishments shall pay the corresponding tax at
the rate fixed above. (Emphasis supplied)

Republic Act No. 6110 took effect on September 1, 1969. By this virtue, petitioners assessed the
club fixed taxes as operators of golf links and restaurants, and also percentage tax (caterer's
tax) for its sale of foods and fermented liquors/wines for the period covering September 1969
to December 1970 in the amount of P32,504.96. The club protested claiming the assessment to
be without basis because Section 42 was vetoed by then President Marcos. The veto message
reads:

MALACAÑANG
Manila

August 4, 1969

Gentlemen of the House

of Representatives:

I have the honor to inform you that I have this day signed H.B. No. 17839, entitled:

AN ACT AMENDING CERTAIN

PROVISIONS OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED

Pursuant to the provisions of Section 20-(3), Article VI, of the Constitution, however, I have
vetoed the following items in this bill:

xxx xxx xxx

pp. 44, SEC. 42. Inserting a new Section 191-A which imposes a caterer's tax of three percent of
the gross receipts of proprietors or operators of restaurants, refreshment parlors and other
eating places; three percent of gross receipts from sale of food or refreshment and seven
percent on gross receipts from the sale of distilled spirits, fermented liquors or wines, on
proprietors or operators of restaurants, bars, cafes and other eating places, including clubs,
where distilled spirits, fermented liquors, or wines are served; and twenty percent of gross
receipts on proprietor or operators of restaurants, refreshment parlors, bars, cafes and other
eating places maintained within the premises or compound of a hotel, motel, resthouse,
cockpit, race track, jai-alai, cabaret, night or day club, or which are accessible to patrons of said
establishments by means of a connecting door or passage.

The burden of petition will be shifted to the consuming public.

The development of hotels, essential to our tourist industry, may be restrained considering that
a big portion of hotel earnings comes from food sale. . . .

This bill, H.B. No. 17839, has become Republic Act No. 6110.

Respectfully,

(SGD.) FERDINAND E. MARCOS

[Emphasis ours]
The protestation of the club was denied by the petitioner who maintains that Section 42 was
not entirely vetoed but merely the words "hotels, motels, resthouses" on the ground that it
might restrain the development of hotels which is essential to the tourism industry. This in fact
was the position of the House Ways and Means Committee which reported, to wit:

When Congress decided to split Section 191 into two parts, one dealing with contractors, and
the other dealing with those who serve food and drinks, the intention was to classify and to
improve. While the Congress expanded the coverage of both 191 and 191-A, it also provided for
certain exemptions. The veto message seems to object to certain additions to 191-A. What
additions are objectionables can be gleaned from the reasons given: a general reason that this
sort of tax is passed on to the consuming public, and a particular reason that hotel
developments, so essential to the tourist industry, may be restrained. These reasons have been
taken together in the interpretations of the veto message and the deletions of such enterprises
as are connected with the tourist industry has therefore been recommended.

To interpret the veto. message otherwise would result in the exemption of entities already
subject of tax. This would be absurd. Where the Congress wanted to exempt, it was so provided
in the bill. While the President may veto any item or items in a revenue bill the constitution
does not give him the power to repeal an existing tax. (2nd Indorsement dated December 9,
1969, Chairman on Ways and Means, Sixth Congress of the Republic of the Phil.) (Exhs. 14, p.
85, B.I.R. rec.). (pp. 20-21, Rollo)

It was by reason of this interpretation of the Committee that R.A. No. 6110 was published in
Volume 66, No. 18, p. 4531 of the Official Gazette (May 4, 1970) in such a way that Section 191-
A was included in the text save for the words "hotels, motels, resthouses."

As already mentioned, the Court of Tax Appeals, upon petition by the club, sustained the
latter's position reasoning that the veto message was clear and unqualified, as in fact it was
confirmed three years later, after much controversy, by the Office of the President, thus:

Mr. Antero M. Sison, Jr.

San Martin Building, 1564,

A. Mabini, P.O. Box 2288

Manila, Philippines

Dear Sir:

With reference to your letter dated July 14, 1972, we wish to inform you that Section 42 (which
contains Sec. 191-A) of House Bill No. 17839, now R.A. 6110 was one of the Sections vetoed by
the President in his veto message dated August 4, 1969, vetoing certain sections of the said
revenue bill.

Very Truly Yours,

(SGD.) IRINEO T. AGUIRRE, JR.

Presidential Staff Assistant

(p. 49, Rollo)

As mentioned earlier, We have already ruled that the presidential veto referred merely to the
inclusion of hotels, motels and resthouses in the 20% caterer's tax bracket but not to the whole
section. But, as mentioned earlier also, the CTA opined that the President could not veto words
or phrases in a bill but only an entire item. Obviously, what the CTA meant by "item" was an
entire section. We do not agree. But even assuming it to be so, it would also be to petitioner's
favor. The ineffectual veto by the President rendered the whole section 191-A as not having
been vetoed at all and it, therefore, became law as an unconstitutional veto has no effect,
whatsoever. (See Bolinao Electronics Corp. v. Valeria No. L-20740, June 30, 1964, 11 SCRA 486).

However, We agree with then Solicitor General Estelito Mendoza and his associates that
inclusion of hotels, motels and resthouses in the 20% caterer's tax bracket are "items" in
themselves within the meaning of Sec. 20(3), Art. VI of the 1935 Constitution which, therefore,
the President has the power to veto. An "item" in a revenue bill does not refer to an entire
section imposing a particular kind of tax, but rather to the subject of the tax and the tax rate. In
the portion of a revenue bill which actually imposes a tax, a section identifies the tax and
enumerates the persons liable therefor with the corresponding tax rate. To construe the word
"item" as referring to the whole section would tie the President's hand in choosing either to
approve the whole section at the expense of also approving a provision therein which he deems
unacceptable or veto the entire section at the expense of foregoing the collection of the kind of
tax altogether. The evil which was sought to be prevented in giving the President the power to
disapprove items in a revenue bill would be perpetrated rendering that power inutile (See
Commonwealth ex rel. Elkin v. Barnett, 199 Pa. 161, 55 LRA 882 [1901]).

ACCORDINGLY, the petition is GRANTED and the decision of the Court of Tax Appeals in CTA
Case No. 2630 is set aside. Section 191-A of RA No. 6110 is valid and enforceable and, hence,
the Manila Golf & Country Club Inc. is liable for the amount assessed against it.

SO ORDERED.
Narvasa, Cruz and Griño-Aquino, JJ., concur.
Gancayco, J., is on leave.

G.R. No. 158540             July 8, 2004

SOUTHERN CROSS CEMENT CORPORATION, petitioner,

vs.
THE PHILIPPINE CEMENT MANUFACTURERS CORP., THE SECRETARY OF THE DEPARTMENT OF
TRADE & INDUSTRY, THE SECRETARY OF THE DEPARTMENT OF FINANCE, and THE
COMMISSIONER OF THE BUREAU OF CUSTOMS, respondents.

DECISION

TINGA, J.:
"Good fences make good neighbors," so observed Robert Frost, the archetype of traditional
New England detachment. The Frost ethos has been heeded by nations adjusting to the effects
of the liberalized global market.1 The Philippines, for one, enacted Republic Act (Rep. Act) No.
8751 (on the imposition of countervailing duties), Rep. Act No. 8752 (on the imposition of anti-
dumping duties) and, finally, Rep. Act No. 8800, also known as the Safeguard Measures Act
("SMA")2 soon after it joined the General Agreement on Tariff and Trade (GATT) and the World
Trade Organization (WTO) Agreement.3

The SMA provides the structure and mechanics for the imposition of emergency measures,
including tariffs, to protect domestic industries and producers from increased imports which
inflict or could inflict serious injury on them.4 The wisdom of the policies behind the SMA,
however, is not put into question by the petition at bar. The questions submitted to the Court
relate to the means and the procedures ordained in the law to ensure that the determination of
the imposition or non-imposition of a safeguard measure is proper.

Antecedent Facts

Petitioner Southern Cross Cement Corporation ("Southern Cross") is a domestic corporation

engaged in the business of cement manufacturing, production, importation and exportation. Its
principal stockholders are Taiheiyo Cement Corporation and Tokuyama Corporation,
purportedly the largest cement manufacturers in Japan.5

Private respondent Philippine Cement Manufacturers Corporation6 ("Philcemcor") is an

association of domestic cement manufacturers. It has eighteen (18)
7 
members, per Record. While Philcemcor heralds itself to be an association of domestic cement
manufacturers, it appears that considerable equity holdings, if not controlling interests in at
least twelve (12) of its member-corporations, were acquired by the three largest cement
manufacturers in the world, namely Financiere Lafarge S.A. of France, Cemex S.A. de C.V. of
Mexico, and Holcim Ltd. of Switzerland (formerly Holderbank Financiere Glaris, Ltd., then
Holderfin B.V.).8

On 22 May 2001, respondent Department of Trade and Industry ("DTI") accepted an application
from Philcemcor, alleging that the importation of gray Portland cement9 in increased quantities
has caused declines in domestic production, capacity utilization, market share, sales and
employment; as well as caused depressed local prices. Accordingly, Philcemcor sought the
imposition at first of provisional, then later, definitive safeguard measures on the import of
cement pursuant to the SMA. Philcemcor filed the application in behalf of twelve (12) of its
member-companies.10

After preliminary investigation, the Bureau of Import Services of the DTI, determined that
critical circumstances existed justifying the imposition of provisional measures.11 On 7
November 2001, the DTI issued an Order, imposing a provisional measure equivalent to Twenty
Pesos and Sixty Centavos (P20.60) per forty (40) kilogram bag on all importations of gray
Portland cement for a period not exceeding two hundred (200) days from the date of issuance
by the Bureau of Customs (BOC) of the implementing Customs Memorandum Order.12 The
corresponding Customs Memorandum Order was issued on 10 December 2001, to take effect
that same day and to remain in force for two hundred (200) days.13

In the meantime, the Tariff Commission, on 19 November 2001, received a request from the
DTI for a formal investigation to determine whether or not to impose a definitive safeguard
measure on imports of gray Portland cement, pursuant to Section 9 of the SMA and its
Implementing Rules and Regulations. A notice of commencement of formal investigation was
published in the newspapers on 21 November 2001. Individual notices were likewise sent to
concerned parties, such as Philcemcor, various importers and exporters, the Embassies of
Indonesia, Japan and Taiwan, contractors/builders associations, industry associations, cement
workers' groups, consumer groups, non-government organizations and concerned government
agencies.14 A preliminary conference was held on 27 November 2001, attended by several
concerned parties, including Southern Cross.15 Subsequently, the Tariff Commission received
several position papers both in support and against Philcemcor's application.16 The Tariff
Commission also visited the corporate offices and manufacturing facilities of each of the
applicant companies, as well as that of Southern Cross and two other cement importers.17

On 13 March 2002, the Tariff Commission issued its Formal Investigation Report ("Report").
Among the factors studied by the Tariff Commission in its Report were the market share of the
domestic industry,18 production and sales,19 capacity utilization,20 financial performance and
profitability,21 and return on sales.22 The Tariff Commission arrived at the following conclusions:

1. The circumstances provided in Article XIX of GATT 1994 need not be demonstrated
since the product under consideration (gray Portland cement) is not the subject of any
Philippine obligation or tariff concession under the WTO Agreement. Nonetheless, such
inquiry is governed by the national legislation (R.A. 8800) and the terms and conditions
of the Agreement on Safeguards.

2. The collective output of the twelve (12) applicant companies constitutes a major
proportion of the total domestic production of gray Portland cement and blended
Portland cement.

3. Locally produced gray Portland cement and blended Portland cement (Pozzolan) are
"like" to imported gray Portland cement.

4. Gray Portland cement is being imported into the Philippines in increased quantities,
both in absolute terms and relative to domestic production, starting in 2000. The
increase in volume of imports is recent, sudden, sharp and significant.

5. The industry has not suffered and is not suffering significant overall impairment in its
condition, i.e., serious injury.
 6. There is no threat of serious injury that is imminent from imports of gray Portland
cement.

7. Causation has become moot and academic in view of the negative determination of
the elements of serious injury and imminent threat of serious injury.23

Accordingly, the Tariff Commission made the following recommendation, to wit:

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.24

The DTI received the Report on 14 March 2002. After reviewing the report, then DTI Secretary
Manuel Roxas II ("DTI Secretary") disagreed with the conclusion of the Tariff Commission that
there was no serious injury to the local cement industry caused by the surge of imports. 25 In
view of this disagreement, the DTI requested an opinion from the Department of Justice
("DOJ") on the DTI Secretary's scope of options in acting on the Commission's
recommendations. Subsequently, then DOJ Secretary Hernando Perez rendered an opinion
stating that Section 13 of the SMA precluded a review by the DTI Secretary of the Tariff
Commission's negative finding, or finding that a definitive safeguard measure should not be
imposed.26

On 5 April 2002, the DTI Secretary promulgated a Decision. After quoting the conclusions of the
Tariff Commission, the DTI Secretary noted the DTI's disagreement with the conclusions.
However, he also cited the DOJ Opinion advising the DTI that it was bound by the negative
finding of the Tariff Commission. Thus, he ruled as follows:

The DTI has no alternative but to abide by the [Tariff] Commission's recommendations.

IN VIEW OF THE FOREGOING, and in accordance with Section 13 of RA 8800 which

states:

"In the event of a negative final determination; or if the cash bond is in excess
of the definitive safeguard duty assessed, the Secretary shall immediately
issue, through the Secretary of Finance, a written instruction to the
Commissioner of Customs, authorizing the return of the cash bond or the
remainder thereof, as the case may be, previously collected as provisional
general safeguard measure within ten (10) days from the date a final decision
has been made; Provided, that the government shall not be liable for any
interest on the amount to be returned. The Secretary shall not accept for
consideration another petition from the same industry, with respect to the
same imports of the product under consideration within one (1) year after the
date of rendering such a decision."
The DTI hereby issues the following:

The application for safeguard measures against the importation of gray Portland cement
filed by PHILCEMCOR (Case No. 02-2001) is hereby denied.27 (Emphasis in the original)

Philcemcor received a copy of the DTI Decision on 12 April 2002. Ten days later, it filed with the
Court of Appeals a Petition for Certiorari, Prohibition and Mandamus 28 seeking to set aside the
DTI Decision, as well as the Tariff Commission's Report. Philcemcor likewise applied for
a Temporary Restraining Order/Injunction to enjoin the DTI and the BOC from implementing the
questioned Decision and 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.29

On 10 June 2002, Southern Cross filed its Comment.30 It argued that the Court of Appeals had no
jurisdiction over Philcemcor's Petition, for it is on the Court of Tax Appeals ("CTA") that the SMA
conferred jurisdiction to review rulings of the Secretary in connection with the imposition of a
safeguard measure. It likewise argued that Philcemcor's resort to the special civil action of
certiorari is improper, considering that what Philcemcor sought to rectify is an error of
judgment and not an error of jurisdiction or grave abuse of discretion, and that a petition for
review with the CTA was available as a plain, speedy and adequate remedy. Finally, Southern
Cross echoed the DOJ Opinion that Section 13 of the SMA precludes a review by the DTI
Secretary of a negative finding of the Tariff Commission.

After conducting a hearing on 19 June 2002 on Philcemcor's application for preliminary

injunction, the Court of Appeals' Twelfth Division31 granted the writ sought in
its Resolution dated 21 June 2002.32 Seven days later, on 28 June 2002, the two-hundred (200)-
day period for the imposition of the provisional measure expired. Despite the lapse of the
period, the BOC continued to impose the provisional measure on all importations of Portland
cement made by Southern Cross. The uninterrupted assessment of the tariff, according to
Southern Cross, worked to its detriment to the point that the continued imposition would
eventually lead to its closure.33

Southern Cross timely filed a Motion for Reconsideration of the Resolution on 9 September

2002. Alleging that Philcemcor was not entitled to provisional relief, Southern Cross likewise
sought a clarificatory order as to whether the grant of the writ of preliminary injunction could
extend the earlier imposition of the provisional measure beyond the two hundred (200)-day
limit imposed by law. The appeals' court failed to take immediate action on Southern Cross's
motion despite the four (4) motions for early resolution the latter filed between September of
2002 and February of 2003. After six (6) months, on 19 February 2003, the Court of Appeals
directed Philcemcor to comment on Southern Cross's Motion for Reconsideration.34 After
Philcemcor filed its Opposition35 on 13 March 2003, Southern Cross filed another set of four (4)
motions for early resolution.
Despite the efforts of Southern Cross, the Court of Appeals failed to directly resolve the Motion
for Reconsideration. Instead, on 5 June 2003, it rendered a Decision,36 granting in part
Philcemcor's petition. The appellate court ruled that it had jurisdiction over the petition for
certiorari since it alleged grave abuse of discretion. It refused to annul the findings of the Tariff
Commission, citing the rule that factual findings of administrative agencies are binding upon the
courts and its corollary, that courts should not interfere in matters addressed to the sound
discretion and coming under the special technical knowledge and training of such
agencies.37 Nevertheless, it held that the DTI Secretary is not bound by 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.38 The dispositive portion of the Decision reads:

WHEREFORE, based on the foregoing premises, petitioner's prayer to set aside the
findings of the Tariff Commission in its assailed Report dated March 13, 2002
is DENIED. On the other hand, the assailed April 5, 2002 Decision of the Secretary of the
Department of Trade and Industry is hereby SET ASIDE. Consequently, the case
is REMANDED to the public respondent Secretary of Department of Trade and Industry
for a final decision in accordance with RA 8800 and its Implementing Rules and
Regulations.

SO ORDERED.39

On 23 June 2003, Southern Cross filed the present petition, assailing the appellate
court's Decision for departing from the accepted and usual course of judicial proceedings, and
not deciding the substantial questions in accordance with law and jurisprudence. The petition
argues in the main that the Court of Appeals has no jurisdiction over Philcemcor's petition, the
proper remedy being 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 conditions
warranting the imposition of general safeguard measures are binding upon the DTI Secretary.

The timely filing of Southern Cross's petition before this Court necessarily prevented the Court
of Appeals Decision from becoming final.40 Yet on 25 June 2003, the DTI Secretary issued a
new Decision, ruling this time 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.41 He made a determination that, contrary to the findings of the Tariff Commission,
the local cement industry had suffered serious injury as a result of the import
surges.42 Accordingly, he imposed a definitive safeguard measure on the importation of gray
Portland cement, in the form of a definitive safeguard duty in the amount of P20.60/40 kg. bag
for three years on imported gray Portland Cement.43

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. Prescinding
from this action, Philcemcor filed with this Court a Manifestation and Motion to Dismiss in
regard to Southern Cross's petition, alleging that it deliberately and willfully resorted to forum-
shopping. It points out that Southern Cross's TRO Application seeks to enjoin the DTI Secretary's
second decision, while its Petition before the CTA prays for the annulment of the same
decision.44

Reiterating its Comment on Southern Cross's Petition for Review, Philcemcor also argues 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.45

After giving due course to Southern Cross's Petition, the Court called the case for oral argument
on 18 February 2004.46 At the oral argument, attended by the counsel for Philcemcor and
Southern 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, (iii) whether a Temporary Restraining Order is warranted.47

During the oral arguments, counsel for Southern Cross manifested that due to the imposition of
the general safeguard measures, Southern Cross was forced to cease operations in the
Philippines in November of 2003.48

Propriety of the Temporary Restraining Order

Before the merits of the Petition, a brief comment on Southern Cross's application for
provisional relief. It sought to enjoin the DTI Secretary from enforcing the definitive safeguard
measure he imposed in his 25 June 2003 Decision. The Court did not grant the provisional relief
for it would be tantamount to enjoining the collection of taxes, a peremptory judicial act which
is traditionally frowned upon,49 unless there is a clear statutory basis for it.50 In that regard,
Section 218 of the Tax Reform Act of 1997 prohibits any court from granting an injunction to
restrain the collection of any national internal revenue tax, fee or charge imposed by the
internal revenue code.51 A similar philosophy is expressed by Section 29 of the SMA, which
states that the filing of a petition for review before the CTA does not stop, suspend, or
otherwise toll the imposition or collection of the appropriate tariff duties or the adoption of
other appropriate safeguard measures.52 This evinces a clear legislative intent that the
imposition of safeguard measures, despite the availability of judicial review, should not be
enjoined notwithstanding any timely appeal of the imposition.

The Forum-Shopping Issue

In the same breath, we are not convinced that the allegation of forum-shopping has been duly
proven, or that sanction should befall upon Southern Cross and its counsel. The standard by
Section 5, Rule 7 of the 1997 Rules of Civil Procedure in order that sanction may be had is that
"the acts of the party or his counsel clearly constitute willful and deliberate forum
shopping."53 The standard implies a malicious intent to subvert procedural rules, and such state
of mind is not evident in this case.

The Jurisdictional Issue

On to the merits of the present petition.

In its assailed Decision, the Court of Appeals, after asserting only in brief that it had jurisdiction
over Philcemcor's Petition, discussed the issue of whether or not the DTI Secretary is bound to
adopt the negative recommendation of the Tariff Commission on the application for safeguard
measure. The Court of Appeals maintained that it had jurisdiction over the petition, as it alleged
grave abuse of discretion on the part of the DTI Secretary, thus:

A perusal of the instant petition reveals allegations of grave abuse of discretion on the
part of the DTI Secretary in rendering the assailed April 5, 2002 Decision wherein it was
ruled that he had no alternative but to abide by the findings of the Commission on the
matter of safeguard measures for the local cement industry. Abuse of discretion is
admittedly within the ambit of certiorari.

Grave abuse of discretion implies such capricious and whimsical exercise of judgment as
is equivalent to lack of jurisdiction. It is alleged that, in the assailed Decision, the DTI
Secretary gravely abused his discretion in wantonly evading to discharge his duty to
render an independent determination or decision in imposing a definitive safeguard
measure.54

We do not doubt that the Court of Appeals' certiorari powers extend to correcting grave abuse
of discretion on the part of an officer exercising judicial or quasi-judicial functions. 55 However,
the special civil action of certiorari is available only when there is no plain, speedy and
adequate remedy in the ordinary course of law.56 Southern Cross relies on this limitation,
stressing that Section 29 of the SMA is a plain, speedy and adequate remedy in the ordinary
course of law which Philcemcor did not avail of. The Section 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.57 (Emphasis
supplied)

It is not difficult to divine why the legislature singled out the CTA as the court with jurisdiction
to review the ruling of the DTI Secretary in connection with the imposition of a safeguard
measure. The Court has long recognized the legislative determination to vest sole and exclusive
jurisdiction on matters involving internal revenue and customs duties to such a specialized
court.58 By the very nature of its function, the CTA is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject.59

At the same time, since the CTA is a court of limited jurisdiction, its jurisdiction to take
cognizance of a case should be clearly conferred and should not be deemed to exist on mere
implication.60 Concededly, Rep. Act No. 1125, the statute creating the CTA, does not extend to it
the power to review decisions of the DTI Secretary in connection with the imposition of
safeguard measures.61 Of course, at that time which was before the advent of trade
liberalization the notion of safeguard measures or safety nets was not yet in vogue.

Undeniably, however, the SMA expanded the jurisdiction of the CTA by including review of the
rulings of the DTI Secretary in connection with the imposition of safeguard measures. However,
Philcemcor and the public respondents agree that the CTA has appellate jurisdiction over a
decision of the DTI Secretary imposing a safeguard measure, but not when his ruling is not to
impose such measure.

In a related development, Rep. Act No. 9282, enacted 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 xxx involving xxx safeguard measures under
Republic Act No. 8800, where either party may appeal the decision to impose or not to
impose said duties."62 Had Rep. Act No. 9282 already been in force at the beginning of the
incidents subject of this case, there would have been no need to make any deeper inquiry as to
the extent of the CTA's jurisdiction. But as Rep. Act No. 9282 cannot be applied retroactively to
the present case, the question of whether such jurisdiction extends to a decision not to impose
a safeguard measure will have to be settled principally on the basis of the SMA.

Under Section 29 of the SMA, 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.
The first two requisites are clearly present. The third requisite deserves closer scrutiny.

Contrary to the stance of the public respondents and Philcemcor, in this case where the DTI
Secretary decides not to impose a safeguard measure, it is the CTA which has jurisdiction to
review his decision. The reasons are as follows:
First. Split jurisdiction is abhorred.

Essentially, respondents' position is that judicial review of the DTI Secretary's ruling is exercised
by two different courts, depending on whether or not it imposes a safeguard measure, and in
either case the court exercising jurisdiction does so to the exclusion of the other. Thus, if the
DTI decision involves the imposition of a safeguard measure it is the CTA which has appellate
jurisdiction; otherwise, it is the Court of Appeals. Such setup is as novel and unusual as it is
cumbersome and unwise. Essentially, respondents advocate that Section 29 of the SMA has
established split appellate jurisdiction over rulings of the DTI Secretary on the imposition of
safeguard measure.

This interpretation cannot be favored, as the Court has consistently refused to sanction split
jurisdiction.63 The power of the DTI Secretary to adopt or withhold a safeguard measure
emanates from the same statutory source, and it boggles the mind why the appeal modality
would be such that one appellate court is qualified if what is to be reviewed is a positive
determination, and it is not if what is appealed is a negative determination. In deciding whether
or not to impose a safeguard measure, provisional or general, the DTI Secretary would be
evaluating only one body of facts and applying them to one set of laws. The reviewing tribunal
will be called upon to examine the same facts and the same laws, whether or not the
determination is positive or negative.

In short, if we were to rule for respondents we would be confirming the exercise by two judicial
bodies of jurisdiction over basically the same subject matter¾precisely the split-jurisdiction
situation which is anathema to the orderly administration of justice. 64 The Court cannot accept
that such was the legislative motive especially considering that the law expressly confers on the
CTA, the tribunal with the specialized competence over tax and tariff matters, the role of
judicial review without mention of any other court that may exercise corollary or ancillary
jurisdiction in relation to the SMA. The provision refers to the Court of Appeals but only in
regard to procedural rules and dispositions of appeals from the CTA to the Court of Appeals.65

The principle enunciated in Tejada v. Homestead Property Corporation66 is applicable to the case
at bar:

The Court agrees with the observation of the [that] when an administrative agency or
body is conferred quasi-judicial functions, all controversies relating to the subject
matter pertaining to its specialization are deemed to be included within the
jurisdiction of said administrative agency or body. Split jurisdiction is not favored.67

Second. The interpretation of the provisions of the SMA favors vesting untrammeled appellate
jurisdiction on the CTA.

A plain reading of Section 29 of the SMA reveals that Congress did not expressly bar the CTA
from reviewing a negative determination by the DTI Secretary nor conferred on the Court of
Appeals such review authority. Respondents note, on the other hand, that neither did the law
expressly grant to the CTA the power to review a negative determination. However, under the
clear text of the law, the CTA is vested with jurisdiction to review the ruling of the DTI Secretary
"in connection with the imposition of a safeguard measure." Had the law been couched instead
to incorporate the phrase "the ruling imposing a safeguard measure," then respondent's claim
would have indisputable merit. Undoubtedly, the phrase "in connection with" not only qualifies
but clarifies the succeeding phrase "imposition of a safeguard measure." As expounded later,
the phrase also encompasses the opposite or converse ruling which is the non-imposition of a
safeguard measure.

In the American case of Shaw v. Delta Air Lines, Inc.,68 the United States Supreme Court, in
interpreting a key provision of the Employee Retirement Security Act of 1974, construed the
phrase "relates to" in its normal sense which is the same as "if it has connection with or
reference to."69 There is no serious dispute that the phrase "in connection with" is synonymous
to "relates to" or "reference to," and that all three phrases are broadly expansive. This is
affirmed not just by jurisprudential fiat, but also the acquired connotative meaning of "in
connection with" in common parlance. Consequently, with the use of the phrase "in connection
with," Section 29 allows the CTA to review not only the ruling imposing a safeguard measure,
but all other rulings related or have reference to the application for such measure.

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
US Supreme Court in New York State Blue Cross Plans v. Travelers Ins.70 conceded that the
phrases "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.71 Thus, in
the case the US High 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."72 A similar inquiry into the other provisions of the SMA is in order to determine the
scope of review accorded therein to the CTA.73

The authority to decide on the safeguard measure is vested in the DTI Secretary in the case of
non-agricultural products, and in the Secretary of the Department of Agriculture in the case of
agricultural products.74 Section 29 is likewise explicit that only the rulings of the DTI Secretary or
the Agriculture Secretary may be reviewed by the CTA.75 Thus, the acts of other bodies that
were granted some powers by the SMA, such as the Tariff Commission, are not subject to direct
review by the CTA.

Under the SMA, the Department Secretary concerned is authorized to decide on several
matters. Within thirty (30) days from receipt of a petition seeking the imposition of a safeguard
measure, or from the date he made motu proprio initiation, the Secretary shall make a
preliminary determination on whether the increased imports of the product under
consideration substantially cause or threaten to cause serious injury to the domestic
industry.76 Such ruling is crucial since only upon the Secretary's positive preliminary
determination that a threat to the domestic industry exists shall the matter be referred to the
Tariff Commission for formal investigation, this time, to determine whether the general
safeguard measure should be imposed or not.77 Pursuant to a positive preliminary
determination, the Secretary may also decide that the imposition of a provisional safeguard
measure would be warranted under Section 8 of the SMA. 78 The Secretary is also authorized to
decide, after receipt of the report of the Tariff Commission, whether or not to impose the
general safeguard measure, and if in the affirmative, what general safeguard measures should
be applied.79 Even after the general safeguard measure is imposed, the Secretary is empowered
to extend the safeguard measure,80 or terminate, reduce or modify his previous rulings on the
general safeguard measure.81

With the explicit grant of certain powers involving safeguard measures by the SMA on the DTI
Secretary, it follows that he is empowered to rule on several issues. These are the issues which
arise in connection with, or in relation to, the imposition of a safeguard measure. They may
arise at different stages – the preliminary investigation stage, the post-formal investigation
stage, or the post-safeguard measure stage – yet all these issues do become ripe for resolution
because an initiatory action has been taken seeking the imposition of a safeguard measure. It is
the initiatory action for the imposition of a safeguard measure that sets the wheels in motion,
allowing the Secretary to make successive rulings, beginning with the preliminary
determination.

Clearly, therefore, the scope and reach of the phrase "in connection with," as intended by
Congress, pertain to all rulings of the DTI Secretary or Agriculture Secretary which arise from
the time an application or motu proprio initiation for the imposition of a safeguard measure is
taken. Indeed, the incidents which require resolution come to the fore only because there is an
initial application or action seeking the imposition of a safeguard measure. From the legislative
standpoint, it was a matter of sense and practicality to lump up the questions related to the
initiatory application or action for safeguard measure and to assign only one court and; that is
the CTA to initially review all the rulings related to such initiatory application or action. Both
directions Congress put in place by employing the phrase "in connection with" in the law.

Given the relative expanse of decisions subject to judicial review by the CTA under Section 29,
we do not doubt that a negative ruling refusing to impose a safeguard measure falls within the
scope of its jurisdiction. On a literal level, such negative ruling is "a ruling of the Secretary in
connection with the imposition of a safeguard measure," as it is one of the possible outcomes
that may result from the initial application or action for a safeguard measure. On a more critical
level, the rulings of the DTI Secretary in connection with a safeguard measure, however diverse
the outcome may be, arise from the same grant of jurisdiction on the DTI Secretary by the
SMA.82 The refusal by the DTI Secretary to grant a safeguard measure involves the same grant of
authority, the same statutory prescriptions, and the same degree of discretion as the
imposition by the DTI Secretary of a safeguard measure.

The position of the respondents is one of "uncritical literalism"83 incongruent with the animus of
the law. Moreover, a fundamentalist approach to Section 29 is not warranted, considering the
absurdity of the consequences.
Third. Interpretatio Talis In Ambiguis Semper Fienda Est, Ut Evitur Inconveniens Et Absurdum.84

Even assuming arguendo that Section 29 has not expressly granted the CTA jurisdiction to
review a negative ruling of the DTI Secretary, the Court is precluded from favoring an
interpretation that would cause inconvenience and absurdity.85 Adopting the respondents'
position favoring the CTA's minimal jurisdiction would unnecessarily lead to illogical and
onerous results.

Indeed, it is illiberal to assume that Congress had intended to provide appellate relief to rulings
imposing a safeguard measure but not to those declining to impose the measure. Respondents
might argue that the right to relief from a negative ruling is not lost since the applicant could, as
Philcemcor did, question such ruling through a special civil action for certiorari under Rule 65 of
the 1997 Rules of Civil Procedure, in lieu of an appeal to the CTA. Yet these two reliefs are of
differing natures and gravamen. While an appeal may be predicated on errors of fact or errors
of law, a special civil action for certiorari is grounded on grave abuse of discretion or lack of or
excess of jurisdiction on the part of the decider. For a special civil action for certiorari to
succeed, it is not enough that the questioned act of the respondent is wrong. As the Court
clarified in Sempio v. Court of Appeals:

A tribunal, board or officer acts without jurisdiction if it/he does not have the legal
power to determine the case. There is excess of jurisdiction where, being clothed with
the power to determine the case, the tribunal, board or officer oversteps its/his
authority as determined by law. And there is grave abuse of discretion where the
tribunal, board or officer acts in a capricious, whimsical, arbitrary or despotic manner in
the exercise of his judgment as to be said to be equivalent to lack of jurisdiction.
Certiorari is often resorted to in order to correct errors of jurisdiction. Where the error
is one of law or of fact, which is a mistake of judgment, appeal is the remedy.86

It is very conceivable that the DTI Secretary, after deliberate thought and careful evaluation of
the evidence, may either make a negative preliminary determination as he is so empowered
under Section 7 of the SMA, or refuse to adopt the definitive safeguard measure under Section
13 of the same law. Adopting the respondents' theory, this negative ruling is susceptible to
reversal only through a special civil action for certiorari, thus depriving the affected party the
chance to elevate the ruling on appeal on the rudimentary grounds of errors in fact or in law.
Instead, and despite whatever indications that the DTI Secretary acted with measure and within
the bounds of his jurisdiction are, the aggrieved party will be forced to resort to a gymnastic
exercise, contorting the straight and narrow in an effort to discombobulate the courts into
believing that what was within was actually beyond and what was studied and deliberate
actually whimsical and capricious. What then would be the remedy of the party aggrieved by a
negative ruling that simply erred in interpreting the facts or the law? It certainly cannot be the
special civil action for certiorari, for as the Court held in Silverio v. Court of Appeals: "Certiorari
is a remedy narrow in its scope and inflexible in its character. It is not a general utility tool in the
legal workshop."87
Fortunately, this theoretical quandary need not come to pass. Section 29 of the SMA is worded
in such a way that it places under the CTA's judicial review all rulings of the DTI Secretary, which
are connected with the imposition of a safeguard measure. This is sound and proper in light of
the specialized jurisdiction of the CTA over tax matters. In the same way that a question of
whether to tax or not to tax is properly a tax matter, so is the question of whether to impose or
not to impose a definitive safeguard measure.

On another note, the second paragraph of Section 29 similarly reveals the legislative intent that
rulings of the DTI Secretary over safeguard measures should first be reviewed by the CTA and
not the Court of Appeals. It reads:

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.

This is the only passage in the SMA in which the Court of Appeals is mentioned. The express
wish of Congress is that the petition conform to the requirements and procedure under Rule 43
of the Rules of Civil Procedure. Since Congress mandated that the form and procedure adopted
be analogous to a review of a CTA ruling by the Court of Appeals, the legislative contemplation
could not have been that the appeal be directly taken to the Court of Appeals.

Issue of Binding Effect of Tariff

Commission's Factual Determination
on DTI Secretary.

The next issue for resolution is whether the factual determination made by the Tariff
Commission under the SMA is binding on the DTI Secretary. Otherwise stated, the question is
whether the DTI Secretary may impose general safeguard measures in the absence of a positive
final determination by the Tariff Commission.

The Court of Appeals relied upon Section 13 of the SMA in ruling that the findings of the Tariff
Commission do not necessarily constitute a final decision. Section 13 details the procedure for
the adoption of a safeguard measure, as well as the steps to be taken in case there is a negative
final determination. The implication of the Court of Appeals' holding is that the DTI Secretary
may adopt a definitive safeguard measure, notwithstanding a negative determination made by
the Tariff Commission.

Undoubtedly, Section 13 prescribes certain limitations and restrictions before general

safeguard measures may be imposed. However, the most fundamental restriction on the DTI
Secretary's power in that respect is contained in Section 5 of the SMA¾that there should first
be a positive final determination of the Tariff Commission¾which the Court of Appeals
curiously all but ignored. Section 5 reads:
 Sec. 5. Conditions for the Application of General Safeguard Measures. – 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. (emphasis
supplied)

The plain meaning of Section 5 shows that it is the Tariff Commission that has the power to
make a "positive final determination." This power lodged in the Tariff Commission, must be
distinguished from the power to impose the general safeguard measure which is properly
vested on the DTI Secretary.88

All in all, there are two condition precedents that must be satisfied before the DTI Secretary
may impose a general safeguard measure on grey Portland cement. First, 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. Second, in the case of
non-agricultural products the Secretary must establish that the application of such safeguard
measures is in the public interest.89 As Southern Cross argues, Section 5 is quite clear-cut, and it
is impossible to finagle a different conclusion even through overarching methods of statutory
construction. There is no safer nor better settled canon of interpretation that when language is
clear and unambiguous it must be held to mean what it plainly expresses:90 In the quotable
words of an illustrious member of this Court, thus:

[I]f a statute is clear, plain and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation. The verba legis or plain meaning rule
rests on the valid presumption that the words employed by the legislature in a statute
correctly express its intent or will and preclude the court from construing it differently.
The legislature is presumed to know the meaning of the words, to have used words
advisedly, and to have expressed its intent by the use of such words as are found in the
statute.91

Moreover, Rule 5 of the Implementing Rules and Regulations of the SMA,92 which interprets
Section 5 of the law, likewise requires a positive final determination on the part of the Tariff
Commission before the application of the general safeguard measure.

The SMA establishes a distinct allocation of functions between the Tariff Commission and the
DTI Secretary. The plain meaning of Section 5 shows that it is the Tariff Commission that has the
power to make a "positive final determination." This power, which belongs to the Tariff
Commission, must be distinguished from the power to impose general safeguard measure
properly vested on the DTI Secretary. The distinction is vital, as a "positive final determination"
clearly antecedes, as a condition precedent, the imposition of a general safeguard measure. At
the same time, a positive final determination does not necessarily result in the imposition of a
general safeguard measure. Under Section 5, notwithstanding the positive final determination
of the Tariff Commission, the DTI Secretary is tasked to decide whether or not that the
application of the safeguard measures is in the public interest.

It is also clear from Section 5 of the SMA that the positive final determination to be undertaken
by the Tariff Commission does not entail a mere gathering of statistical data. In order to arrive
at such determination, it has to establish causal linkages from the statistics that it compiles and
evaluates: after finding there is an importation in increased quantities of the product in
question, that such importation is a substantial cause of serious threat or injury to the domestic
industry.

The Court of Appeals relies heavily on the legislative record of a congressional debate during
deliberations on the SMA to assert a purported legislative intent that the findings of the Tariff
Commission do not bind the DTI Secretary.93 Yet as explained earlier, the plain meaning of
Section 5 emphasizes that only if the Tariff Commission renders a positive determination could
the DTI Secretary impose a safeguard measure. Resort to the congressional records to ascertain
legislative intent is not warranted if a statute is clear, plain and free from ambiguity. The
legislature is presumed to know the meaning of the words, to have used words advisedly, and
to have expressed its intent by the use of such words as are found in the statute.94

Indeed, the legislative record, if at all to be availed of, should be approached with extreme
caution, as legislative debates and proceedings are powerless to vary the terms of the statute
when the meaning is clear.95 Our holding in Civil Liberties Union v. Executive Secretary 96 on the
resort to deliberations of the constitutional convention to interpret the Constitution is likewise
appropriate in ascertaining statutory intent:

While it is permissible in this jurisdiction to consult the debates and proceedings of the
constitutional convention in order to arrive at the reason and purpose of the resulting
Constitution, resort thereto may be had only when other guides fail as said proceedings
are powerless to vary the terms of the Constitution when the meaning is clear. Debates
in the constitutional convention "are of value as showing the views of the individual
members, and as indicating the reasons for their votes, but they give us no light as to
the views of the large majority who did not talk xxx. We think it safer to construe the
constitution from what appears upon its face."97

Moreover, it is easy to selectively cite passages, sometimes out of their proper context, in order
to assert a misleading interpretation. The effect can be dangerous. Minority or solitary views,
anecdotal ruminations, or even the occasional crude witticisms, may improperly acquire the
mantle of legislative intent by the sole virtue of their publication in the authoritative
congressional record. Hence, resort to legislative deliberations is allowable when the statute is
crafted in such a manner as to leave room for doubt on the real intent of the legislature.
Section 5 plainly evinces legislative intent to restrict the DTI Secretary's power to impose a
general safeguard measure by preconditioning such imposition on a positive determination by
the Tariff Commission. Such legislative intent should be given full force and effect, as the
executive power to impose definitive safeguard measures is but a delegated power¾the power
of taxation, by nature and by command of the fundamental law, being a preserve of the
legislature.98 Section 28(2), Article VI of the 1987 Constitution confirms the delegation of
legislative power, yet ensures that the prerogative of Congress to impose limitations and
restrictions on the executive exercise of this power:

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.99

The safeguard measures which the DTI Secretary may impose under the SMA may take the
following variations, to wit: (a) an increase in, or imposition of any duty on the imported
product; (b) a decrease in or the imposition of a tariff-rate quota on the product; (c) a
modification or imposition of any quantitative restriction on the importation of the product into
the Philippines; (d) one or more appropriate adjustment measures, including the provision of
trade adjustment assistance; and (e) any combination of the above-described actions. Except
for the provision of trade adjustment assistance, the measures enumerated by the SMA are
essentially imposts, which precisely are the subject of delegation under Section 28(2), Article VI
of the 1987 Constitution.100

This delegation of the taxation power by the legislative to the executive is authorized by the
Constitution itself.101 At the same time, the Constitution also grants the delegating authority
(Congress) the right to impose restrictions and limitations on the taxation power delegated to
the President.102 The restrictions and limitations imposed by Congress take on the mantle of a
constitutional command, which the executive branch is obliged to observe.

The SMA empowered the DTI Secretary, as alter ego of the President,103 to impose definitive
general safeguard measures, which basically are tariff imposts of the type spoken of in the
Constitution. However, the law did not grant him full, uninhibited discretion to impose such
measures. The DTI Secretary authority is derived from the SMA; it does not flow from any
inherent executive power. Thus, the limitations imposed by Section 5 are absolute, warranted
as they are by a constitutional fiat.104

Philcemcor cites our 1912 ruling in Lamb v. Phipps105 to assert that the DTI Secretary, having the
final decision on the safeguard measure, has the power to evaluate the findings of the Tariff
Commission and make an independent judgment thereon. Given the constitutional and
statutory limitations governing the present case, the citation is misplaced. Lamb pertained to
the discretion of the Insular Auditor of the Philippine Islands, whom, as the Court recognized,
"[t]he statutes of the United States require[d] xxx to exercise his judgment upon the legality xxx
[of] provisions of law and resolutions of Congress providing for the payment of money, the
means of procuring testimony upon which he may act."106

Thus in Lamb, while the Court recognized the wide latitude of discretion that may have been
vested on the Insular Auditor, it also recognized that such latitude flowed from, and is
consequently limited by, statutory grant. However, in this case, the provision of the
Constitution in point expressly recognizes the authority of Congress to prescribe limitations in
the case of tariffs, export/import quotas and other such safeguard measures. Thus, the broad
discretion granted to the Insular Auditor of the Philippine Islands cannot be analogous to the
discretion of the DTI Secretary which is circumscribed by Section 5 of the SMA.

For that matter, Cariño v. Commissioner on Human Rights,107 likewise cited by Philcemcor, is

also inapplicable owing to the different statutory regimes prevailing over that case and the
present petition. In Cariño, the Court ruled that the constitutional power of the Commission on
Human Rights (CHR) to investigate human rights' violations did not extend to adjudicating
claims on the merits.108 Philcemcor claims that the functions of the Tariff Commission being
"only investigatory," it could neither decide nor adjudicate.109

The applicable law governing the issue in Cariño is Section 18, Article XIII of the Constitution,
which delineates the powers and functions of the CHR. The provision does not vest on the CHR
the power to adjudicate cases, but only to investigate all forms of human rights
violations.110 Yet, without modifying the thorough disquisition of the Court in Cariño on the
general limitations on the investigatory power, the precedent is inapplicable because of the
difference in the involved statutory frameworks. The Constitution does not repose binding
effect on the results of the CHR's investigation.111 On the other hand, through Section 5 of the
SMA and under the authority of Section 28(2), Article VI of the Constitution, Congress did
intend to bind the DTI Secretary to the determination made by the Tariff Commission. 112 It is of
no consequence that such determination results from the exercise of investigatory powers by
the Tariff Commission since Congress is well within its constitutional mandate to limit the
authority of the DTI Secretary to impose safeguard measures in the manner that it sees fit.

The Court of Appeals and Philcemcor also rely on Section 13 of the SMA and Rule 13 of the
SMA's Implementing Rules in support of the view that the DTI Secretary may decide
independently of the determination made by the Tariff Commission. Admittedly, there are
certain infelicities in the language of Section 13 and Rule 13. But reliance should not be placed
on the textual imprecisions. Rather, Section 13 and Rule 13 must be viewed in light of the
fundamental prescription imposed by Section 5. 113

Section 13 of the SMA lays down the procedure to be followed after the Tariff Commission
renders its report. The provision reads in full:

SEC. 13. Adoption of Definitive Measures. — Upon its positive determination, the

Commission shall recommend to the Secretary an appropriate definitive measure, in the
form of:
(a) An increase in, or imposition of, any duty on the imported product;

(b) A decrease in or the imposition of a tariff-rate quota (MAV) on the product;

(c) A modification or imposition of any quantitative restriction on the importation of the

product into the Philippines;

(d) One or more appropriate adjustment measures, including the provision of trade
adjustment assistance;

(e) Any combination of actions described in subparagraphs (a) to (d).

The Commission may also recommend other actions, including the initiation of
international negotiations to address the underlying cause of the increase of imports of
the product, to alleviate the injury or threat thereof to the domestic industry, and to
facilitate positive adjustment to import competition.

The general safeguard measure shall be limited to the extent of redressing or preventing
the injury and to facilitate adjustment by the domestic industry from the adverse effects
directly attributed to the increased imports: Provided, however, That when quantitative
import restrictions are used, such measures shall not reduce the quantity of imports
below the average imports for the three (3) preceding representative years, unless clear
justification is given that a different level is necessary to prevent or remedy a serious
injury.

A general safeguard measure shall not be applied to a product originating from a

developing country if its share of total imports of the product is less than three percent
(3%): Provided, however, That developing countries with less than three percent (3%)
share collectively account for not more than nine percent (9%) of the total imports.

The decision imposing a general safeguard measure, the duration of which is more than
one (1) year, shall be reviewed at regular intervals for purposes of liberalizing or
reducing its intensity. The industry benefiting from the application of a general
safeguard measure shall be required to show positive adjustment within the allowable
period. A general safeguard measure shall be terminated where the benefiting industry
fails to show any improvement, as may be determined by the Secretary.

The Secretary shall issue a written instruction to the heads of the concerned
government agencies to implement the appropriate general safeguard measure as
determined by the Secretary within fifteen (15) days from receipt of the report.

In the event of a negative final determination, or if the cash bond is in excess of the
definitive safeguard duty assessed, the Secretary shall immediately issue, through the
Secretary of Finance, a written instruction to the Commissioner of Customs, authorizing
 the return of the cash bond or the remainder thereof, as the case may be, previously
collected as provisional general safeguard measure within ten (10) days from the date a
final decision has been made: Provided, That the government shall not be liable for any
interest on the amount to be returned. The Secretary shall not accept for consideration
another petition from the same industry, with respect to the same imports of the
product under consideration within one (1) year after the date of rendering such a
decision.

When the definitive safeguard measure is in the form of a tariff increase, such increase
shall not be subject or limited to the maximum levels of tariff as set forth in Section
401(a) of the Tariff and Customs Code of the Philippines.

To better comprehend Section 13, note must be taken of the distinction between the
investigatory and recommendatory functions of the Tariff Commission under the SMA.

The word "determination," as used in the SMA, pertains to the factual findings on whether
there are increased imports into the country of the product under consideration, and on
whether such increased imports are a substantial cause of serious injury or threaten to
substantially cause serious injury to the domestic industry.114 The SMA explicitly authorizes the
DTI Secretary to make a preliminary determination,115 and the Tariff Commission to make the
final determination.116 The distinction is fundamental, as these functions are not
interchangeable. The Tariff Commission makes its determination only after a formal
investigation process, with such investigation initiated only if there is a positive preliminary
determination by the DTI Secretary under Section 7 of the SMA. 117 On the other hand, the DTI
Secretary may impose definitive safeguard measure only if there is a positive final
determination made by the Tariff Commission.118

In contrast, a "recommendation" is a suggested remedial measure submitted by the Tariff

Commission under Section 13 after making a positive final determination in accordance with
Section 5. The Tariff Commission is not empowered to make a recommendation absent a
positive final determination on its part.119 Under Section 13, the Tariff Commission is required to
recommend to the [DTI] Secretary an "appropriate definitive measure."120 The Tariff
Commission "may also recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of imports of the products, to
alleviate the injury or threat thereof to the domestic industry and to facilitate positive
adjustment to import competition."121

The recommendations of the Tariff Commission, as rendered under Section 13, are not
obligatory on the DTI Secretary. Nothing in the SMA mandates 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 based on its positive final determination.122 The non-binding force of the Tariff
Commission's recommendations is congruent with the command of Section 28(2), Article VI of
the 1987 Constitution that only the President may be empowered by the Congress to impose
appropriate tariff rates, import/export quotas and other similar measures.123 It is the DTI
Secretary, as alter ego of the President, who under the SMA may impose such safeguard
measures subject to the limitations imposed therein. A contrary conclusion would in essence
unduly arrogate to the Tariff Commission the executive power to impose the appropriate tariff
measures. That is why the SMA empowers the DTI Secretary to adopt safeguard measures
other than those recommended by the Tariff Commission.

Unlike the recommendations of the Tariff Commission, its determination has a different effect
on the DTI Secretary. Only on the basis of a positive final determination made by the Tariff
Commission under Section 5 can the DTI Secretary impose a general safeguard measure.
Clearly, then the DTI Secretary is bound by the determination made by the Tariff Commission.

Some confusion may arise because the sixth paragraph of Section 13124 uses the variant word
"determined" in a different context, as it contemplates "the appropriate general safeguard
measure as determined by the Secretary within fifteen (15) days from receipt of the report."
Quite plainly, the word "determined" in this context pertains to the DTI Secretary's power of
choice of the appropriate safeguard measure, as opposed to the Tariff Commission's power to
determine the existence of conditions necessary for the imposition of any safeguard measure.
In relation to Section 5, such choice also relates to the mandate of the DTI Secretary to
establish that the application of safeguard measures is in the public interest, also within the
fifteen (15) day period. Nothing in Section 13 contradicts the instruction in Section 5 that the
DTI Secretary is allowed to impose the general safeguard measures only if there is a positive
determination made by the Tariff Commission.

Unfortunately, Rule 13.2 of the Implementing Rules of the SMA is captioned "Final
Determination by the Secretary." The assailed Decision and Philcemcor latch on this
phraseology to imply that the factual determination rendered by the Tariff Commission under
Section 5 may be amended or reversed by the DTI Secretary. Of course, implementing rules
should conform, not clash, with the law that they seek to implement, for a regulation which
operates to create a rule out of harmony with the statute is a nullity. 125 Yet imperfect
draftsmanship aside, nothing in Rule 13.2 implies that the DTI Secretary can set aside the
determination made by the Tariff Commission under the aegis of Section 5. This can be seen by
examining the specific provisions of Rule 13.2, thus:

RULE 13.2. Final Determination by the Secretary

RULE 13.2.a. Within fifteen (15) calendar days from receipt of the Report of the
Commission, the Secretary shall make a decision, taking into consideration the
measures recommended by the Commission.

RULE 13.2.b. If the determination is affirmative, the Secretary shall issue, within
two (2) calendar days after making his decision, a written instruction to the
heads of the concerned government agencies to immediately implement the
 appropriate general safeguard measure as determined by him. Provided,
however, that in the case of non-agricultural products, the Secretary shall first
establish that the imposition of the safeguard measure will be in the public
interest.

RULE 13.2.c. Within two (2) calendar days after making his decision, the
Secretary shall also order its publication in two (2) newspapers of general
circulation. He shall also furnish a copy of his Order to the petitioner and other
interested parties, whether affirmative or negative. (Emphasis supplied.)

Moreover, the DTI Secretary does not have the power to review the findings of the Tariff
Commission for it is not subordinate to the Department of Trade and Industry ("DTI"). It falls
under the supervision, not of the DTI nor of the Department of Finance (as mistakenly asserted
by Southern Cross),126 but of the National Economic Development Authority, an independent
planning agency of the government of co-equal rank as the DTI. 127 As the supervision and
control of a Department Secretary is limited to the bureaus, offices, and agencies under
him,128 the DTI Secretary generally cannot exercise review authority over actions of the Tariff
Commission. Neither does the SMA specifically authorize the DTI Secretary to alter, amend or
modify in any way the determination made by the Tariff Commission. The most that the DTI
Secretary could do to express displeasure over the Tariff Commission's actions is to ignore its
recommendation, but not its determination.

The word "determination" as used in Rule 13.2 of the Implementing Rules is dissonant with the
same word as employed in the SMA, which in the latter case is undeviatingly in reference to the
determination made by the Tariff Commission. Beyond the resulting confusion, however, the
divergent use in Rule 13.2 is explicable as the Rule textually pertains to the power of the DTI
Secretary to review the recommendations of the Tariff Commission, not the latter's
determination. Indeed, an examination of the specific provisions show that there is no real
conflict to reconcile. Rule 13.2 respects the logical order imposed by the SMA. The Rule does
not remove the essential requirement under Section 5 that a positive final determination be
made by the Tariff Commission before a definitive safeguard measure may be imposed by the
DTI Secretary.

The assailed Decision characterizes the findings of the Tariff Commission as merely

recommendatory and points to the DTI Secretary as the authority who renders the final
decision.129 At the same time, Philcemcor asserts that the Tariff Commission's functions are
merely investigatory, and as such do not include the power to decide or adjudicate. These
contentions, viewed in the context of the fundamental requisite set forth by Section 5, are
untenable. They run counter to the statutory prescription that a positive final determination
made by the Tariff Commission should first be obtained before the definitive safeguard
measures may be laid down.

Was it anomalous for Congress to have provided for a system whereby the Tariff Commission
may preclude the DTI, an office of higher rank, from imposing a safeguard measure? Of course,
this Court does not inquire into the wisdom of the legislature but only charts the boundaries of
powers and functions set in its enactments. But then, it is not difficult to see the internal logic
of this statutory framework.

For one, as earlier stated, the DTI cannot exercise review powers over the Tariff Commission
which is not its subordinate office.

Moreover, the mechanism established by Congress establishes a measure of check and balance
involving two different governmental agencies with disparate specializations. The matter of
safeguard measures is of such national importance that a decision either to impose or not to
impose then could have ruinous effects on companies doing business in the Philippines. Thus, it
is ideal to put in place a system which affords all due deliberation and calls to fore various
governmental agencies exercising their particular specializations.

Finally, if this arrangement drawn up by Congress makes it difficult to obtain a general

safeguard measure, it is because such safeguard measure is the exception, rather than the rule.
The Philippines is obliged to observe its obligations under the GATT, under whose framework
trade liberalization, not protectionism, is laid down. Verily, the GATT actually prescribes
conditions before a member-country may impose a safeguard measure. The pertinent portion
of the GATT Agreement on Safeguards reads:

2. A Member may only apply a safeguard measure to a product only if that member has
determined, pursuant to the provisions set out below, that such product is being
imported into its territory in such increased quantities, absolute or relative to domestic
production, and under such conditions as to cause or threaten to cause serious injury to
the domestic industry that produces like or directly competitive products.130

3. (a) A Member may apply a safeguard measure only following an investigation by the
competent authorities of that Member pursuant to procedures previously established
and made public in consonance with Article X of the GATT 1994. This investigation shall
include reasonable public notice to all interested parties and public hearings or other
appropriate means in which importers, exporters and other interested parties could
present evidence and their views, including the opportunity to respond to the
presentations of other parties and to submit their views, inter alia, as to whether or not
the application of a safeguard measure would be in the public interest. The competent
authorities shall publish a report setting forth their findings and reasoned conclusions
reached on all pertinent issues of fact and law.131

The SMA was designed not to contradict the GATT, but to complement it. The two requisites
laid down in Section 5 for a positive final determination are the same conditions provided under
the GATT Agreement on Safeguards for the application of safeguard measures by a member
country. Moreover, the investigatory procedure laid down by the SMA conforms to the
procedure required by the GATT Agreement on Safeguards. Congress has chosen the Tariff
Commission as the competent authority to conduct such investigation. Southern Cross stresses
that applying the provision of the GATT Agreement on Safeguards, the Tariff Commission is
clearly empowered to arrive at binding conclusions. 132 We agree: binding on the DTI Secretary is
the Tariff Commission's determinations on whether a product is imported in increased
quantities, absolute or relative to domestic production and whether any such increase is a
substantial cause of serious injury or threat thereof to the domestic industry.133

Satisfied as we are with the proper statutory paradigm within which the SMA should be
analyzed, the flaws in the reasoning of the Court of Appeals and in the arguments of the
respondents become apparent. To better understand the dynamics of the procedure set up by
the law leading to the imposition of definitive safeguard measures, a brief step-by-step recount
thereof is in order.

1. After the initiation of an action involving a general safeguard measure,134 the DTI Secretary
makes a preliminary determination whether the increased imports of the product under
consideration substantially cause or threaten to substantially cause serious injury to the
domestic industry,135 and whether the imposition of a provisional measure is warranted under
Section 8 of the SMA.136 If the preliminary determination is negative, it is implied that no further
action will be taken on the application.

2. When his preliminary determination is positive, the Secretary immediately transmits the
records covering the application to the Tariff Commission for immediate formal investigation.137

3. The Tariff Commission conducts its formal investigation, keyed towards making a final
determination. In the process, it holds public hearings, providing interested parties the
opportunity to present evidence or otherwise be heard.138 To repeat, Section 5 enumerates
what the Tariff Commission is tasked to determine: (a) whether a product is being imported
into the country in increased quantities, irrespective of whether the product is absolute or
relative to the domestic production; and (b) whether the importation in increased quantities is
such that it causes serious injury or threat to the domestic industry. 139 The findings of the Tariff
Commission as to these matters constitute the final determination, which may be either
positive or negative.

4. Under Section 13 of the SMA, if the Tariff Commission makes a positive determination, the
Tariff Commission "recommends to the [DTI] Secretary an appropriate definitive measure." The
Tariff Commission "may also recommend other actions, including the initiation of international
negotiations to address the underlying cause of the increase of imports of the products, to
alleviate the injury or threat thereof to the domestic industry, and to facilitate positive
adjustment to import competition."140

5. If the Tariff Commission makes a positive final determination, the DTI Secretary is then to
decide, within fifteen (15) days from receipt of the report, as to what appropriate safeguard
measures should he impose.
6. However, if the Tariff Commission makes a negative final determination, the DTI Secretary
cannot impose any definitive safeguard measure. Under Section 13, he is instructed instead to
return whatever cash bond was paid by the applicant upon the initiation of the action for
safeguard measure.

The Effect of the Court's Decision

The Court of Appeals erred in remanding the case back to the DTI Secretary, with the
instruction that the DTI Secretary may impose a general safeguard measure even if there is no
positive final determination from the Tariff Commission. More crucially, the Court of Appeals
could not have acquired jurisdiction over Philcemcor's petition for certiorari in the first place, as
Section 29 of the SMA properly vests jurisdiction on the CTA. Consequently, the
assailed Decision is an absolute nullity, and we declare it as such.

What is the effect of the nullity of the assailed Decision on the 5 June 2003 Decision of the DTI
Secretary imposing the general safeguard measure? We have recognized that any initial judicial
review of a DTI ruling in connection with the imposition of a safeguard measure belongs to the
CTA. At the same time, the Court also recognizes the fundamental principle that a null and void
judgment cannot produce any legal effect. There is sufficient cause to establish that the 5 June
2003 Decision of the DTI Secretary resulted from the assailed Court of Appeals Decision, even if
the latter had not yet become final. Conversely, it can be concluded that it was because of the
putative imprimatur of the Court of Appeals' Decision that the DTI Secretary issued his ruling
imposing the safeguard measure. Since the 5 June 2003 Decision derives its legal effect from
the void Decision of the Court of Appeals, this ruling of the DTI Secretary is consequently
void. The spring cannot rise higher than the source.

The DTI Secretary himself acknowledged that he drew stimulating force from the appellate
court's Decision for in his own 5 June 2003 Decision, he declared:

From the aforementioned ruling, the CA has remanded the case to the DTI Secretary for
a final decision. Thus, there is no legal impediment for the Secretary to decide on the
application.141

The inescapable conclusion is that the DTI Secretary needed the assailed Decision of the Court
of Appeals to justify his rendering a second Decision. He explicitly invoked the Court of
Appeals' Decision as basis for rendering his 5 June 2003 ruling, and implicitly recognized that
without such Decision he would not have the authority to revoke his previous ruling and render
a new, obverse ruling.

It is clear then that the 25 June 2003 Decision of the DTI Secretary is a product of the
void Decision, it being an attempt to carry out such null judgment. There is therefore no choice
but to declare it void as well, lest we sanction the perverse existence of a fruit from a non-
existent tree. It does not even matter what the disposition of the 25 June 2003 Decision was, its
nullity would be warranted even if the DTI Secretary chose to uphold his earlier ruling denying
the application for safeguard measures.

It is also an unfortunate spectacle to behold the DTI Secretary, seeking to enforce a judicial
decision which is not yet final and actually pending review on appeal. Had it been a judge who
attempted to enforce a decision that is not yet final and executory, he or she would have
readily been subjected to sanction by this Court. The DTI Secretary may be beyond the ambit of
administrative review by this Court, but we are capacitated to allocate the boundaries set by
the law of the land and to exact fealty to the legal order, especially from the instrumentalities
and officials of government.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is

DECLARED NULL AND VOID and SET ASIDE. The Decision of the DTI Secretary dated 25 June
2003 is also DECLARED NULL AND VOID and SET ASIDE. No Costs.

SO ORDERED.

[G.R. No. 118233. December 10, 1999.]

ANTONIO Z. REYES, ELISEO P. OCAMPO and EDITHA ARCIAGA-SANTOS, Petitioners, v. COURT

OF APPEALS, HON. SECRETARY OF JUSTICE FRANKLIN DRILON and MAYOR JINGGOY ESTRADA
(JOSE EJERCITO) OF THE MUNICIPALITY OF SAN JUAN, METRO MANILA, Respondents.

RESOLUTION

QUISUMBING, J.:

For review is the decision 1 of the Court of Appeals, dated August 3, 1994 and its resolution 2
dated December 8, 1994 in CA-G.R. SP No. 32473. Said decision dismissed the prohibition case
brought by the petitioners against respondent officials of the Municipality of San Juan to stop
the enforcement of Tax Ordinance Nos. 87, 91, 95, 100 and 101.chanroblesvirtualawlibrary

The factual antecedents are as follows:chanrob1es virtual 1aw library

The Sangguniang Bayan of San Juan, Metro Manila implemented several tax ordinances as
follows:chanrob1es virtual 1aw library
Ordinance

No. Title

87 An ordinance imposing a municipal tax of fifty percent (50%) of one percent (1%) of the
gross receipt on business of printing and publication

91 An ordinance imposing a transfer tax equivalent to fifty percent (50%) of one percent (1%) of
the total consideration on the sale, donation, barter or any other mode of transferring
ownership or title of real property situated in San Juan, Metro Manila, or its fair market value,
whichever is higher

95 An ordinance imposing fifty percent (50%) of one percent of (1%) for social housing tax on
the assessed value of all real estate property in San Juan, Metro Manila in excess of P50,000.00
value as provided in the New Urban Land Reform Law, also known as R.A. 7279.

100 An ordinance imposing new rates of business taxes of the Municipality of San Juan Metro
Manila

101 An ordinance levying an annual "Ad Valorem" tax on real property and an additional tax
accruing to the special education fund (SEF)

On May 21, 1993, petitioners filed an appeal with the Department of Justice assailing the
constitutionality of these tax ordinances allegedly because they were promulgated without
previous public hearings thereby constituting deprivation of property without due process of
law.

On June 10, 1993, respondent Secretary of Justice dismissed the appeal for having been filed
out of time. Citing Section 187, R.A. No. 7160, he said:jgc:chanrobles.com.ph

"It appears that the tax ordinances in question took effect on September 24, 1992, in the case
of Tax Ordinance No. 87, until October 22, 1992, in the case of Tax Ordinance Nos. 91 and 95,
and until October 29, 1992, in the case of Tax Ordinance Nos. 100 and 101, or more than thirty
(30) days from the effectivity thereof when the appeal was filed and received by this
Department on May 21, 1993 and therefore not in accordance with the requirements provided
for under Section 187 of the Local Government Code of 1991.chanroblesvirtualawlibrary

WHEREFORE, the instant appeal, having been filed out of time, is hereby DISMISSED." 3

Undaunted, petitioners filed with the Court of Appeals a petition for certiorari and prohibition
(CA-G.R. SP No. 32473). But respondent court affirmed the decision of the Secretary. On
December 8, 1994, the motion for reconsideration filed by the petitioners was denied for lack
of merit.
Hence, the present petition for review, raising the following questions:jgc:chanrobles.com.ph

"1. Whether or not the questioned tax ordinances are violative of the Constitution, considering
the undisputed fact that no public hearings were ever held on the ordinances before they were
passed and approved as required by the Local Government Code of 1991, thereby constituting
as they do a deprivation of property without due process;

"2. Whether or not the wording of the law under Section 187 of the Local Government Code of
1991 that "any question on the constitutionality . . . of tax ordinance . . . may be raised on
appeal within thirty (30) days from the effectivity thereof . . ." is a reductio ad absurdum, since
if the tax ordinance is found to be unconstitutional, it will be considered as never having
become effective at all from the very beginning, for which reason the thirty-day appeal period
cannot be reckoned and cannot be enforced;

"3. Whether or not the constitutionality of a tax ordinance, or any law for that matter, can be
questioned at any time despite the prescription of a limited period within which to question it,
as in the case at bar; and

"4. Whether or not the constitutionality of an ordinance or a law may be questioned even if the
question of constitutionality may not have been originally or initially raised, or is not the lis
mota of the case, if it appears that a determination of the question of constitutionality is
necessary to a decision of the case." 4

In our view, the pertinent issues for our resolution now are:chanrob1es virtual 1aw library

1. Whether or not the Court of Appeals erred in affirming the decision of the Secretary of
Justice who dismissed the prohibition suit, on the ground that it was filed out of time?

2. Whether or not lack of mandatory public hearings prior to enacting Municipal Ordinance Nos.
87, 91, 95, 100 and 101 render them void on the ground of deprivation of property without due
process?chanrobles lawlibrary : rednad

3. Whether or not the constitutional validity of Sec. 187 of the Local Government Code could be
raised for the first time on appeal?

According to petitioners, respondent Secretary erred in declaring that they failed to file their
appeal on time. Also, they assail Municipal Ordinance Nos. 87, 91, 95, 100 and 101, for alleged
failure of the Municipal Council of San Juan to conduct mandatory public hearings. Because of
this, they claim the ordinances are inoperative, as though they were never passed.
Consequently, no prescriptive thirty-day period to question the validity of the ordinance could
toll to bar their appeal to the Department of Justice.

Sec. 187 of R.A. 7160, cited by respondent Secretary, provides as follows:jgc:chanrobles.com.ph

"SECTION 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue
Measures; Mandatory Public Hearings. — The procedure for approval of local tax ordinances
and revenue measures shall be in accordance with the provisions of this Code: Provided, That
public hearings shall be conducted for the purpose prior to the enactment thereof: Provided
further, That any question on the constitutionality or legality of tax ordinances or revenue
measures may be raised on appeal within thirty (30) days from the effectivity thereof to the
Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of
the appeal: Provided, however, That such appeal shall not have the effect of suspending the
effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied
therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse
of the sixty-day period without the Secretary of Justice acting upon the appeal, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction."cralaw
virtua1aw library

Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality of a
tax ordinance must file his appeal to the Secretary of Justice, within 30 days from effectivity
thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an
aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60
days, a party could already proceed to seek relief in court. These three separate periods are
clearly given for compliance as a prerequisite before seeking redress in a competent court. Such
statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge
of judicial functions. 5 For this reason the courts construe these provisions of statutes as
mandatory. 6

A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax
is the most effective instrument to raise needed revenues to finance and support the myriad
activities of local government units for the delivery of basic services essential to the promotion
of the general welfare and enhancement of peace, progress, and prosperity of the people. 7
Consequently, any delay in implementing tax measures would be to the detriment of the public.
It is for this reason that protests over tax ordinances are required to be done within certain
time frames. In the instant case, it is our view that the failure of petitioners to appeal to the
Secretary of Justice within 30 days as required by Sec. 187 of R.A. 7160 is fatal to their cause.

On the second issue, petitioners allege that the Sangguniang Bayan of San Juan did not comply
with the prescribed procedure for enacting an ordinance because they failed to conduct public
hearings.chanroblesvirtuallawlibrary:red

In Figuerres v. Court of Appeals, 8 where the municipality failed to conduct public hearings prior
to enacting the revisions on the schedule of fair market values and assessment level of classes
of real estate properties, the Court said:jgc:chanrobles.com.ph

"Petitioner is right in contending that public hearings are required to be conducted prior to the
enactment of an ordinance imposing real property taxes. R.A. No. 7160, Sec. 186, provides that
an ordinance levying taxes, fees, or charges ‘shall not be enacted without any prior public
hearing conducted for the purpose.’

However, it is noteworthy that apart from her bare assertions, petitioner Figuerres has not
presented any evidence to show that no public hearings were conducted prior to the
enactment of the ordinances in question. On the other hand, the Municipality of Mandaluyong
claims that public hearings were indeed conducted before the subject ordinances were
adopted, although it likewise failed to submit any evidence to establish this allegation.
However, in accordance with the presumption of validity in favor of an ordinance, their
constitutionality or legality should be upheld in the absence of evidences showing that
procedure prescribed by law was not observed in their enactment. . . .

Furthermore, the lack of a public hearing is a negative allegation essential to petitioner’s cause
of action in the present case. Hence, as petitioner is the party asserting it, she has the burden of
proof. Since petitioner failed to rebut the presumption of validity in favor of the subject
ordinances and to discharge the burden of proving that no public hearings were conducted
prior to the enactment thereof, we are constrained to uphold their constitutionality or legality."
9

We find Figuerres instructive. Petitioners have not proved in the case before us that the
Sangguniang Bayan of San Juan failed to conduct the required public hearings before the
enactment of Ordinance Nos. 87, 91, 95, 100 and 101. Although the Sanggunian had the control
of records or the better means of proof regarding the facts alleged, petitioners are not relieved
from the burden of proving their averments. 10 Proof that public hearings were not held falls
on petitioners’ shoulders. For failing to discharge that burden, their petition was properly
dismissed.chanrobles virtual lawlibrary

In any event, for the purpose of securing certainty where doubt would be intolerable, it is a
general rule that the regularity of the enactment of an officially promulgated statute or
ordinance may not be impeached by parol evidence or oral testimony either of individual
officers and members, or of strangers who may be interested in nullifying legislative action. 11
This rule supplements the presumption in favor of the regularity of official conduct which we
have upheld repeatedly, absent a clear showing to the contrary.

Finally, on the validity of Section 187 of R.A. 7160, the Local Government Code, we must stress
that the constitutionality of an act of Congress will not be passed upon by the Court unless at
the first opportunity that question is properly raised and presented in an appropriate case, and
is necessary to a determination of the case, particularly where the issue of constitutionality is
the very lis mota presented. 12 The constitutional validity of a statutory provision should not be
entertained by the Court where it was not specifically raised below, insisted upon, and
adequately argued. 13 Moreover, given the circumstances in this case, we find no genuine
necessity to dwell on the issue of constitutional invalidity of Section 187 in relation to issue of
valid enactment of the subject ordinances, as shown in the foregoing discussion. Suffice it now
to say that, having resolved the first and second issues, we find no grave abuse of discretion nor
reversible error in the decision of the respondent appellate court. Further constitutional
scrutiny of Section 187 is unwarranted.

WHEREFORE, the present petition is DISMISSED for lack of merit and the assailed decision of
the Court of Appeals is AFFIRMED. No pronouncement as to costs.chanrobles law library : red

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Purisima, Pardo,
Buena, Gonzaga-Reyes, Ynares-Santiago and De Leon, Jr., JJ., concur.

G.R. No. 131359 May 5, 1999

MANILA ELECTRIC COMPANY, petitioner,

vs.
PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial Treasurer of
Laguna, respondents.

VITUG, J.:

On various dates, certain municipalities of the Province of Laguna, including, Biñan, Sta. Rosa,
San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued
resolutions through their respective municipal councils granting franchise in favor of petitioner
Manila Electric Company ("MERALCO") for the supply of electric light, heat and power within
their concerned areas. On 19 January 1983, MERALCO was likewise granted a franchise by the
National Electrification Administration to operate an electric light and power service in the
Municipality of Calamba, Laguna.

On 12 September 1991, Republic Act No. 7160, otherwise known as the "Local Government
Code of 1991," was enacted to take effect on 01 January 1992 enjoining local government units
to create their own sources of revenue and to levy taxes, fees and charges, subject to the
limitations expressed therein, consistent with the basic policy of local autonomy. Pursuant to
the provisions of the Code, respondent province enacted Laguna Provincial Ordinance No. 01-
92, effective 01 January 1993, providing, in part, as follows:

Sec. 2.09. Franchise Tax. — There is hereby imposed a tax on businesses enjoying
a franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross
annual receipts, which shall include both cash sales and sales on account realized
 during the preceding calendar year within this province, including the territorial
limits on any city located in the province.

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to
MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then
amounted to P19,520.628.42, under protest. A formal claim for refund was thereafter sent by
MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and
continued to pay to the National Government pursuant to P.D. 551 already included the
franchise tax imposed by the Provincial Tax Ordinance. MERALCO, contended that the
imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92,
insofar as it concerned MERALCO, contravened the provisions of Section 1 of P.D. 551 which
read:

Any provision of law or local ordinance to the contrary notwithstanding, the

franchise tax payable by all grantees of franchises to generate, distribute and sell
electric current for light, heat and power shall be two per cent (2%) of their gross
receipts received from the sale of electric current and from transactions incident
to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or

his duly authorized representative on or before the twentieth day of the month
following the end of each calendar quarter or month, as may be provided in the
respective franchise or pertinent municipal regulation and shall, any provision of
the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of
all taxes and assessments of whatever nature imposed by any national or local
authority on earnings, receipts, income and privilege of generation, distribution
and sale of electric current.

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor
Jose D. Lina relied on a more recent law, i.e. Republic Act No. 7160 or the Local Government
Code of 1991, than the old decree invoked by petitioner.

On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta. Cruz,
Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary injunction
and/or temporary restraining order, against the Province of Laguna and also Benito R. Balazo in
his capacity as the Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for
which petitioner MERALCO had priorly made a formal request for refund, petitioner thereafter
likewise made additional payments under protest on various dates totaling P27,669,566.91.

The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and
concluded:
 WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,
JUDGMENT is hereby rendered in favor of the defendants and against the
plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,

reasonable and enforceable. 2

In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:

1. Whether the imposition of a franchise tax under Section 2.09 of Laguna

Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of
the non-impairment clause of the Constitution and Section 1 of Presidential
Decree No. 551.

2. Whether Republic Act No. 7160, otherwise known Local Government Code of
1991, has repealed, amended or modified Presidential Decree No. 551.

3. Whether the doctrine of administrative remedies is applicable in this case. 3

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherent power to
tax 4 except to the extent that such power might be delegated to them either by the basic law
or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that
power has been given in favor of local government units. Thus:

Sec. 3. The Congress shall enact a local government code which shall provide for
a more responsive and accountable local government structure instituted
through a system of decentralization with effective mechanisms of recall,
initiative, and referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions, and
duties of local officials, and all other matters relating to the organization and
operation of the local units.

xxx xxx xxx

Sec. 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to
the local governments.
 The 1987 Constitution has a counterpart provision in the 1973 Constitution which did
come out with a similar delegation of revenue making powers to local governments. 5

Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and
local government units instead derived their tax powers under a limited statutory authority.
Whereas, then, the delegation of tax powers granted at that time by statute to local
governments was confined and defined (outside of which the power was deemed withheld),
the present constitutional rule (starting with the 1973 Constitution), however, would broadly
confer such tax powers subject only to specific exceptions that the law might prescribe.

Under the now prevailing Constitution, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability
and self-sufficiency of local government units by directly granting them general and broad tax
powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and
unconditional; the constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous, 6 the legislature must
still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d)
local taxation will be fair, uniform, and just.

The Local Government Code of 1991 has incorporated and adopted, by and large, the
provisions of the now repealed Local Tax Code, which had been in effect since 01 July 1973,
promulgated into law by Presidential Decree
7
No. 231  pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The
1991 Code explicitly authorizes provincial governments, notwithstanding "any exemption
granted by any law or other special law, . . . (to) impose a tax on businesses enjoying a
franchise." Section 137 thereof provides:

Sec. 137. Franchise Tax — Notwithstanding any exemption granted by any law or

other special law, the province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the
gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction. In the case of a newly
started business, the tax shall not exceed one-twentieth (1/20) of one percent
(1%) of the capital investment. In the succeeding calendar year, regardless of
when the business started to operate, the tax shall be based on the gross
receipts for the preceding calendar year, or any fraction thereof, as provided
herein. (Underscoring supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax
powers to local government units, the Local Government Code has effectively withdrawn under
Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This
law states:

Sec. 193. Withdrawal of Tax Exemption Privileges — Unless otherwise provided

in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.
(Underscoring supplied for emphasis)

The Code, in addition, contains a general repealing clause in its Section 534; thus:

Sec. 534. Repealing Clause. — . . .

(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or
modified accordingly. (Underscoring supplied for emphasis) 8

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos, 9 the Court upheld the
withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International
Airport Authority. The Court ratiocinated:

. . . These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy
genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them effective partners in
the attainment of national goals. The power to tax is the most effective
instrument to raise needed revenues to finance and support myriad activities if
local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. It may also be relevant to recall that the original
reasons for the withdrawal of tax exemption privileges granted to government-
owned and controlled corporations and all other units of government were that
such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarity situated enterprises, and there was a need for these
entities to share in the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them. 10

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court
in Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.; 11 thus:
 In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority" found in the franchise of the
Visayan Electric Company was held to exempt the company from payment of the
5% tax on corporate franchise provided in Section 259 of the Internal Revenue
Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name
and nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act
No. 1510) exempts the Manila Railroad from payment of internal revenue tax for
its importations of coal and oil under Act No. 2432 and the Amendatory Acts of
the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13,
Act No. 1497) justified the exemption of the Philippine Railway Company from
payment of the tax on its corporate franchise under Section 259 of the Internal
Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of
Internal Revenue, 91 Phil. 35).

Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light
and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7
of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32
SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant
Company when it was required to pay the corporate franchise tax under Section
259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric &
Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4]. 1068). This Court
pointed out that such exemption is part of the inducement for the acceptance of
the franchise and the rendition of public service by the grantee. 2

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V.

Reyes, et al., 13 the Court has held that the phrase in lieu of all taxes "have to give way to the
peremptory language of the Local Government Code specifically providing for the withdrawal of
such exemptions, privileges," and that "upon the effectivity of the Local Government Code all
exemptions except only as provided therein can no longer be invoked by MERALCO to disclaim
liability for the local tax." In fine, the Court has viewed its previous rulings as laying stress more
on the legislative intent of the amendatory law — whether the tax exemption privilege is to be
withdrawn or not — rather than on whether the law can withdraw, without violating the
Constitution, the tax exemption or not.

While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from being strictly contractual in nature.
Contractual tax exemptions, in the real sense of the term and where the non-impairment clause
of the Constitution can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered into
by them under enabling laws in which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind
may not be revoked without impairing the obligations of contracts. 14 These contractual tax
exemptions, however, are not to be confused with tax exemptions granted under franchises. A
franchise partakes the nature of a grant which is beyond the purview of the non-impairment
clause of the Constitution.15 Indeed, Article XII, Section 11, of the 1987 Constitution, like its
precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such privilege shall
be subject to amendment, alteration or repeal by Congress as and when the common good so
requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs.1âwphi1.nêt

SO ORDERED.

Romero, Panganiban, Purisima and Gonzaga-Reyes, JJ., concur.

THIRD DIVISION

G.R. No. 155491               July 21, 2009

SMART COMMUNICATIONS, INC., Petitioner,

vs.
THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the
SANGGUNIANG PANLUNSOD OF DAVAO CITY, Respondents.

RESOLUTION

NACHURA, J.:

Before the Court is a Motion for Reconsideration1 filed by Smart Communications, Inc. (Smart)
of the Decision2 of the Court dated September 16, 2008, denying its appeal of the Decision and
Order of the Regional Trial Court (RTC) of Davao City, dated July 19, 2002 and September 26,
2002, respectively.

Briefly, the factual antecedents are as follows:

On February 18, 2002, Smart filed a special civil action for declaratory relief 3 for the
ascertainment of its rights and obligations under the Tax Code of the City of Davao, which
imposes a franchise tax on businesses enjoying a franchise within the territorial jurisdiction of
Davao. Smart avers that its telecenter in Davao City is exempt from payment of franchise tax to
the City.

On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for
reconsideration, which was denied by the trial court in an Order dated September 26, 2002.
Smart filed an appeal before this Court, but the same was denied in a decision dated September
16, 2008. Hence, the instant motion for reconsideration raising the following grounds: (1) the
"in lieu of all taxes" clause in Smart’s franchise, Republic Act No. 7294 (RA 7294), covers local
taxes; the rule of strict construction against tax exemptions is not applicable; (2) the "in lieu of
all taxes" clause is not rendered ineffective by the Expanded VAT Law; (3) Section 23 of Republic
Act No. 79254 (RA 7925) includes a tax exemption; and (4) the imposition of a local franchise tax
on Smart would violate the constitutional prohibition against impairment of the obligation of
contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart’s
legislative franchise contains the contentious "in lieu of all taxes" clause. The Section reads:

Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the
same taxes on their real estate buildings and personal property, exclusive of this franchise, as
other persons or corporations which are now or hereafter may be required by law to pay. In
addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to
three percent (3%) of all gross receipts of the business transacted under this franchise by the
grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this
franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall
continue to be liable for income taxes payable under Title II of the National Internal Revenue
Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended
or repealed, in which case the amendment or repeal shall be applicable thereto.

xxx5

Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality
clause, contains the word "exemption," viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry — Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be
granted, shall ipso facto become part of previously granted telecommunications franchises and
shall be accorded immediately and unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect provisions of telecommunications
franchises concerning territory covered by the franchise, the life span of the franchise, or the
type of the service authorized by the franchise.6
A review of the recent decisions of the Court on the matter of exemptions from local franchise
tax and the interpretation of the word "exemption" found in Section 23 of RA 7925 is
imperative in order to resolve this issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,7 Digitel used

as an argument the "in lieu of all taxes" clauses/provisos found in the legislative franchises of
Globe,8 Smart and Bell,9 vis-à-vis Section 23 of RA 7925, in order to claim exemption from the
payment of local franchise tax. Digitel claimed, just like the petitioner in this case, that it was
exempt from the payment of any other taxes except the national franchise and income taxes.
Digitel alleged that Smart was exempted from the payment of local franchise tax.

However, it failed to substantiate its allegation, and, thus, the Court denied Digitel’s claim for
exemption from provincial franchise tax. Cited was the ruling of the Court in PLDT v. City of
Davao,10 wherein the Court, speaking through Mr. Justice Vicente V. Mendoza, held that in
approving Section 23 of RA No. 7925, Congress did not intend it to operate as a blanket tax
exemption to all telecommunications entities. Section 23 cannot be considered as having
amended PLDT’s franchise so as to entitle it to exemption from the imposition of local franchise
taxes. The Court further held that tax exemptions are highly disfavored and that a tax
exemption must be expressed in the statute in clear language that leaves no doubt of the
intention of the legislature to grant such exemption. And, even in the instances when it is
granted, the exemption must be interpreted in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.

The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the
word "exemption" as used in the statute refers or pertains merely to an exemption from
regulatory or reporting requirements of the Department of Transportation and Communication
or the National Transmission Corporation and not to an exemption from the grantee’s tax
liability.

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna,11 PLDT was a

holder of a legislative franchise under Act No. 3436, as amended. On August 24, 1991, the
terms and conditions of its franchise were consolidated under Republic Act No. 7082, Section
12 of which embodies the so-called "in-lieu-of-all taxes" clause. Under the said Section, PLDT
shall pay a franchise tax equivalent to three percent (3%) of all its gross receipts, which
franchise tax shall be "in lieu of all taxes." The issue that the Court had to resolve was whether
PLDT was liable to pay franchise tax to the Province of Laguna in view of the "in lieu of all taxes"
clause in its franchise and Section 23 of RA 7925.lawph!l

Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts
are resolved in favor of municipal corporations in interpreting statutory provisions on municipal
taxing powers, the Court held that Section 23 of RA 7925 could not be considered as having
amended petitioner's franchise so as to entitle it to exemption from the imposition of local
franchise taxes.
In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City of
Davao12 and PLDT v. City of Bacolod,13 in denying the claim for exemption from the payment of
local franchise tax.

In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the
franchisee is still liable to pay the local franchise tax, unless it is expressly and unequivocally
exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes"
clause in a legislative franchise should categorically state that the exemption applies to both
local and national taxes; otherwise, the exemption claimed should be strictly construed against
the taxpayer and liberally in favor of the taxing authority.

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish
the payment of local franchise tax. It merely replaced the national franchise tax that was
previously paid by telecommunications franchise holders and in its stead imposed a ten percent
(10%) VAT in accordance with Section 108 of the Tax Code. VAT replaced the national franchise
tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or
municipaties.

The power to tax by local government units emanates from Section 5, Article X of the
Constitution which empowers them to create their own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and limitations as the Congress may provide. The
imposition of local franchise tax is not inconsistent with the advent of the VAT, which renders
functus officio the franchise tax paid to the national government. VAT inures to the benefit of
the national government, while a local franchise tax is a revenue of the local government unit.

WHEREFORE, the motion for reconsideration is DENIED, and this denial is final.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

G.R. No. 137377            December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the
Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to
have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the
laws of Japan. It is engaged in general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the Philippines and maintains a
branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of

authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts in the Philippines, both of
which were completed in 1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation of a wharf/port complex at
the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The
other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency

income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX

     FY ended March 31, 1985
Undeclared gross income (Philphos and
NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
20% int. p.a.fr. 7-15-85 to 8-15-
86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
     FY ended March 31, 1985
Undeclared gross income from Philphos
and NDC construction projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr. 4-26-85 to 8-15-
86 12,305,360.66
TOTAL AMOUNT DUE P83,036,965.16
III. DEFICIENCY CONTRACTOR'S TAX
     FY ended March 31, 1985
Undeclared gross receipts/gross income
from Philphos and NDC construction
projects P967,269,811.14
Contractor's tax due thereon (4%) 38,690,792.00
50% surcharge for non-
Add: declaration 19,345,396.00
20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86 17,854,739.46
TOTAL AMOUNT DUE P85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
     FY ended March 31, 1985
Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
50% surcharge for non-
Add: declaration 814,284.50
20% surcharge for late payment    407,142.25
Sub-total 2,849,995.75
Add: 20% int. p.a.fr. 4-21-85 to 8-15-    751,539.98
 86
TOTAL AMOUNT DUE      P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid
taxable revenues while the 25% surcharge was imposed because of your client's failure to pay
on time the above deficiency percentage taxes.

xxx           xxx           xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that
the gross income from the two projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction and installation of facilities in
the Philippines, the entire income therefrom constituted income from Philippine sources,
hence, subject to internal revenue taxes. The assessment letter further stated that the same
was petitioner's final decision and that if respondent disagreed with it, respondent may file an
appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31, 1986:
(a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a certified
true copy of his statement declaring his net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of said net worth
subject to verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent
(10%) of the increase in net worth from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net
worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on November
3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of
its net worth increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years
1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on
business under Chapter II, Title V of the National Internal Revenue Code, also covering the years
1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41
were extended to the foregoing tax liabilities, and the period within which the taxpayer could
avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed
their amnesty return under E.O. No. 41, as amended, could avail themselves of the benefits,
immunities and privileges under the new E.O. by filing an amended return and paying an
additional 5% on the increase in net worth to cover business, estate and donor's tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit
of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent
(5%) of the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly
availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to

DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and
the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order No. 41, as
amended."4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court
of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of
the Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's availment of tax amnesty under Executive Orders Nos.
41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income
tax, branch profit remittance tax and contractor's tax. These taxes are covered by the amnesties
granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the exception in Section 4 (b) of
E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty
herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code,
as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of
the effectivity hereof as a result of information furnished under Section 316 of the
National Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before
the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty on October 30,
1986, CTA Case No. 4109 had already been filed and was pending; before the Court of Tax
Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases
already filed in court as of the effectivity hereof." The point of reference is the date of
effectivity of E.O. No. 41. The filing of income tax cases in court must have been made before
and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under
Section 4 (b) there must have been no income tax cases filed in court against him when E.O. No.
41 took effect. This is regardless of when the taxpayer filed for income tax amnesty, provided of
course he files it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractor's tax assessments was filed by respondent
with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on
August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation
did not fall under the said exception in Section 4 (b), hence, respondent was not disqualified
from availing of the amnesty for income tax under E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III
of the National Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income
Tax. It is a tax on income. Respondent therefore did not fall under the exception in Section 4 (b)
when it filed for amnesty of its deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41
by including estate and donor's taxes and tax on business. Estate and donor's taxes fall under
Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The
contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No.
64 provided that:

"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and
effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or

inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No.
41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4
(b) in particular, this provision excepts from tax amnesty coverage a taxpayer who has "income
tax cases already filed in court as of the effectivity hereof." As to what Executive Order the
exception refers to, respondent argues that because of the words "income" and "hereof," they
refer to Executive Order No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer
to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original
act as if it had always been contained therein,10 it may not be given a retroactive effect unless it
is so provided expressly or by necessary implication and no vested right or obligations of
contract are thereby impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of
E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any
of its provisions should apply retroactively. Executive Order No. 64 is a substantive amendment
of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original
act by adding other taxes not covered in the first.12 It has been held that where a statute
amending a tax law is silent as to whether it operates retroactively, the amendment will not be
given a retroactive effect so as to subject to tax past transactions not subject to tax under the
original act.13 In an amendatory act, every case of doubt must be resolved against its retroactive
effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law. 15 It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give tax evaders who wish
to relent a chance to start with a clean slate.16 A tax amnesty, much like a tax exemption, is
never favored nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.18 For the right of taxation is inherent in government. The State cannot strip itself of
the most essential power of taxation by doubtful words. He who claims an exemption (or an
amnesty) from the common burden must justify his claim by the clearest grant of organic or
state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the
intent of the legislature, that doubt must be resolved in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax cases" should be
read as to refer to estate and donor's taxes and taxes on business while the word "hereof," to
E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently,
insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4
(b) of E.O. No. 41 should be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent
already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified
from availing of the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under the
two Executive Orders, it is still not liable for the deficiency contractor's tax because the income
from the projects came from the "Offshore Portion" of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-
scale manufacture of phosphatic fertilizer for the local and foreign markets. 20 The Philphos
plant complex which was envisioned to be the largest phosphatic fertilizer operation in Asia,
and among the largest in the world, covered an area of 180 hectares within the 435-hectare
Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at
the Leyte Industrial Development Estate. It was to be specifically adapted to the site for the
handling of phosphate rock, bagged or bulk fertilizer products, liquid materials and other
products of Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar), 21 and
other industrial plants within the Estate. The bidding was participated in by Marubeni Head
Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation."22 The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities,
harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.23 The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and
know-how,24 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract, as well as the coordination
of tie-ins at boundaries and schedule of the use of a part or the whole of the Wharf/Port
Complex through the Owner, with the design and construction of other facilities around
the site. The scope of works shall also include any activity, work and supply necessary
for, incidental to or appropriate under present international industrial port practice, for
the timely and successful implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I."25

The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In
the contract, the price in Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency
was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were
financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic Cooperation
Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-Import Bank of
Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote economic development.26 The
OECF extended to the Philippine Government a loan of ¥7,560,000,000.00 for the Leyte
Industrial Estate Port Development Project and authorized the NDC to implement the
same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni,
obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-
contractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment and
services rendered on the project. The price breakdown and the corresponding materials,
equipment and services were contained in a list attached as Annex III to the contract.29

A few months after execution of the NDC contract, Philphos opened for public bidding a project
to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982,
Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract
for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation."30 The object of the contract was to establish and place in operating
condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia31 and for the delivery of ammonia
to an integrated fertilizer plant adjacent to the storage complex and to vessels at the
dock.32 The storage complex was to consist of ammonia storage tanks, refrigeration system,
ship unloading system, transfer pumps, ammonia heating system, fire-fighting system, area
lighting, spare parts, and other related facilities.33 The scope of the works required for the
completion of the ammonia storage complex covered the supply, including grants of licenses
and transfer of technology and know-how,34 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Ammonia Storage Complex through the Owner with the design and construction of
other facilities at and around the Site. The scope of works shall also include any activity,
work and supply necessary for, incidental to or appropriate under present international
industrial practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I."35

The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken
down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine
currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were
financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the
three portions were further broken down into the corresponding materials, equipment and
services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III.36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were classified
— the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the
Japanese Yen Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II
and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's
tax on the income from the two projects. In fact respondent claims, which petitioner has not
denied, that the income it derived from the Onshore Portion of the two projects had been
declared for tax purposes and the taxes thereon already paid to the Philippine government.39 It
is with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that
the liabilities involved in the assessments subject of this case arose. Petitioner argues that since
the two agreements are turn-key,40 they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is
in the Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines.41 Accordingly, respondent's
entire receipts from the contracts, including its receipts from the Offshore Portion, constitute
income from Philippine sources. The total gross receipts covering both labor and materials
should be subjected to contractor's tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co.42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A

contractor's tax of four percent of the gross receipts is hereby imposed on proprietors
or operators of the following business establishments and/or persons engaged in the
business of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in

Republic Act No. 4566;

xxx           xxx           xxx

(q) Other independent contractors. The term "independent contractors" includes

persons (juridical or natural) not enumerated above (but not including
individuals subject to the occupation tax under the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless
 of whether or not the performance of the service calls for the exercise or use of
the physical or mental faculties of such contractors or their employees. It does
not include regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region.

xxx           xxx           xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity

consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of
such contractors or their employees. The word "contractor" refers to a person who, in the
pursuit of independent business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting himself to control as to the
petty details.44

A contractor's tax is a tax imposed upon the privilege of engaging in business.45 It is generally in
the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a
sale on products;46 and is directly collectible from the person exercising the privilege.47 Being an
excise tax, it can be levied by the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority. 48 Like property taxes, it cannot be
imposed on an occupation or privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent contractor under the
terms of the two subject contracts. Respondent, however, argues that the work therein were
not all performed in the Philippines because some of them were completed in Japan in
accordance with the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials and equipment to
be made and the works and services to be performed by respondent are indeed classified into
two. The first part, entitled "Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:

xxx           xxx           xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project
are listed under Portion I while labor and other supplies are listed under Portion II and the
Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant
Section II of the Industrial Plant Department of Marubeni Corporation in Japan who supervised
the implementation of the two projects, testified that all the machines and equipment listed
under Japanese Yen Portion I in Annex III were manufactured in Japan. 51 The machines and
equipment were designed, engineered and fabricated by Japanese firms sub-contracted by
Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki
Steel Corporation which did the design, fabrication, engineering and manufacture
thereof;53 Yashima & Co. Ltd. which manufactured the mobile equipment; Bridgestone which
provided the rubber fenders of the mobile equipment;54 and B.S. Japan for the supply of radio
equipment.55 The engineering and design works made by Kawasaki Steel Corporation included
the lay-out of the plant facility and calculation of the design in accordance with the
specifications given by respondent.56 All sub-contractors and manufacturers are Japanese
corporations and are based in Japan and all engineering and design works were performed in
that country.57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of
two (2) sets of ship unloader and loader; several boats and mobile equipment.58 The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top of
each is a large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the specifications of the
project. After manufacture, they were rolled on to a barge and transported to Isabel,
Leyte.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to
the pier to the spot where they were installed.60 Their installation simply consisted of bolting
them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment,
consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also
manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once
unloaded at the port, they were ready to be driven and perform what they were designed to
do.62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to
the NDC contract. These other items consist of supplies and materials for five (5) berths, two (2)
roads, a causeway, a warehouse, a transit shed, an administration building and a security
building. Most of the materials consist of steel sheets, steel pipes, channels and beams and
other steel structures, navigational and communication as well as electrical equipment.63
In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units.64 The steel plates for the
tank were manufactured and cut in Japan according to drawings and specifications and then
shipped to Isabel. Once there, respondent's employees put the steel plates together to form
the storage tank. As to the refrigeration units, they were completed and assembled in Japan
and thereafter shipped to Isabel. The units were simply installed there. 65 Annex III to the
Philphos contract lists down under the Japanese Yen Portion I the materials for the ammonia
storage tank, incidental equipment, piping facilities, electrical and instrumental apparatus,
foundation material and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts.66 The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests on
the machines and equipment67 while Philphos sent a representative to Japan to inspect the
storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid
by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly
the Assistant General Manager and Manager of the Steel Plant Marketing Department,
Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment
and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid
by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese
and English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of
respondent through the Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's
submission of pertinent documents, released the amount in the letters of credit in favor of
respondent and credited the amount therein to respondent's account within the same bank.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . .
"72 of the two projects involved two taxing jurisdictions. These acts occurred in two countries —
Japan and the Philippines. While the construction and installation work were completed within
the Philippines, the evidence is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The two sets of ship unloader and loader, the
boats and mobile equipment for the NDC project and the ammonia storage tanks and
refrigeration units were made and completed in Japan. They were already finished products
when shipped to the Philippines. The other construction supplies listed under the Offshore
Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus,
these were not finished products when shipped to the Philippines. They, however, were
likewise fabricated and manufactured by the sub-contractors in Japan. All services for the
design, fabrication, engineering and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan. These services were rendered
outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor's
tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported
some items for the system it designed and installed.74 The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

SO ORDERED.

Davide, Jr., C .J ., Kapunan, Pardo, and Ynares-Santiago, JJ ., concur.

G.R. No. 193007               July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

ABAD, J.:

May toll fees collected by tollway operators be subjected to value- added tax?

The Facts and the Case

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief1 assailing the validity of the impending imposition of value-added tax (VAT) by
the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored
the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act
8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant Secretary of the Department of
Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past administration.

Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of
the consistent opposition of Diaz and other sectors to such move. But, upon President Benigno
C. Aquino III’s assumption of office in 2010, the BIR revived the idea and would impose the
challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll
fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s
tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on public
service; and that, since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from
notice.2 Later, the Court issued another resolution treating the petition as one for prohibition.3

On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should
seek the meaning and intent of the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR
rulings and circulars.5

The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the non-
impairment clause cannot limit the State’s sovereign taxing power which is generally read into
contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by
the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting
any excess collection in an escrow account. But this would be illegal since only the Congress can
modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular
63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT
of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which
grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:

1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and

2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues:

1. Whether or not the government is unlawfully expanding VAT coverage by including

tollway operators and tollway operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and

2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax
and not a tax on services; b) will impair the tollway operators’ right to a reasonable
return of investment under their TOAs; and c) is not administratively feasible and cannot
be implemented.

The Court’s Rulings

A. On the Procedural Issues:

On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition
rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol
gave their action. The government has sought reconsideration of the Court’s
resolution,7 however, arguing that petitioners’ allegations clearly made out a case for
declaratory relief, an action over which the Court has no original jurisdiction. The government
adds, moreover, that the petition does not meet the requirements of Rule 65 for actions for
prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it
sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and
adequate remedy in the ordinary course of law against the BIR action in the form of an appeal
to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if
the case has far-reaching implications and raises questions that need to be resolved for the
public good.8 The Court has also held that a petition for prohibition is a proper remedy to
prohibit or nullify acts of executive officials that amount to usurpation of legislative authority.9

Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday, but
more so on the government’s effort to raise revenue for funding various projects and for
reducing budgetary deficits.

To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed,
could cause more mischief both to the tax-paying public and the government. A belated
declaration of nullity of the BIR action would make any attempt to refund to the motorists what
they paid an administrative nightmare with no solution. Consequently, it is not only the right,
but the duty of the Court to take cognizance of and resolve the issues that the petition raises.

Although the petition does not strictly comply with the requirements of Rule 65, the Court has
ample power to waive such technical requirements when the legal questions to be resolved are
of great importance to the public. The same may be said of the requirement of locus standi
which is a mere procedural requisite.10

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties. The third paragraph of
Section 108 defines "sale or exchange of services" as follows:

The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; proprietors, operators or keepers of hotels,
motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in
securities; lending investors; transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes; common carriers by air and sea relative
to their transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees except those
under Section 119 of this Code and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services regardless of
whether or not the performance thereof calls for the exercise or use of the physical or mental
faculties. (Underscoring supplied)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services is
not exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the term
"services" an all-encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of "service" rendered for a fee
should be deemed included unless some provision of law especially excludes it.

Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render.
Essentially, tollway operators construct, maintain, and operate expressways, also called
tollways, at the operators’ expense. Tollways serve as alternatives to regular public highways
that meander through populated areas and branch out to local roads. Traffic in the regular
public highways is for this reason slow-moving. In consideration for constructing tollways at
their expense, the operators are allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover their expenses and earn reasonable
returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use
of the tollway facilities over which the operator enjoys private proprietary rights 12 that its
contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee:

1. Lessors of property, whether personal or real;

2. Warehousing service operators;

3. Lessors or distributors of cinematographic films;

4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,

resorts;

5. Lending investors (for use of money);

6. Transportation contractors on their transport of goods or cargoes, including persons

who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and
 7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties." This means that "services" to be subject to VAT need
not fall under the traditional concept of services, the personal or professional kinds that require
the use of human knowledge and skills.

And not only do tollway operators come under the broad term "all kinds of services," they also
come under the specific class described in Section 108 as "all other franchise grantees" who are
subject to VAT, "except those under Section 119 of this Code."

Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than ₱10
million and gas and water utilities) that Section 11913 spares from the payment of VAT. The
word "franchise" broadly covers government grants of a special right to do an act or series of
acts of public concern.14

Petitioners of course contend that tollway operators cannot be considered "franchise grantees"
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the "franchise grantees" it speaks of are those who hold legislative franchises.
Petitioners give no reason, and the Court cannot surmise any, for making a distinction between
franchises granted by Congress and franchises granted by some other government agency. The
latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted by
local authorities, as agents of the state, constitute as much a legislative franchise as though the
grant had been made by Congress itself.15 The term "franchise" has been broadly construed as
referring, not only to authorizations that Congress directly issues in the form of a special law,
but also to those granted by administrative agencies to which the power to grant franchises has
been delegated by Congress.16

Tollway operators are, owing to the nature and object of their business, "franchise grantees."
The construction, operation, and maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a special grant of authority from the
state. Indeed, Congress granted special franchise for the operation of tollways to the Philippine
National Construction Company, the former tollway concessionaire for the North and South
Luzon Expressways. Apart from Congress, tollway franchises may also be granted by the TRB,
pursuant to the exercise of its delegated powers under P.D. 1112.17 The franchise in this case is
evidenced by a "Toll Operation Certificate."18

Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code. But,
again, nothing in Section 108 supports this contention. The reverse is true. In specifically
including by way of example electric utilities, telephone, telegraph, and broadcasting
companies in its list of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for its use or service is a franchise.19

Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,20 "statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law." The congressional will is ultimately
determined by the language of the law that the lawmakers voted on. Consequently, the
meaning and intention of the law must first be sought "in the words of the statute itself, read
and considered in their natural, ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced or subtle construction."

Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is
tantamount to taxing a tax.21 Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:22

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

x x x The operation by the government of a tollway does not change the character of the road
as one for public use. Someone must pay for the maintenance of the road, either the public
indirectly through the taxes they pay the government, or only those among the public who
actually use the road through the toll fees they pay upon using the road. The tollway system is
even a more efficient and equitable manner of taxing the public for the maintenance of public
roads.

The charging of fees to the public does not determine the character of the property whether it
is for public dominion or not. Article 420 of the Civil Code defines property of public dominion
as "one intended for public use." Even if the government collects toll fees, the road is still
"intended for public use" if anyone can use the road under the same terms and conditions as
the rest of the public. The charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of the road do not affect the
public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed user’s tax. This means taxing those among the public who actually use a public
facility instead of taxing all the public including those who never use the particular public
facility. A user’s tax is more equitable – a principle of taxation mandated in the 1987
Constitution."23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax"
must also pertain to tollway fees. But the main issue in the MIAA case was whether or not
Parañaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the
national government, the Court held that the City could not proceed with the auction sale.
MIAA forms part of the national government although not integrated in the department
framework."24 Thus, its airport lands and buildings are properties of public dominion beyond
the commerce of man under Article 420(1)25 of the Civil Code and could not be sold at public
auction.

As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are user’s tax, but to make the point that airport lands and
buildings are properties of public dominion and that the collection of terminal fees for their use
does not make them private properties. Tollway fees are not taxes. Indeed, they are not
assessed and collected by the BIR and do not go to the general coffers of the government.

It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible
from motorists, for the construction and maintenance of certain roadways. The tax in such a
case goes directly to the government for the replenishment of resources it spends for the
roadways. This is not the case here. What the government seeks to tax here are fees collected
from tollways that are constructed, maintained, and operated by private tollway operators at
their own expense under the build, operate, and transfer scheme that the government has
adopted for expressways.26 Except for a fraction given to the government, the toll fees
essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose
of raising revenues to fund public expenditures.27 Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a tax. Taxes may
be imposed only by the government under its sovereign authority, toll fees may be demanded
by either the government or private individuals or entities, as an attribute of ownership.28

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of
VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is
not the seller’s liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears
its burden since the amount of VAT paid by the former is added to the selling price. Once
shifted, the VAT ceases to be a tax30 and simply becomes part of the cost that the buyer must
pay in order to purchase the good, property or service.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the
course of trade or business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.

For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed
as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts and not
necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the
tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in order to use the tollways.32

Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned under the TOAs. The interest in
and right to recover investments solely belongs to the private tollway investors.

Besides, her allegation that the private investors’ rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her
assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based
on uncertain, prophetic grounds.

Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and incapable of implementation. They cite the
fact that, in order to claim input VAT, the name, address and tax identification number of the
tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR
intends to implement the VAT – by rounding off the toll rate and putting any excess collection in
an escrow account – is also illegal, while the alternative of giving "change" to thousands of
motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according
to them, the VAT on tollway operations is not administratively feasible.33

Administrative feasibility is one of the canons of a sound tax system. It simply means that the
tax system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome
to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or
the Constitution.

Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR intends to go about it,35 the facts pertaining to
the matter are not sufficiently established for the Court to pass judgment on. Besides, any
concern about how the VAT on tollway operations will be enforced must first be addressed to
the BIR on whom the task of implementing tax laws primarily and exclusively rests. The Court
cannot preempt the BIR’s discretion on the matter, absent any clear violation of law or the
Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)36 of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but failed to
charge VAT-inclusive toll fees which by now can no longer be collected. The tollway operators
agreed to waive the 2% transitional input VAT, in exchange for cancellation of their past due
VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the tollway
operators who have not questioned the circular’s validity. They are thus the ones who have a
right to challenge the circular in a direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand
the VAT law’s coverage when she sought to impose VAT on tollway operations. Section 108(A)
of the Code clearly states that services of all other franchise grantees are subject to VAT, except
as may be provided under Section 119 of the Code. Tollway operators are not among the
franchise grantees subject to franchise tax under the latter provision. Neither are their services
among the VAT-exempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be
justified by clear statutory grant and based on language in the law too plain to be
mistaken.37 But as the law is written, no such exemption obtains for tollway operators. The
Court is thus duty-bound to simply apply the law as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Court’s role is to merely uphold this legislative policy, as reflected
first and foremost in the language of the tax statute. Thus, any unwarranted burden that may
be perceived to result from enforcing such policy must be properly referred to Congress. The
Court has no discretion on the matter but simply applies the law.

The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax laws.
Consequently, the executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the
petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE
the Court’s temporary restraining order dated August 13, 2010.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice

WE CONCUR:

G.R. No. L-26521      December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.

Pelaez, Jalandoni and Jamir for plaintiff-appellees.

Assistant City Fiscal Vicente P. Gengos for defendant-appellant.

CASTRO, J.:

Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo
declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal
License Tax On Persons Engaged In The Business Of Operating Tenement Houses," and ordering
the City to refund to the plaintiffs-appellees the sums of collected from them under the said
ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing
license tax fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2)
tenement house, partly or wholly engaged in or dedicated to business in the streets of J.M.
Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly engaged
in business in any other streets, P12.00 per apartment. The validity and constitutionality of this
ordinance were challenged by the spouses Eusebio Villanueva and Remedies Sian Villanueva,
owners of four tenement houses containing 34 apartments. This Court, in City of Iloilo vs.
Remedios Sian Villanueva and Eusebio Villanueva, L-12695, March 23, 1959, declared the
ordinance ultra vires, "it not appearing that the power to tax owners of tenement houses is one
among those clearly and expressly granted to the City of Iloilo by its Charter."

On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the
passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the
authority or power to enact an ordinance similar to that previously declared by this Court
as ultra vires, enacted Ordinance 11, series of 1960, hereunder quoted in full:

AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE

BUSINESS OF OPERATING TENEMENT HOUSES

Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of
Republic Act No. 2264, otherwise known as the Autonomy Law of Local Government,
that:

Section 1. — A municipal license tax is hereby imposed on tenement houses in

accordance with the schedule of payment herein provided.

Section 2. — Tenement house as contemplated in this ordinance shall mean any building
or dwelling for renting space divided into separate apartments or accessorias.

Section 3. — The municipal license tax provided in Section 1 hereof shall be as follows:

I. Tenement houses:

(a) Apartment house made of strong materials P20.00 per door p.a.

(b) Apartment house made of mixed materials P10.00 per door p.a.

II Rooming house of strong materials P10.00 per door p.a.

Rooming house of mixed materials P5.00 per door p.a.

III. Tenement house partly or wholly engaged in or dedicated

to business in the following streets: J.M. Basa, Iznart, Aldeguer,
Guanco and Ledesma from Plazoleto Gay to Valeria. St. P30.00 per door p.a.
 IV. Tenement house partly or wholly engaged in or dedicated
to business in any other street P12.00 per door p.a.

V. Tenement houses at the streets surrounding the super

market as soon as said place is declared commercial P24.00 per door p.a.

Section 4. — All ordinances or parts thereof inconsistent herewith are hereby amended.

Section 5. — Any person found violating this ordinance shall be punished with a fine
note exceeding Two Hundred Pesos (P200.00) or an imprisonment of not more than six
(6) months or both at the discretion of the Court.

Section 6 — This ordinance shall take effect upon approval.

ENACTED, January 15, 1960.

In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five
tenement houses, aggregately containing 43 apartments, while the other appellees and the
same Remedios S. Villanueva are owners of ten apartments. Each of the appellees' apartments
has a door leading to a street and is rented by either a Filipino or Chinese merchant. The first
floor is utilized as a store, while the second floor is used as a dwelling of the owner of the store.
Eusebio Villanueva owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City,
Baguio City and Quezon City, which cities, according to him, do not impose tenement or
apartment taxes.

By virtue of the ordinance in question, the appellant City collected from spouses Eusebio
Villanueva and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and
from the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the
years 1960-1964, the sum of P1,317.00. Eusebio Villanueva has likewise been paying real estate
taxes on his property.

On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended
complaint, respectively, against the City of Iloilo, in the aforementioned court, praying that
Ordinance 11, series of 1960, be declared "invalid for being beyond the powers of the
Municipal Council of the City of Iloilo to enact, and unconstitutional for being violative of the
rule as to uniformity of taxation and for depriving said plaintiffs of the equal protection clause
of the Constitution," and that the City be ordered to refund the amounts collected from them
under the said ordinance.

On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the
grounds that (a) "Republic Act 2264 does not empower cities to impose apartment taxes," (b)
the same is "oppressive and unreasonable," for the reason that it penalizes owners of tenement
houses who fail to pay the tax, (c) it constitutes not only double taxation, but treble at that and
(d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:

1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double
taxation?

2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?

3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a

penal clause?

4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?

1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:

SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities,
municipalities and municipal districts shall have authority to impose municipal license
taxes or fees upon persons engaged in any occupation or business, or exercising
privileges in chartered cities, municipalities or municipal districts by requiring them to
secure licences at rates fixed by the municipal board or city council of the city, the
municipal council of the municipality, or the municipal district council of the municipal
district; to collect fees and charges for services rendered by the city, municipality or
municipal district; to regulate and impose reasonable fees for services rendered in
connection with any business, profession or occupation being conducted within the city,
municipality or municipal district and otherwise to levy for public purposes, just and
uniform taxes, licenses or fees; Provided, That municipalities and municipal districts
shall, in no case, impose any percentage tax on sales or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax, except gasoline, under the
provisions of the National Internal Revenue Code; Provided, however, That no city,
municipality or municipal district may levy or impose any of the following:

(a) Residence tax;

(b) Documentary stamp tax;

(c) Taxes on the business of persons engaged in the printing and publication of any
newspaper, magazine, review or bulletin appearing at regular intervals and having fixed
prices for for subscription and sale, and which is not published primarily for the purpose
of publishing advertisements;

(d) Taxes on persons operating waterworks, irrigation and other public utilities except
electric light, heat and power;

(e) Taxes on forest products and forest concessions;

 (f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;

(g) Taxes on income of any kind whatsoever;

(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof;

(i) Customs duties registration, wharfage dues on wharves owned by the national
government, tonnage, and all other kinds of customs fees, charges and duties;

(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax;
and

(k) Taxes on premiums paid by owners of property who obtain insurance directly with
foreign insurance companies.

A tax ordinance shall go into effect on the fifteenth day after its passage, unless the
ordinance shall provide otherwise: Provided, however, That the Secretary of Finance
shall have authority to suspend the effectivity of any ordinance within one hundred and
twenty days after its passage, if, in his opinion, the tax or fee therein levied or imposed
is unjust, excessive, oppressive, or confiscatory, and when the said Secretary exercises
this authority the effectivity of such ordinance shall be suspended.

In such event, the municipal board or city council in the case of cities and the municipal
council or municipal district council in the case of municipalities or municipal districts
may appeal the decision of the Secretary of Finance to the court during the pendency of
which case the tax levied shall be considered as paid under protest.

It is now settled that the aforequoted provisions of Republic Act 2264 confer on local
governments broad taxing authority which extends to almost "everything, excepting those
which are mentioned therein," provided that the tax so levied is "for public purposes, just and
uniform," and does not transgress any constitutional provision or is not repugnant to a
controlling statute.2 Thus, when a tax, levied under the authority of a city or municipal
ordinance, is not within the exceptions and limitations aforementioned, the same comes within
the ambit of the general rule, pursuant to the rules of expressio unius est exclusio alterius, and
exceptio firmat regulum in casibus non excepti.

Does the tax imposed by the ordinance in question fall within any of the exceptions provided
for in section 2 of the Local Autonomy Act? For this purpose, it is necessary to determine the
true nature of the tax. The appellees strongly maintain that it is a "property tax" or "real estate
tax,"3 and not a "tax on persons engaged in any occupation or business or exercising privileges,"
or a license tax, or a privilege tax, or an excise tax.4 Indeed, the title of the ordinance designates
it as a "municipal license tax on persons engaged in the business of operating tenement
houses," while section 1 thereof states that a "municipal license tax is hereby imposed on
tenement houses." It is the phraseology of section 1 on which the appellees base their
contention that the tax involved is a real estate tax which, according to them, makes the
ordinance ultra vires as it imposes a levy "in excess of the one per centum real estate tax
allowable under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.

It is our view, contrary to the appellees' contention, that the tax in question is not a real estate
tax. Obviously, the appellees confuse the tax with the real estate tax within the meaning of the
Assessment Law,6 which, although not applicable to the City of Iloilo, has counterpart provisions
in the Iloilo City Charter.7 A real estate tax is a direct tax on the ownership of lands and
buildings or other improvements thereon, not specially exempted,8 and is payable regardless of
whether the property is used or not, although the value may vary in accordance with such
factor.9 The tax is usually single or indivisible, although the land and building or improvements
erected thereon are assessed separately, except when the land and building or improvements
belong to separate owners.10 It is a fixed proportion11 of the assessed value of the property
taxed, and requires, therefore, the intervention of assessors.12 It is collected or payable at
appointed times,13 and it constitutes a superior lien on and is enforceable against the
property14 subject to such taxation, and not by imprisonment of the owner.

The tax imposed by the ordinance in question does not possess the aforestated attributes. It is
not a tax on the land on which the tenement houses are erected, although both land and
tenement houses may belong to the same owner. The tax is not a fixed proportion of the
assessed value of the tenement houses, and does not require the intervention of assessors or
appraisers. It is not payable at a designated time or date, and is not enforceable against the
tenement houses either by sale or distraint. Clearly, therefore, the tax in question is not a real
estate tax.

"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the
court looks less to its words and more to the context, subject-matter, consequence and effect.
Accordingly, what is within the spirit is within the ordinance although it is not within the letter
thereof, while that which is in the letter, although not within the spirit, is not within the
ordinance."15 It is within neither the letter nor the spirit of the ordinance that an additional real
estate tax is being imposed, otherwise the subject-matter would have been not merely
tenement houses. On the contrary, it is plain from the context of the ordinance that the
intention is to impose a license tax on the operation of tenement houses, which is a form of
business or calling. The ordinance, in both its title and body, particularly sections 1 and 3
thereof, designates the tax imposed as a "municipal license tax" which, by itself, means an
"imposition or exaction on the right to use or dispose of property, to pursue a business,
occupation, or calling, or to exercise a privilege."16.

"The character of a tax is not to be fixed by any isolated words that may beemployed in
the statute creating it, but such words must be taken in the connection in which they
are used and the true character is to be deduced from the nature and essence of the
subject."17 The subject-matter of the ordinance is tenement houses whose nature and
essence are expressly set forth in section 2 which defines a tenement house as "any
 building or dwelling for renting space divided into separate apartments or accessorias."
The Supreme Court, in City of Iloilo vs. Remedios Sian Villanueva, et al., L-12695, March
23, 1959, adopted the definition of a tenement house18 as "any house or building, or
portion thereof, which is rented, leased, or hired out to be occupied, or is occupied, as
the home or residence of three families or more living independently of each other and
doing their cooking in the premises or by more than two families upon any floor, so
living and cooking, but having a common right in the halls, stairways, yards, water-
closets, or privies, or some of them." Tenement houses, being necessarily offered for
rent or lease by their very nature and essence, therefore constitute a distinct form of
business or calling, similar to the hotel or motel business, or the operation of lodging
houses or boarding houses. This is precisely one of the reasons why this Court, in the
said case of City of Iloilo vs. Remedios Sian Villanueva, et al., supra, declared Ordinance
86 ultra vires, because, although the municipal board of Iloilo City is empowered, under
sec. 21, par. j of its Charter, "to tax, fix the license fee for, and regulate hotels,
restaurants, refreshment parlors, cafes, lodging houses, boarding houses, livery garages,
public warehouses, pawnshops, theaters, cinematographs," tenement houses, which
constitute a different business enterprise,19 are not mentioned in the aforestated section
of the City Charter of Iloilo. Thus, in the aforesaid case, this Court explicitly said:.

"And it not appearing that the power to tax owners of tenement houses is one among
those clearly and expressly granted to the City of Iloilo by its Charter, the exercise of
such power cannot be assumed and hence the ordinance in question is ultra
vires insofar as it taxes a tenement house such as those belonging to defendants." .

The lower court has interchangeably denominated the tax in question as a tenement tax or an
apartment tax. Called by either name, it is not among the exceptions listed in section 2 of the
Local Autonomy Act. On the other hand, the imposition by the ordinance of a license tax on
persons engaged in the business of operating tenement houses finds authority in section 2 of
the Local Autonomy Act which provides that chartered cities have the authority to impose
municipal license taxes or fees upon persons engaged in any occupation or business, or
exercising privileges within their respective territories, and "otherwise to levy for public
purposes, just and uniform taxes, licenses, or fees." .

2. The trial court condemned the ordinance as constituting "not only double taxation but treble
at that," because "buildings pay real estate taxes and also income taxes as provided for in Sec.
182 (A) (3) (s) of the National Internal Revenue Code, besides the tenement tax under the said
ordinance." Obviously, what the trial court refers to as "income taxes" are the fixed taxes on
business and occupation provided for in section 182, Title V, of the National Internal Revenue
Code, by virtue of which persons engaged in "leasing or renting property, whether on their
account as principals or as owners of rental property or properties," are considered "real estate
dealers" and are taxed according to the amount of their annual income.20.

While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the
National Internal Revenue Code as real estate dealers, and still taxable under the ordinance in
question, the argument against double taxation may not be invoked. The same tax may be
imposed by the national government as well as by the local government. There is nothing
inherently obnoxious in the exaction of license fees or taxes with respect to the same
occupation, calling or activity by both the State and a political subdivision thereof.21.

The contention that the plaintiffs-appellees are doubly taxed because they are paying the real
estate taxes and the tenement tax imposed by the ordinance in question, is also devoid of
merit. It is a well-settled rule that a license tax may be levied upon a business or occupation
although the land or property used in connection therewith is subject to property tax. The State
may collect an ad valorem tax on property used in a calling, and at the same time impose a
license tax on that calling, the imposition of the latter kind of tax being in no sensea double
tax.22.

"In order to constitute double taxation in the objectionable or prohibited sense the
same property must be taxed twice when it should be taxed but once; both taxes must
be imposed on the same property or subject-matter, for the same purpose, by the same
State, Government, or taxing authority, within the same jurisdiction or taxing district,
during the same taxing period, and they must be the same kind or character of tax." 23 It
has been shown that a real estate tax and the tenement tax imposed by the ordinance,
although imposed by the sametaxing authority, are not of the same kind or character.

At all events, there is no constitutional prohibition against double taxation in the

Philippines.24 It is something not favored, but is permissible, provided some other constitutional
requirement is not thereby violated, such as the requirement that taxes must be uniform."25.

3. The appellant City takes exception to the conclusion of the lower court that the ordinance is
not only oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6
months or both, if the owner or owners of the tenement buildings divided into apartments do
not pay the tenement or apartment tax fixed in said ordinance," but also unconstitutional as it
subjects the owners of tenement houses to criminal prosecution for non-payment of an
obligation which is purely sum of money." The lower court apparently had in mind, when it
made the above ruling, the provision of the Constitution that "no person shall be imprisoned
for a debt or non-payment of a poll tax."26 It is elementary, however, that "a tax is not a debt in
the sense of an obligation incurred by contract, express or implied, and therefore is not within
the meaning of constitutional or statutory provisions abolishing or prohibiting imprisonment for
debt, and a statute or ordinance which punishes the non-payment thereof by fine or
imprisonment is not, in conflict with that prohibition."27 Nor is the tax in question a poll tax, for
the latter is a tax of a fixed amount upon all persons, or upon all persons of a certain class,
resident within a specified territory, without regard to their property or the occupations in
which they may be engaged.28 Therefore, the tax in question is not oppressive in the manner
the lower court puts it. On the other hand, the charter of Iloilo City 29 empowers its municipal
board to "fix penalties for violations of ordinances, which shall not exceed a fine of two
hundred pesos or six months' imprisonment, or both such fine and imprisonment for each
offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court overruled the
pronouncement of the lower court declaring illegal and void an ordinance imposing an
occupation tax on persons exercising various professions in the City of Manilabecause it
imposed a penalty of fine and imprisonment for its violation.30.

4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.

"... because while the owners of the other buildings only pay real estate tax and income
taxes the ordinance imposes aside from these two taxes an apartment or tenement tax.
It should be noted that in the assessment of real estate tax all parts of the building or
buildings are included so that the corresponding real estate tax could be properly
imposed. If aside from the real estate tax the owner or owners of the tenement
buildings should pay apartment taxes as required in the ordinance then it will violate the
rule of uniformity of taxation.".

Complementing the above ruling of the lower court, the appellees argue that there is "lack of
uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo are
singled out to pay taxes on their tenement houses, while citizens of other cities, where their
councils do not enact a similar tax ordinance, are permitted to escape such imposition." .

It is our view that both assertions are undeserving of extended attention. This Court has already
ruled that tenement houses constitute a distinct class of property. It has likewise ruled that
"taxes are uniform and equal when imposed upon all property of the same class or character
within the taxing authority."31 The fact, therefore, that the owners of other classes of buildings
in the City of Iloilo do not pay the taxes imposed by the ordinance in question is no argument at
all against uniformity and equality of the tax imposition. Neither is the rule of equality and
uniformity violated by the fact that tenement taxesare not imposed in other cities, for the same
rule does not require that taxes for the same purpose should be imposed in different territorial
subdivisions at the same time.32 So long as the burden of the tax falls equally and impartially on
all owners or operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.33 The plaintiffs-appellees, as owners of tenement houses
in the City of Iloilo, have not shown that the tax burden is not equally or uniformly distributed
among them, to overthrow the presumption that tax statutes are intended to operate
uniformly and equally.34.

5. The last important issue posed by the appellees is that since the ordinance in the case at bar
is a mere reproduction of Ordinance 86 of the City of Iloilo which was declared by this Court in
L-12695, supra, as ultra vires, the decision in that case should be accorded the effect of res
judicata in the present case or should constitute estoppel by judgment. To dispose of this
contention, it suffices to say that there is no identity of subject-matter in that case andthis case
because the subject-matter in L-12695 was an ordinance which dealt not only with tenement
houses but also warehouses, and the said ordinance was enacted pursuant to the provisions of
the City charter, while the ordinance in the case at bar was enacted pursuant to the provisions
of the Local Autonomy Act. There is likewise no identity of cause of action in the two cases
because the main issue in L-12695 was whether the City of Iloilo had the power under its
charter to impose the tax levied by Ordinance 11, series of 1960, under the Local Autonomy Act
which took effect on June 19, 1959, and therefore was not available for consideration in the
decision in L-12695 which was promulgated on March 23, 1959. Moreover, under the
provisions of section 2 of the Local Autonomy Act, local governments may now tax any taxable
subject-matter or object not included in the enumeration of matters removed from the taxing
power of local governments.Prior to the enactment of the Local Autonomy Act the taxes that
could be legally levied by local governments were only those specifically authorized by law, and
their power to tax was construed in strictissimi juris. 35.

ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid, the
complaint is hereby dismissed. No pronouncement as to costs..

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,Fernando and Capistrano,
JJ., concur..

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,

COURT OF APPEALS, and THE COURT OF TAX APPEALS, Respondents.

ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April
8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No.
4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax
liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code
of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in
the total amount of P123,821.982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE

TAX DUE

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

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

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

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

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

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

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

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

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

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

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

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

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

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for
the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims
for tax credit/refund should be applied against the tax liabilities, citing our ruling
in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since
these pending claims have not yet been established or determined with certainty, it follows
that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex
settle the amount plus interest within 30 days from the receipt of the letter.

In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against
its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6,
1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the
amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. "Liquidated" debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In
the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still
has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the
Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which
Petitioner conceived to exist in its favor (see Compañia General de Tabacos vs. French and
Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8

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

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

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

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision
dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated
July 11, 1996. 13

However, a few days after the denial of its motion for reconsideration, Philex was able to obtain
its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and
1994, computed as follows: 14

Period Covered Tax Credit Date

By Claims For Certificate of

VAT refund/credit Number Issue Amount

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

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

1989 007732 11 July 1996 P37,322,799.19

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

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

In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and
demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place.

We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that
taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. 17 There is a material distinction between
a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due
to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the
aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically

held that taxes cannot be subject to set-off or compensation, thus:

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

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

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

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc

Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax
liability even though the refund has not yet been approved by the Commissioner, 21 is no longer
without any support in statutory law.

It is important to note, that the premise of our ruling in the aforementioned case was anchored
on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same provision upon which the Itogon-
Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated
in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition
of surcharge and interest for the non-payment of the excise taxes within the time prescribed
was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities
within the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in
tax law that taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render
ineffective our tax collection system. Too simplistic, it finds no support in law or in
jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that
it has a pending tax claim for refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather
than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If
any taxpayer can defer the payment of taxes by raising the defense that it still has a pending
claim for refund or credit, this would adversely affect the government revenue system. A
taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim
against the government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which taxpayers credit and
offset their tax liabilities.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under Section
248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is
not vested with any authority to waive the collection thereof. 28 The same cannot be condoned
for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its
tax liabilities.

Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue
Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years
for the latter to grant its tax claim for VAT input credit/refund. 32

In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of
proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once
the claimant has submitted all the required documents it is the function of the BIR to assess
these documents with purposeful dispatch. After all, since taxpayers owe honestly to
government it is but just that government render fair service to the taxpayers. 34

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its
function. As aptly held in Roxas v. Court of Tax Appeals: 36

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax 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.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is
a settled rule that in the performance of governmental function, the State is not bound by the
neglect of its agents and officers. Nowhere is this more true than in the field of
taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same
is not a valid reason for the non-payment of its tax liabilities.

To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or
employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet
needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter
can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by
law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse
under the Civil Code and the Tax Code can also be availed of.

Art. 27 of the Civil Code provides:

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

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

xxx xxx xxx

(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.

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

In sum, while we can never condone the BIR's apparent callousness in performing its duties,
still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should
take the law into his own hands" should have guided Philex's action.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed
decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Kapunan and Purisima, JJ., concur.

G.R. No. 183553 : November 12, 2012

DIAGEO PHILIPPINES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

PERLAS-BERNABE, J.:

Before the Court is a Petition for Review under Rule 45 of the Rules of Court assailing the
Decision1Ï‚rνll of the Court of Tax Appeals (CTA) En Banc dated July 2, 2008 in CTA EB No. 260.

The petition seeks the proper interpretation of Section 130(D)2Ï‚rνll of the National Internal
Revenue Code of 1997 (Tax Code), particularly, on the question of who may claim the refund or
tax credit of excise taxes paid on goods actually exported.

The Factual Antecedents

Petitioner Diageo Philippines, Inc. (Diageo) is a domestic corporation organized and existing
under the laws of the Republic of Philippines and is primarily engaged in the business of
importing, exporting, manufacturing, marketing, distributing, buying and selling, by wholesale,
all kinds of beverages and liquors and in dealing in any material, article, or thing required in
connection with or incidental to its principal business.3Ï‚rνll It is registered with the Bureau of
Internal Revenue (BIR) as an excise tax taxpayer, with Tax Identification No. 000-161-879-
000.4ςrνll

For the periodNovember 1, 2003 to December 31, 2004, Diageo purchased raw alcohol from its
supplier for use in the manufacture of its beverage and liquor products. The supplier imported
the raw alcohol and paid the related excise taxes thereon before the same were sold to the
petitioner.5Ï‚rνll The purchase price for the raw alcohol included, among others, the excise
taxes paid by the supplierin the total amount of P12,007,528.83.6ςrνll

Subsequently, Diageo exported its locally manufactured liquor products to Japan, Taiwan,
Turkey and Thailand and received the corresponding foreign currency proceeds of such export
sales.7ςrνll

Within two (2) years from the time the supplier paid the subject excise taxes, Diageo filed with
the BIR Large Taxpayers Audit and Investigation Division II applications for tax refund/issuance
of tax credit certificates corresponding to the excise taxes which its supplier paid but passed on
to it as part of the purchase price of the subject raw alcohol invoking Section 130(D) of the Tax
Code.

However, due to the failure of the respondent Commissioner of Internal Revenue (CIR) to act
upon Diageos claims, the latter was constrained to timely file a petition for review before the
CTA.8ςrνll

On December 27, 2005, the CIR filed its Answer assailing Diageos lack of legal personality to
institute the claim for refund because it was not the one that paid the alleged excise taxes but
its supplier.9Ï‚rνll Subsequently, the CIR filed a motion to dismiss reiterating the same
issue.10ςrνll

The Ruling of the Court of Tax Appeals

On July 20, 2006, the CTA Second Division issued a Resolution11dismissing the petition on the
ground that Diageo is not the real party in interest to file the claim for refund. Citing Philippine
Acetylene Co., Inc. v. Commissioner of Internal Revenue,12Ï‚rνll the CTA Second Division ruled
that although an excise tax is an indirect tax which can be passed on to the purchaser of goods,
the liability therefor still remains with the manufacturer or seller, hence, the right to claim
refund is only available to it.13Ï‚rνll Diageo filed a motion for reconsideration which was
subsequently denied in the Resolution dated January 8, 2007.14ςrνll

On February 13, 2007, Diageo filed a petition for review15Ï‚rνll which the CTAEn Bancin its
Decision dated July 2, 2008dismissed,thereby affirming the ruling of the CTA Second
Division.16ςrνll

Citing Rule 3, Section 2,17Ï‚rνll of the Rules of Court, the CTA En Banc held that the right to a
refund or tax credit of the excise taxes under Section 130(D) of the Tax Code is available only to
persons enumerated in Sections 130(A)(1)18Ï‚rνll and (2)19Ï‚rνll of the same Code because they
are the ones primarily and legally liable to pay such taxes. As Diageo failed to prove that it had
actually paid the claimed excise taxes as manufacturer-exporter, the CTA En Banc likewise did
not find it as the proper party to claim a refund.Hence, the instant petition.
Diageo claims to be a real party in interest entitled to recover the subject refund or tax credit
because it stands to be benefited or injured by the judgment in this suit.20Ï‚rνll It contends that
the tax privilege under Section 130(D) applies to every exporter provided the conditions therein
set forth are complied with, namely, (1) the goods are exported either in their original state or
as ingredients or part of any manufactured goods or products; (2) the exporter submits proof of
exportation; and (3) the exporter likewise submits proof of receipt of the corresponding foreign
exchange payment.21It argues that Section 130(D) does not limit the grant of the tax privilege to
manufacturers/producers-exporters only but to every exporter of locally
22
manufactured/produced goods subject only to the conditions aforementioned. ςrνll

The Issue

The sole issue to be resolved is whether Diageo has the legal personality to file aclaim for
refund or tax credit for the excise taxes paid by its supplier on the raw alcohol it purchased and
used in the manufacture of its exported goods.

Ruling of the Court

The petition is without merit.

Excise taxes partake of the nature of indirect taxes.

Diageo bases its claim for refund on Section 130 of the Tax Code which reads:

Section 130.Filing of Return and Payment of Excise Tax on Domestic Products. xxx

(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax.-

(1) Persons Liable to File a Return. Every person liable to pay excise tax imposed under this Title
shall file a separate return for each place of production setting forth, among others, the
description and quantity or volume of products to be removed, the applicable tax base and the
amount of tax due thereon; Provided however, That in the case of indigenous petroleum,
natural gas or liquefied natural gas, the excise tax shall be paid by the first buyer, purchaser or
transferee for local sale, barter or transfer, while the excise tax on exported products shall be
paid by the owner, lessee, concessionaire or operator of the mining claim.Should domestic
products be removed from the place of production without the payment of the tax, the owner
or person having possession thereof shall be liable for the tax due thereon.

xxx

(D) Credit for Excise tax on Goods Actually Exported.- When goods locally produced or
manufactured are removed and actually exported without returning to the Philippines, whether
so exported in their original state or as ingredients or parts of any manufactured goods or
products, any excise tax paid thereon shall be credited or refunded upon submission of the
proof of actual exportation and upon receipt of the corresponding foreign exchange payment:
Provided, That the excise tax on mineral products, except coal and coke, imposed under Section
151 shall not be creditable or refundable even if the mineral products are actually exported.

A reading of the foregoing provision, however, reveals that contrary to the position of Diageo,
the right to claim a refund or be credited with the excise taxes belongs to its supplier. The
phrase "any excise tax paid thereon shall be credited or refunded" requires that the claimant be
the same person who paid the excise tax. In Silkair (Singapore) Pte, Ltd. v. Commissioner of
Internal Revenue, the Court has categorically declared that "[t]he proper party to question, or
seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if he shifts the burden thereof to another."23ςrνll

Excise taxes imposed under Title VI of the Tax Code are taxes on property 24Ï‚rνll which are
imposed on "goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition and to things imported."25Ï‚rνll Though excise taxes
are paid by the manufacturer or producer before removal of domestic products from the place
of production26Ï‚rνll or by the owner or importer before the release of imported articles from
the customshouse,27Ï‚rνll the same partake of the nature of indirect taxes when it is passed on
to the subsequent purchaser.

Indirect taxesare defined asthose wherein the liability for the payment of the tax falls on one
person but the burden thereof can be shifted to another person. When the seller passes on the
tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as
part of the price of goods sold or services rendered.28ςrνll

Accordingly, when the excise taxes paid by the supplier were passed on to Diageo, what was
shifted is not the tax per se but anadditional cost of the goods sold. Thus, the supplier remains
the statutory taxpayer even if Diageo, the purchaser, actually shoulders the burden of tax.

The statutory taxpayer is the proper

party to claim refund of indirect
taxes.

As defined in Section 22(N) of the Tax Code, a taxpayer means any person subject to tax. He is,
therefore, the person legally liable to file a return and pay the tax as provided for in Section
130(A). As such, he is the person entitled to claim a refund.

Relevant isSection 204(C) of the Tax Code which provides:chanroblesvirtuallawlibrary

Section 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit
Taxes.- The Commissioner may -

xxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refined their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, that a return filed showing an overpayment shall be considered as
a written claim for credit or refund. (Emphasis supplied)

Pursuant to the foregoing, the person entitled to claim a tax refund is the statutory taxpayer or
the person liable for or subject to tax.29Ï‚rνll In the present case, it is not disputed that the
supplier of Diageo imported the subject raw alcohol, hence, it was the one directly liable and
obligated to file a return and pay the excise taxes under the Tax Code before the goods or
products are removed from the customs house. It is, therefore, the statutory taxpayer as
contemplated by law and remains to be so, even if it shifts the burden of tax to Diageo.
Consequently, the right to claim a refund, if legally allowed, belongs to it and cannot be
transferred to another, in this case Diageo, without any clear provision of law allowing the
same.

Unlike the law on Value Added Tax which allows the subsequent purchaser under the tax credit
method to refund or credit input taxes passed on to it by a supplier, 30Ï‚rνll no provision for
excise taxes exists granting non-statutory taxpayer like Diageo to claim a refund or credit. It
should also be stressed that when the excise taxes were included in the purchase price of the
goods sold to Diageo, the same was no longer in the nature of a tax but already formed part of
the cost of the goods.

Finally, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and
liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and
based on language in law too plain to be mistaken.31Ï‚rνll Unfortunately, Diageo failed to meet
the burden of proof that it is covered by the exemption granted under Section 130(D) of the Tax
Code.

In sum, Diageo, not being the party statutorily liable to pay excise taxes and having failed to
prove that it is covered by the exemption granted under Section 130(D) of the Tax Code, is not
the proper party to claim a refund or credit of the excise taxes paid on the ingredients of its
exported locally produced liquor.

WHIEREFORE, the petition is DENIED and the assailed CTA En Banc Decision in CTA EB No. 260
dated July 2, 2008 is AFFIRMED.ςrαlαωlιbrαr

SO ORDERED.
G.R. No. 167679               July 22, 2015

ING BANK N.V., engaged in banking operations in the Philippines as ING BANK N.V. MANILA
BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty
program under Republic Act No. 9480,1 otherwise known as the 2007 Tax Amnesty Act. Thus,
the provision in BIR Revenue Memorandum Circular No. 19-2008 excepting "[i]ssues and cases
which were ruled by any court (even without finality) in favor of the BIR prior to amnesty
availment of the taxpayer" from the benefits of the law is illegal, invalid, and null and void.2 The
duty to withhold the tax on compensation arises upon its accrual.

This is a Petition for Review3 appealing the April 5, 2005 Decision4 of the Court of Tax Appeals
En Banc, which in turn affirmed the August 9, 2004 Decision 5 and November 12, 2004
Resolution6 of the Court of Tax Appeals Second Division. The August 9, 2004 Decision held
petitioner ING Bank, N.V. Manila Branch (ING Bank) liable for (a) deficiency documentary stamp
tax for the taxable years 1996 and 1997 in the total amount of ₱238,545,052.38 inclusive of
surcharges; (b) deficiency onshore tax for the taxable year 1996 in the total amount of
₱997,333.89 inclusive of surcharges and interest; and (c) deficiency withholding tax on
compensation for the taxable years 1996 and 1997 in the total amount of ₱564,542.67 inclusive
of interest. The Resolution denied ING Bank’s Motion for Reconsideration.7

While this case was pending before this court, ING Bank filed a Manifestation and
Motion8 stating that it availed itself of the government’s tax amnesty program under Republic
Act No. 9480 with respect to its deficiency documentary stamp tax and deficiency onshore tax
liabilities.9 What is at issue now is whether ING Bank is entitled to the immunities and privileges
under Republic Act No. 9480,and whether the assessment for deficiency withholding tax on
compensation is proper.

ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign banking
corporation incorporated in the Netherlands[,] is duly authorized by the Bangko Sentral ng
Pilipinas to operate as a branch with full banking authority in the Philippines."10

On January 3, 2000, ING Bank received a Final Assessment Notice11 dated December 3,

1999.12 The Final Assessment Notice also contained the Details of Assessment13 and 13
Assessment Notices "issued by the Enforcement Service of the Bureau of Internal Revenue
through its Assistant Commissioner Percival T. Salazar[.]" 14 The Final Assessment Notice covered
the following deficiency tax assessments for taxable years 1996 and 1997:15

Particulars Basic Tax( ) Surcharge( ) Interest( ) Total( )

Deficiency Income Tax
1996 (ST-INC-96-0174-99) 20,916,785.03 11,346,639.55 32,263,424.58
1997 (ST-INC-97-0185-99) 133,533,114.54 45,730,518.68 179,263,633.22
Deficiency Withholding Tax
on Compensation
1996 (ST-WC-96-0175-99) 1,027,267.20 602,288.17 1,629,555.37
1997 (ST-WC-97-0184-99) 2,505,925.25 968,042.36 3,473,967.61
Deficiency Onshore Tax
1996 (ST-OT-96-0176-99) 8,267,437.54 4,847,209.95 13,114,647.49
Deficiency Branch Profit
Remittance Tax
1996 (ST-RT-96-0177-99) 39,215,700.00 22,992,218[.]63 62,207,918.63
1997 (ST-RT-97-0181-99) 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17
Deficiency Documentary
Stamp Tax
1996 (ST-DST-96-0178-99 3,838,753.06 959,688.27 4,798,441.33
1997 (ST-DST-97-0181-99) 1,569,990.18 392,497.55 1,962,487.73
1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05
Compromise Penalty
1996 (ST-CP-96-0179-99) 1,000.00 1,000.00
1997 (ST-CP-97-0186-99) 1,000.00 1,000.00
Deficiency Final Tax
1997 (ST-FT-97-0183-99) 53,200.89 20,551.58 73,752.47

TOTALS 490,514,844.13 54,830,688.21 127,307,159.31 672,652,691.65

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

On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996 compromise
penalty, 1997 deficiency documentary stamp tax and 1997 deficiency final tax in the respective
amounts of ₱1,000.00, ₱1,000.00 and ₱75,013.25 [the original amount of ₱73,752.47 plus
additional interest]."16 ING Bank, however, "protested [on the same day] the remaining ten (10)
deficiency tax assessments in the total amount of ₱672,576,939.18."17

ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000. This
case was docketed as C.T.A. Case No. 6187.18 The Petition was filed to seek "the cancellation
and withdrawal of the deficiency tax assessments for the years 1996 and 1997, including the
alleged deficiency documentary stamp tax on special savings accounts, deficiency onshore tax,
and deficiency withholding tax on compensation mentioned above."19
 After trial, the Court of Tax Appeals Second Division rendered its Decision on August 9, 2004,
with the following disposition:

WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and 1997
deficiency branch profit remittance tax and 1997 deficiency documentary stamp tax on IBCLs
exceeding five days are hereby CANCELLED and WITHDRAWN. However, the assessments for
1996 and 1997 deficiency withholding tax on compensation, 1996 deficiency onshore tax and
1996 and 1997 deficiency documentary stamp tax on special savings accounts are hereby
UPHELD in the following amounts:

Particulars Basic Tax Surcharge Interest Total

Deficiency Withholding Tax

on Compensation
1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97
1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70
Deficiency Onshore Tax
1996 (ST-OT-96-0176-99) 544,991.20 P 136,247.80 316,094.89 997,333.89
Deficiency Documentary
Stamp Tax
1996 (ST-DST-96-0178-99) 3,838,753.06 959,688.27 4,798,441.33
1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05
TOTALS ₱191,774,768.40 ₱47,845,258.28 P 486,902.26 ₱240,106,928.94

Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of

₱240,106,928.94, plus 20% delinquency interest per annum from February 3, 2000 until fully
paid, pursuant to Section 249(C) of the National Internal Revenue Code of 1997.

SO ORDERED.20 (Emphasis in the original)

Both the Commissioner of Internal Revenue and ING Bank filed their respective Motions for
Reconsideration.21 Both Motions were denied through the Second Division’s Resolution dated
November 12, 2004, as follows:

WHEREFORE, the respondent’s Motion for Partial Reconsideration and the petitioner’s Motion
for Reconsideration are hereby DENIED for lack of merit. The pronouncement reached in the
assailed decision is REITERATED.

SO ORDERED.22

On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En Banc.23 The
Court of Tax Appeals En Banc denied due course to ING Bank’s Petition for Review and
dismissed the same for lack of merit in the Decision promulgated on April 5, 2005.24
Hence, ING Bank filed its Petition for Review25 before this court. The Commissioner of Internal
Revenue filed its Comment26 on October 5, 2005 and ING Bank its Reply 27 on December 14,
2005. Pursuant to this court’s Resolution28 dated January 25, 2006, the Commissioner of
Internal Revenue filed its Manifestation and Motion29 on February 14, 2006, stating that it is
adopting its Comment as its Memorandum, and ING Bank filed its Memorandum 30 on March 9,
2006.

On December 20, 2007, ING Bank filed a Manifestation and Motion31 informing this court that it
had availed itself of the tax amnesty authorized and granted under Republic Act No. 9480
covering "all national internal revenue taxes for the taxable year 2005 and prior years, with or
without assessments duly issued therefor, that have remained unpaid as of December 31,
2005[.]"32 ING Bank stated that it filed before the Bureau of Internal Revenue its Notice of
Availment of Tax Amnesty Under Republic Act No. 948033 on December 14, 2007, together with
the following documents:

(1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005
(original and amended declarations);34

(2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form No.
2116);35 and (3) Tax Amnesty Payment Form (Acceptance of Payment Form) for Taxable
Year 2005 and Prior Years (BIR Form No. 0617)36 showing payment of the amnesty tax in
the amount of ₱500,000.00.

ING Bank prayed that this court issue a resolution taking note of its availment of the tax
amnesty, and confirming its entitlement to all the immunities and privileges under Section 6 of
Republic Act No. 9480, particularly with respect to the "payment of deficiency documentary
stamp taxes on its special savings accounts for the taxable years 1996 and 1997 and deficiency
tax on onshore interest income derived under the foreign currency deposit system for taxable
year 1996[.]"37

Pursuant to this court’s Resolution38 dated January 23, 2008, the Commissioner of Internal
Revenue filed its Comment39 and ING Bank, its Reply.40

Originally, ING Bank raised the following issues in its pleadings:

First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner’s Special
Saving Accounts are subject to documentary stamp tax (DST) as certificates of deposit under
Section 180 of the 1977 Tax Code";41

Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for
deficiency onshore tax considering that under the 1977 Tax Code and the pertinent revenue
regulations, the obligation to pay the ten percent (10%) final tax on onshore interest income
rests on the payors-borrowers and not on petitioner as payee-lender";42 and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for
deficiency withholding tax on compensation for the accrued bonuses in the taxable years 1996
and 1997 considering that these were not distributed to petitioner’s officers and employees
during those taxable years, hence, were not yet subject to withholding tax."43

However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with respect
to its liabilities for deficiency documentary stamp taxes on its special savings accounts for the
taxable years 1996 and 1997 and deficiency tax on onshore interest income under the foreign
currency deposit system for taxable year 1996.

Consequently, the issues now for resolution are:

First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by
Republic Act No. 9480; and

Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued bonuses
for the taxable years 1996 and 1997.

Tax amnesty availment

Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section 5 [of
Republic Act No. 9480] and . . . not disqualified under Section 8 [of the same
law]."44 Respondent Commissioner of Internal Revenue, for its part, does not deny the
authenticity of the documents submitted by petitioner ING Bank or dispute the payment of the
amnesty tax. However, respondent Commissioner of Internal Revenue claims that petitioner
ING Bank is not qualified to avail itself of the tax amnesty granted under Republic Act No. 9480
because both the Court of Tax Appeals En Banc and Second Division ruled in its favor that
confirmed the liability of petitioner ING Bank for deficiency documentary stamp taxes, onshore
taxes, and withholding taxes.45

Respondent Commissioner of Internal Revenue asserts that BIR Revenue Memorandum Circular
No. 19-2008 specifically excludes "cases which were ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment of the taxpayer" from the coverage of the tax
amnesty under Republic Act No. 9480.46 In any case, respondent Commissioner of Internal
Revenue argues that petitioner ING Bank’s availment of the tax amnesty is still subject to its
evaluation,47 that it is "empowered to exercise [its] sound discretion . . . in the implementation
of a tax amnesty in favor of a taxpayer,"48 and "petitioner cannot presume that its application . .
. would be granted[.]"49 Accordingly, respondent Commissioner of Internal Revenue prays that
"petitioner [ING Bank’s] motion be denied for lack of merit."50

Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008 cannot
override Republic Act No. 9480 and its Implementing Rules and Regulations, which only exclude
from tax amnesty "tax cases subject of final and [executory] judgment by the
courts."51 Petitioner ING Bank asserts that its full compliance with the conditions prescribed in
Republic Act No. 9480 (the conditions being submission of the requisite documents and
payment of the amnesty tax), which respondent Commissioner of Internal Revenue does not
dispute, confirms that it is "qualified to avail itself, and has actually availed itself, of the tax
amnesty."52 It argues that there is nothing in the law that gives respondent Commissioner of
Internal Revenue the discretion to rescind or erase the legal effects of its tax amnesty
availment.53 Thus, the issue is no longer about whether "[it] is entitled to avail itself of the tax
amnesty[,]"54 but rather whether the effects of its tax amnesty availment extend to the
assessments of deficiency documentary stamp taxes on its special savings accounts for 1996
and 1997 and deficiency tax on onshore interest income for 1996.55

Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank and Trust
Company v. Commissioner of Internal Revenue,56 to the effect that full compliance with the
requirements of the tax amnesty law extinguishes the tax deficiencies subject of the amnesty
availment.57 Thus, with its availment of the tax amnesty and full compliance with all the
conditions prescribed in the statute, petitioner ING Bank asserts that it is entitled to all the
immunities and privileges under Section 6 of Republic Act No. 9480.58

Withholding tax on compensation

Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to its
officers and employees during taxable years 1996 and 1997.59 It maintains its position that the
liability of the employer to withhold the tax does not arise until such bonus is actually
distributed. It cites Section 72 of the 1977 National Internal Revenue Code, which states that
"[e]very employer making payment of wages shall deduct and withhold upon such wages a tax,"
and BIR Ruling No. 555-88 (November 23, 1988) declaring that "[t]he withholding tax on the
bonuses should be deducted upon the distribution of the same to the officers and
employees[.]"60 Since the supposed bonuses were not distributed to the officers and employees
in 1996 and 1997 but were distributed in the succeeding year when the amounts of the
bonuses were finally determined, petitioner ING Bank asserts that its duty as employer to
withhold the tax during these taxable years did not arise.61

Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on Section 29(j) of
the 1993 National Internal Revenue Code and Section 3 of Revenue Regulations No. 8-90 is not
applicable because the issue in this case "is not whether the accrued bonuses should be
allowed as deductions from petitioner’s taxable income but, rather, whether the accrued
bonuses are subject to withholding tax on compensation in the respective years of
accrual[.]"62 Respondent Commissioner of Internal Revenue counters that petitioner ING Bank’s
application of BIR Ruling No. 555-88 is misplaced because as found by the Second Division of
the Court of Tax Appeals, the factual milieu is different:63

In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter [sic] the
audit of each company is completed (on or before April 15 of the succeeding year)". The
withholding and remittance of income taxes were also made in the year they were distributed
to the employees. . . .
In petitioner’s case, bonuses were determined during the year but were distributed in the
succeeding year. No withholding of income tax was effected but the bonuses were claimed as
an expense for the year. . . .

Since the bonuses were not subjected to withholding tax during the year they were claimed as
an expense, the same should be disallowed pursuant to the above-quoted law.64

Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s act of
"claim[ing] [the] subject bonuses as deductible expenses in its taxable income although it has
not yet withheld and remitted the [corresponding withholding] tax"65 to the Bureau of Internal
Revenue contravened Section 29(j) of the 1997 National Internal Revenue Code, as
amended.66 Respondent Commissioner of Internal Revenue claims that "subject bonuses should
also be disallowed as deductible expenses of petitioner."67

Taxpayers with pending tax cases may avail themselves of the tax amnesty program under
Republic Act No. 9480.

In CS Garment, Inc. v. Commissioner of Internal Revenue,68 this court has "definitively

declare[d] . . . the exception ‘[i]ssues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer’ under BIR [Revenue
Memorandum Circular No.] 19-2008 [as] invalid, [for going] beyond the scope of the provisions
of the 2007 Tax Amnesty Law."69 Thus:

[N]either the law nor the implementing rules state that a court ruling that has not attained
finality would preclude the availment of the benefits of the Tax Amnesty Law. Both R.A. 9480
and DOF Order No. 29-07 are quite precise in declaring that "[t]ax cases subject of final and
executory judgment by the courts" are the ones excepted from the benefits of the law. In fact,
we have already pointed out the erroneous interpretation of the law in Philippine Banking
Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal Revenue, viz:

The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in
favor of the BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC
19-2008 is misplaced. RA 9480 is specifically clear that the exceptions to the tax amnesty
program include "tax cases subject of final and executory judgment by the courts." The present
case has not become final and executory when Metrobank availed of the tax amnesty
program.70 (Emphasis in the original, citation omitted)

Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner of Internal
Revenue,71 we confirmed that only cases that involve final and executory judgments are
excluded from the tax amnesty program as explicitly provided under Section 8 of Republic Act
No. 9480.72
Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty under the
law during the pendency of its appeal before this court.

II

Petitioner ING Bank showed that it complied with the requirements set forth under Republic
Act No. 9480. Respondent Commissioner of Internal Revenue never questioned or rebutted
that petitioner ING Bank fully complied with the requirements for tax amnesty under the law.
Moreover, the contestability period of one (1) year from the time of petitioner ING Bank’s
availment of the tax amnesty law on December 14, 2007 lapsed. Correspondingly, it is fully
entitled to the immunities and privileges mentioned under Section 6 of Republic Act No. 9480.
This is clear from the following provisions:

SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail himself
of the tax amnesty authorized and granted under this Act shall file with the Bureau of Internal
Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement of Assets,
Liabilities and Networth (SALN) as of December 31, 2005, in such form asmay be prescribed in
the implementing rules and regulations (IRR) of this Act, and pay the applicable amnesty tax
within six months from the effectivity of the IRR.

....

SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31, 2005 shall be
considered as true and correct except where the amount of declared networth is understated
to the extent of thirty percent (30%) or more as may be established in proceedings initiated by,
or at the instance of, parties other than the BIR or its agents: Provided, That such proceedings
must be initiated within one year following the date of the filing of the tax amnesty return and
the SALN. Findings of or admission in congressional hearings, other administrative agencies of
government, and/or courts shall be admissible to prove a thirty percent (30%) under-
declaration. . . . .

SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty under
Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following
immunities and privileges:

a. The taxpayer shall be immune from the payment of taxes, as well as addition thereto,
and the appurtenant civil, criminal or administrative penalties under the National
Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.

b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31, 2005 shall not
be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior
years, insofar as such proceedings relate to internal revenue taxes, before judicial,
quasi-judicial or administrative bodies in which he is a defendant or respondent, and
 except for the purpose of ascertaining the networth beginning January 1, 2006, the
same shall not be examined, inquired or looked into by any person or government
office. However, the taxpayer may use this as a defense, whenever appropriate, in cases
brought against him.

c. The books of accounts and other records of the taxpayer for the years covered by the
tax amnesty availed of shall not be examined: Provided, That the Commissioner of
Internal Revenue may authorize in writing the examination of the said books of accounts
and other records to verify the validity or correctness of a claim for any tax refund, tax
credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or
exemptions under existing laws. (Emphasis supplied)

Contrary to respondent Commissioner of Internal Revenue’s stance, Republic Act No. 9480
confers no discretion on respondent Commissioner of Internal Revenue. The provisions of the
law are plain and simple. Unlike the power to compromise or abate a taxpayer’s liability under
Section 20473 of the 1997 National Internal Revenue Code that is within the discretion of
respondent Commissioner of Internal Revenue,74 its authority under Republic Act No. 9480 is
limited to determining whether (a) the taxpayer is qualified to avail oneself of the tax amnesty;
(b) all the requirements for availment under the law were complied with; and (c) the correct
amount of amnesty tax was paid within the period prescribed by law. There is nothing in
Republic Act No. 9480 which can be construed as authority for respondent Commissioner of
Internal Revenue to introduce exceptions and/or conditions to the coverage of the law nor to
disregard its provisions and substitute his own personal judgment.

Republic Act No. 9480 provides a general grant of tax amnesty subject only to the cases
specifically excepted by it. A tax amnesty "partakes of an absolute. . . waiver by the
Government of its right to collect what otherwise would be due it[.]"75 The effect of a qualified
taxpayer’s submission of the required documents and the payment of the prescribed amnesty
tax was immunity from payment of all national internal revenue taxes as well as all
administrative, civil, and criminal liabilities founded upon or arising from non-payment of
national internal revenue taxes for taxable year 2005 and prior taxable years.76

Finally, the documentary stamp tax and onshore income tax are covered by the tax amnesty
program under Republic Act No. 9480 and its Implementing Rules and Regulations. 77 Moreover,
as to the deficiency tax on onshore interest income, it is worthy to state that petitioner ING
Bank was assessed by respondent Commissioner of Internal Revenue, not as a withholding
agent, but as one that was directly liable for the tax on onshore interest income and failed to
pay the same.

Considering petitioner ING Bank’s tax amnesty availment, there is no more issue regarding its
liability for deficiency documentary stamp taxes on its special savings accounts for 1996 and
1997 and deficiency tax on onshore interest income for 1996, including surcharge and interest.
III.
The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division that
accrued bonuses were recorded in petitioner ING Bank’s books as expenses for taxable years
1996 and 1997, although no withholding of tax was effected:

With the preceding defense notwithstanding, petitioner now maintained that the portion of the
disallowed bonuses in the amounts of ₱3,879,407.85 and ₱9,004,402.63 for the respective
years 1996 and 1997, were actually payments for reimbursements of representation, travel and
entertainment expenses of its officers. These expenses according to petitioner are not
considered compensation of employees and likewise not subject to withholding tax.

In order to prove that the discrepancy in the accrued bonuses represents reimbursement of
expenses, petitioner availed of the services of an independent CPA pursuant to CTA Circular No.
1-95, as amended. As a consequence, Mr. Ruben Rubio was commissioned by the court to
verify the accuracy of petitioner’s position and to check its supporting documents.

In a report dated January 29, 2002, the commissioned independent CPA noted the following
pertinent findings: . . .

Findings and Observations 1997 1996

Supporting document is under the P 930,307.56 P 1,849,040.70
name of the employee
Supporting document is not under 537,456.37 53,384.80
the name of the Bank nor its
employees (addressee is
"cash"/blank)
Supporting document is under the 7,039,976.36 1,630,292.14
name of the Bank
Supporting document is in the name 362,919.59 62,615.91
of another person (other than the
employee claiming the expense)
Supporting document is not dated 13,404.00 423,199.07
within the period (i.e., 1996 and
1997)
Date/year of transaction is not 31,510.00 26,126.49
Indicated
Amount is not supported by 313,319.09 935,044.28
liquidation document(s)
TOTAL ₱9,228,892.97 ₱4,979,703.39
Based on the above report, only the expenses in the name of petitioner’s employee and those
under its name can be given credence. Therefore, the following expenses are valid expenses for
income tax purposes:

  1996 1997
Supporting document is under the ₱1,849,040.70 P 930,307.56
name of the employee
Supporting document is under the 1,630,292.14 7,039,976.36
name of the Bank
TOTAL ₱3,479,332.84 P 7,970,283.92

Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ₱397,157.70
representing deficiency withholding taxes on compensation for the respective years of 1996
and 1997, computed as follows:

1996 1997

Total Disallowed Accrued P 3,879,407.85 P 9,004,402.63

Bonus
Less: Substantiated
Reimbursement of Expense 3,479,332.84 7,970,283.92

Unsubstantiated P 400,075.01 P 1,034,119.43

Tax Rate 26.48% 27.83%

Basic Withholding Tax Due

Thereon P 105,939.86 P 287,795.44
Interest (Sec. 249) 61,445.11 109,362.26

Deficiency Withholding Tax on

78
Compensation P 167,384.97 P 397,157.70

An expense, whether the same is paid or payable, "shall be allowed as a deduction only if it is
shown that the tax required to be deducted and withheld therefrom [was] paid to the Bureau
of Internal Revenue[.]"79

Section 29(j) of the 1977 National Internal Revenue Code80 (now Section 34(K) of the 1997
National Internal Revenue Code) provides:
Section 29. Deductions from gross income. — In computing taxable income subject to tax under
Sec. 21(a); 24(a), (b) and (c); and 25(a) (1), there shall be allowed as deductions the items
specified in paragraphs (a) to (i) of this section: . . . .

....

(a) Expenses. — (1) Business expenses. — (A) In general. — All 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; travelling expenses while away from home in the pursuit of a trade, profession or
business, rentals or other payments required to be made as a condition to the continued use or
possession, for the purpose of the trade, profession or business, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity.

....

(j) Additional requirement for deductibility of certain payments. — Any amount paid or payable
which is otherwise deductible from, or taken into account in computing gross income for which
depreciation or amortization may be allowed under this section, shall be allowed as a deduction
only if it is shown that the tax required to be deducted and withheld therefrom has been paid
to the Bureau of Internal Revenue in accordance with this section, Sections 51 81 and 7482 of this
Code. (Emphasis supplied)

Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue Regulations No. 2-
98) provides:

Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as follows:

Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise
deductible under Sections 29 and 54 of the Tax Code, as amended, shall be allowed as a
deduction from the payor’s gross income only if it is shown that the tax required to be withheld
has been paid to the Bureau of Internal Revenue in accordance with Sections 50, 51, 72, and 74
also of the Tax Code.(Emphasis supplied)

Under the National Internal Revenue Code, every form of compensation for personal services is
subject to income tax and, consequently, to withholding tax. The term "compensation" means
all remunerations paid for services performed by an employee for his or her employer, whether
paid in cash or in kind, unless specifically excluded under Sections 32(B)83 and 78(A)84 of the
1997 National Internal Revenue Code.85 The name designated to the remuneration for services
is immaterial. Thus, "salaries, wages, emoluments and honoraria, bonuses, allowances (such as
transportation, representation, entertainment, and the like), [taxable] fringe benefits[,]
pensions and retirement pay, and other income of a similar nature constitute compensation
income"86 that is taxable.
Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it claimed the
same as expenses in the year they were accrued.

Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were not yet
subject to withholding tax because these bonuses were actually distributed only in the
succeeding years of their accrual (i.e., in 1997 and 1998) when the amounts were finally
determined.

Petitioner ING Bank’s contention is untenable.

The tax on compensation income is withheld at source under the creditable withholding tax
system wherein the tax withheld is intended to equal or at least approximate the tax due of the
payee on the said income. It was designed to enable (a) the individual taxpayer to meet his or
her income tax liability on compensation earned; and (b) the government to collect at source
the appropriate taxes on compensation.87 Taxes withheld are creditable in nature.88 Thus, the
employee is still required to file an income tax return to report the income and/or pay the
difference between the tax withheld and the tax due on the income. 89 For over withholding, the
employee is refunded.90 Therefore, absolute or exact accuracy in the determination of the
amount of the compensation income is not a prerequisite for the employer’s withholding
obligation to arise.

It is true that the law and implementing regulations require the employer to deduct and pay the
income tax on compensation paid to its employees, either actually or constructively.

Section 72 of the 1977 National Internal Revenue Code, as amended,91 states:

SECTION 72. Income tax collected at source. — (a) Requirement of withholding. — Every
employer making payment of wages shall deduct and withhold upon such wages a tax
determined in accordance with regulations to be prepared and promulgated by the Minister of
Finance. (Emphasis supplied)

Sections 7 and 14 of Revenue Regulations No. 6-82,92 as amended,93 relative to the withholding

of tax on compensation income, provide:

Section 7. Requirement of withholding.— Every employer or any person who pays or controls
the payment of compensation to an employee, whether resident citizen or alien, non-resident
citizen, or nonresident alien engaged in trade or business in the Philippines, must withhold from
such compensation paid, an amount computed in accordance with these regulations.

I. Withholding of tax on compensation paid to resident employees. – (a)In general, every

employer making payment of compensation shall deduct and withhold from such compensation
income for the entire calendar year, a tax determined in accordance with the prescribed new
Withholding Tax Tables effective January 1, 1992 (ANNEX "A").
....

Section 14. Liability for the Tax.— The employer is required to collect the tax by deducting and
withholding the amount thereof from the employee’s compensation as when paid, either
actually or constructively. An employer is required to deduct and withhold the tax
notwithstanding that the compensation is paid in something other than money (for example,
compensation paid in stocks or bonds) and to pay the tax to the collecting officer. If
compensation is paid in property other than money, the employer should make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for
payment to the collecting officer.

Every person required to deduct and withhold the tax from the compensation of an employee is
liable for the payment of such tax whether or not collected from the employee. If, for example,
the employer deducts less than the correct amount of tax, or if he fails to deduct any part of
the tax, he is nevertheless liable for the correct amount of the tax. However, if the employer in
violation of the provisions of Chapter XI, Title II of the Tax Code fails to deduct and withhold and
thereafter the employee pays the tax, it shall no longer be collected from the employer. Such
payment does not, however, operate to relieve the employer from liability for penalties or
additions to the tax for failure to deduct and withhold within the time prescribed by law or
regulations. The employer will not be relieved of his liability for payment of the tax required to
be withheld unless he can show that the tax has been paid by the employee.

The amount of any tax withheld/collected by the employer is a special fund in trust for the
Government of the Philippines.

When the employer or other person required to deduct and withhold the tax under this
Chapter XI, Title II of the Tax Code has withheld and paid such tax to the Commissioner of
Internal Revenue or to any authorized collecting officer, then such employer or person shall be
relieved of any liability to any person. (Emphasis supplied)

Constructive payment of compensation is further defined in Revenue Regulations No. 6-82:

Section 25. Applicability; constructive receipt of compensation.

—....

Compensation is constructively paid within the meaning of these regulations when it is credited
to the account of or set apart for an employee so that it may be drawn upon by him at any time
although not then actually reduced to possession. To constitute payment in such a case, the
compensation must be credited or set apart for the employee without any substantial
limitation or restriction as to the time or manner of payment or condition upon which payment
is to be made, and must be made available to him so that it may be drawn upon at any time,
and its payment brought within his control and disposition. (Emphasis supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal Revenue
Code (then Section 39 of the 1977 National Internal Revenue Code, as amended), deductions
from gross income are taken for the taxable year in which "paid or accrued" or "paid or
incurred" is dependent upon the method of accounting income and expenses adopted by the
taxpayer.

In Commissioner of Internal Revenue v. Isabela Cultural Corporation,94 this court explained the

accrual method of accounting, as against the cash method:

Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions. . . .

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.

For a taxpayer using the accrual method, the determinative question is, when do the facts
present themselves in such a manner that the taxpayer must recognize income or expense? The
accrual of income and expense is permitted when the all-events test has been met. This test
requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy.1âwphi1 However, the test does
not demand that the amount of income or liability be known absolutely, only that a taxpayer
has at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined
exactly; it must be determined with "reasonable accuracy. "Accordingly, the term "reasonable
accuracy" implies something less than anex act or completely accurate amount.95 (Emphasis
supplied, citations omitted)

Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was paid, regardless
of the year it was incurred. If he is on the accrual method, he can deduct the expense upon
accrual thereof. An item that is reasonably ascertained as to amount and acknowledged to be
due has "accrued"; actual payment is not essential to constitute "expense."

Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the obligation
to pay is already fixed; (2) the amount can be determined with reasonable accuracy; and (3) it is
already knowable or the taxpayer can reasonably be expected to have known at the closing of
its books for the taxable year.

Section 29(j) of the 1977 National Internal Revenue Code96 (Section 34(K) of the 1997 National
Internal Revenue Code) expressly requires, as a condition for deductibility of an expense, that
the tax required to be withheld on the amount paid or payable is shown to have been remitted
to the Bureau of Internal Revenue by the taxpayer constituted as a withholding agent of the
government.

The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the 1997
National Internal Revenue Code) regarding withholding on wages must be read and construed
in harmony with Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the
1997 National Internal Revenue Code) on deductions from gross income. This is in accordance
with the rule on statutory construction that an interpretation is to be sought which gives effect
to the whole of the statute, such that every part is made effective, harmonious, and
sensible,97 if possible, and not defeated nor rendered insignificant, meaningless, and
nugatory.98 If we go by the theory of petitioner ING Bank, then the condition imposed by
Section 29(j) would have been rendered nugatory, or we would in effect have created an
exception to this mandatory requirement when there was none in the law.

Reading together the two provisions, we hold that the obligation of the payor/employer to
deduct and withhold the related withholding tax arises at the time the income was paid or
accrued or recorded as an expense in the payor’s/employer’s books, whichever comes first.

Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books.
Therefore, its obligation to withhold the related withholding tax due from the deductions for
accrued bonuses arose at the time of accrual and not at the time of actual payment.

In Filipinas Synthetic Fiber Corporation v. Court of Appeals,99 the issue was raised on "whether
the liability to withhold tax at source on income payments to non-resident foreign corporations
arises upon remittance of the amounts due to the foreign creditors or upon accrual
thereof."100 In resolving this issue, this court considered the nature of the accounting method
employed by the withholding agent, which was the accrual method, wherein it was the right to
receive income, and not the actual receipt, that determined when to report the amount as part
of the taxpayer’s gross income.101 It upheld the lower court’s finding that there was already a
definite liability on the part of petitioner at the maturity of the loan contracts. 102 Moreover,
petitioner already deducted as business expense the said amounts as interests due to the
foreign corporation.103 Consequently, the taxpayer could not claim that there was "no duty to
withhold and remit income taxes as yet because the loan contract was not yet due and
demandable."104 Petitioner, "[h]aving ‘written-off’ the amounts as business expense in its books,
. . . had taken advantage of the benefit provided in the law allowing for deductions from gross
income."105

Here, petitioner ING Bank already recognized a definite liability on its part considering that it
had deducted as business expense from its gross income the accrued bonuses due to its
employees. Underlying its accrual of the bonus expense was a reasonable expectation or
probability that the bonus would be achieved. In this sense, there was already a constructive
payment for income tax purposes as these accrued bonuses were already allotted or made
available to its officers and employees.

We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the bonus
accruals in 1996 and 1997 were disbursed in the following year of accrual, as reimbursements
of representation, travel, and entertainment expenses incurred by its employees.106 This shows
that the accrued bonuses in the amounts of ₱400,075.0l (1996) and Pl,034,119.43 (1997) on
which deficiency withholding taxes of Pl67,384.97 (1996) and ₱397,157.70 (1997) were
imposed, respectively, were already set apart or made available to petitioner ING Bank's
officers and employees. To avoid any tax issue, petitioner ING Bank should likewise have
recognized the withholding tax liabilities associated with the bonuses at the time of accrual.

WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to petitioner ING
Bank's liabilities for deficiency documentary stamp taxes on its special savings accounts for the
taxable years 1996 and 1997 and deficiency tax on onshore interest income under the foreign
currency deposit system for taxable year 1996 are hereby SET ASIDE solely in view of petitioner
ING Bank's availment of the tax amnesty program under Republic Act No. 9480. The April 5,
2005 Decision of the Court of Tax Appeals En Banc, which affirmed the August 9, 2004 Decision
and November 12, 2004 Resolution of the Court of Tax Appeals Second Division holding
petitioner ING Bank liable for deficiency withholding tax on compensation for the taxable years
1996 and 1997 in the total amount of ₱564,542.67 inclusive of interest, is AFFIRMED.

SO ORDERED.

[ G.R. No. L-9408, October 31, 1956 ]

EMILIO Y. HILADO, PETITIONER, VS. THE COLLECTOR OF INTERNAL REVENUE AND THE COURT
OF TAX APPEALS, RESPONDENTS.

DECISION

BAUTISTA ANGELO, J.:

On March 31, 1952, petitioner filed his income tax return for 1951 with the treasurer of Bacolod
City wherein he claimed, among other things, the amount of P12,837.65 as a deductible item
from his gross income pursuant to General Circular No. V-123 issued by the Collector of Internal
Revenue. This circular was issued pursuant to certain rules laid down by the Secretary of
Finance On the basis of said return, an assessment notice demanding the payment of P9,419
was sent to petitioner, who paid the tax in monthly installments, the last payment having been
made on January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal
Revenue, issued General Circular No. V-139 which not only revoked and declared void his
general Circular No. V-123 but laid down the rule that losses of property which occurred during
the period of World War II from fires, storms, shipwreck or other casualty, or from robbery,
theft, or embezzlement are deductible in the year of actual loss or destruction of said
property.   As a consequence, the amount of P12,837.65 was disallowed as a deduction from
the gross income of petitioner for 1951 and the Collector of Internal Revenue demanded from
him the payment of the sum of P3,546 as deficiency income tax for said year. When the petition
for reconsideration filed by petitioner was denied, he filed a petition for review with the Court
of Tax Appeals. In due time, this court rendered decision affirming the assessment made by
respondent Collector of Internal Revenue. This is an appeal from said decision.
It appears that petitioner claimed in his 1951 income tax return the deduction of the sum of
P12,837.65 as a loss consisting in a portion of his war damage claim which had been duly
approved by the Philippine War Damage Commission under the Philippine Rehabilitation Act of
1946 but which was not paid and never has been paid pursuant to a notice served upon him by
said Commission that said part of his claim will not be paid until the United States Congress
should make further appropriation. He claims that said amount of P12,837.65 represents a
''business asset" within the meaning of said Act which he is entitled to deduct as a loss in his
return for 1951.   This claim is untenable.
To begin with, assuming that said amount represents a portion of the 75% of his war damage
claim which was not paid, the sa,me would not be deductible as a loss in 1951 because,
according to petitioner, the last installment he received from the War Damage Commission,
together with the notice that no further payment would be made on his claim, was in 1950. In
the circumstance, said amount would at most be a proper deduction from his 1950 gross
income. In the second place, said amount cannot be considered as a "business asset" which can
be deducted as a loss in contemplation of law because its collection is not enforceable as a
matter of right, but is dependent merely upon the generosity and magnanimity of the U. S.
government. Note that, as of the end of 1945, there was absolutely no law under which
petitioner could claim compensation for the destruction of his properties during the battle for
the liberation of the Philippines. And under the Philippine Rehabilitation Act of 1946, the
payments of claims by the War Damage Commission merely depended upon its discretion to be
exercised in the manner it may see lit, but the non-payment of which cannot give rise to any
enforceable right, for, under said Act, "All findings, of the Commission concerning the amount
of loss or damage sustained, the cause of such loss or damage, the persons to whom
compensation pursuant to this title is payable, and the value of the property lost or damaged,
shall be conclusive and shall not be reviewable by any court", (section 113).
It is true that under the authority of section 338 of the National Internal Revenue Code the
Secretary of Finance, in the exercise of his administrative powers, caused the issuance of
General Circular No. V-123 as an implementation or interpretative regulation of section 30 of
the same Code, under which the amount of P12,837.65 was allowed to be deducted "in the
year the last installment was received with notice that no further payment would be made until
the United States Congress makes further appropriation therefor", but such circular was found
later to be wrong and was revoked. Thus, when doubts arose as to the soundness or validity of
such circular, the Secretary of Finance sought the advice of the Secretary of Justice who,
accordingly, gave his opinion the pertinent portion oi which reads as follows: 
"Yet it might be argued that war losses were not included as deductions for the year when they
were sustained because the taxpayers had prospects that losses would be compensated for by
the United States Government; that since only uncompensated losses are deductible, they had
to wait until after the determination by the Philippine War Damage Commission as to the
compensability in part or in whole of their war losses so that they could exclude from the
deductions those compensated for by the said Commission; and that, of necessity, such
determination could be complete only much later than in the year 'when the loss was
sustained. This contention falls to the ground when it is considered that the Philippine
Rehabilitation Act which authorized the payment by the United States Government of war
losses suffered by property owners in the Philippines was passed only on August 30, 1946, long
after the losses were sustained. It cannot be said therefore, that the property owners had any.
conclusive assurance during the years said losses were sustained, that the compensation was to
be paid therefor. Whatever assurance they could have had,4 could have been based only on
some information less reliable and less conclusive than the passage of the Act itself. Hence, as
diligent property owners, they should adopt the safest alternative by considering such losses
deductible during the year when they were sustained."
In line with this opinion, the Secretary of Finance, through the Collector of Internal Revenue,
issued General Circular No. V-I39 which not only revoked and declared void his previous
Circular No. V 123 but laid down the rule that losses; of property which occurred during the
period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft,
or embezzlement are deductible for income tax purposes in the year of actual destruction of
said property. We can hardly argue against this opinion. Since we have already stated that the
amount claimed does not represent a "business asset" that may be deducted as a loss in 1951,
it is clear that the loss of the corresponding asset or property could only be deducted in the
year it was actually sustained. This is in line with section 30 (d) of the National Internal Revenue
Code which prescribes that losses sustained are allowable as deduction only within the
corresponding taxable year.
Petitioner's contention that during the last war and as a consequence of enemy occupation in
the Philippines "there was no taxable year" within the meaning of our internal revenue laws
because during that period they were unenforceable, is without merit. It is well known that our
internal revenue laws are not political in nature and as such were continued in force during the
period of enemy occupation and in effect were actually enforced by the occupation
government. As a matter of fact, income tax returns were filed during that period and income
tax payment were effected and considered valid and legal. Such tax laws are deemed to be the
laws of the occupied territory and not of the occupying enemy. 
"Furthermore, it is a legal maxim, that excepting that of a political nature, 'Law once established
continues until changed by some competent legislative power. It is not changed merely by
change of sovereignty.' (Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9,
citing Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his Treatise on
the Conflict of Laws (Cambridge, 1916, section 131): 'There can be no break or interregnun in
law. From the time the law comes into existence with the first-felt corporateness of a primitive
people it must last until the final disappearance of human society. Once created, it persists until
a change takes place, and when changed it continues in such changed condition until the next
change and so forever. Conquest or colonization is impotent to bring law to an end; inspite of
change of constitution, the law continues unchanged until the new sovereign by legislative act
creates a change.'" (Co Kim Chan vs. Valdez Tan Keh and Dizon, 75 Phil., 113, 142-143.)
It is likewise contended that the power to pass upon the validity of General Circular No. V-123 is
vested exclusively in our courts in view of the principle of separation of powers and, therefore,
the Secretary of Finance acted without valid authority in revoking it and approving in lieu
thereof General Circular No. V-139. It cannot be denied, however, that; the Secretary of Finance
is vested with authority to revoke, repeal or abrogate the acts or previous rulings of his
predecessor in office because the construction of a statute by those administering it is not
binding on their successors if thereafter the latter become satisfied that a different construction
should be given. [Association of Clerical Employees vs. Brotherhood of Railways & Steamship
Clerks, 85 F. (2d) 152, 109 A.L.R., 345.] 
"When the Commissioner determined in 1937 that the petitioner was not exempt and never
had been, it was his duty to determine, assess and collect the tax due for all years not barred by
the statutes of limitation.   The conclusion reached and announced by his predecessor in 1924
was not binding upon him. It did not exempt the petitioner from tax, This same point was
decided in this way in Stanford University Bookstore, 29 B. T. A., 1280; affd., 83 Fed. (2d) 710."
(Southern Maryland Agricultural Fair Association vs. Commissioner of Internal Revenue, 40 B. T.
A., 549, 554),
With regard to the contention that General Circular No. V-139 cannot be given retroactive
effect because that would affect and obliterate the vested right acquired by petitioner under
the previous circular, suffice it to say that General Circular No. V-123, having been, issued on a
wrong construction of the law, cannot give rise to a vested right that can be invoked by a
taxpayer. The reason, is obvious: a vested right cannot spring from a wrong interpretation. This
is too clear to require elaboration. 
"It seems too clear for serious argument that an administrative officer can not change a law
enacted by Congress. A regulation that is merely an interpretation of the statute when once
determined to have been erroneous becomes nullity. An erroneous construction of the law by
the Treasury Department or the collector of internal revenue does not preclude or estop the
government from collecting a tax which is legally due."    (Ben Stocker, et al., 12 B. T. A., 1351.) 
"Art. 2254. No vested or acquired right can arise from acts or omissions which are against the
law or which infringe upon the rights of others."    (Article 2254, New Civil Code.)
Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.
Paras, C. J., Padilla, Montemayor, Labrador, Concepcion, Reyes, J. B. L., Endencia, and Felix,
JJ., concur.

G.R. No. 166408             October 6, 2008

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners,

vs.
ABS-CBN BROADCASTING CORPORATION, respondent.

DECISION

REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot
be made out of inference or implication.

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) and that2 of the Regional Trial Court (RTC) ordering the refund and declaring
invalid the imposition and collection of local franchise tax by the City Treasurer of Quezon City
on ABS-CBN Broadcasting Corporation (ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local government unit duly organized and
existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter of
Quezon City. Petitioner City Treasurer of Quezon City is primarily responsible for the imposition
and collection of taxes within the territorial jurisdiction of Quezon City.

Under Section 31, Article 13 of the Quezon City Revenue Code of 1993, 3 a franchise tax was
imposed on businesses operating within its jurisdiction. The provision states:

Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption
to the contrary notwithstanding, any person, corporation, partnership or association
enjoying a franchise whether issued by the national government or local government
and, doing business in Quezon City, shall pay a franchise tax at the rate of ten percent
(10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one percent (1%) for
1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding years
thereafter, of gross receipts and sales derived from the operation of the business in
Quezon City during the preceding calendar year.
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television
broadcasting stations in the Philippines under R.A. No. 7966.4 Section 8 of R.A. No. 7966
provides the tax liabilities of ABS-CBN which reads:

Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay
the same taxes on their real estate, buildings and personal property, exclusive of this
franchise, as other persons or corporations are now hereafter may be required by law to
pay. In addition thereto, the grantee, its successors or assigns, shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the radio/television business
transacted under this franchise by the grantee, its successors or assigns, and the said
percentage tax shall be in lieu of all taxes on this franchise or earnings
thereof; Provided that the grantee, its successors or assigns shall continue to be liable
for income taxes under Title II of the National Internal Revenue Code pursuant to
Section 2 of Executive No. 72 unless the latter enactment is amended or repealed, in
which case the amendment or repeal shall be applicable thereto. (Emphasis added)

ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the
above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the
corporation developed the opinion that it is not liable to pay the local franchise tax imposed by
Quezon City. Consequently, ABS-CBN paid under protest the local franchise tax imposed by
Quezon City on the dates, in the amounts and under the official receipts as follows:

O.R. No. Date Amount Paid

2464274 7/18/1995 P 1,489,977.28
2484651 10/20/1995 1,489,977.28
2536134 1/22/1996 2,880,975.65
8354906 1/23/1997 8,621,470.83
48756 1/23/1997 2,731,135.81
67352 4/3/1997     2,731,135.81
Total P19,944,672.665

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to
Quezon City for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million
Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos
(P14,233,582.29) broken down as follows:

O.R. No. Date Amount Paid

2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97     2,731,135.81
Total P14,233,582.296
In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for
refund of local franchise taxes paid.

On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN
filed a complaint before the RTC in Quezon City seeking the declaration of nullity of the
imposition of local franchise tax by the City Government of Quezon City for being
unconstitutional. It likewise prayed for the refund of local franchise tax in the amount of
Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100
centavos (P19,944,672.66) broken down as follows:

O.R. No. Date Amount Paid

2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97     2,731,135.81
Total P19,944,672.667

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been
intended to prevail over a constitutional mandate which ensures the viability and self-
sufficiency of local government units. Further, that taxes collectible by and payable to the local
government were distinct from taxes collectible by and payable to the national government,
considering that the Constitution specifically declared that the taxes imposed by local
government units "shall accrue exclusively to the local governments." Lastly, the City contended
that the exemption claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress when
the Local Government Code (LGC) was passed.8 Section 193 of the LGC provides:

Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this

Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or -controlled corporations,
except local water districts, cooperatives duly registered under R.A. 6938, non-stock and
non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the
local franchise tax paid for the third quarter of 1997 in the amount of Two Million Seven
Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100 centavos (P2,731,135.81)
and of other amounts of local franchise tax as may have been and will be paid by ABS-CBN until
the resolution of the case.
Quezon City insisted that the claim for refund must fail because of the absence of a prior
written claim for it.

RTC and CA Dispositions

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and
collection from ABS-CBN of local franchise tax paid pursuant to Quezon City Ordinance No. SP-
91, S-93, after the enactment of R.A. No. 7966, and ordered the refund of all payments made.
The dispositive portion of the RTC decision reads:

WHEREFORE, judgment is hereby rendered declaring the imposition on and collection

from plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant
to Quezon City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966
to be invalid, and, accordingly, the Court hereby orders the defendants to refund all its
payments made after the effectivity of its legislative franchise on May 3, 1995.

SO ORDERED.9

In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of
R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed
under Quezon City Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN
from payment of local franchise tax could be discerned from the usage of the "in lieu of all
taxes" provision and from the absence of any qualification except income taxes. Had Congress
intended to exclude taxes imposed from the exemption, it would have expressly mentioned so
in a fashion similar to the proviso on income taxes.

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan
Electric Power and Light Company, Inc. (CEPALCO).10 In said case, the exemption of respondent
electric company CEPALCO from payment of provincial franchise tax was upheld on the ground
that the franchise of CEPALCO was a special law, while the Local Tax Code, on which the
provincial ordinance imposing the local franchise tax was based, was a general law. Further, it
was held that whenever there is a conflict between two laws, one special and particular and the
other general, the special law must be taken as intended to constitute an exception to the
general act.

The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity
of the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an
exception since the legislature ought to be presumed to have enacted it with the knowledge
and awareness of the existence and prior enactment of Section 13711 of the LGC.

In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric
Power and Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local franchise tax
was an impairment of ABS-CBN's contract with the government. The imposition of another
franchise on the corporation by the local authority would constitute an impairment of the
former's charter, which is in the nature of a private contract between it and the government.

As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim
for refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the
case in court. The RTC ruled that although Fourteen Million Two Hundred Thirty-Three
Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) was the only
amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN should
nonetheless be also refunded of all payments made after the effectivity of R.A. No. 7966. The
inaction of the City Treasurer on the claim for refund of ABS-CBN legally rendered any further
claims for refund on the part of plaintiff absurd and futile in relation to the succeeding
payments.

The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently
denied by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed
the petition of Quezon City and its Treasurer. According to the appellate court, the issues raised
were purely legal questions cognizable only by the Supreme Court. The CA ratiocinated:

For another, the issues which appellants submit for this Court's consideration are more
of legal query necessitating a legal opinion rather than a call for adjudication on the
matter in dispute.

xxxx

The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan
Electric and Power Co., Inc. to be a legal one. There is no more argument to this.

The next issue although it may need the reexamination of the pertinent provisions of
the local franchise and the legislative franchise given to appellee, also needs no
evaluation of facts. It suffices that there may be a conflict which may need to be
reconciled, without regard to the factual backdrop of the case.

The last issue deals with a legal question, because whether or not there is a prior written
claim for refund is no longer in dispute. Rather, the question revolves on whether the
said requirement may be dispensed with, which obviously is not a factual issue.13

On September 23, 2004, petitioner moved for reconsideration. The motion was, however,
denied by the CA in its Resolution dated December 16, 2004. Hence, the present recourse.

Issues

Petitioner submits the following issues for resolution:

I.
 Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the
respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of the
local franchise tax imposed by the petitioners-appellants.

II.

Whether or not the petitioners-appellants raised factual and legal issues before the Honorable
Court of Appeals.14

Our Ruling

The second issue, being procedural in nature, shall be dealt with immediately. But there are
other resultant issues linked to the first.

I. The dismissal by the CA of petitioners' appeal is in order because it raised purely legal
issues, namely:

1) Whether appellee, whose franchise expressly provides that its payment of franchise
tax shall be in lieu of all taxes in this franchise or earnings thereof, is absolutely excused
from paying the franchise tax imposed by appellants;

2) Whether appellants' imposition of local franchise tax is a violation of appellee's

legislative franchise; and

3) Whether one can do away with the requirement on prior written claim for refund.15

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all
other courts. There is a question of law when the doubt or difference arises as to what the law
is pertaining to a certain state of facts.16

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41
raising only questions of law is erroneous and shall be dismissed, issues of pure law not being
within its jurisdiction.17 Consequently, the dismissal by the CA of petitioners' appeal was in
order.

In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the appeal of
petitioner was valid, considering the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being
the wrong mode of appeal. The appellate court held that since the issue being raised is
whether the RTC has jurisdiction over the subject matter of the case, which is a question
of law, the appeal should have been elevated to the Supreme Court under Rule 45 of
the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the same Rules
which governs appeals from judgments and final orders of the RTC to the Court of
Appeals, provides:

SEC. 2. Modes of appeal. -

(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its original jurisdiction shall be taken by
filing a notice of appeal with the court which rendered the judgment or final
order appealed from and serving a copy thereof upon the adverse party. No
record on appeal shall be required except in special proceedings and other cases
of multiple or separate appeals where the law or these Rules so require. In such
cases, the record on appeal shall be filed and served in like manner.

(b) Petition for review. - The appeal to the Court of Appeals in cases decided by
the Regional Trial Court in the exercise of its appellate jurisdiction shall be by
petition for review in accordance with Rule 42.

(c) Appeal by certiorari. - In all cases where only questions of law are raised or
involved, the appeal shall be to the Supreme Court by petition for review on
certiorari in accordance with Rule 45.

In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized
the rule on appeals as follows:

(1) In all cases decided by the RTC in the exercise of its original jurisdiction,
appeal may be made to the Court of Appeals by mere notice of appeal where the
appellant raises questions of fact or mixed questions of fact and law;

(2) In all cases decided by the RTC in the exercise of its original jurisdiction where
the appellant raises only questions of law, the appeal must be taken to the
Supreme Court on a petition for review on certiorari under Rule 45;

(3) All appeals from judgments rendered by the RTC in the exercise of its
appellate jurisdiction, regardless of whether the appellant raises questions of
fact, questions of law, or mixed questions of fact and law, shall be brought to the
Court of Appeals by filing a petition for review under Rule 42.

It is not disputed that the issue brought by petitioners to the Court of Appeals involves
the jurisdiction of the RTC over the subject matter of the case. We have a long standing
rule that a court's jurisdiction over the subject matter of an action is conferred only by
the Constitution or by statute. Otherwise put, jurisdiction of a court over the subject
matter of the action is a matter of law. Consequently, issues which deal with the
jurisdiction of a court over the subject matter of a case are pure questions of law. As
petitioners' appeal solely involves a question of law, they should have directly taken their
 appeal to this Court by filing a petition for review on certiorari under Rule 45, not an
ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did
not err in holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule
50 of the same Rules provides that an appeal from the RTC to the Court of Appeals
raising only questions of law shall be dismissed; and that an appeal erroneously taken to
the Court of Appeals shall be dismissed outright, x x x.19 (Emphasis added)

However, to serve the demands of substantial justice and equity, the Court opts to relax
procedural rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and
Finance Corporation,20 this Court stated:

Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to
litigation and the parties' right to due process. In numerous cases, this Court has
allowed liberal construction of the rules when to do so would serve the demands of
substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:

"The court has the discretion to dismiss or not to dismiss an appellant's appeal. It
is a power conferred on the court, not a duty. The "discretion must be a sound
one, to be exercised in accordance with the tenets of justice and fair play, having
in mind the circumstances obtaining in each case." Technicalities, however, must
be avoided. The law abhors technicalities that impede the cause of justice. The
court's primary duty is to render or dispense justice. "A litigation is not a game of
technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and not on technicality. Every party
litigant must be afforded the amplest opportunity for the proper and just
determination of his cause, free from the unacceptable plea of technicalities.
Thus, dismissal of appeals purely on technical grounds is frowned upon where
the policy of the court is to encourage hearings of appeals on their merits and
the rules of procedure ought not to be applied in a very rigid, technical sense;
rules of procedure are used only to help secure, not override substantial justice.
It is a far better and more prudent course of action for the court to excuse a
technical lapse and afford the parties a review of the case on appeal to attain the
ends of justice rather than dispose of the case on technicality and cause a grave
injustice to the parties, giving a false impression of speedy disposal of cases
while actually resulting in more delay, if not a miscarriage of justice.21

II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment
of local franchise tax.
A. The present controversy essentially boils down to a dispute between the inherent taxing
power of Congress and the delegated authority to tax of local governments under the 1987
Constitution and effected under the LGC of 1991.

The power of the local government of Quezon City to impose franchise tax is based on Section
151 in relation to Section 137 of the LGC, to wit:

Section 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
the 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. x x x

xxxx

Section 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 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. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can
enact legislation granting exemptions. This principle was upheld in City Government of Quezon
City, et al. v. Bayan Telecommunications, Inc.22 Said this Court:

This thus raises the question of whether or not the City's Revenue Code pursuant to
which the city treasurer of Quezon City levied real property taxes against Bayantel's real
properties located within the City effectively withdrew the tax exemption enjoyed by
Bayantel under its franchise, as amended.

Bayantel answers the poser in the negative arguing that once again it is only "liable to
pay the same taxes, as any other persons or corporations on all its real or personal
properties, exclusive of its franchise."

Bayantel's posture is well-taken. While the system of local government taxation has
changed with the onset of the 1987 Constitution, the power of local government units to
tax is still limited. As we explained in Mactan Cebu International Airport Authority:

"The power to tax is primarily vested in the Congress; however, in our

jurisdiction, it may be exercised by local legislative bodies, no longer merely be
 virtue of a valid delegation as before, but pursuant to direct authority conferred
by Section 5, Article X of the Constitution. Under the latter, the exercise of the
power may be subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy of local
autonomy. x x x"

Clearly then, while a new slant on the subject of local taxation now prevails in the sense
that the former doctrine of local government units' delegated power to tax had been
effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the
basic doctrine on local taxation remains essentially the same. For as the Court stressed
in Mactan, "the power to tax is [still] primarily vested in the Congress."

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987
Constitution, thus:

"What is the effect of Section 5 on the fiscal position of municipal corporations?

Section 5 does not change the doctrine that municipal corporations do not
possess inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create sources of
revenue. They no longer have to wait for a statutory grant of these powers. The
power of the legislative authority relative to the fiscal powers of local
governments has been reduced to the authority to impose limitations on
municipal powers. Moreover, these limitations must be "consistent with the
basic policy of local autonomy." The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved against municipal corporations.
Henceforth, in interpreting statutory provisions on municipal fiscal powers,
doubts will be resolved in favor of municipal corporations. It is understood,
however, that taxes imposed by local government must be for a public purpose,
uniform within a locality, must not be confiscatory, and must be within the
jurisdiction of the local unit to pass."

In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the
power to exempt, and the local government's delegated power to tax under the aegis of
the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all
real properties within the city's territory and removed exemptions theretofore
"previously granted to, or presently enjoyed by all persons, whether natural or juridical
[x x x]" there can really be no dispute that the power of the Quezon City Government to
tax is limited by Section 232 of the LGC which expressly provides that "a province or city
or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax
on real property such as land, building, machinery, and other improvement not
 hereinafter specifically exempted." Under this law, the Legislature highlighted its power
to thereafter exempt certain realties from the taxing power of local government units.
An interpretation denying Congress such power to exempt would reduce the phrase
"not hereinafter specifically exempted" as a pure jargon, without meaning whatsoever.
Needless to state, such absurd situation is unacceptable.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao,
this Court has upheld the power of Congress to grant exemptions over the power of
local government units to impose taxes. There, the Court wrote:

"Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The legal
effect of the constitutional grant to local governments simply means that in
interpreting statutory provisions on municipal taxing powers, doubts must be
resolved in favor of municipal corporations."23 (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995,
subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was granted the
franchise to install and operate radio and television broadcasting stations in the Philippines.
Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise tax. It bears stressing,
however, that payment of the percentage franchise tax shall be "in lieu of all taxes" on the said
franchise.24

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On
the other hand, the power of Quezon City to tax is prescribed by Section 151 in relation to
Section 137 of the LGC which expressly provides that notwithstanding any exemption granted
by any law or other special law, the City may impose a franchise tax. It must be noted that
Section 137 of the LGC does not prohibit grant of future exemptions. As earlier discussed, this
Court in City Government of Quezon City v. Bayan Telecommunications, Inc.25 sustained the
power of Congress to grant tax exemptions over and above the power of the local
government's delegated power to tax.

B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which
contains the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local
franchise tax.

Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not
expressly exempt it from payment of local franchise tax. They contend that a tax exemption
cannot be created by mere implication and that one who claims tax exemptions must be able to
justify his claim by clearest grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation.
Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and
liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and
based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule,
exemption is the exception.26 The burden of proof rests upon the party claiming the exemption
to prove that it is in fact covered by the exemption so claimed.27

The basis for the rule on strict construction to statutory provisions granting tax exemptions or
deductions is to minimize differential treatment and foster impartiality, fairness and equality of
treatment among taxpayers.28 He who claims an exemption from his share of common burden
must justify his claim that the legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they presumed. They must be
expressed in the clearest and most unambiguous language and not left to mere implications. It
has been held that "exemptions are never presumed, the burden is on the claimant to establish
clearly his right to exemption and cannot be made out of inference or implications but must be
laid beyond reasonable doubt. In other words, since taxation is the rule and exemption the
exception, the intention to make an exemption ought to be expressed in clear and
unambiguous terms.29

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent
of all gross receipts of the radio/television business transacted under the franchise and the
franchise tax shall be "in lieu of all taxes" on the franchise or earnings thereof.

The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what
kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include
both local, whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN
shall be liable to pay three (3) percent franchise tax and income taxes under Title II of the NIRC.
But whether the "in lieu of all taxes provision" would include exemption from local tax is not
unequivocal.

As adverted to earlier, the right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision should be
construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the
exemption so claimed. ABS-CBN miserably failed in this regard.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,30 Manila
Railroad v. Rafferty,31 Philippine Railway Co. v. Collector of Internal Revenue,32 and Visayan
Electric Co. v. David33 to support its claim that that the "in lieu of all taxes" clause includes
exemption from all taxes.

However, a review of the foregoing case law reveals that the grantees' respective franchises
expressly exempt them from municipal and provincial taxes. Said the Court in Manila Railroad
v. Rafferty:34
 On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was
granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No.
1510) provides that:

"In consideration of the premises and of the granting of this concession or

franchise, there shall be paid by the grantee to the Philippine Government,
annually, for the period of thirty (30) years from the date hereof, an amount
equal to one-half (1/2) of one per cent of the gross earnings of the grantee in
respect of the lines covered hereby for the preceding year; after said period of
thirty (30) years, and for the fifty (50) years thereafter, the amount so to be paid
annually shall be an amount equal to one and one-half (1 1/2) per cent of such
gross earnings for the preceding year; and after such period of eighty (80) years,
the percentage and amount so to be paid annually by the grantee shall be fixed
by the Philippine Government.

Such annual payments, when promptly and fully made by the grantee, shall be in
lieu of all taxes of every name and nature - municipal, provincial or central -
upon its capital stock, franchises, right of way, earnings, and all other property
owned or operated by the grantee under this concession or
franchise."35 (Underscoring supplied)

In the case under review, ABS-CBN's franchise did not embody an exemption similar to those
in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to
specify the taxing authority from whose jurisdiction the taxing power is withheld, whether
municipal, provincial, or national. In fine, since ABS-CBN failed to justify its claim for exemption
from local franchise tax, by a grant expressed in terms "too plain to be mistaken" its claim for
exemption for local franchise tax must fail.

C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with
the abolition of the franchise tax on broadcasting companies with yearly gross receipts
exceeding Ten Million Pesos.

In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes"
provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the
local franchise tax. The RTC further pronounced that ABS-CBN shall instead be liable to pay a
franchise tax of 3% of all gross receipts in lieu of all other taxes.

On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the
grant of ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3%
franchise tax.

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3%
franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as
amended, viz.:
 SECTION 117. Tax on franchises. - Any provision of general or special laws to the
contrary notwithstanding, there shall be levied, assessed and collected in respect to all
franchise, upon the gross receipts from the business covered by the law granting the
franchise, a tax in accordance with the schedule prescribed hereunder:

(a) On electric utilities, city gas, and water supplies Two (2%) percent

(b) On telephone and/or telegraph systems, radio and/or broadcasting stations

Three (3%) percent

(c) On other franchises Five (5%) percent. (Emphasis supplied)

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax
Law,36 took effect and subjected to VAT those services rendered by radio and/or broadcasting
stations. Section 3 of R.A. No. 7716 provides:

Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby
further amended to read as follows:

SEC. 102. Value-added tax on sale of services and use or lease of properties.

- (a) Rate and base of tax. - There shall be levied, assessed and collected,
as value-added tax equivalent to 10% of gross receipts derived from the sale or
exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds of
services in the Philippines, for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
x x x services of franchise grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under
Section 117 of this Code; x x x (Emphasis supplied)

Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and
other franchise grantees" were omitted from the list of entities subject to franchise tax. The
impression was that these entities were subject to 10% VAT but not to franchise tax. Only the
franchise tax on "electric, gas and water utilities" remained. Section 12 of R.A. No. 7716
provides:

Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:

SEC. 117. Tax on Franchises. - Any provision of general or special law to the

contrary notwithstanding there shall be levied, assessed and collected in respect
to all franchises on electric, gas and water utilities a tax of two percent (2%) on
 the gross receipts derived from the business covered by the law granting the
franchise. (Emphasis added)

Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing more amendments to

the NIRC. Radio and/or television companies whose annual gross receipts do not
exceed P10,000,000.00 were granted the option to choose between paying 3% national
franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:

SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:

"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:

"Sec. 117. Tax on franchise. - Any provision of general or special law to the

contrary, notwithstanding, there shall be levied, assessed and collected in respect
to all franchises on radio and/or television broadcasting companies whose
annual gross receipts of the preceding year does not exceed Ten million pesos
(P10,000,000.00), subject to Section 107(d) of this Code, a tax of three percent
(3%) and on electric, gas and water utilities, a tax of two percent (2%) on the
gross receipts derived from the business covered by the law granting the
franchise: Provided, however, That radio and television broadcasting companies
referred to in this section, shall have an option to be registered as a value-added
tax payer and pay the tax due thereon: Provided, further, That once the option is
exercised, it shall not be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with yearly gross
receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the
NIRC.

On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT liability of radio and/or
television companies with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law
further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the
imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006.

In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the
payment of VAT. It does not have the option to choose between the payment of franchise tax
or VAT since it is a broadcasting company with yearly gross receipts exceeding Ten Million
Pesos (P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the
course of trade or business, sells, barters, exchanges, leases, goods or properties, renders
services. It is also levied on every importation of goods whether or not in the course of trade or
business. The tax base of the VAT is limited only to the value added to such goods, properties,
or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be
passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is
imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee.

The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when
what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting
companies with yearly gross receipts exceeding ten million pesos has been abolished, the "in
lieu of all taxes" clause has now become functus officio, rendered inoperative.

In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes"
clause in its franchise failed to specify the taxes the company is sought to be exempted from.
Neither did it particularize the jurisdiction from which the taxing power is withheld. Second, the
clause has become functus officio because as the law now stands, ABS-CBN is no longer subject
to a franchise tax. It is now liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE.
The petition in the trial court for refund of local franchise tax is DISMISSED.

SO ORDERED.

G.R. No. 191761 : November 14, 2012

CAGAYAN ELECTRIC POWER AND LIGHT CO., INC., Petitioner, v. CITY OF CAGAYAN DE

ORO, Respondent.

DECISION

CARPIO, J.:

The Case

G.R. No. 191761 is a petition for review1Ï‚rνll assailing the Decision2Ï‚rνll promulgated on 28

May 2009 as well as the Resolution3Ï‚rνll promulgated on 24 March 2010 by the Court of
Appeals (appellate court) in CA-G.R. CV No. 01105-Min. The appellate court affirmed the 8
January 2007 Decision4Ï‚rνll of Branch 18 of the Regional Trial Court of Misamis Oriental (trial
court) in Civil Case No. 2005-207.
The trial court upheld the validity of the City of Cagayan de Oros Ordinance No. 9503-2005 and
denied Cagayan Electric Power and Light Co., Inc.s (CEPALCO) claim of exemption from the said
ordinance.

The Facts

The appellate court narrated the facts as follows:chanroblesvirtuallawlibrary

On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro (City Council) passed
Ordinance No. 9503-2005 imposing a tax on the lease or rental of electric and/or
telecommunication posts, poles or towers by pole owners to other pole users at ten percent
(10%) of the annual rental income derived from such lease or rental.

The City Council, in a letter dated 15 March 2005, informed appellant Cagayan Electric Power
and Light Company, Inc. (CEPALCO), through its President and Chief Operation Manager, Ms.
Consuelo G. Tion, of the passage of the subject ordinance.

On September 30, 2005, appellant CEPALCO, purportedly on pure question of law, filed a
petition for declaratory relief assailing the validity of Ordinance No. 9503-2005 before the
Regional Trial Court of Cagayan de Oro City, Branch 18, on the ground that the tax imposed by
the disputed ordinance is in reality a tax on income which appellee City of Cagayan de Oro may
not impose, the same being expressly prohibited by Section 133(a) of Republic Act No. 7160
(R.A. 7160) otherwise known as the Local Government Code (LGC) of 1991. CEPALCO argues
that, assuming the City Council can enact the assailed ordinance, it is nevertheless exempt from
the imposition by virtue of Republic Act No. 9284 (R.A. 9284) providing for its franchise.
CEPALCO further claims exemplary damages of PhP200,000.00 alleging that the passage of the
ordinance manifests malice and bad faith of the respondent-appellee towards it.

In its Answer, appellee raised the following affirmative defenses: (a) the enactment and
implementation of the subject ordinance was a valid and lawful exercise of its powers pursuant
to the 1987 Constitution, the Local Government Code, other applicable provisions of law, and
pertinent jurisprudence; (b) non-exemption of CEPALCO because of the express withdrawal of
the exemption provided by Section 193 of the LGC; (c) the subject ordinance is legally presumed
valid and constitutional; (d) prescription of respondent-appellees action pursuant to Section
187 of the LGC; (e) failure of respondent-appellee to exhaust administrative remedies under
the Local Government Code; (f) CEPALCOs action for declaratory relief cannot prosper since no
breach or violation of the subject ordinance was yet committed by the City.5ςrνll

Ordinance No. 9503-2005 reads:chanroblesvirtuallawlibrary

ORDINANCE IMPOSING A TAX ON THE LEASE OR RENTAL OF ELECTRIC AND/OR

TELECOMMUNICATION POSTS, POLES OR TOWERS BY POLE OWNERS TO OTHER POLE USERS AT
THE RATE OF TEN (10) PERCENT OF THE ANNUAL RENTAL INCOME DERIVED THEREFROM AND
FOR OTHER PURPOSES BE IT ORDAINED by the City Council (Sangguniang Panlungsod) of the
City of Cagayan de Oro in session assembled that:chanroblesvirtuallawlibrary

SECTION 1. - Whenever used in this Ordinance, the following terms shall be construed as:

a. Electric companies include all public utility companies whether corporation or cooperative
engaged in the distribution and sale of electricity;

b. Telecommunication companies refer to establishments or entities that are holders of

franchise through an Act of Congress to engage, maintain, and operate telecommunications,
voice and data services, under existing Philippine laws, rules and regulations;

c. Pole User includes any person, natural or juridical, including government agencies and
entities that use and rent poles and towers for the installation of any cable, wires, service drops
and other attachments;

d. Pole Owner includes electric and telecommunication company or corporation that owns
poles, towers and other accessories thereof.

SECTION 2. - There shall be imposed a tax on the lease or rental of electric and/or
telecommunication posts, poles or towers by pole owners to other pole users at the rate of ten
(10) percent of the annual rental income derived therefrom.

SECTION 3. - The tax imposed herein shall not be passed on by pole owners to the bills of pole
users in the form of added rental rates.

SECTION 4. (a) Pole owners herein defined engaged in the business of renting their posts, poles
and/or towers shall secure a separate business permit therefor as provided under Article (P),
Section 62(a) of Ordinance No. 8847-2003, otherwise known as the Cagayan de Oro City
Revenue Code of 2003.

(b) Pertinent provisions of Ordinance No. 8847-2003, covering situs of the tax, payment of taxes
and administrative provisions shall apply in the imposition of the tax under this Ordinance.

SECTION 5. - This Ordinance shall take effect after 15 days following its publication in a local
newspaper of general circulation for at least three (3) consecutive issues.

UNANIMOUSLY APPROVED.6ςrνll

Ordinance No. 9503-2005 was unanimously approved by the City Council of Cagayan de Oro on
10 January 2005.

The Trial Courts Ruling

On 8 January 2007, the trial court rendered its Decision7Ï‚rνll in favor of the City of Cagayan de
Oro. The trial court identified three issues for its resolution: (1) whether Ordinance No. 9503-
2005 is valid; (2) whether CEPALCO should be exempted from tax; and (3) whether CEPALCOs
action is barred for non-exhaustion of administrative remedies and for prescription.

In ruling for the validity of Ordinance No. 9503-2005, the trial court rejected CEPALCOs claim
that the ordinance is an imposition of income tax prohibited by Section 133(a) of the Local
Government Code.8Ï‚rνll The trial court reasoned that since CEPALCOs business of leasing its
posts to pole users is what is directly taxed, the tax is not upon the income but upon the
privilege to engage in business. Moreover, Section 143(h), in relation to Section 151, of the
Local Government Code authorizes a city to impose taxes, fees and charges on any business
which is not specified as prohibited under Section 143(a) to (g) and which the city council may
deem proper to tax.

The trial court also rejected CEPALCOs claim of exemption from tax. The trial court noted that
Republic Act (R.A.) Nos. 3247,9Ï‚rνll 357010Ï‚rνll and 6020,11Ï‚rνll which previously granted
CEPALCOs franchise, expressly stated that CEPALCO would pay a three percent franchise tax in
lieu of all assessments of whatever authority. However, there is no similar provision in R.A. No.
9284, which gave CEPALCO its current franchise.

Finally, the trial court found that CEPALCOs action is barred by prescription as it failed to raise
an appeal to the Secretary of Justice within the thirty-day period provided in Section 187 of the
Local Government Code.

The dispositive portion of the trial courts decision reads:chanroblesvirtuallawlibrary

WHEREFORE, it is crystal clear that Petitioner CEPALCO failed not only in proving its allegations
that City Ordinance 9503-2005 is illegal and contrary to law, and that [it] is exempted from the
imposition of tax, but also in convincing the Court that its action is not barred for non-
exhaustion of administrative remedy [sic] and by prescription. Hence, the instant petition is
DENIED.

SO ORDERED.12ςrνll

CEPALCO filed a brief with the appellate court and raised the following errors of the trial court:

A. The lower court manifestly erred in concluding that the instant action is barred for non-
exhaustion of administrative remedies and by prescription.

B. The lower court gravely erred in finding that Ordinance No. 9503-2005 of the City of Cagayan
de Oro does not partake of the nature of an income tax.

C. The lower court gravely erred in finding that Ordinance No. 9503-2005 of the City of Cagayan
de Oro is valid.
D. The lower court seriously erred in finding that herein appellant is not exempted from
payment of said tax.13ςrνll

The Appellate Courts Ruling

On 28 May 2009, the appellate court rendered its Decision14Ï‚rνll and affirmed the trial courts
decision.

The appellate court stated that CEPALCO failed to file a timely appeal to the Secretary of
Justice, and did not exhaust its administrative remedies. The appellate court agreed with the
trial courts ruling that the assailed ordinance is valid and declared that the subject tax is a
license tax for the regulation of business in which CEPALCO is engaged. Finally, the appellate
court found that CEPALCOs claim of tax exemption rests on a strained interpretation of R.A. No.
9284.

In a Resolution15Ï‚rνll dated 24 March 2010, the appellate court denied CEPALCOs motion for
reconsideration for lack of merit. The resolution also denied CEPALCOs 3 August 2009
supplemental motion for reconsideration for being filed out of time.

CEPALCO filed the present petition for review before this Court on 27 May 2010.

The Issues

CEPALCO enumerated the following reasons for warranting review:

1. In spite of its patent illegality, a City Ordinance passed in violation or in excess of the citys
delegated power to tax was upheld;

2. In a case involving pure questions of law, the Court of Appeals still insisted on a useless
administrative remedy before resort to the court may be made; and

3. Recent legislation affirming CEPALCOs tax exemptions was disregarded.16ςrνll

In a Resolution dated 6 July 2011,17Ï‚rνll this Court required both parties to discuss whether the
amount of tax imposed by Section 2 of Ordinance No. 9503-2005 complies with or violates, as
the case may be, the limitation set by Section 151, in relation to Sections 137 and 143(h), of the
Local Government Code.

The Courts Ruling

Failure to Exhaust Administrative Remedies

Ordinance No. 9503-2005 is a local revenue measure. As such, the Local Government Code
applies.
SEC. 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures;
Mandatory Public Hearings. The procedure for approval of local tax ordinances and revenue
measures shall be in accordance with the provisions of this Code: Provided, That public hearings
shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any
question on the constitutionality or legality of tax ordinances or revenue measures may be
raised on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice
who shall render a decision within sixty (60) days from the date of receipt of the appeal:
Provided, however, That such appeal shall not have the effect of suspending the effectivity of
the ordinance and the accrual and payment of the tax, fee, or charge levied therein: Provided,
finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day
period without the Secretary of Justice acting upon the appeal, the aggrieved party may file
appropriate proceedings with a court of competent jurisdiction.

SEC. 188. Publication of Tax Ordinances and Revenue Measures. Within ten (10) days after their
approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue
measures shall be published in full for three (3) consecutive days in a newspaper of local
circulation: Provided, however, That in provinces, cities and municipalities where there are no
newspapers of local circulation, the same may be posted in at least two (2) conspicuous and
publicly accessible places.

The Sangguniang Panlungsod of Cagayan de Oro approved Ordinance No. 9503-2005 on 10

January 2005. Section 5 of said ordinance provided that the "Ordinance shall take effect after
15 days following its publication in a local newspaper of general circulation for at least three (3)
consecutive issues." Gold Star Daily published Ordinance No. 9503-2005 on 1 to 3 February
2005. Ordinance No. 9503-2005 thus took effect on 19 February 2005. CEPALCO filed its
petition for declaratory relief before the Regional Trial Court on 30 September 2005, clearly
beyond the 30-day period provided in Section 187. CEPALCO did not file anything before the
Secretary of Justice. CEPALCO ignored our ruling in Reyes v. Court of Appeals 18Ï‚rνll on the
mandatory nature of the statutory periods:chanroblesvirtuallawlibrary

Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality of a
tax ordinance must file his appeal to the Secretary of Justice, within 30 days from effectivity
thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an
aggrieved party to go to court. But if the Secretary does not act thereon, after the lapse of 60
days, a party could already proceed to seek relief in court. These three separate periods are
clearly given for compliance as a prerequisite before seeking redress in a competent court. Such
statutory periods are set to prevent delays as well as enhance the orderly and speedy discharge
of judicial functions. For this reason the courts construe these provisions of statutes as
mandatory.

A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax
is the most effective instrument to raise needed revenues to finance and support the myriad
activities of local government units for the delivery of basic services essential to the promotion
of the general welfare and enhancement of peace, progress, and prosperity of the people.
Consequently, any delay in implementing tax measures would be to the detriment of the public.
It is for this reason that protests over tax ordinances are required to be done within certain
time frames. In the instant case, it is our view that the failure of petitioners to appeal to the
Secretary of Justice within 30 days as required by Sec. 187 of R.A. 7160 is fatal to their cause.

As in Reyes, CEPALCOs failure to appeal to the Secretary of Justice within the statutory period
of 30 days from the effectivity of the ordinance should have been fatal to its cause. However,
we relax the application of the rules in view of the more substantive matters.

City of Cagayan de Oros Power to Create Sources of Revenue

vis-a-vis CEPALCOs Claim of Exemption

Section 5, Article X of the 1987 Constitution provides that "each local government unit shall
have the power to create its own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
government." The Local Government Code supplements the Constitution with Sections 151 and
186:chanroblesvirtuallawlibrary

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.

SEC. 186. Power to Levy Other Taxes, Fees or Charges. ‒ Local government units may exercise
the power to levy taxes, fees or charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the National Internal Revenue Code, as
amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided,
further, That the ordinance levying such taxes, fees, or charges shall not be enacted without
any prior public hearing conducted for the purpose.

Although CEPALCO does not question the authority of the Sangguniang Panlungsod of Cagayan
de Oro to impose a tax or to enact a revenue measure, CEPALCO insists that Ordinance No.
9503-2005 is an imposition of an income tax which is prohibited by Section 133(a) 19Ï‚rνll of the
Local Government Code. Unfortunately for CEPALCO, we agree with the ruling of the trial and
appellate courts that Ordinance No. 9503-2005 is a tax on business. CEPALCOs act of leasing for
a consideration the use of its posts, poles or towers to other pole users falls under the Local
Government Codes definition of business. Business is defined by Section 131(d) of the Local
Government Code as "trade or commercial activity regularly engaged in as a means of
livelihood or with a view to profit." In relation to Section 131(d),20Ï‚rνll Section 143(h)21Ï‚rνll of
the Local Government Code provides that the city may impose taxes, fees, and charges on any
business which is not specified in Section 143(a) to (g)22Ï‚rνll and which the sanggunian
concerned may deem proper to tax.

In contrast to the express statutory provisions on the City of Cagayan de Oros power to tax,
CEPALCOs claim of tax exemption of the income from its poles relies on a strained
interpretation.23Ï‚rνll Section 1 of R.A. No. 9284 added Section 9 to R.A. No. 3247, CEPALCOs
franchise:chanroblesvirtuallawlibrary

SEC. 9. Tax Provisions. ‒ The grantee, its successors or assigns, shall be subject to the payment
of all taxes, duties, fees or charges and other impositions applicable to private electric utilities
under the National Internal Revenue Code (NIRC) of 1997, as amended, the Local Government
Code and other applicable laws: Provided, That nothing herein shall be construed as repealing
any specific tax exemptions, incentives, or privileges granted under any relevant law: Provided,
further, That all rights, privileges, benefits and exemptions accorded to existing and future
private electric utilities by their respective franchises shall likewise be extended to the grantee.

The grantee shall file the return with the city or province where its facility is located and pay the
taxes due thereon to the Commissioner of Internal Revenue or his duly authorized
representative in accordance with the NIRC and the return shall be subject to audit by the
Bureau of Internal Revenue.

The Local Government Code withdrew tax exemption privileges previously given to natural or
juridical persons, and granted local government units the power to impose franchise
tax,24Ï‚rνll thus:chanroblesvirtuallawlibrary

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.

xxx

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.

SEC. 534. Repealing Clause. x x x.

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and
administrative regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly.

It is hornbook doctrine that tax exemptions are strictly construed against the claimant. For this
reason, tax exemptions must be based on clear legal provisions. The separate opinion in PLDT v.
City of Davao25Ï‚rνll is applicable to the present case, thus:chanroblesvirtuallawlibrary

Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point
to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption
from a common burden. Any doubt whether a tax exemption exists is resolved against the
taxpayer. Tax exemptions cannot arise by mere implication, much less by an implied re-
enactment of a repealed tax exemption clause.

CEPALCOs claim of exemption under the "in lieu of all taxes" clause must fail in light of Section
193 of the Local Government Code as well as Section 9 of its own franchise.

Ordinance No. 9503-2005s Compliance with

the Local Government Code

In our Resolution dated 6 July 2011, 26Ï‚rνll we asked both parties to discuss whether the
amount of tax imposed by Section 2 of Ordinance No. 9503-2005 complies with or violates, as
the case may be, the limitation set by Section 151, in relation to Sections 137 and 143(h), of the
Local Government Code.

CEPALCO argues that Ordinance No. 9503-2005 should be invalidated because the City of
Cagayan de Oro exceeded its authority in enacting it. CEPALCO argued thus:

5. Thus, the taxes imposable under either Section 137 or Section 143(h) are not unbridled but
are restricted as to the amount which may be imposed. This is the first limitation. Furthermore,
if it is a city which imposes the same, it can impose only up to one-half of what the province or
municipality may impose. This is the second limitation.

6. Let us now examine Ordinance No. 9503-2005 of the respondent City of Cagayan de Oro in
the light of the twin limitations mentioned above.

7. Ordinance No. 9503-2005 of the respondent City of Cagayan de Oro imposes a tax on the
lease or rental of electric and/or telecommunication posts, poles or towers by pole owners to
other pole users "at the rate of ten (10) percent of the annual rental income derived
therefrom."

8. With respect to Section 137, considering that the tax allowed provinces "shall not exceed 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," the tax imposed by
Ordinance No. 9503-2005 "at the rate of ten (10) percent of the annual rental income derived
therefrom" is too much. There is a whale of a difference between the allowable 50% of 1% and
the 10% tax imposed by the respondent. To illustrate: assuming that the gross annual receipt is
Php100, the maximum tax that a province may impose under Section 137 (50% of 1%) shall be
Php0.5 or only fifty centavos. Therefore, the maximum tax that the City may impose shall only
be one-half of this, which is Php0.25 or only twenty-five centavos. But the questioned
Ordinance imposes a tax amounting to 10% of the gross annual receipt of Php100, which is
Php10, or Ten Pesos. This a whooping [sic] 40 times more than that allowed for the province!
The violation made by respondent city of its delegated taxing authority is all too patent.

9. With respect to Section 143(h), the rate of tax which the municipality may impose "shall not
exceed two percent (2%) of gross sales or receipts of the preceding calendar year." On the
other hand, the tax imposed by Ordinance No. 9503-2005 is "at the rate of ten (10) percent of
the annual rental income derived therefrom." Again, it is obvious that the respondent Citys
questioned tax ordinance is way too much. Using the same tax base of Php100 to illustrate, let
us compute:

Under Section 143(h), the maximum tax that a municipality may impose is 2% of Php100, which
is Php2 or Two Pesos. Therefore, the maximum tax that the City may impose shall be one-half
of this, which is Php1 or One Peso. But the tax under Ordinance No. 9503-2005 is Php10, or Ten
Pesos. This is a whooping [sic] 10 times more than that allowed for the municipality! As in the
earlier instance discussed above, the violation made by the respondent city of its delegated
taxing authority is all too patent.27Ï‚rνll (Boldfacing and underscoring in the original)

The interpretation of the City of Cagayan de Oro is diametrically opposed to that of CEPALCO.
The City of Cagayan de Oro points out that under Section 151 of the Local Government Code,
cities not only have the power to levy taxes, fees and charges which the provinces or
municipalities may impose, but the maximum rate of taxes imposable by cities may exceed the
maximum rate of taxes imposable by provinces or municipalities by as much as 50%. The City of
Cagayan de Oro goes on to state:

6. Thus, Section 30 of City of Cagayan de Oros Ordinance No. 8847-2003, otherwise known as
the Revenue Code of Cagayan de Oro, imposes a franchise tax on the gross receipts realized
from the preceding year by a business enjoying a franchise, at the rate of 75% of 1%. The
increase of 25% over that which is prescribed under Section 137 of the LGC is in accordance
with Section 151 thereof prescribing the allowable increase on the rate of tax on the businesses
duly identified and enumerated under Section 143 of the LGC or those defined and categorized
in the preceding sections thereof;

7. Section 143 of the LGC prescribes the rate of taxes on the identified categories of business
enumerated therein which were determined to be existing at the time of its enactment. On the
other hand, Section 151 of the LGC prescribes the allowable rate of increase over the rate of
taxes imposed on businesses identified under Section 143 and the preceding sections thereof. It
is [City of Cagayan de Oros humble opinion that the allowable rate of increase provided under
Section 151 of the LGC applies only to those businesses identified and enumerated under
Section 143 thereof. Thus, it is respectfully submitted by City of Cagayan de Oro that the 2%
limitation prescribed under Section 143(h) applies only to the tax rates on the businesses
identified thereunder and does not apply to those that may thereafter be deemed taxable
under Section 186 of the LGC, such as the herein assailed Ordinance No. 9503-2005. On the
same vein, it is the respectful submission of City of Cagayan de Oro that the limitation under
Section 151 of the LGC likewise does not apply in our particular instance, otherwise it will run
counter to the intent and purpose of Section 186 of the LGC;

8. Be it strongly emphasized here that CEPALCO is differently situated vis-vis the rest of the
businesses identified under Section 143 of the LGC. The imposition of a tax "xxx on the lease or
rental of electric and/or telecommunications posts, poles or towers by pole owners to other
pole users at the rate of ten (10%) of the annual rental income derived therefrom" as provided
under Section 2 of the questioned Ordinance No. 9503-2005 is based on a reasonable
classification, to wit: (a) It is based on substantial distinctions which make a real difference; (b)
these are germane to the purpose of the law; (c) the classification applies not only to the
present conditions but also to future conditions which are substantially identical to those of the
present; and (d) the classification applies only to those belonging to the same class;

9. Furthermore, Section 186 of the LGC allow [sic] local government units to exercise their
taxing power to levy taxes, fees or charges on any base or subject not otherwise specifically
enumerated in the preceding sections, more particularly Section 143 thereof, or under the
provisions of the National Internal Revenue Code, as long as they are not unjust, excessive,
oppressive, confiscatory or contrary to declared national policy. Moreover, a public hearing is
required before the Ordinance levying such taxes, fees or charges can be enacted;

10. It is respectfully submitted by City of Cagayan de Oro that the tax rate imposed under
Section 2 of the herein assailed Ordinance is not unjust, excessive, oppressive, confiscatory or
contrary to a declared national policy;

11. A reading of Section 143 of the LGC reveals that it has neither identified the operation of a
business engaged in leasing nor prescribed its tax rate. Moreover, a Lessor, in any manner, is
not included among those defined as Contractor under Section 131(h) of the LGC. However, a
Lessor, in its intended general application in City of Cagayan de Oro (one who rents out real
estate properties), was identified, categorized and included as one of the existing businesses
operating in the city, and thus falling under the provisions of Ordinance No. 8847-2003 (the
Revenue Code of Cagayan de Oro) and, therefore, imposed only a tax rate of 2% on their gross
annual receipts;

12. While the herein assailed Ordinance similarly identifies that the base of the tax imposed
therein are receipts and/or revenue derived from rentals of poles and posts, CEPALCO cannot
be considered under the definition of Lessor under the spirit, essence and intent of Section
58(h) of the Revenue Code of Cagayan de Oro, because the same refers only to "Real Estate
Lessors, Real Estate Dealers and Real Estate Developers." Thus, CEPALCO should be, as it has
been, categorized as a (Distinct) Lessor where it enjoys not only a tremendous and substantial
edge but also an absolute advantage in the rental of poles, posts and/or towers to other
telecommunication and cable TV companies and the like over and above all others in view of its
apparent monopoly by allowing the use of their poles, posts and/or towers by, leasing them out
to, telecommunication and cable TV companies operating within the city and suburbs.
Furthermore, CEPALCO has neither competition in this field nor does it expect one since there
are no other persons or entities who are engaged in this particular business activity;

x x x28ςrνll

CEPALCO is mistaken when it states that a city can impose a tax up to only one-half of what the
province or city may impose. A more circumspect reading of the Local Government Code could
have prevented this error. Section 151 of the Local Government Code states that, subject to
certain exceptions, a city may exceed by "not more than 50%" the tax rates allowed to
provinces and municipalities.29Ï‚rνll A province may impose a franchise tax at a rate "not
exceeding 50% of 1% of the gross annual receipts."30Ï‚rνll Following Section 151, a city may
impose a franchise tax of up to 0.0075 (or 0.75%) of a business gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction. A municipality may impose a business tax at a rate not exceeding "two percent of
gross sales or receipts."31Ï‚rνll Following Section 151, a city may impose a business tax of up to
0.03 (or 3%) of a business gross sales or receipts of the preceding calendar year.

CEPALCO also erred when it equates Section 137s "gross annual receipts" with Ordinance No.
9503-2005s "annual rental income." Section 2 of Ordinance No. 9503-2005 imposes "a tax on
the lease or rental of electric and/or telecommunication posts, poles or towers by pole owners
to other pole users at the rate of ten (10) percent of the annual rental income derived
therefrom," and not on CEPALCOs gross annual receipts. Thus, although the tax rate of 10% is
definitely higher than that imposable by cities as franchise or business tax, the tax base of
annual rental income of "electric and/or telecommunication posts, poles or towers by pole
owners to other pole users" is definitely smaller than that used by cities in the computation of
franchise or business tax. In effect, Ordinance No. 9503-2005 wants a slice of a smaller pie.

However, we disagree with the City of Cagayan de Oros submission that Ordinance No. 9503-
2005 is not subject to the limits imposed by Sections 143 and 151 of the Local Government
Code. On the contrary, Ordinance No. 9503-2005 is subject to the limitation set by Section
143(h). Section 143 recognizes separate lines of business and imposes different tax rates for
different lines of business. Let us suppose that one is a brewer of liquor and, at the same time, a
distributor of articles of commerce. The brewery business is subject to the rates established in
Section 143(a) while the distribution business is subject to the rates established in Section
143(b). The City of Cagayan de Oros imposition of a tax on the lease of poles falls under Section
143(h), as the lease of poles is CEPALCOs separate line of business which is not covered by
paragraphs (a) to (g) of Section 143. The treatment of the lease of poles as a separate line of
business is evident in Section 4(a) of Ordinance No. 9503-2005. The City of Cagayan de Oro
required CEPALCO to apply for a separate business permit.
More importantly, because "any person, who in the course of trade or business x x x leases
goods or properties x x x shall be subject to the value-added tax," 32Ï‚rνll the imposable tax rate
should not exceed two percent of gross receipts of the lease of poles of the preceding calendar
year. Section 143(h) states that "on any business subject to x x x value-added x x x tax under the
National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%)
of gross sales or receipts of the preceding calendar year" from the lease of goods or properties.
Hence, the 10% tax rate imposed by Ordinance No. 9503-2005 clearly violates Section 143(h) of
the Local Government Code.

Finally, in view of the lack of a separability clause, we declare void the entirety of Ordinance No.
9503-2005. Any payment made by reason of the tax imposed by Ordinance No. 9503-2005
should, therefore, be refunded to CEPALCO. Our ruling, however, is made without prejudice to
the enactment by the City of Cagayan de Oro of a tax ordinance that complies with the limits
set by the Local Government Code.ςηαοblενιrυαllαωlιbrαr

WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. CV No.
01105-Min promulgated on 28 May 2009 and the Resolution promulgated on 24 March 2010
are REVERSED and SET ASIDE Ordinance No. 9503-2005 is declared void.ςrαlαωlιbrαr

SO ORDERED.

Endnotes: