G.R. No.

L-16318

October 21, 1921

PANG LIM and BENITO GALVEZ, plaintiffs-appellees, vs. LO SENG, defendant-appellant. Cohn, Fisher and DeWitt for appellant. No appearance for appellees.

STREET, J.: For several years prior to June 1, 1916, two of the litigating parties herein, namely, Lo Seng and Pang Lim, Chinese residents of the City of Manila, were partners, under the firm name of Lo Seng and Co., in the business of running a distillery, known as "El Progreso," in the Municipality of Paombong, in the Province of Bulacan. The land on which said distillery is located as well as the buildings and improvements originally used in the business were, at the time to which reference is now made, the property of another Chinaman, who resides in Hongkong, named Lo Yao, who, in September, 1911, leased the same to the firm of Lo Seng and Co. for the term of three years. Upon the expiration of this lease a new written contract, in the making of which Lo Yao was represented by one Lo Shui as attorney in fact, became effective whereby the lease was extended for fifteen years. The reason why the contract was made for so long a period of time appears to have been that the Bureau of Internal Revenue had required sundry expensive improvements to be made in the distillery, and it was agreed that these improvements should be effected at the expense of the lessees. In conformity with this understanding many thousands of pesos were expended by Lo Seng and Co., and later by Lo Seng alone, in enlarging and improving the plant. Among the provisions contained in said lease we note the following: Know all men by these presents: xxx xxx xxx

1. That I, Lo Shui, as attorney in fact in charge of the properties of Mr. Lo Yao of Hongkong, cede by way of lease for fifteen years more said distillery "El Progreso" to Messrs. Pang Lim and Lo Seng (doing business under the firm name of Lo Seng and Co.), after the termination of the previous contract, because of the fact that they are required, by the Bureau of Internal Revenue, to rearrange, alter and clean up the distillery. 2. That all the improvements and betterments which they may introduce, such as machinery, apparatus, tanks, pumps, boilers and buildings which the business may require, shall be, after the termination of the fifteen years of lease, for the benefit of Mr. Lo Yao, my principal, the buildings being considered as improvements. 3. That the monthly rent of said distillery is P200, as agreed upon in the previous contract of September 11, 1911, acknowledged before the notary public D. Vicente Santos; and all modifications and repairs which may be needed shall be paid for by Messrs. Pang Lim and Lo Seng.

We, Pang Lim and Lo Seng, as partners in said distillery "El Progreso," which we are at present conducting, hereby accept this contract in each and all its parts, said contract to be effective upon the termination of the contract of September 11, 1911. Neither the original contract of lease nor the agreement extending the same was inscribed in the property registry, for the reason that the estate which is the subject of the lease has never at any time been so inscribed. On June 1, 1916, Pang Lim sold all his interest in the distillery to his partner Lo Seng, thus placing the latter in the position of sole owner; and on June 28, 1918, Lo Shui, again acting as attorney in fact of Lo Yao, executed and acknowledged before a notary public a deed purporting to convey to Pang Lim and another Chinaman named Benito Galvez, the entire distillery plant including the land used in connection therewith. As in case of the lease this document also was never recorded in the registry of property. Thereafter Pang Lim and Benito Galvez demanded possession from Lo Seng, but the latter refused to yield; and the present action of unlawful detainer was thereupon initiated by Pang Lim and Benito Galvez in the court of the justice of the peace of Paombong to recover possession of the premises. From the decision of the justice of the peace the case was appealed to the Court of First Instance, where judgment was rendered for the plaintiffs; and the defendant thereupon appealed to the Supreme Court. The case for the plaintiffs is rested exclusively on the provisions of article 1571 of the Civil Code, which reads in part as follows: ART. 1571. The purchaser of a leased estate shall be entitled to terminate any lease in force at the time of making the sale, unless the contrary is stipulated, and subject to the provisions of the Mortgage Law. In considering this provision it may be premised that a contract of lease is personally binding on all who participate in it regardless of whether it is recorded or not, though of course the unrecorded lease creates no real charge upon the land to which it relates. The Mortgage Law was devised for the protection of third parties, or those who have not participated in the contracts which are by that law required to be registered; and none of its provisions with reference to leases interpose any obstacle whatever to the giving of full effect to the personal obligations incident to such contracts, so far as concerns the immediate parties thereto. This is rudimentary, and the law appears to be so understood by all commentators, there being, so far as we are aware, no authority suggesting the contrary. Thus, in the commentaries of the authors Galindo and Escosura, on the Mortgage Law, we find the following pertinent observation: "The Mortgage Law is enacted in aid of and in respect to third persons only; it does not affect the relations between the contracting parties, nor their capacity to contract. Any question affecting the former will be determined by the dispositions of the special law [i.e., the Mortgage Law], while any question affecting the latter will be determined by the general law." (Galindo y Escosura, Comentarios a la Legislacion Hipotecaria, vol. I, p. 461.) Although it is thus manifest that, under the Mortgage Law, as regards the personal obligations expressed therein, the lease in question was from the beginning, and has remained, binding upon all the parties thereto among whom is to be numbered Pang Lim, then a member of the firm of Lo Seng and Co. this does not really solve the problem now before us, which is, whether the plaintiffs herein, as purchasers of the estate, are at liberty to terminate the lease, assuming that it was originally binding upon all parties participating in it. Upon this point the plaintiffs are undoubtedly supported, prima facie, by the letter of article 1571 of the Civil Code; and the position of the defendant derives no assistance from the mere circumstance that the lease was admittedly binding as between the parties thereto.
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The words "subject to the provisions of the Mortgage Law," contained in article 1571, express a qualification which evidently has reference to the familiar proposition that recorded instruments are effective against third persons from the date of registration (Co-Tiongco vs. Co-Guia, 1 Phil., 210); from whence it follows that a recorded lease must be respected by any purchaser of the estate whomsoever. But there is nothing in the Mortgage Law which, so far as we now see, would prevent a purchaser from exercising the precise power conferred in article 1571 of the Civil Code, namely, of terminating any lease which is unrecorded; nothing in that law that can be considered as arresting the force of article 1571 as applied to the lease now before us. Article 1549 of the Civil Code has also been cited by the attorneys for the appellant as supplying authority for the proposition that the lease in question cannot be terminated by one who, like Pang Lim, has taken part in the contract. That provision is practically identical in terms with the first paragraph of article 23 of the Mortgage Law, being to the effect that unrecorded leases shall be of no effect as against third persons; and the same observation will suffice to dispose of it that was made by us above in discussing the Mortgage Law, namely, that while it recognizes the fact that an unrecorded lease is binding on all persons who participate therein, this does not determine the question whether, admitting the lease to be so binding, it can be terminated by the plaintiffs under article 1571. Having thus disposed of the considerations which arise in relation with the Mortgage Law, as well as article 1549 of the Civil Coded all of which, as we have seen, are undecisive we are brought to consider the aspect of the case which seems to us conclusive. This is found in the circumstance that the plaintiff Pang Lim has occupied a double role in the transactions which gave rise to this litigation, namely, first, as one of the lessees; and secondly, as one of the purchasers now seeking to terminate the lease. These two positions are essentially antagonistic and incompatible. Every competent person is by law bond to maintain in all good faith the integrity of his own obligations; and no less certainly is he bound to respect the rights of any person whom he has placed in his own shoes as regards any contract previously entered into by himself. While yet a partner in the firm of Lo Seng and Co., Pang Lim participated in the creation of this lease, and when he sold out his interest in that firm to Lo Seng this operated as a transfer to Lo Seng of Pang Lim's interest in the firm assets, including the lease; and Pang Lim cannot now be permitted, in the guise of a purchaser of the estate, to destroy an interest derived from himself, and for which he has received full value. The bad faith of the plaintiffs in seeking to deprive the defendant of this lease is strikingly revealed in the circumstance that prior to the acquisition of this property Pang Lim had been partner with Lo Seng and Benito Galvez an employee. Both therefore had been in relations of confidence with Lo Seng and in that position had acquired knowledge of the possibilities of the property and possibly an experience which would have enabled them, in case they had acquired possession, to exploit the distillery with profit. On account of his status as partner in the firm of Lo Seng and Co., Pang Lim knew that the original lease had been extended for fifteen years; and he knew the extent of valuable improvements that had been made thereon. Certainly, as observed in the appellant's brief, it would be shocking to the moral sense if the condition of the law were found to be such that Pang Lim, after profiting by the sale of his interest in a business, worthless without the lease, could intervene as purchaser of the property and confiscate for his own benefit the property which he had sold for a valuable consideration to Lo Seng. The sense of justice recoils before the mere possibility of such eventuality. Above all other persons in business relations, partners are required to exhibit towards each other the highest degree of good faith. In fact the relation between partners is essentially fiduciary, each being considered in law, as he is in fact, the confidential agent of the other. It is therefore accepted as fundamental in equity jurisprudence that one partner cannot, to the detriment of another, apply exclusively to his own benefit the results of the knowledge and information gained in the character of partner. Thus, it has been held that if one partner obtains in his own name and for his own benefit the renewal of a lease on property used by the firm, to commence at a date

subsequent to the expiration of the firm's lease, the partner obtaining the renewal is held to be a constructive trustee of the firm as to such lease. (20 R. C. L., 878-882.) And this rule has even been applied to a renewal taken in the name of one partner after the dissolution of the firm and pending its liquidation. (16 R. C. L., 906; Knapp vs. Reed, 88 Neb., 754; 32 L. R. A. [N. S.], 869; Mitchell vs. Reed 61 N. Y., 123; 19 Am. Rep., 252.) An additional consideration showing that the position of the plaintiff Pang Lim in this case is untenable is deducible from articles 1461 and 1474 of the Civil Code, which declare that every person who sells anything is bound to deliver and warrant the subject-matter of the sale and is responsible to the vendee for the legal and lawful possession of the thing sold. The pertinence of these provisions to the case now under consideration is undeniable, for among the assets of the partnership which Pang Lim transferred to Lo Seng, upon selling out his interest in the firm to the latter, was this very lease; and while it cannot be supposed that the obligation to warrant recognized in the articles cited would nullify article 1571, if the latter article had actually conferred on the plaintiffs the right to terminate this lease, nevertheless said articles (1461, 1474), in relation with other considerations, reveal the basis of an estoppel which in our opinion precludes Pang Lim from setting up his interest as purchaser of the estate to the detriment of Lo Seng. It will not escape observation that the doctrine thus applied is analogous to the doctrine recognized in courts of common law under the head of estoppel by deed, in accordance with which it is held that if a person, having no title to land, conveys the same to another by some one or another of the recognized modes of conveyance at common law, any title afterwards acquired by the vendor will pass to the purchaser; and the vendor is estopped as against such purchaser from asserting such after-acquired title. The indenture of lease, it may be further noted, was recognized as one of the modes of conveyance at common law which created this estoppel. (8 R. C. L., 1058, 1059.) From what has been said it is clear that Pang Lim, having been a participant in the contract of lease now in question, is not in a position to terminate it: and this is a fatal obstacle to the maintenance of the action of unlawful detainer by him. Moreover, it is fatal to the maintenance of the action brought jointly by Pang Lim and Benito Galvez. The reason is that in the action of unlawful detainer, under section 80 of the Code of Civil Procedure, the only question that can be adjudicated is the right to possession; and in order to maintain the action, in the form in which it is here presented, the proof must show that occupant's possession is unlawful, i. e., that he is unlawfully withholding possession after the determination of the right to hold possession. In the case before us quite the contrary appears; for, even admitting that Pang Lim and Benito Galvez have purchased the estate from Lo Yao, the original landlord, they are, as between themselves, in the position of tenants in common or owners pro indiviso, according to the proportion of their respective contribution to the purchase price. But it is well recognized that one tenant in common cannot maintain a possessory action against his cotenant, since one is as much entitled to have possession as the other. The remedy is ordinarily by an action for partition. (Cornista vs. Ticson, 27 Phil., 80.) It follows that as Lo Seng is vested with the possessory right as against Pang Lim, he cannot be ousted either by Pang Lim or Benito Galvez. Having lawful possession as against one cotenant, he is entitled to retain it against both. Furthermore, it is obvious that partition proceedings could not be maintained at the instance of Benito Galvez as against Lo Seng, since partition can only be effected where the partitioners are cotenants, that is, have an interest of an identical character as among themselves. (30 Cyc., 178-180.) The practical result is that both Pang Lim and Benito Galvez are bound to respect Lo Seng's lease, at least in so far as the present action is concerned. We have assumed in the course of the preceding discussion that the deed of sale under which the plaintiffs acquired the right of Lo Yao, the owner of the fee, is competent proof in behalf of the plaintiffs. It is, however, earnestly insisted by the attorney for Lo Seng that this document, having never been recorded in the property registry, cannot under article 389 of the Mortgage Law, be used in court against him because as to said instrument he is a third party. The important question thus raised is not absolutely necessary to the decision of this case, and we are inclined to pass it without decision, not only because the question does not seem to have been ventilated in the Court of First

Instance but for the further reason that we have not had the benefit of any written brief in this case in behalf of the appellees. The judgment appealed from will be reversed, and the defendant will be absolved from the complaint. It is so ordered, without express adjudication as to costs. Johnson, Araullo, Avancea and Villamor, JJ., concur.

G.R. No. 106436 December 3, 1994 VIRGILIO D. IMSON, petitioner, vs. HON. COURT OF APPEALS, HOLIDAY HILLS STOCK AND BREEDING FARM CORPORATION, FNCB FINANCE CORPORATION, respondents. Polotan Law Office for petitioner. Felix R. Solomon for private respondents.

PUNO, J.: The case at bench arose from a vehicular collision on December 11, 1983, involving petitioner's Toyota Corolla and a Hino diesel truck registered under the names of private respondents FNCB Finance Corporation and Holiday Hills Stock and Breeding Farm Corporation. The collision seriously injured petitioner and totally wrecked his car. On January 6, 1984, petitioner filed with the RTC Baguio City 1 a Complaint for Damages 2 Sued were private respondents as registered owners of the truck; truck driver Felix B. Calip, Jr.; the beneficial owners of the truck, Gorgonio Co Adarme, Felisa T. Co (also known as Felisa Tan), and Cirilia Chua Siok Bieng, and the truck insurer, Western Guaranty Corporation. The Complaint prayed that defendants be ordered to pay, jointly and severally, two hundred seventy thousand pesos (P270,000.00) as compensatory damages, fifty thousand pesos (P50,000.00) each as moral and exemplary damages, and attorney's fees, litigation expenses, and cost of suit. 8 Defendants driver and beneficial owners failed to answer and were declared in default. 4 On May 29, 1987, however, petitioner and defendant insurer, entered into a compromise agreement which provided, inter alia: 1. Defendant Western Guaranty Corporation (Western Guaranty for short) admits that its total liability under the laws and the insurance contract sued upon is P70,000.00; 2. In full settlement of its liability under the laws and the said insurance contract, defendant Western Guaranty shall pay plaintiff (herein petitioner) the amount of P70,000.00 upon the signing of this compromise agreement; 3. This compromise agreement shall in no way waive nor prejudice plaintiffs (herein petitioner's) rights to proceed against the other defendants with respect the remainder of his claims; 4. This compromise agreement shall be a full and final settlement of the issues between plaintiff (herein petitioner) and defendant Western Guaranty in their complaint and answer and, from now on, they shall have no more right against one another except the enforcement of this compromise agreement. In consequence of the compromise agreement, the trial court dismissed the Complaint for Damages against Western Guaranty Corporation on June 16, 1987. 8 A copy of the Order of dismissal was received by private respondent Holiday Hills Stock and Breeding Farm Corporation on July 13, 1987. Nearly eighteen (18) months later, said private respondent moved to dismiss the case against all the

other defendants. It argued that since they are all indispensable parties under a common cause of action, the dismissal of the case against defendant insurer must result in the dismissal of the suit against all of them. The trial court denied the motion. Private respondent Holiday Hills Stock and Breeding Farm Corporation assailed the denial order through a Petition for Certiorari, Prohibition and Mandamus With Restraining Order filed with respondent Court of Appeals. The Petition was docketed as CA-G.R. SP No. 17651. On July 10, 1992, the Court of Appeals, 7 through its Special Sixth Division, 8 reversed the trial court, as it ruled: The petitioner (herein private respondent Holiday Hills Stock and Breeding Farm Corporation) cites the doctrine laid down in Lim Tanhu v. Hon. Ramolete, 66 SCRA 425, as applied later in Co v. Acosta, 134 SCRA 185, to support its averment that the court a quo gravely abused its discretion in refusing to dismiss the case. Essentially, the doctrine adverted to essays that in a common cause of action where all the defendants are indispensable parties, the court's power to act is integral and cannot be split, such that it cannot relieve any of them and at the same time render judgment against the rest. We find applicability of the doctrine to the case at bar. A cursory reading of the complaint . . . reveals that the cause of action was the alleged bad faith and gross negligence of the defendants resulting in the injuries complained of and for which the action for damages was filed. The inclusion of Western Guaranty Corporation was vital to the claim, it being the insurer of the diesel truck without which, the claim could be set for naught. Stated otherwise, it is an indispensable party as the petitioner (herein private respondent stock and breeding farm corporation) . . . . Private respondent's (herein petitioner's argument that the said insurance company was sued on a different cause of action, i.e., its bounden duty under the insurance law to pay or settle claims arising under its policy coverage, is untenable, for the cited law perceives the existence of a just cause, and according to the answer filed by the Western Guaranty Corporation . . . the proximate cause of the accident was the fault of the plaintiff (herein petitioner), hence it was not liable for damages. There is in fact a congruence of affirmative defense among the answering defendants. Moreover, it is undisputed that the injury caused is covered by the insurance company concerned. Thus, when the said insurer settled its liability with the private respondent (petitioner herein) . . . , the other defendants, as the insured and indispensable parties to a common cause of action, necessarily benefited from such settlement including the defaulted defendants, for as stated in the aforecited cases, it is deemed that anything done by or for the answering defendant is done by or for the ones in default since it is implicit in the rule that default is in essence a mere formality that deprives them of no more than to take part in the trial, but if the complaint is dismissed as to the answering defendant, it should also be dismissed as to them. 9 (Citations omitted.) Petitioner now comes to this Court with the following assignments of error: A. RESPONDENT COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE DEFENDANTS IN CIVIL CASE NO. 248-R ARE INDISPENSABLE PARTIES; B. RESPONDENT COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT IN CIVIL CASE NO. 248-R THERE IS A COMMON CAUSE OF ACTION AGAINST THE DEFENDANTS THEREIN;

C. RESPONDENT COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT IN CIVIL CASE NO. 248-R THE RULING OF THIS HONORABLE COURT IN LIM TAN HU VS. RAMOLETEIS APPLICABLE; D. RESPONDENT COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE DOCTRINE OF ESTOPPEL AND LACHES ON MATTERS OF JURISDICTION IS NOT APPLICABLE IN CIVIL CASE NO. 248-R. There is merit to the petition,. In the case of Lim Tanhu v. Ramolete, 66 SCRA 425, 458-459 (1975) this court held that: . . . (I)n all instances where a common cause of action is alleged against several defendants, some of whom answer and the others do not, the latter or those in default acquire a vested right not only to own the defense interposed in the answer of their co-defendant or co-defendants not in default but also to expect a result of the litigation totally common with them in kind and in amount whether favorable or unfavorable. The substantive unity of the plaintiffs cause against all the defendants is carried through to its adjective phase as ineluctably demanded by the homogeneity and indivisibility of justice itself. . . . The integrity of the common cause of action against all the defendants and the indispensability of all of them in the proceedings do not permit any possibility of waiver of the plaintiffs right only as to one or some of them, without including all of them, and so, as a rule, withdrawal must be deemed to be a confession of weakness as to all. . . . . Where all the defendants are indispensable parties, for which reason the absence of any of them in the case would result in the court losing its competency to act validly, any compromise that the plaintiff might wish to make with any of them must, as a matter of correct procedure, have to await until after the rendition of the judgment, at which stage the plaintiff may then treat the matter of its execution and the satisfaction of his claim as variably as he might please. Accordingly, in the case now before Us together with the dismissal of the complaint against the non-defaulted defendants, the court should have ordered also the dismissal thereof as to petitioner (referring to the defaulting defendants in the case). In sum, Lim Tanhu states that where a complaint alleges a common cause of action against defendants who are all indispensable parties to the case, its dismissal against any of them by virtue of a compromise agreement with the plaintiff necessarily results in the dismissal of the case against the other defendants, including those in default. The ruling is rooted on the rationale that the court's power to act in a case involving a common cause of action against indispensable parties "is integral and cannot be split such that it cannot relieve any of them and at the same time render judgment against the rest. 10 For Lim Tanhu to apply to the case at bench, it must be established that: (1) petitioner has common cause of action against private respondents and the other defendants in Civil Case No. 248-R; and (2) all the defendants are indispensable parties to the case. Cause of action has a fixed meaning in this jurisdiction. It is the delict or wrong by which the right of the plaintiff is violated by the defendant. 11 The question as to whether a plaintiff has a cause of action is determined by the averments in the pleadings pertaining to the acts of the defendant. Whether such acts give him a right of action is determined by substantive law. 12

In the case at bench, it is clear that petitioner has different and separate causes of action against the defendants in the case. The allegations in the Complaint show that petitioner seeks to recover from the truck driver for his wrong which caused injury to petitioner and his car. The cause of action against him is based on quasi-delict under Article 2176 of the New Civil Code. Quasi-delict, too, is the basis of the cause of action against defendants beneficial and registered owners. But in their case, it is Article 2180 of the same Code which governs the rights of the parties. However, with respect to defendant Western Guaranty Corporation, petitioner's cause of action is based on contract. He seeks to recover from the insurer on the basis of the third party liability clause of its insurance contract with the owners of the truck. This is acknowledged by the second paragraph of the compromise agreement between petitioner and defendant insurer, thus: 2. In full settlement of its liability under the laws and the said insurance contract, defendant Western Guaranty shall pay plaintiff (herein petitioner) the amount of P70,000.00 upon the signing of this compromise agreement. Quite clearly then, Lim Tanhu will not apply to the case at bench for there is no showing that petitioner has a common cause of action against the defendants in Civil Case No. 248-R. But this is not all. Defendants in Civil Case No. 248-R are not all indispensable parties. An indispensable party is one whose interest will be affected by the court's action in the litigation, and without whom no final determination of the case can be had. The party's interest in the subject matter of the suit and in the relief sought are so inextricably intertwined with the other parties' that his legal presence as a party to the proceeding is an absolute necessity. 13 In his absence there cannot be a resolution of the dispute of the parties before the court which is effective, complete, or equitable. 14 Conversely, a party is not indispensable to the suit if his interest in the controversy or subject matter is distinct and divisible from the interest of the other parties and will not necessarily be prejudiced by a judgment which does complete justice to the parties in court. 15 He is not indispensable if his presence would merely permit complete relief between him and those already parties to the action, or will simply avoid multiple litigation. 16 It is true that all of petitioner's claims in Civil Case No. 248-R is premised on the wrong committed by defendant truck driver. Concededly, the truck driver is an indispensable party to the suit. The other defendants, however, cannot be categorized as indispensable parties. They are merely proper parties to the case. Proper parties have been described as parties whose presence is necessary in order to adjudicate the whole controversy, but whose interests are so far separable that a final decree can be made in their absence without affecting them. 17 It is easy to see that if any of them had not been impleaded as defendant, the case would still proceed without prejudicing the party not impleaded. Thus, if petitioner did not sue Western Guaranty Corporation, the omission would not cause the dismissal of the suit against the other defendants. Even without the insurer, the trial court would not lose its competency to act completely and validly on the damage suit. The insurer, clearly, is not an indispensable party in Civil Case No. 248-R. IN VIEW WHEREOF, the instant petition is GRANTED. The Decision, dated July 10, 1992, of the Court of Appeals in CA-G.R. SP No. 17651 is REVERSED AND SET ASIDE. The Complaint in Civil Case No. 248-R is REINSTATED and REMANDED to the trial court for further proceedings. No costs. SO ORDERED. Narvasa C.J., Regalado and Mendoza, JJ., concur.
#Footnotes

1 The case was raffled off to Branch 5 of the trial court, presided by Judge Salvador J. Valdez, Jr. 2 Civil Case No. 248-R. 3 Petition, Annex "B" (Complaint, Civil Case No. 248-R), pp. 13-14; Rollo, pp. 48-49. 4 Petition, Annex "A" (Decision of the Court of Appeals in CA-G.R. SP No. 17651), pp. 1-2;Rollo, pp. 31-32. 5 Petition, Annex "C," Rollo, p. 51. 6 Petition, Annex "E", Rollo, p. 54. 7 Petition, Annex "A", p. 4; Rollo, p. 35. 8 Composed of Associate Justices Emeterio C. Cui (ponente and chairman), Nicolas P. Lapea, Jr. and Justo P. Torres, Jr. 10 Ibid. 11 Racoma v. Fortich, 39 SCRA 520 (1971). 12 Espaol v. Chairman, Philippine Veterans Administration (1985). 13 See Co v. Intermediate Appellate Court, 162 SCRA 390 (1988). See also Tam Chun Suy v. Court of Appeals, 212 SCRA 713 (1992); Quisumbing v. Court of Appeals, 189 SCRA 325 (1990); Alberto v. Mananghala, 89 Phil. 188 (1951). 14 67A C.J.S. Parties, Sec. 4, citing Insurance Co. of North America v. Allied Crude Vegetable Oil Refining Corp., 215 A. 2d 579; Brown v. Lavine, 358 N.Y.S. 2d 579; Writers Guild of America, West, Inc. v. Screen Gems, Inc., 250 C.A. 2d 596; Hall v. Wood, 174 N.Y.S. 2d 16; Layne v. Huffman, 333 N.E. 2d 147; and Morrison Homes Corp. v. City of Pleasanton, 58 C.A. 3d 724. 15 Ibid., citing Peterson v. Sucro, 93 F. 2d 878; and Colman v. Shimer, 163 F. Supp. 347. 16 Id., citing Petroleum Anchor Equipment, Inc. v. Tyra, 406 S.W. 2d 891; and Layne v. Huffman, op. cit. 17 FLORENZ D. REGALADO, Remedial Law Compendium (1988), p. 57, citing Wyoga Gas & Oil Corp. v. Schrack, 1 Fed. Rules Service 292.

G.R. No. L-14617 December 9, 1920 R. Y. HANLON, plaintiff-appellee, vs. JOHN W. HAUSSERMANN and A. W. BEAM, defendants-appellants. GEORGE C. SELLNER, intervener.1 Cohn and Fisher for appellants Thomas D. Aitken and Gibbs, McDonough & Johnson for appellee.

STREET, J.: We take occasion, from the presentation of a motion to rehear, to add a few words to an opinion already perhaps unduly extended. Directing attention again to the interpretation of clause (d) of paragraph II of the profit sharing agreement, which is the central feature of the case, we note that the proponents of the motion reiterate their contention to the effect that the discharge contemplated in that clause is merely a discharge of the guaranty, so-called, to raise the capital which Sellner on the one part, and Haussermann and Beam on the other, had respectively agreed to raise on or before May 6, 1914; and that the discharge of Haussermann and Beam from this obligation left intact the broad obligation, expressed in paragraph I of the same contract, to do all in their power to promote the Hanlon project. Upon this point counsel say that not only the language but the punctuation of clause (d) shows conclusively that the antecedent of the word "obligation," twice employed therein, is the guaranty, or promise, to obtain the subscriptions within the period stated. This may possibly be true, but the statement is apparently barren of significance; for when the contract is carefully examined, it will be found that his promise (guaranty?) expresses exactly the principal thing that these parties had agreed to do towards realizing the projects. To be more specific: In one of the introductory clauses of the contract it is recited that the parties have agreed to cooperate and assist Hanlon in the flotation of the project for the rehabilitation of the Benguet Consolidated Mining Company; in paragraph I it is stipulated that each shall do all in his power to float said project and make the same a success; and in paragraph II it is agreed that said project shall be floated by the raising of capital in a certain manner and within a certain time. In other words, that which in the beginning is expressed in general terms as an undertaking to cooperate is finally reduced by a process of definition to the precise obligation indicated in the mutual promises of Sellner, Haussermann, and Beam, to raise the necessary capital within the period of six months. Of course nobody will be misled, by the use of the very guarantee in clause (d), into supposing that the obligation there created is of a distinct type, different from that created by any ordinary and direct promise. In its ordinary significance the word "guarantee" implies the creation of a collateral obligation, but here it is evidently used for emphasis simply in the sense of promise. What has been said shows the impossibility of separating the duty of the three associates abovementioned to assist in the promotion of the Hanlon project from the more specific duty to raise the necessary capital in the particular manner set forth in clause (d). When the one obligation was discharged the other was necessarily extinguished also.
lawphi1.net

A single observation will be made upon another point, which may be indicated in the following question: What are the conditions under which an attorney in fact is bound to exercise a power in behalf of and for the benefit of his principal? Manifestly, before the attorney in fact can be held liable for the breach of duty towards his principal there must have existed a specific obligation on the part of the attorney in fact to act for the principal. Such obligation is sometimes discoverable from an examination of the power itself, but is more often discoverable by implication in the circumstances surrounding the parties and their special relations with reference to each other and the subjectmatter of the power.

In the present case the specific power of attorney executed by Hanlon in favor of Beam on November 10, 1913, prior to Hanlon's departure for the United States, clearly shows that it was executed in relation with the contract of November 5 and 6, and was to be used in carrying those contracts into effect. Those contracts, however, as we have shown in the principal opinion, failed and became inoperative without fault of the defendants on May 6, 1914; and so far as the record shows, there was no act which could have been done in furtherance of those contracts prior to that date which was neglected by Beam under that power. Burt it will be said that, even conceding that Beam was under no positive duty to act for Hanlon under the power of attorney in the matter of rehabilitating the mine after the sixth of May, nevertheless as he did afterwards in fact proceed in that matter under new and different auspices, he must now be held in equity to have been acting, in cooperation with Haussermann, for the benefit of the old joint enterprise. The difficulty here is and this we consider to be one of the fundamental fallacies underlying the case that the plaintiff is attempting to enforce an equitable obligation inconsistent with the specific contract. It is a well-known rule that no implied obligation, either legal or equitable, is ever created or imposed by law in respect to a matter which has been made the subject of express contract. Likewise, no implied duty can ever spring from the same solid where an express contract has existed and has been discharged. It follows that the discharge of Haussermann and Beam under the express provisions of clause (d), paragraph I, of the profit-sharing agreement, is a fatal obstacle to the creation of any implied duty, legal or equitable, derived from that contract or from the relation of the parties as incident thereto. the rights of the parties must be determined by the contract. And this applied not only with reference to the extent of the contractual obligation but to the conditions under which the obligation was extinguished.
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The motion to rehear is denied. So ordered. Mapa, C.J., Araullo, Malcolm, Avancea and Villamor, JJ., concur. Footnotes 1 See main decision in 40 Phil., 796.

Sancho vs. Lizarraga, 55 Phil. 601, No. 33580, February 06, 1931 G.R. No. L-33580 February 6, 1931 MAXIMILIANO SANCHO, plaintiff-appellant, vs. SEVERIANO LIZARRAGA, defendant-appellee. Jose Perez Cardenas and Jose M. Casal for appellant. Celso B. Jamora and Antonio Gonzalez for appellee. ROMUALDEZ, J.: The plaintiff brought an action for the rescission of a partnership contract between himself and the defendant, entered into on October 15, 1920, the reimbursement by the latter of his 50,000 peso investment therein, with interest at 12 per cent per annum form October 15, 1920, with costs, and any other just and equitable remedy against said defendant. The defendant denies generally and specifically all the allegations of the complaint which are incompatible with his special defenses, cross-complaint and counterclaim, setting up the latter and asking for the dissolution of the partnership, and the payment to him as its manager and administrator of P500 monthly from October 15, 1920, until the final dissolution, with interest, one-half of said amount to be charged to the plaintiff. He also prays for any other just and equitable remedy. The Court of First Instance of Manila, having heard the cause, and finding it duly proved that the defendant had not contributed all the capital he had bound himself to invest, and that the plaintiff had demanded that the defendant liquidate the partnership, declared it dissolved on account of the expiration of the period for which it was constituted, and ordered the defendant, as managing partner, to proceed without delay to liquidate it, submitting to the court the result of the liquidation together with the accounts and vouchers within the period of thirty days from receipt of notice of said judgment, without costs. The plaintiff appealed from said decision making the following assignments of error: 1. In holding that the plaintiff and appellant is not entitled to the rescission of the partnership contract, Exhibit A, and that article 1124 of the Civil Code is not applicable to the present case. 2. In failing to order the defendant to return the sum of P50,000 to the plaintiff with interest from October 15, 1920, until fully paid. 3. In denying the motion for a new trial. In the brief filed by counsel for the appellee, a preliminary question is raised purporting to show that this appeal is premature and therefore will not lie. The point is based on the contention that inasmuch as the liquidation ordered by the trial court, and the consequent accounts, have not been made and submitted, the case cannot be deemed terminated in said court and its ruling is not yet appealable. In support of this contention counsel cites section 123 of the Code of Civil Procedure, and the decision of this court in the case of Natividad vs. Villarica (31 Phil., 172). This contention is well founded. Until the accounts have been rendered as ordered by the trial court, and until they have been either approved or disapproved, the litigation involved in this action cannot be considered as completely decided; and, as it was held in said case of Natividad vs .Villarica, also with reference to an appeal taken from a decision ordering the rendition of accounts following the dissolution of partnership, the appeal in the instant case must be deemed premature. But even going into the merits of the case, the affirmation of the judgment appealed from is inevitable. In view of the lower court's findings referred to above, which we cannot revise because the parol evidence has not been forwarded to this court, articles 1681 and 1682 of the Civil Code have been properly applied. Owing to the defendant's failure to pay to the partnership the whole amount which he bound himself to pay, he became indebted to it for the remainder, with interest and any damages occasioned thereby, but the plaintiff did not thereby acquire the right to demand rescission of the partnership contract according to article 1124 of the Code. This article cannot be applied to the case in question, because it refers to the resolution of obligations in general, whereas article 1681 and 1682 specifically refer to the contract of partnership in particular. And it is a well known principle that special provisions prevail over general provisions. By virtue of the foregoing, this appeal is hereby dismissed, leaving the decision appealed from in full force, without special pronouncement of costs. So ordered. Avancea, C.J., Johnson, Street, Malcolm, Villamor, Ostrand, Johns and Villa-Real, JJ., concur

April 27, 1960 G.R. No. L-13680 MAURO LOZANA, plaintiff-appellee, vs. SERAFIN DEPAKAKIBO, defendant-appellant. Antonio T. Lozada for appellee. Agustin T. Misola and Tomas D. Dominado for appellant. Labrador, J.: This is an appeal from a judgment of the Court of First Instance of Iloilo, certified to us by the Court of Appeals, for the reason that only questions of law are involved in said appeal. The record discloses that on November 16, 1954 plaintiff Mauro Lozana entered into a contract with defendant Serafin Depakakibo wherein they established a partnership capitalized at the sum of P30,000, plaintiff furnishing 60% thereof and the defendant, 40%, for the purpose of maintaining, operating and distributing electric light and power in the Municipality of Dumangas, Province of Iloilo, under a franchise issued to Mrs. Piadosa Buenaflor. However, the franchise or certificate of public necessity and convenience in favor of the said Mrs. Piadosa Buenaflor was cancelled and revoked by the Public Service Commission on May 15, 1955. But the decision of the Public Service Commission was appealed to Us on October 21, 1955. A temporary certificate of public convenience was issued in the name of Olimpia D. Decolongon on December 22, 1955 (Exh. B). Evidently because of the cancellation of the franchise in the name of Mrs. Piadosa Buenaflor, plaintiff herein Mauro Lozana sold a generator, Buda (diesel), 75 hp. 30 KVA capacity, Serial No. 479, to the new grantee Olimpia D. Decolongon, by a deed dated October 30, 1955 (Exhibit C). Defendant Serafin Depakakibo, on the other hand, sold one Crossly Diesel Engine, 25 h. p., Serial No. 141758, to the spouses Felix Jimenea and Felina Harder, by a deed dated July 10, 1956. On November 15, 1955, plaintiff Mauro Lozana brought an action against the defendant, alleging that he is the owner of the Generator Buda (Diesel), valued at P8,000 and 70 wooden posts with the wires connecting the generator to the different houses supplied by electric current in the Municipality of Dumangas, and that he is entitled to the possession thereof, but that the defendant has wrongfully detained them as a consequence of which plaintiff suffered damages. Plaintiff prayed that said properties be delivered back to him. Three days after the filing of the complaint, that is on November 18, 1955, Judge Pantaleon A. Pelayo issued an order in said case authorizing the sheriff to take possession of the generator and 70 wooden posts, upon plaintiffs filing of a bond in the amount of P16,000 in favor of the defendant (for subsequent delivery to the plaintiff). On December 5, 1955, defendant filed an answer, denying that the generator and the equipment mentioned in the complaint belong to the plaintiff and alleging that the same had been contributed by the plaintiff to the partnership entered into between them in the same manner that defendant had contributed equipments also, and therefore that he is not unlawfully detaining them. By way of counterclaim, defendant alleged that under the partnership agreement the parties were to contribute equipments, plaintiff contributing the generator and the defendant, the wires for the purpose of installing the main and delivery lines; that the plaintiff sold his contribution to the partnership, in violation of the terms of their agreement. He, therefore, prayed that the complaint against him be dismissed; that plaintiff be

adjudged guilty of violating the partnership contract and be ordered to pay the defendant the sum of P3,000, as actual damages, P600.00 as attorneys fees and P2,600 annually as actual damages; that the court order dissolution of the partnership, after the accounting and liquidation of the same. On September 27, 1956, the defendant filed a motion to declare plaintiff in default on his counterclaim, but this was denied by the court. Hearings on the case were conducted on October 25, 1956 and November 5, 1956, and on the latter date the judge entered a decision declaring plaintiff owner of the equipment and entitled to the possession thereof, with costs against defendant. It is against this judgment that the defendant has appealed. The above judgment of the court was rendered on a stipulation of facts, which is as follows: 1. That on November 16, 1954, in the City of Iloilo, the aforementioned plaintiff, and the defendant entered into a contract of Partnership, a copy of which is attached as Annex A of defendants answer and counterclaim, for the purpose set forth therein and under the national franchise granted to Mrs. Piadosa Buenaflor; 2. That according to the aforementioned Partnership Contract, the plaintiff Mr. Mauro Lozana, contributed the amount of Eighteen Thousand Pesos (P18,000.00); said contributions of both parties being the appraised values of their respective properties brought into the partnership; 3. That the said Certificate of Public Convenience and Necessity was revoked and cancelled by order of the Public Service Commission dated March 15, 1955, promulgated in case No. 58188, entitled, Piadosa Buenaflor, applicant, which order has been appealed to the Supreme Court by Mrs. Buenaflor; 4. That on October 30, 1955, the plaintiff sold properties brought into by him to the said partnership in favor of Olimpia Decolongon in the amount of P10,000.00 as per Deed of Sale dated October 30, 1955 executed and ratified before Notary Public, Delfin Demaisip, in and for the Municipality of Dumangas, Iloilo and entered in his Notarial Registry as Doc. No. 832; Page No. 6; Book No. XIII; and Series of 1955, a copy thereof is made as Annex B of defendants answer and counterclaim; 5. That there was no liquidation of partnership and that at the time of said Sale on October 30, 1955, defendant was the manager thereof; 6. That by virtue of the Order of this Honorable Court dated November 18, 1955, those properties sold were taken by the Provincial Sheriff on November 20, 1955 and delivered to the plaintiff on November 25, 1955 upon the latter posting the required bond executed by himself and the Luzon Surety Co., dated November 17, 1955 and ratified before the Notary Public, Eleuterio del Rosario in and for the province of Iloilo known as Doc. No. 200; Page 90; Book No. VII; and Series of 1955; of said Notary Public; 7. That the said properties sold are now in the possession of Olimpia Decolongon, the purchaser, who is presently operating an electric light plant in Dumangas, Iloilo; 8. That the defendant sold certain properties in favor of the spouses, Felix Jimenea and Felisa Harder contributed by him to the partnership for P3,500.00 as per Deed of Sale executed and ratified before

the Notary Public Rodrigo J. Harder in and for the Province of Iloilo, known as Doc. No. 76; Page 94; Book No. V; and Series of 1955, a certified copy of which is hereto attached marked as Annex A, and made an integral part hereof; (pp, 27-29 ROA). As it appears from the above stipulation of facts that the plaintiff and the defendant entered into the contract of partnership, plaintiff contributing the amount of P18,000, and as it is not stated therein that there bas been a liquidation of the partnership assets at the time plaintiff sold the Buda Diesel Engine on October 15, 1955, and since the court below had found that the plaintiff had actually contributed one engine and 70 posts to the partnership, it necessarily follows that the Buda diesel engine contributed by the plaintiff had become the property of the partnership. As properties of the partnership, the same could not be disposed of by the party contributing the same without the consent or approval of the partnership or of the other partner. (Clemente vs. Galvan, 67 Phil. 565). The lower court declared that the contract of partnership was null and void, because by the contract of partnership, the parties thereto have become dummies of the owner of the franchise. The reason for this holding was the admission by defendant when being cross-examined by the court that he and the plaintiff are dummies. We find that this admission by the defendant is an error of law, not a statement of a fact. The Anti-Dummy law has not been violated as parties plaintiff and defendant are not aliens but Filipinos. The Anti-Dummy law refers to aliens only (Commonwealth Act 108 as amended). Upon examining the contract of partnership, especially the provision thereon wherein the parties agreed to maintain, operate and distribute electric light and power under the franchise belonging to Mrs. Buenaflor, we do not find the agreement to be illegal, or contrary to law and public policy such as to make the contract of partnership, null and void ab initio. The agreement could have been submitted to the Public Service Commission if the rules of the latter require them to be so presented. But the fact of furnishing the current to the holder of the franchise alone, without the previous approval of the Public Service Commission, does not per se make the contract of partnership null and void from the beginning and render the partnership entered into by the parties for the purpose also void and nonexistent. Under the circumstances, therefore, the court erred in declaring that the contract was illegal from the beginning and that parties to the partnership are not bound therefor, such that the contribution of the plaintiff to the partnership did not pass to it as its property. It also follows that the claim of the defendant in his counterclaim that the partnership be dissolved and its assets liquidated is the proper remedy, not for each contributing partner to claim back what he had contributed. For the foregoing considerations, the judgment appealed from as well as the order of the court for the taking of the property into custody by the sheriff must be, as they hereby are set aside and the case remanded to the court below for further proceedings in accordance with law. Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Concepcion, Endencia, Barrera and Gutierrez David, JJ., concur.

G.R. No. 144256

June 8, 2005

ALTERNATIVE CENTER FOR ORGANIZATIONAL REFORMS AND DEVELOPMENT, INC. (ACORD), BALAY MINDANAW FOUNDATION, INC. (BMFI); BARRIOS, INC.; CAMARINES SUR NGO-PO DEVELOPMENT NETWORK, INC. (CADENET); CENTER FOR PARTICIPATORY GOVERNANCE (CPAG); ENVIRONMENTAL LEGAL ASSISTANCE CENTER, INC. (ELAC); FELLOWSHIP FOR ORGANIZING ENDEAVORS (FORGE); FOUNDATION FOR LOCAL AUTONOMY AND GOOD GOVERNNANCE, INC. (FLAGG); INSTITUTE OF POLITICS AND GOVERNANCE (IPG); KAISAHAN PARA SA KAUNLARAN NG KANAYUNAN AT REPORMANG PANSAKAHAN (KAISAHAN); MANGGAGAGAWANG KABABAIHANG MITHI AY PAGLAYA (MAKALAYA); NAGA CITY PEOPLE'S COUNCIL (NCPC); NGO-PO COUNCIL OF CAMARINES SUR FOR COMMUNITY PARTICIPATION AND EMPOWERMENT, INC. (NPCCS); PAILIG DEVELOPMENT FOUNDATION INC. (PDFI); PHILIPPINE ECUMENICAL ACTION FOR COMMUNITY EMPOWERMENT FOUNDATION, INC. (PEACE FOUNDATION, INC.); PHILIPPINE PARTNERSHIP FOR THE DEVELOPMENT OF HUMAN RESOURCES IN RURAL AREAS (PHILDHRRA); PILIPINA, INC. (ANG KILUSAN NG KABABAIHANG PILIPINO); SENTRO NG ALTERNATIBONG LINGAP PANLIGAL (SALIGAN); URBAN LAND REFORM TASK FORCE (ULR-TF); ADELINO C. LAVADOR; PUNONG BARANGAY ISABEL MENDEZ; PUNONG BARANGAY CAROLINA ROMANOS,petitioners, vs. HON. RONALDO ZAMORA, in his capacity as Executive Secretary, HON. BENJAMIN DIOKNO, in his capacity as Secretary, Department of Budget and Management, HON. LEONOR MAGTOLIS-BRIONES, in her capacity as National Treasurer, and the COMMISSION ON AUDIT, respondents. DECISION CARPIO MORALES, J.: Pursuant to Section 22, Article VII of the Constitution1 mandating the President to submit to Congress a budget of expenditures within thirty days before the opening of every regular session, then President Joseph Ejercito Estrada submitted the National Expenditures Program for Fiscal Year 2000. In the said Program, the President proposed an Internal Revenue Allotment (IRA) in the amount of P121,778,000,000 following the formula provided for in Section 284 of the Local Government Code of 1992, viz: SECTION 284. Allotment of Internal Revenue Taxes. - Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows: (a) On the first year of the effectivity of this Code, thirty percent (30%); (b) On the second year, thirty-five percent (35%); and (c) On the third year and thereafter, forty percent (40%). x x x (Emphasis supplied) On February 16, 2000, the President approved House Bill No. 8374 - a bill sponsored in the Senate by then Senator John H. Osmea who was the Chairman of the Committee on Finance. This bill became Republic Act No. 8760, "AN ACT APPROPRIATING FUNDS FOR THE OPERATION OF THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES FROM JANUARY ONE TO DECEMBER THIRTY-ONE, TWO THOUSAND, AND FOR OTHER PURPOSES". The act, otherwise known as the General Appropriations Act (GAA) for the Year 2000, provides under the heading "ALLOCATIONS TO LOCAL GOVERNMENT UNITS" that the IRA for local government units shall amount toP111,778,000,000:
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XXXVII. ALLOCATIONS TO LOCAL GOVERNMENT UNITS A. INTERNAL REVENUE ALLOTMENT

For apportionment of the shares of local government units in the internal revenue taxes in accordance with the purpose indicated hereunder ... P111,778,000,000 New Appropriations, by Purpose Current Operating Expenditures Maintenance and Other A. PURPOSE(S) a. Internal Revenue Allotment xxx TOTAL NEW APPROPRIATIONS P111,778,000,000 P111,778,000,000 P111,778,000,000 Personal Services Operating Expenses Capital Total Outlays

In another part of the GAA, under the heading "UNPROGRAMMED FUND," it is provided that an amount ofP10,000,000,000 (P10 Billion), apart from the P111,778,000,000 mentioned above, shall be used to fund the IRA, which amount shall be released only when the original revenue targets submitted by the President to Congress can be realized based on a quarterly assessment to be conducted by certain committees which the GAA specifies, namely, the Development Budget Coordinating Committee, the Committee on Finance of the Senate, and the Committee on Appropriations of the House of Representatives. LIV. UNPROGRAMMED FUND For fund requirements in accordance with the purposes indicated hereunder P48,681,831,000 A. PURPOSE(S) xxxx 6. Additional Operational Requirements and Projects of Agencies

P14,788,764,000 xxxx

Special Provisions 1. Release of the Fund. The amounts herein appropriated shall be released only when the revenue collections exceed the original revenue targets submitted by the President of the Philippines to Congress pursuant to Section 22, Article VII of the Constitution or when the corresponding funding or receipts for the purpose have been realized except in the special cases covered by specific procedures in Special Provision Nos. 2, 3, 4, 5, 7, 8, 9, 13 and 14 herein: PROVIDED, That in cases of foreign-assisted projects, the existence of a perfected loan agreement shall be sufficient compliance for the issuance of a Special Allotment Release Order covering the loan proceeds: PROVIDED, FURTHER, That no amount of the Unprogrammed Fund shall be funded out of the savings generated from programmed items in this Act. xxxx

4. Additional Operational Requirements and Projects of Agencies. The appropriations for Purpose 6 - Additional Operational Requirements and Projects of Agencies herein indicated shall be released only when the original revenue targets submitted by the President of the Philippines to Congress pursuant to Section 22, Article VII of the Constitution can be realized based on a quarterly assessment of the Development Budget Coordinating Committee, the Committee on Finance of the Senate and the Committee on Appropriations of the House of Representatives and shall be used to fund the following: xxxx Internal Revenue Allotments Maintenance and Other Operating Expenses P10,000,000,000 total IRA -------------------P10,000,000,000 xxxx Total P14,788,764,000 x x x x (Emphasis supplied) Thus, while the GAA appropriates P111,778,000,000 of IRA as Programmed Fund, it appropriates a separate amount of P10 Billion of IRA under the classification of Unprogrammed Fund, the latter amount to be released only upon the occurrence of the condition stated in the GAA. On August 22, 2000, a number of non-governmental organizations (NGOs) and people's organizations, along with three barangay officials filed with this Court the petition at bar, for Certiorari, Prohibition and Mandamus With Application for Temporary Restraining Order, against respondents then Executive Secretary Ronaldo Zamora, then Secretary of the Department of Budget and Management Benjamin Diokno, then National Treasurer Leonor Magtolis-Briones, and the Commission on Audit, challenging the constitutionality of abovequoted provision of XXXVII (ALLOCATIONS TO LOCAL GOVERNMENT UNITS) referred to by petitioners as Section 1, XXXVII (A), and LIV (UNPROGRAMMED FUND) Special Provisions 1 and 4 of the GAA (the GAA provisions). Petitioners contend that: 1. SECTION 1, XXXVII (A) AND LIV, SPECIAL PROVISIONS 1 AND 4, OF THE YEAR 2000 GAA ARE NULL AND VOID FOR BEING UNCONSTITUTIONAL AS THEY VIOLATE THE AUTONOMY OF LOCAL GOVERNMENTS BY UNLAWFULLY REDUCING BY TEN BILLION PESOS (P10 BILLION) THE INTERNAL REVENUE ALLOTMENTS DUE TO THE LOCAL GOVERNMENTS AND WITHHOLDING THE RELEASE OF SUCH AMOUNT BY PLACING THE SAME UNDER "UNPROGRAMMED FUNDS." THIS VIOLATES THE CONSTITUTIONAL MANDATE IN ART. X, SEC. 6, THAT THE LOCAL GOVERNMENT UNITS' JUST SHARE IN THE NATIONAL TAXES SHALL BE AUTOMATICALLY RELEASED TO THEM. IT ALSO VIOLATES THE LOCAL GOVERNMENT CODE, SPECIFICALLY, SECS. 18, 284, AND 286. 2. SECTION 1, XXXVII (A) AND LIV, SPECIAL PROVISIONS 1 AND 4, OF THE YEAR 2000 GAA ARE NULL AND VOID FOR BEING UNCONSTITUTIONAL AS THEY VIOLATE THE AUTONOMY OF LOCAL GOVERNMENTS BY PLACING TEN BILLION PESOS (P10 BILLION) OF THE INTERNAL REVENUE ALLOTMENTS DUE TO THE LOCAL GOVERNMENTS, EFFECTIVELY AND PRACTICALLY, WITHIN THE CONTROL OF THE CENTRAL AUTHORITIES. 3. SECTION 1, XXXVII (A) AND LIV, SPECIAL PROVISIONS 1 AND 4, OF THE YEAR 2000 GAA ARE NULL AND VOID FOR BEING UNCONSTITUTIONAL AS THE PLACING OF P10 BILLION PESOS OF THE IRA UNDER "UNPROGRAMMED FUNDS" CONSTITUTES AN UNDUE DELEGATION OF LEGISLATIVE POWER TO THE RESPONDENTS.

4. SECTION 1, XXXVII (A) AND LIV, SPECIAL PROVISIONS 1 AND 4, OF THE YEAR 2000 GAA ARE NULL AND VOID FOR BEING UNCONSTITUTIONAL AS THE PLACING OF P10 BILLION PESOS OF THE IRA UNDER "UNPROGRAMMED FUNDS" CONSTITUTES AN AMENDMENT OF THE LOCAL GOVERNMENT CODE OF 1991, WHICH CANNOT BE DONE IN A GENERAL APPROPRIATIONS ACT AND WHICH PURPOSE WAS NOT REFLECTED IN THE TITLE OF THE YEAR 2000 GAA. 5. THE YEAR 2000 GAA'S REDUCTION OF THE IRA UNDERMINES THE FOUNDATION OF OUR LOCAL GOVERNANCE SYSTEM WHICH IS ESSENTIAL TO THE EFFICIENT OPERATION OF THE GOVERNMENT AND THE DEVELOPMENT OF THE NATION. 6. THE CONGRESS AND THE EXECUTIVE, IN PASSING AND APPROVING, RESPECTIVELY, THE YEAR 2000 GAA, AND THE RESPONDENTS, IN IMPLEMENTING THE SAID YEAR 2000 GAA, INSOFAR AS SECTION 1, XXXVII (A) AND LIV, SPECIAL PROVISIONS 1 AND 4, ARE CONCERNED, ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION AS THEY TRANSGRESSED THE CONSTITUTION AND THE LOCAL GOVERNMENT CODE'S PROHIBITION ON ANY INVALID REDUCTION AND WITHHOLDING OF THE LOCAL GOVERNMENTS' IRA. (Underscoring supplied) After the parties had filed their respective memoranda, a "MOTION FOR INTERVENTION/MOTION TO ADMIT ATTACHED PETITION FOR INTERVENTION" was filed on October 22, 2001 by the Province of Batangas, represented by then Governor Hermilando I. Mandanas. On November 6, 2001, the Province of Nueva Ecija, represented by Governor Tomas N. Joson III, likewise filed a "MOTION FOR LEAVE OF COURT TO INTERVENE AND FILE PETITION-IN-INTERVENTION". The motions for intervention, both of which adopted the arguments of the main petition,2 were granted by this Court.3 Although the effectivity of the Year 2000 GAA has ceased, this Court shall nonetheless proceed to resolve the issues raised in the present case, it being impressed with public interest. The ruling of this Court in the case ofThe Province of Batangas v. Romulo,4 wherein GAA provisions relating to the IRA were likewise challenged, is in point, to wit: Granting arguendo that, as contended by the respondents, the resolution of the case had already been overtaken by supervening events as the IRA, including the LGSEF, for 1999, 2000 and 2001, had already been released and the government is now operating under a new appropriations law, still, there is compelling reason for this Court to resolve the substantive issue raised by the instant petition. Supervening events, whether intended or accidental, cannot prevent the Court from rendering a decision if there is a grave violation of the Constitution. Even in cases where supervening events had made the cases moot, the Court did not hesitate to resolve the legal or constitutional issues raised to formulate controlling principles to guide the bench, bar and public. Another reason justifying the resolution by this Court of the substantive issue now before it is the rule that courts will decide a question otherwise moot and academic if it is "capable of repetition, yet evading review." For the GAAs in the coming years may contain provisos similar to those now being sought to be invalidated, and yet, the question may not be decided before another GAA is enacted. It, thus, behooves this Court to make a categorical ruling on the substantive issue now.5 Passing on the arguments of all parties, bearing in mind the dictum that "the court should not form a rule of constitutional law broader than is required by the precise facts to which it is applied,"6 this Court finds that only the following issues need to be resolved in the present petition: (1) whether the petition contains proper verifications and certifications against forum-shopping, (2) whether petitioners have the requisite standing to file this suit, and (3) whether the questioned provisions violate the constitutional injunction that the just share of local governments in the national taxes or the IRA shall be automatically released. Sufficiency of Verification and Certification Against Forum-Shopping Respondents assail as improperly executed petitioners' verifications and certifications against forum-shopping as they merely state that the allegations of the Petition are "true of our knowledge and belief" instead of "true

and correct of our personal knowledge or based on authentic records" as required under Rule 7, Section 4 of the Rules of Court.7 Jurisprudence is on petitioners' side. In Decano v. Edu,8 this Court held: Respondents finally raise a technical point referring to the allegedly defective verification of the petition filed in the trial court, contending that the clause in the verification statement "that I have read the contents of the said petition; and that [to] the best of my knowledge are true and correct" is insufficient since under section 6 of Rule 7, it is required that the person verifying must have read the pleading and that the allegations thereof are true of his own knowledge. We do not see any reason for rendering the said verification void. The statement "to the best of my knowledge are true and correct" referring to the allegations in the petition does not mean mere "knowledge, information and belief." It constitutes substantial compliance with the requirement of section 6 of Rule 7, as held in Madrigal vs. Rodas (80 Phil. 252.). At any rate, this petty technicality deserves scant consideration where the question at issue is one purely of law and there is no need of delving into the veracity of the allegations in the petition, which are not disputed at all by respondents. As we have held time and again, imperfections of form and technicalities of procedure are to be disregarded except where substantial rights would otherwise be prejudiced. (Emphasis and underscoring supplied) Respondents go on to claim that the same verifications were signed by persons who were not authorized by the incorporated cause-oriented groups which they claim to represent, hence, the Petition should be treated as an unsigned pleading. Indeed, only duly authorized natural persons may execute verifications in behalf of juridical entities such as petitioners NGOs and people's organizations. As this Court held in Santos v. CA, "In fact, physical actions, e.g., signing and delivery of documents, may be performed on behalf of the corporate entity only by specifically authorized individuals."9 Nonetheless, the present petition cannot be treated as an unsigned pleading. For even if the rule that representatives of corporate entities must present the requisite authorization were to be strictly applied, there would remain among the multi-group-petitioners the individuals who validly executed verifications in their own names, namely, petitioners Adelino C. Lavador, Punong Barangay Isabel Mendez, and Punong Barangay Carolina Romanos. At all events, in light of the following ruling of this Court in Shipside Inc. v. CA:10 . . . in Loyola, Roadway, and Uy, the Court excused non-compliance with the requirement as to the certificate of non-forum shopping. With more reason should we allow the instant petition since petitioner herein did submit a certification on non-forum shopping, failing only to show proof that the signatory was authorized to do so. Thatpetitioner subsequently submitted a secretary's certificate attesting that Balbin was authorized to file an action on behalf of petitioner likewise mitigates this oversight. It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory, nonetheless the requirements must not be interpreted too literally and thus defeat the objective of preventing the undesirable practice of forum-shopping (Bernardo v. NLRC, 255 SCRA 108 [1996]). Lastly, technical rules of procedure should be used to promote, not frustrate justice. While the swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal. (Underscoring supplied), a too literal interpretation must be avoided if it defeats the objective of preventing the practice of forum shopping. Standing Respondents assail petitioners' standing in this controversy, proffering that it is the local government units each having a separate juridical entity - which stand to be injured. The subsequent intervention of the provinces of Batangas and Nueva Ecija which have adopted the arguments of petitioners has, however, made the question of standing academic.11

Respondents, contending that petitioners have no cause of action against them as they claim to have no responsibility with respect to the mandate of the GAA provisions, proffer that the committees mentioned in the GAA provisions, namely, the Development Budget Coordinating Committee, Committee on Finance of the Senate, and Committee on Appropriations of the House of Representatives, should instead have been impleaded. Respondents' position does not lie. The GAA provisions being challenged were not to be implemented solely by the committees specifically mentioned therein, for they being in the nature of appropriations provisions, they were also to be implemented by the executive branch, particularly the Department of Budget and Management (DBM) and the National Treasurer. The task of the committees related merely to the conduct of the quarterly assessment required in the provisions, and not in the actual release of the IRA which is the duty of the executive. Since the present controversy centers on the proper manner of releasing the IRA, the impleaded respondents are the proper parties to this suit. In fact in earlier petitions likewise involving the constitutionality of provisions of previous general appropriations acts which this Court granted, the therein respondent officials were the same as those in the present case, e.g.,Guingona v. Carague12 and PHILCONSA v. Enriquez.13 Constitutionality of the GAA Provisions Article X, Section 6 of the Constitution provides: SECTION 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. Petitioners argue that the GAA violated this constitutional mandate when it made the release of IRA contingent on whether revenue collections could meet the revenue targets originally submitted by the President, rather than making the release automatic. Respondents counterargue that the above constitutional provision is addressed not to the legislature but to the executive, hence, the same does not prevent the legislature from imposing conditions upon the release of the IRA. They cite the exchange between Commissioner (now Chief Justice) Davide and Commissioner Nolledo in the deliberations of the Constitutional Commission on the above-quoted Sec. 6, Art. X of the Constitution, to wit: THE PRESIDENT. How about the second sentence? MR. DAVIDE. The second sentence would be a new section that would be Section 13. As modified it will read as follows: "LOCAL GOVERNMENT UNITS SHALL HAVE A JUST SHARE, AS DETERMINED BY LAW, in the national taxes WHICH SHALL BE automatically PERIODICALLY released to them." MR. NOLLEDO. That will be Section 12, subsection (1) in the amendment. MR. DAVIDE. No, we will just delete that because the second would be another section so Section 12 would only be this: "LOCAL GOVERNMENT UNITS SHALL HAVE A JUST SHARE, AS DETERMINED BY LAW, in the national taxes WHICH SHALL BE automatically PERIODICALLY released to them." MR. NOLLEDO. But the word "PERIODICALLY" may mean possibly withholding the automatic release to them by adopting certain periods of automatic release. If we use the word "automatically" without "PERIODICALLY," the latter may be already contemplated by "automatically." So, the Committee objects to the word "PERIODICALLY." MR. DAVIDE. If we do not say PERIODICALLY, it might be very, very difficult to comply with it because these are taxes collected and actually released by the national government every quarter. It is not that upon collection a portion should immediately be released. It is quarterly. Otherwise, the national government will have to remit everyday and that would be very expensive.

MR. NOLLEDO. That is not hindered by the word "automatically." But if we put "automatically" and "PERIODICALLY" at the same time, that means certain periods have to be observed as will be set forth by theBudget Officer thereby negating the meaning of "automatically." MR. DAVIDE. On the other hand, if we do not state PERIODICALLY, it may be done every semester; it may be done at the end of the year. It is still automatic release. MR. NOLLEDO. As far as the Committee is concerned, we vigorously object to the word "PERIODICALLY." MR. DAVIDE. Only the word PERIODICALLY? MR. NOLLEDO. If the Commissioner is amenable to deleting that, we will accept the amendment. MR. DAVIDE. I will agree to the deletion of the word PERIODICALLY. MR. NOLLEDO. Thank you. The Committee accepts the amendment. (Emphasis supplied)14 In the above exchange of statements, it is clear that although Commissioners Davide and Nolledo held different views with regard to the proper wording of the constitutional provision, they shared a common assumption that the entity which would execute the automatic release of internal revenue was the executive department. Commissioner Davide referred to the national government as the entity that collects and remits internal revenue. Similarly, Commissioner Nolledo alluded to the Budget Officer, who is clearly under the executive branch. Respondents thus infer that the subject constitutional provision merely prevents the executive branch of the government from "unilaterally" withholding the IRA, but not the legislature from authorizing the executive branch to withhold the same. In the words of respondents, "This essentially means that the President or any member of the Executive Department cannot unilaterally, i.e., without the backing of statute, withhold the release of the IRA."15 Respondents' position does not lie. As the Constitution lays upon the executive the duty to automatically release the just share of local governments in the national taxes, so it enjoins the legislature not to pass laws that might prevent the executive from performing this duty. To hold that the executive branch may disregard constitutional provisions which define its duties, provided it has the backing of statute, is virtually to make the Constitution amendable by statute - a proposition which is patently absurd. Moreover, there is merit in the argument of the intervenor Province of Batangas that, if indeed the framers intended to allow the enactment of statutes making the release of IRA conditional instead of automatic, then Article X, Section 6 of the Constitution would have been worded differently. Instead of reading "Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them" (italics supplied), it would have read as follows, so the Province of Batangas posits: "Local government units shall have a just share, as determined by law, in the national taxes which shall be [automatically] released to them as provided by law," or, "Local government units shall have a just share in the national taxes which shall be [automatically] released to them as provided by law," or "Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them subject to exceptions Congress may provide."16 (Italics supplied)

Since, under Article X, Section 6 of the Constitution, only the just share of local governments is qualified by the words "as determined by law," and not the release thereof, the plain implication is that Congress is not authorized by the Constitution to hinder or impede the automatic release of the IRA. Indeed, that Article X, Section 6 of the Constitution did bind the legislative just as much as the executive branch was presumed in the ruling of this Court in the case of The Province of Batangas v. Romulo17 which is analogous in many respects to the one at bar. In Batangas, the petitioner therein challenged the constitutionality of certain provisos of the GAAs for FY 1999, 2000, and 2001 which set up the Local Government Service Equalization Fund (LGSEF). The LGSEF was a portion of the IRA which was to be released only upon a finding of the Oversight Committee on Devolution that the LGU concerned had complied with the guidelines issued by said committee. This Court measured the challenged legislative acts against Article X, Section 6 and declared them unconstitutional - a ruling which presupposes that the legislature, like the executive, is mandated by said constitutional provision to ensure that the just share of local governments in the national taxes are automatically released. Respondents, in further support of their claim that the automatic release requirement in the Constitution constrains only the executive branch and not the legislature, cite three statutory provisions whereby the legislature authorized the executive branch to withhold the IRA in certain circumstances, namely, Section 70 of the Philippine National Police Reform and Reorganization Act of 1998,18 Section 531(e) of the Local Government Code,19 and Section 10 of Republic Act 7924 (1995).20 Towards the same end, respondents also cite Rule XXXII, Article 383(c) of the Rules and Regulations Implementing the Local Government Code. 21 While statutes and implementing rules are entitled to great weight in constitutional construction as indicators of contemporaneous interpretation, such interpretation is not necessarily binding or conclusive on the courts. InTaada v. Cuenco, the Court held: As a consequence, "where the meaning of a constitutional provision is clear, a contemporaneous or practical . . . executive interpretation thereof is entitled to no weight and will not be allowed to distort or in any way change its natural meaning." The reason is that "the application of the doctrine of contemporaneous construction is more restricted as applied to the interpretation of constitutional provisions than when applied to statutory provisions," and that "except as to matters committed by the constitution itself to the discretion of some other department, contemporaneous or practical construction is not necessarily binding upon the courts, even in a doubtful case." Hence, "if in the judgment of the court, such construction is erroneous and its further application is not made imperative by any paramount considerations of public policy, it may be rejected." (Emphasis and underscoring supplied, citations omitted)22 The validity of the legislative acts assailed in the present case should, therefore, be assessed in light of Article X, Section 6 of the Constitution. Again, in Batangas,23 this Court interpreted the subject constitutional provision as follows: When parsed, it would be readily seen that this provision mandates that (1) the LGUs shall have a "just share" in the national taxes; (2) the "just share" shall be determined by law; and (3) the "just share" shall be automatically released to the LGUs. xxx Webster's Third New International Dictionary defines "automatic" as "involuntary either wholly or to a major extent so that any activity of the will is largely negligible; of a reflex nature; without volition; mechanical; like or suggestive of an automaton." Further, the word "automatically" is defined as "in an automatic manner: without thought or conscious intention." Being "automatic," thus, connotes something mechanical, spontaneous and perfunctory. x x x" (Emphasis and underscoring supplied)24 Further on, the Court held: To the Court's mind, the entire process involving the distribution and release of the LGSEF is constitutionally impermissible. The LGSEF is part of the IRA or "just share" of the LGUs in the national taxes. To subject its distribution and release to the vagaries of the implementing rules and regulations, including the guidelines and

mechanisms unilaterally prescribed by the Oversight Committee from time to time, as sanctioned by the assailed provisos in the GAAs of 1999, 2000 and 2001 and the OCD resolutions, makes the release not automatic, a flagrant violation of the constitutional and statutory mandate that the "just share" of the LGUs "shall be automatically released to them." The LGUs are, thus, placed at the mercy of the Oversight Committee. Where the law, the Constitution in this case, is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed. Moreover, as correctly posited by the petitioner, the use of the word "shall" connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. x x x (Emphasis and underscoring supplied)25 While "automatic release" implies that the just share of the local governments determined by law should be released to them as a matter of course, the GAA provisions, on the other hand, withhold its release pending an event which is not even certain of occurring. To rule that the term "automatic release" contemplates such conditional release would be to strip the term "automatic" of all meaning. Additionally, to interpret the term automatic release in such a broad manner would be inconsistent with the ruling inPimentel v. Aguirre.26 In the said case, the executive withheld the release of the IRA pending an assessment very similar to the one provided in the GAA. This Court ruled that such withholding contravened the constitutional mandate of an automatic release, viz: Section 4 of AO 372 cannot, however, be upheld. A basic feature of local fiscal autonomy is the automatic release of the shares of LGUs in the national internal revenue. This is mandated by no less than the Constitution. The Local Government Code specifies further that the release shall be made directly to the LGU concerned within five (5) days after every quarter of the year and "shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose." As a rule, the term "shall" is a word of command that must be given a compulsory meaning. The provision is, therefore, imperative. Section 4 of AO 372, however, orders the withholding, effective January 1, 1998, of 10 percent of the LGUs' IRA "pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation" in the country. Such withholding clearly contravenes the Constitution and the law. x x x27 (Italics in the original; underscoring supplied) There is no substantial difference between the withholding of IRA involved in Pimentel and that in the present case, except that here it is the legislature, not the executive, which has authorized the withholding of the IRA. The distinction notwithstanding, the ruling in Pimentel remains applicable. As explained above, Article X, Section 6 of the Constitution - the same provision relied upon in Pimentel - enjoins both the legislative and executive branches of government. Hence, as in Pimentel, under the same constitutional provision, the legislative is barred from withholding the release of the IRA. It bears stressing, however, that in light of the proviso in Section 284 of the Local Government Code which reads: Provided, That in the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the "liga," to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year: Provided, further, That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personal services. (Underscoring supplied), the only possible exception to mandatory automatic release of the IRA is, as held in Batangas: if the national internal revenue collections for the current fiscal year is less than 40 percent of the collections of the preceding third fiscal year, in which case what should be automatically released shall be a proportionate amount of the collections for the current fiscal year. The adjustment may even be made on a quarterly basis

depending on the actual collections of national internal revenue taxes for the quarter of the current fiscal year. x x x28 A final word. This Court recognizes that the passage of the GAA provisions by Congress was motivated by the laudable intent to "lower the budget deficit in line with prudent fiscal management."29 The pronouncement inPimentel, however, must be echoed: "[T]he rule of law requires that even the best intentions must be carried out within the parameters of the Constitution and the law. Verily, laudable purposes must be carried out by legal methods."30 WHEREFORE, the petition is GRANTED. XXXVII and LIV Special Provisions 1 and 4 of the Year 2000 GAA are hereby declared unconstitutional insofar as they set apart a portion of the IRA, in the amount of P10 Billion, as part of the UNPROGRAMMED FUND. SO ORDERED. Davide, Jr., C.J., Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, and Garcia, JJ., concur. Puno, J., on official leave.

Footnotes
1

"The President shall submit to the Congress within thirty days from the opening of every regular session, as the basis of the general appropriations bill, a budget of expenditures and sources of financing, including receipts from existing and proposed revenue measures."
2

The Petition-in-Intervention of the Province of Batangas states: "Intervenor joins the Petitioners in the Main Petition and fully subscribes and supports the position taken and arguments presented by the latter." (Rollo at 315) Similarly, the Petition-in-Intervention With Motion for Early Resolution of Case filed by the Province of Nueva Ecija states: "Petitioner-intervenor, thru this instant petition-inintervention, joins cause with the petitioners in the above-captioned case and with Movant-intervenor Province of Batangas, represented by its Governor, Hon. Hermilando I. Mandanas, which filed its petition-in-intervention before this Honorable Supreme Court on 18 October 2001, as well as with such other local government units which may file their petitions and/or motions to intervene in the abovecaptioned case; x x x" (Rollo at 350)
3

Rollo at 363. 429 SCRA 736 (2004). Id. at 757-758.

Demetria v. Alba, 148 SCRA 208, 211 (1987), see also the concurring opinion of Justice Vicente Mendoza in Estrada v. Desierto, 353 SCRA 452, 550 (2001).
7

SECTION 4. Verification. - Except when otherwise specifically required by law or rule, pleadings need not be under oath, verified or accompanied by affidavit. A pleading is verified by an affidavit that the affiant has read the pleading and that the allegations therein are true and correct of his personal knowledge or based on authentic records. A pleading required to be verified which contains a verification based on "information and belief," or upon "knowledge, information and belief," or lacks a proper verification, shall be treated as an unsigned pleading.

99 SCRA 410, 420 (1980). 360 SCRA 521, 526 (2001). 352 SCRA 334, 346-347 (2001). Vide Pimentel v. Aguirre, 336 SCRA 201, 213 (2000). 196 SCRA 221 (1991). 235 SCRA 506 (1994). III RECORD 479-480. Rollo at 274, emphasis in the original. Id. at 329-330. Supra.

10

11

12

13

14

15

16

17

18

SECTION 70. Budget Allocation. - The annual budget of the Local Government Units (LGU) shall include an item and the corresponding appropriation for the maintenance and operation of their local PLEBs. The Secretary shall submit a report to Congress and the President within fifteen (15) days from the effectivity of this Act on the number of PLEBs already organized as well as the LGUs still without PLEBs. Municipalities or cities without a PLEB or with an insufficient number of organized PLEBs shall have thirty (30) days to organize their respective PLEBs. After such period, the DILG and the Department of Budget and Management shall withhold the release of the LGUs share in the national taxes in cities and municipalities still without PLEB(s). (Rollo at 276, emphasis in the original)
19

This provision is among the Transitory Provisions of the Code, and is quoted by respondents as follows: "SECTION 531. Debt Relief for Local Government Units.- x x x (e) Recovery schemes for the national government. - Local government units shall pay back the national government whatever amounts were advanced or offset by the national government to settle their obligations to GFIs, GOCCs, and private utilities. The national government shall not charge interest or penalties on the outstanding balance owed by the local government units. "These outstanding obligations shall be restructured and an amortization schedule prepared, based on the capability of the local government unit to pay, taking into consideration the amount owed to the national government. "The national government is hereby authorized to deduct from the quarterly share of each local government unit in the internal revenue collections an amount to be determined on the basis of the amortization schedule of the local unit concerned: Provided, That such amount shall not exceed five percent (5%) of the monthly internal revenue allotment of the local government unit concerned. x x x" (Rollo at 276-277, emphasis in the original)
20

Sources of Funds and the Operating Budget of MMDA: xxx

(d) Five percent (5%) of the total annual gross revenue of the preceding year, net of the internal revenue allotment, or each local government unit mentioned in Section 2 hereof, shall accrue and become payable monthly to the MMDA by each city or municipality. In case of failure to remit the said fixed contribution, the DBM shall cause the disbursement of the same to the MMDA chargeable against the IRA allotment of the city or municipality concerned, the provisions of Section 286 of RA 7160 to the contrary notwithstanding. (Rollo at 277, emphasis in the original)
21

ARTICLE 383. Automatic Release of IRA Shares of LGUs. - x x x (c) The IRA share of LGUs shall not be subject to any lien or holdback that may be imposed by the National Government for whatever purpose unless otherwise provided in the Code or other applicable laws and loan contract or project agreements arising from foreign loans and international commitments, such as premium contributions of LGUs to the Government Service Insurance System and loans contracted by LGUs under foreign-assisted projects. (Rollo at 277, emphasis in the original)

22

103 Phil. 1051, 1075-1076 (1957). Supra. Supra at 760. Supra at 763. 336 SCRA 201 (2000). Id. at 220-221 (2000). Supra at 768.

23

24

25

26

27

28

29

Respondents quote former Senator Osmea's written reply to their query pertaining to the present case, in which the senator made the following explanation: "In the course of the annual budget deliberations, Congress at times sees the need to classify certain expenditures of the national government as part of the Unprogrammed Fund, which, by definition, are released only when additional funding sources are made available. This becomes necessary when the revenue targets submitted by the President to Congress are deemed optimistic given the conditions prevailing in the economy. The overriding objective is to lessen the gap between revenues and expenditures and thus lower the budget deficit in line with prudent fiscal management. For FY 2000 budget the local government units have been asked to share in the burden of the revenue shortfall when the amount of P10 Billion of the 121.778 Billion IRA has been appropriated under the unprogrammed fund." ( Rollo at 127-128, underscoring supplied)
30

Supra at 221.

EN BANC

[G.R. No. 152774. May 27, 2004]

THE PROVINCE OF BATANGAS, represented by its Governor, HERMILANDO I. MANDANAS, petitioner, vs. HON. ALBERTO G. ROMULO, Executive Secretary and Chairman of the Oversight Committee on Devolution; HON. EMILIA BONCODIN, Secretary, Department of Budget and Management; HON. JOSE D. LINA, JR., Secretary, Department of Interior and Local Government, respondents. DECISION
CALLEJO, SR., J.:

The Province of Batangas, represented by its Governor, Hermilando I. Mandanas, filed the present petition for certiorari, prohibition and mandamus under Rule 65 of the Rules of Court, as amended, to declare as unconstitutional and void certain provisos contained in the General Appropriations Acts (GAA) of 1999, 2000 and 2001, insofar as they uniformly earmarked for each corresponding year the amount of five billion pesos (P5,000,000,000.00) of the Internal Revenue Allotment (IRA) for the Local Government Service Equalization Fund (LGSEF) and imposed conditions for the release thereof. Named as respondents are Executive Secretary Alberto G. Romulo, in his capacity as Chairman of the Oversight Committee on Devolution, Secretary Emilia Boncodin of the Department of Budget and Management (DBM) and Secretary Jose Lina of the Department of Interior and Local Government (DILG).

Background On December 7, 1998, then President Joseph Ejercito Estrada issued Executive Order (E.O.) No. 48 entitled ESTABLISHING A PROGRAM FOR DEVOLUTION ADJUSTMENT AND EQUALIZATION. The program was established to facilitate the process of enhancing the capacities of local government units (LGUs) in the discharge of the functions and services devolved to them by the National Government Agencies concerned pursuant to the Local Government Code.[1] The Oversight Committee (referred to as the Devolution Committee in E.O. No. 48) constituted under Section 533(b) of Republic Act No. 7160 (The Local Government Code of 1991) has been tasked to formulate and issue the appropriate rules and regulations necessary for its effective implementation.[2] Further, to address the funding shortfalls of functions and services devolved to the LGUs and other funding requirements of the program, the Devolution Adjustment and Equalization Fund was created.[3] For 1998, the DBM was directed to set aside an amount to be determined by the Oversight Committee based on

the devolution status appraisal surveys undertaken by the DILG. [4] The initial fund was to be sourced from the available savings of the national government for CY 1998.[5] For 1999 and the succeeding years, the corresponding amount required to sustain the program was to be incorporated in the annual GAA.[6] The Oversight Committee has been authorized to issue the implementing rules and regulations governing the equitable allocation and distribution of said fund to the LGUs.[7]

The LGSEF in the GAA of 1999 In Republic Act No. 8745, otherwise known as the GAA of 1999, the program was renamed as the LOCAL GOVERNMENT SERVICE EQUALIZATION FUND (LGSEF). Under said appropriations law, the amount of P96,780,000,000 was allotted as the share of the LGUs in the internal revenue taxes. Item No. 1, Special Provisions, Title XXXVI A. Internal Revenue Allotment of Rep. Act No. 8745 contained the following proviso:

... PROVIDED, That the amount of FIVE BILLION PESOS (P5,000,000,000) shall be earmarked for the Local Government Service Equalization Fund for the funding requirements of projects and activities arising from the full and efficient implementation of devolved functions and services of local government units pursuant to R.A. No. 7160, otherwise known as the Local Government Code of 1991: PROVIDED, FURTHER, That such amount shall be released to the local government units subject to the implementing rules and regulations, including such mechanisms and guidelines for the equitable allocations and distribution of said fund among local government units subject to the guidelines that may be prescribed by the Oversight Committee on Devolution as constituted pursuant to Book IV, Title III, Section 533(b) of R.A. No. 7160. The Internal Revenue Allotment shall be released directly by the Department of Budget and Management to the Local Government Units concerned.
On July 28, 1999, the Oversight Committee (with then Executive Secretary Ronaldo B. Zamora as Chairman) passed Resolution Nos. OCD-99-003, OCD-99-005 and OCD99-006 entitled as follows:

OCD-99-005
RESOLUTION ADOPTING THE ALLOCATION SCHEME FOR THE PhP5 BILLION CY 1999 LOCAL GOVERNMENT SERVICE EQUALIZATION FUND (LGSEF) AND REQUESTING HIS EXCELLENCY PRESIDENT JOSEPH EJERCITO ESTRADA TO APPROVE SAID ALLOCATION SCHEME.

OCD-99-006
RESOLUTION ADOPTING THE ALLOCATION SCHEME FOR THE PhP4.0 BILLION OF THE 1999 LOCAL GOVERNMENT SERVICE EQUALIZATION FUND AND ITS CONCOMITANT GENERAL FRAMEWORK, IMPLEMENTING GUIDELINES AND MECHANICS FOR ITS IMPLEMENTATION AND RELEASE, AS PROMULGATED BY THE OVERSIGHT COMMITTEE ON DEVOLUTION.

OCD-99-003
RESOLUTION REQUESTING HIS EXCELLENCY PRESIDENT JOSEPH EJERCITO ESTRADA TO APPROVE THE REQUEST OF THE OVERSIGHT COMMITTEE ON DEVOLUTION TO SET ASIDE TWENTY PERCENT (20%) OF THE LOCAL GOVERNMENT SERVICE EQUALIZATION FUND (LGSEF) FOR LOCAL AFFIRMATIVE ACTION PROJECTS AND OTHER PRIORITY INITIATIVES FOR LGUs INSTITUTIONAL AND CAPABILITY BUILDING IN ACCORDANCE WITH THE IMPLEMENTING GUIDELINES AND MECHANICS AS PROMULGATED BY THE COMMITTEE.

These OCD resolutions were approved by then President Estrada on October 6, 1999. Under the allocation scheme adopted pursuant to Resolution No. OCD-99-005, the five billion pesos LGSEF was to be allocated as follows:
1. The PhP4 Billion of the LGSEF shall be allocated in accordance with the allocation scheme and implementing guidelines and mechanics promulgated and adopted by the OCD. To wit:

a. The first PhP2 Billion of the LGSEF shall be allocated in accordance with the codal formula sharing scheme as prescribed under the 1991 Local Government Code; b. The second PhP2 Billion of the LGSEF shall be allocated in accordance with a modified 1992 cost of devolution fund (CODEF) sharing scheme, as recommended by the respective leagues of provinces, cities and municipalities to the OCD. The modified CODEF sharing formula is as follows: Province : 40% Cities : 20% Municipalities : 40%
This is applied to the P2 Billion after the approved amounts granted to individual provinces, cities and municipalities as assistance to cover decrease in 1999 IRA share due to reduction in land area have been taken out. 2. The remaining PhP1 Billion of the LGSEF shall be earmarked to support local affirmative action projects and other priority initiatives submitted by LGUs to the Oversight Committee on Devolution for approval in accordance with its prescribed guidelines as promulgated and adopted by the OCD.

In Resolution No. OCD-99-003, the Oversight Committee set aside the one billion pesos or 20% of the LGSEF to support Local Affirmative Action Projects (LAAPs) of LGUs. This remaining amount was intended to respond to the urgent need for additional funds assistance, otherwise not available within the parameters of other existing fund sources. For LGUs to be eligible for funding under the one-billion-peso portion of the LGSEF, the OCD promulgated the following:

III.

CRITERIA FOR ELIGIBILITY:

1. LGUs (province, city, municipality, or barangay), individually or by group or multi-LGUs or leagues of LGUs, especially those belonging to the 5th and 6th class, may access the fund to support any projects or activities that satisfy any of the aforecited purposes. A barangay may also access this fund directly or through their respective municipality or city. 2. The proposed project/activity should be need-based, a local priority, with high development impact and are congruent with the socio-cultural, economic and development agenda of the Estrada Administration, such as food security, poverty alleviation, electrification, and peace and order, among others. 3. Eligible for funding under this fund are projects arising from, but not limited to, the following areas of concern: a. delivery of local health and sanitation services, hospital services and other tertiary services; b. delivery of social welfare services; c. provision of socio-cultural services and facilities for youth and community development; d. provision of agricultural and on-site related research; e. improvement of community-based forestry projects and other local projects on environment and natural resources protection and conservation; f. improvement of tourism facilities and promotion of tourism; g. peace and order and public safety; h. construction, repair and maintenance of public works and infrastructure, including public buildings and facilities for public use, especially those destroyed or damaged by man-made or natural calamities and disaster as well as facilities for water supply, flood control and river dikes; i. provision of local electrification facilities; j. livelihood and food production services, facilities and equipment; k. other projects that may be authorized by the OCD consistent with the aforementioned objectives and guidelines;

4. Except on extremely meritorious cases, as may be determined by the Oversight Committee on Devolution, this portion of the LGSEF shall not be used in expenditures for personal costs or benefits under existing laws applicable to governments. Generally, this fund shall cover the following objects of expenditures for programs, projects and activities arising from the implementation of devolved and regular functions and services: a. acquisition/procurement of supplies and materials critical to the full and effective implementation of devolved programs, projects and activities; b. repair and/or improvement of facilities; c. repair and/or upgrading of equipment; d. acquisition of basic equipment; e. construction of additional or new facilities; f. counterpart contribution to joint arrangements or collective projects among groups of municipalities, cities and/or provinces related to devolution and delivery of basic services. 5. To be eligible for funding, an LGU or group of LGU shall submit to the Oversight Committee on Devolution through the Department of Interior and Local Governments, within the prescribed schedule and timeframe, a Letter Request for Funding Support from the Affirmative Action Program under the LGSEF, duly signed by the concerned LGU(s) and endorsed by cooperators and/or beneficiaries, as well as the duly signed Resolution of Endorsement by the respective Sanggunian(s) of the LGUs concerned. The LGU-proponent shall also be required to submit the Project Request (PR), using OCD Project Request Form No. 99-02, that details the following: (a) general description or brief of the project; (b) objectives and justifications for undertaking the project, which should highlight the benefits to the locality and the expected impact to the local program/project arising from the full and efficient implementation of social services and facilities, at the local levels; (c) target outputs or key result areas;

(d) schedule of activities and details of requirements; (e) total cost requirement of the project; (f) proponents counterpart funding share, if any, and identified source(s) of counterpart funds for the full implementation of the project; (g) requested amount of project cost to be covered by the LGSEF.
Further, under the guidelines formulated by the Oversight Committee as contained in Attachment - Resolution No. OCD-99-003, the LGUs were required to identify the projects eligible for funding under the one-billion-peso portion of the LGSEF and submit the project proposals thereof and other documentary requirements to the DILG for appraisal. The project proposals that passed the DILGs appraisal would then be submitted to the Oversight Committee for review, evaluation and approval. Upon its approval, the Oversight Committee would then serve notice to the DBM for the preparation of the Special Allotment Release Order (SARO) and Notice of Cash Allocation (NCA) to effect the release of funds to the said LGUs.

The LGSEF in the GAA of 2000 Under Rep. Act No. 8760, otherwise known as the GAA of 2000, the amount of P111,778,000,000 was allotted as the share of the LGUs in the internal revenue taxes. As in the GAA of 1999, the GAA of 2000 contained a proviso earmarking five billion pesos of the IRA for the LGSEF. This proviso, found in Item No. 1, Special Provisions, Title XXXVII A. Internal Revenue Allotment, was similarly worded as that contained in the GAA of 1999. The Oversight Committee, in its Resolution No. OCD-2000-023 dated June 22, 2000, adopted the following allocation scheme governing the five billion pesos LGSEF for 2000:

1. The PhP3.5 Billion of the CY 2000 LGSEF shall be allocated to and shared by the four levels of LGUs, i.e., provinces, cities, municipalities, and barangays, using the following percentage-sharing formula agreed upon and jointly endorsed by the various Leagues of LGUs: For Provinces 26% or P 910,000,000 For Cities 23% or 805,000,000 For Municipalities 35% or 1,225,000,000 For Barangays 16% or 560,000,000 Provided that the respective Leagues representing the provinces, cities, municipalities and barangays shall draw up and adopt the horizontal distribution/sharing schemes among the member LGUs whereby the Leagues concerned may opt to adopt direct financial assistance or

project-based arrangement, such that the LGSEF allocation for individual LGU shall be released directly to the LGU concerned; Provided further that the individual LGSEF shares to LGUs are used in accordance with the general purposes and guidelines promulgated by the OCD for the implementation of the LGSEF at the local levels pursuant to Res. No. OCD-99-006 dated October 7, 1999 and pursuant to the Leagues guidelines and mechanism as approved by the OCD; Provided further that each of the Leagues shall submit to the OCD for its approval their respective allocation scheme, the list of LGUs with the corresponding LGSEF shares and the corresponding project categories if project-based; Provided further that upon approval by the OCD, the lists of LGUs shall be endorsed to the DBM as the basis for the preparation of the corresponding NCAs, SAROs, and related budget/release documents. 2. The remaining P1,500,000,000 of the CY 2000 LGSEF shall be earmarked to support the following initiatives and local affirmative action projects, to be endorsed to and approved by the Oversight Committee on Devolution in accordance with the OCD agreements, guidelines, procedures and documentary requirements:
On July 5, 2000, then President Estrada issued a Memorandum authorizing then Executive Secretary Zamora and the DBM to implement and release the 2.5 billion pesos LGSEF for 2000 in accordance with Resolution No. OCD-2000-023. Thereafter, the Oversight Committee, now under the administration of President Gloria Macapagal-Arroyo, promulgated Resolution No. OCD-2001-29 entitled ADOPTING RESOLUTION NO. OCD-2000-023 IN THE ALLOCATION, IMPLEMENTATION AND RELEASE OF THE REMAINING P2.5 BILLION LGSEF FOR CY 2000. Under this resolution, the amount of one billion pesos of the LGSEF was to be released in accordance with paragraph 1 of Resolution No. OCD-2000-23, to complete the 3.5 billion pesos allocated to the LGUs, while the amount of 1.5 billion pesos was allocated for the LAAP. However, out of the latter amount, P400,000,000 was to be allocated and released as follows: P50,000,000 as financial assistance to the LAAPs of LGUs; P275,360,227 as financial assistance to cover the decrease in the IRA of LGUs concerned due to reduction in land area; andP74,639,773 for the LGSEF Capability-Building Fund.

The LGSEF in the GAA of 2001 In view of the failure of Congress to enact the general appropriations law for 2001, the GAA of 2000 was deemed re-enacted, together with the IRA of the LGUs therein and the proviso earmarking five billion pesos thereof for the LGSEF.

On January 9, 2002, the Oversight Committee adopted Resolution No. OCD-2002001 allocating the five billion pesos LGSEF for 2001 as follows:

Modified Codal Formula P 3.000 billion Priority Projects 1.900 billion Capability Building Fund .100 billion P 5.000 billion RESOLVED FURTHER, that the P3.0 B of the CY 2001 LGSEF which is to be allocated according to the modified codal formula shall be released to the four levels of LGUs, i.e., provinces, cities, municipalities and barangays, as follows: LGUs Provinces Cities Municipalities Barangays 15 25 35 Percentage 25 Amount P 0.750 billion 0.750 1.050 0.450 100 P 3.000 billion RESOLVED FURTHER, that the P1.9 B earmarked for priority projects shall be distributed according to the following criteria: 1.0 For projects of the 4th, 5th and 6th class LGUs; or 2.0 Projects in consonance with the Presidents State of the Nation Address (SONA)/summit commitments. RESOLVED FURTHER, that the remaining P100 million LGSEF capability building fund shall be distributed in accordance with the recommendation of the Leagues of Provinces, Cities, Municipalities and Barangays, and approved by the OCD.
Upon receipt of a copy of the above resolution, Gov. Mandanas wrote to the individual members of the Oversight Committee seeking the reconsideration of Resolution No. OCD-2002-001. He also wrote to Pres. Macapagal-Arroyo urging her to disapprove said resolution as it violates the Constitution and the Local Government Code of 1991. On January 25, 2002, Pres. Macapagal-Arroyo approved Resolution No. OCD2002-001. The Petitioners Case

The petitioner now comes to this Court assailing as unconstitutional and void the provisos in the GAAs of 1999, 2000 and 2001, relating to the LGSEF. Similarly assailed are the Oversight Committees Resolutions Nos. OCD-99-003, OCD-99-005, OCD-99006, OCD-2000-023, OCD-2001-029 and OCD-2002-001 issued pursuant thereto. The petitioner submits that the assailed provisos in the GAAs and the OCD resolutions, insofar as they earmarked the amount of five billion pesos of the IRA of the LGUs for 1999, 2000 and 2001 for the LGSEF and imposed conditions for the release thereof, violate the Constitution and the Local Government Code of 1991. Section 6, Article X of the Constitution is invoked as it mandates that the just share of the LGUs shall be automatically released to them. Sections 18 and 286 of the Local Government Code of 1991, which enjoin that the just share of the LGUs shall be automatically and directly released to them without need of further action are, likewise, cited. The petitioner posits that to subject the distribution and release of the five-billionpeso portion of the IRA, classified as the LGSEF, to compliance by the LGUs with the implementing rules and regulations, including the mechanisms and guidelines prescribed by the Oversight Committee, contravenes the explicit directive of the Constitution that the LGUs share in the national taxes shall be automatically released to them. The petitioner maintains that the use of the word shall must be given a compulsory meaning. To further buttress this argument, the petitioner contends that to vest the Oversight Committee with the authority to determine the distribution and release of the LGSEF, which is a part of the IRA of the LGUs, is an anathema to the principle of local autonomy as embodied in the Constitution and the Local Government Code of 1991. The petitioner cites as an example the experience in 2001 when the release of the LGSEF was long delayed because the Oversight Committee was not able to convene that year and no guidelines were issued therefor. Further, the possible disapproval by the Oversight Committee of the project proposals of the LGUs would result in the diminution of the latters share in the IRA. Another infringement alleged to be occasioned by the assailed OCD resolutions is the improper amendment to Section 285 of the Local Government Code of 1991 on the percentage sharing of the IRA among the LGUs. Said provision allocates the IRA as follows: Provinces 23%; Cities 23%; Municipalities 34%; and Barangays 20%.[8] This formula has been improperly amended or modified, with respect to the fivebillion-peso portion of the IRA allotted for the LGSEF, by the assailed OCD resolutions as they invariably provided for a different sharing scheme. The modifications allegedly constitute an illegal amendment by the executive branch of a substantive law. Moreover, the petitioner mentions that in the Letter dated December 5, 2001 of respondent Executive Secretary Romulo addressed to respondent Secretary Boncodin, the former endorsed to the latter the release of funds to certain LGUs from the LGSEF in accordance with the handwritten instructions of President Arroyo. Thus, the LGUs are at a loss as to how a portion of the LGSEF is actually allocated. Further, there are still portions of the LGSEF that, to date, have not been received by the petitioner; hence, resulting in damage and injury to the petitioner. The petitioner prays that the Court declare as unconstitutional and void the assailed provisos relating to the LGSEF in the GAAs of 1999, 2000 and 2001 and the assailed

OCD resolutions (Resolutions Nos. OCD-99-003, OCD-99-005, OCD-99-006, OCD2000-023, OCD-2001-029 and OCD-2002-001) issued by the Oversight Committee pursuant thereto. The petitioner, likewise, prays that the Court direct the respondents to rectify the unlawful and illegal distribution and releases of the LGSEF for the aforementioned years and release the same in accordance with the sharing formula under Section 285 of the Local Government Code of 1991. Finally, the petitioner urges the Court to declare that the entire IRA should be released automatically without further action by the LGUs as required by the Constitution and the Local Government Code of 1991. The Respondents Arguments The respondents, through the Office of the Solicitor General, urge the Court to dismiss the petition on procedural and substantive grounds. On the latter, the respondents contend that the assailed provisos in the GAAs of 1999, 2000 and 2001 and the assailed resolutions issued by the Oversight Committee are not constitutionally infirm. The respondents advance the view that Section 6, Article X of the Constitution does not specify that the just share of the LGUs shall be determined solely by the Local Government Code of 1991. Moreover, the phrase as determined by law in the same constitutional provision means that there exists no limitation on the power of Congress to determine what is the just share of the LGUs in the national taxes. In other words, Congress is the arbiter of what should be the just share of the LGUs in the national taxes. The respondents further theorize that Section 285 of the Local Government Code of 1991, which provides for the percentage sharing of the IRA among the LGUs, was not intended to be a fixed determination of their just share in the national taxes. Congress may enact other laws, including appropriations laws such as the GAAs of 1999, 2000 and 2001, providing for a different sharing formula. Section 285 of the Local Government Code of 1991 was merely intended to be the default share of the LGUs to do away with the need to determine annually by law their just share. However, the LGUs have no vested right in a permanent or fixed percentage as Congress may increase or decrease the just share of the LGUs in accordance with what it believes is appropriate for their operation. There is nothing in the Constitution which prohibits Congress from making such determination through the appropriations laws. If the provisions of a particular statute, the GAA in this case, are within the constitutional power of the legislature to enact, they should be sustained whether the courts agree or not in the wisdom of their enactment. On procedural grounds, the respondents urge the Court to dismiss the petition outright as the same is defective. The petition allegedly raises factual issues which should be properly threshed out in the lower courts, not this Court, not being a trier of facts. Specifically, the petitioners allegation that there are portions of the LGSEF that it has not, to date, received, thereby causing it (the petitioner) injury and damage, is subject to proof and must be substantiated in the proper venue, i.e., the lower courts. Further, according to the respondents, the petition has already been rendered moot and academic as it no longer presents a justiciable controversy. The IRAs for the years 1999, 2000 and 2001, have already been released and the government is now

operating under the 2003 budget. In support of this, the respondents submitted certifications issued by officers of the DBM attesting to the release of the allocation or shares of the petitioner in the LGSEF for 1999, 2000 and 2001. There is, therefore, nothing more to prohibit. Finally, the petitioner allegedly has no legal standing to bring the suit because it has not suffered any injury. In fact, the petitioners just share has even increased. Pursuant to Section 285 of the Local Government Code of 1991, the share of the provinces is 23%. OCD Nos. 99-005, 99-006 and 99-003 gave the provinces 40% of P2 billion of the LGSEF. OCD Nos. 2000-023 and 2001-029 apportioned 26% of P3.5 billion to the provinces. On the other hand, OCD No. 2001-001 allocated 25% of P3 billion to the provinces. Thus, the petitioner has not suffered any injury in the implementation of the assailed provisos in the GAAs of 1999, 2000 and 2001 and the OCD resolutions.

The Ruling of the Court

Procedural Issues Before resolving the petition on its merits, the Court shall first rule on the following procedural issues raised by the respondents: (1) whether the petitioner has legal standing orlocus standi to file the present suit; (2) whether the petition involves factual questions that are properly cognizable by the lower courts; and (3) whether the issue had been rendered moot and academic.

The petitioner has locus standi to maintain the present suit The gist of the question of standing is whether a party has alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions.[9] Accordingly, it has been held that the interest of a party assailing the constitutionality of a statute must be direct and personal. Such party must be able to show, not only that the law or any government act is invalid, but also that he has sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement, and not merely that he suffers thereby in some indefinite way. It must appear that the person complaining has been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act complained of.[10] The Court holds that the petitioner possesses the requisite standing to maintain the present suit. The petitioner, a local government unit, seeks relief in order to protect or vindicate an interest of its own, and of the other LGUs. This interest pertains to the LGUs share in the national taxes or the IRA. The petitioners constitutional claim is, in substance, that the assailed provisos in the GAAs of 1999, 2000 and 2001, and the

OCD resolutions contravene Section 6, Article X of the Constitution, mandating the automatic release to the LGUs of their share in the national taxes. Further, the injury that the petitioner claims to suffer is the diminution of its share in the IRA, as provided under Section 285 of the Local Government Code of 1991, occasioned by the implementation of the assailed measures. These allegations are sufficient to grant the petitioner standing to question the validity of the assailed provisos in the GAAs of 1999, 2000 and 2001, and the OCD resolutions as the petitioner clearly has a plain, direct and adequate interest in the manner and distribution of the IRA among the LGUs.

The petition involves a significant legal issue The crux of the instant controversy is whether the assailed provisos contained in the GAAs of 1999, 2000 and 2001, and the OCD resolutions infringe the Constitution and the Local Government Code of 1991. This is undoubtedly a legal question. On the other hand, the following facts are not disputed:
1. 2. The earmarking of five billion pesos of the IRA for the LGSEF in the assailed provisos in the GAAs of 1999, 2000 and re-enacted budget for 2001; The promulgation of the assailed OCD resolutions providing for the allocation schemes covering the said five billion pesos and the implementing rules and regulations therefor; and The release of the LGSEF to the LGUs only upon their compliance with the implementing rules and regulations, including the guidelines and mechanisms, prescribed by the Oversight Committee.

3.

Considering that these facts, which are necessary to resolve the legal question now before this Court, are no longer in issue, the same need not be determined by a trial court.[11]In any case, the rule on hierarchy of courts will not prevent this Court from assuming jurisdiction over the petition. The said rule may be relaxed when the redress desired cannot be obtained in the appropriate courts or where exceptional and compelling circumstances justify availment of a remedy within and calling for the exercise of this Courts primary jurisdiction.[12] The crucial legal issue submitted for resolution of this Court entails the proper legal interpretation of constitutional and statutory provisions. Moreover, the transcendental importance of the case, as it necessarily involves the application of the constitutional principle on local autonomy, cannot be gainsaid. The nature of the present controversy, therefore, warrants the relaxation by this Court of procedural rules in order to resolve the case forthwith.

The substantive issue needs to be resolved notwithstanding the supervening events Granting arguendo that, as contended by the respondents, the resolution of the case had already been overtaken by supervening events as the IRA, including the LGSEF, for 1999, 2000 and 2001, had already been released and the government is

now operating under a new appropriations law, still, there is compelling reason for this Court to resolve the substantive issue raised by the instant petition. Supervening events, whether intended or accidental, cannot prevent the Court from rendering a decision if there is a grave violation of the Constitution.[13] Even in cases where supervening events had made the cases moot, the Court did not hesitate to resolve the legal or constitutional issues raised to formulate controlling principles to guide the bench, bar and public.[14] Another reason justifying the resolution by this Court of the substantive issue now before it is the rule that courts will decide a question otherwise moot and academic if it is capable of repetition, yet evading review.[15] For the GAAs in the coming years may contain provisos similar to those now being sought to be invalidated, and yet, the question may not be decided before another GAA is enacted. It, thus, behooves this Court to make a categorical ruling on the substantive issue now.

Substantive Issue As earlier intimated, the resolution of the substantive legal issue in this case calls for the application of a most important constitutional policy and principle, that of local autonomy.[16] In Article II of the Constitution, the State has expressly adopted as a policy that:

Section 25. The State shall ensure the autonomy of local governments.
An entire article (Article X) of the Constitution has been devoted to guaranteeing and promoting the autonomy of LGUs. Section 2 thereof reiterates the State policy in this wise:

Section 2. The territorial and political subdivisions shall enjoy local autonomy.
Consistent with the principle of local autonomy, the Constitution confines the Presidents power over the LGUs to one of general supervision. [17] This provision has been interpreted to exclude the power of control. The distinction between the two powers was enunciated in Drilon v. Lim:[18]

An officer in control lays down the rules in the doing of an act. If they are not followed, he may, in his discretion, order the act undone or re-done by his subordinate or he may even decide to do it himself. Supervision does not cover such authority. The supervisor or superintendent merely sees to it that the rules are followed, but he himself does not lay down such rules, nor does he have the discretion to modify or replace them. If the rules are not observed, he may order the work done or re-done but only to conform to the prescribed rules. He may not prescribe his own manner for doing the act. He has no judgment on this matter except to see to it that the rules are followed.
[19]

The Local Government Code of 1991[20] was enacted to flesh out the mandate of the Constitution.[21] The State policy on local autonomy is amplified in Section 2 thereof:

Sec. 2. Declaration of Policy. (a) It is hereby declared the policy of the State that the territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them more effective partners in the attainment of national goals. Toward this end, the State shall provide for a more responsive and accountable local government structure instituted through a system of decentralization whereby local government units shall be given more powers, authority, responsibilities, and resources. The process of decentralization shall proceed from the National Government to the local government units.
Guided by these precepts, the Court shall now determine whether the assailed provisos in the GAAs of 1999, 2000 and 2001, earmarking for each corresponding year the amount of five billion pesos of the IRA for the LGSEF and the OCD resolutions promulgated pursuant thereto, transgress the Constitution and the Local Government Code of 1991.

The assailed provisos in the GAAs of 1999, 2000 and 2001 and the OCD resolutions violate the constitutional precept on local autonomy Section 6, Article X of the Constitution reads:

Sec. 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.
When parsed, it would be readily seen that this provision mandates that (1) the LGUs shall have a just share in the national taxes; (2) the just share shall be determined by law; and (3) the just share shall be automatically released to the LGUs. The Local Government Code of 1991, among its salient provisions, underscores the automatic release of the LGUs just share in this wise:

Sec. 18. Power to Generate and Apply Resources. Local government units shall have the power and authority to establish an organization that shall be responsible for the efficient and effective implementation of their development plans, program objectives and priorities; to create their own sources of revenue and to levy taxes, fees, and charges which shall accrue exclusively for their use and disposition and which shall be retained by them; to have a just share in national taxes which shall be automatically and directly released to them without need of further action; ... Sec. 286. Automatic Release of Shares. (a) The share of each local government unit shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer, as the case may be, on a quarterly basis within five

(5) days after the end of each quarter, and which shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose. (b) Nothing in this Chapter shall be understood to diminish the share of local government units under existing laws.
Websters Third New International Dictionary defines automatic as involuntary either wholly or to a major extent so that any activity of the will is largely negligible; of a reflex nature; without volition; mechanical; like or suggestive of an automaton. Further, the word automatically is defined as in an automatic manner: without thought or conscious intention. Being automatic, thus, connotes something mechanical, spontaneous and perfunctory. As such, the LGUs are not required to perform any act to receive the just share accruing to them from the national coffers. As emphasized by the Local Government Code of 1991, the just share of the LGUs shall be released to them without need of further action. Construing Section 286 of the LGC, we held in Pimentel, Jr. v. Aguirre,[22] viz:

Section 4 of AO 372 cannot, however, be upheld. A basic feature of local fiscal autonomy is the automatic release of the shares of LGUs in the National internal revenue. This is mandated by no less than the Constitution. The Local Government Code specifies further that the release shall be made directly to the LGU concerned within five (5) days after every quarter of the year and shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose. As a rule, the term SHALL is a word of command that must be given a compulsory meaning. The provision is, therefore, IMPERATIVE. Section 4 of AO 372, however, orders the withholding, effective January 1, 1998, of 10 percent of the LGUs IRA pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation in the country. Such withholding clearly contravenes the Constitution and the law. Although temporary, it is equivalent to a holdback, which means something held back or withheld, often temporarily. Hence, the temporary nature of the retention by the national government does not matter. Any retention is prohibited. In sum, while Section 1 of AO 372 may be upheld as an advisory effected in times of national crisis, Section 4 thereof has no color of validity at all. The latter provision effectively encroaches on the fiscal autonomy of local governments. Concededly, the President was well-intentioned in issuing his Order to withhold the LGUs IRA, but the rule of law requires that even the best intentions must be carried out within the parameters of the Constitution and the law. Verily, laudable purposes must be carried out by legal methods.
[23]

The just share of the LGUs is incorporated as the IRA in the appropriations law or GAA enacted by Congress annually. Under the assailed provisos in the GAAs of 1999, 2000 and 2001, a portion of the IRA in the amount of five billion pesos was earmarked for the LGSEF, and these provisos imposed the condition that such amount shall be

released to the local government units subject to the implementing rules and regulations, including such mechanisms and guidelines for the equitable allocations and distribution of said fund among local government units subject to the guidelines that may be prescribed by the Oversight Committee on Devolution. Pursuant thereto, the Oversight Committee, through the assailed OCD resolutions, apportioned the five billion pesos LGSEF such that:

For 1999 P2 billion - allocated according to Sec. 285 LGC P2 billion - Modified Sharing Formula (Provinces 40%; Cities 20%; Municipalities 40%) P1 billion projects (LAAP) approved by OCD.
[24]

For 2000 P3.5 billion Modified Sharing Formula (Provinces 26%; Cities 23%; Municipalities 35%; Barangays 16%); P1.5 billion projects (LAAP) approved by the OCD.
[25]

For 2001 P3 billion Modified Sharing Formula (Provinces 25%; Cities 25%; Municipalities 35%; Barangays 15%) P1.9 billion priority projects P100 million capability building fund.
[26]

Significantly, the LGSEF could not be released to the LGUs without the Oversight Committees prior approval. Further, with respect to the portion of the LGSEF allocated for various projects of the LGUs (P1 billion for 1999; P1.5 billion for 2000 and P2 billion for 2001), the Oversight Committee, through the assailed OCD resolutions, laid down guidelines and mechanisms that the LGUs had to comply with before they could avail of funds from this portion of the LGSEF. The guidelines required (a) the LGUs to identify the projects eligible for funding based on the criteria laid down by the Oversight Committee; (b) the LGUs to submit their project proposals to the DILG for appraisal; (c) the project proposals that passed the appraisal of the DILG to be submitted to the Oversight Committee for review, evaluation and approval. It was only upon approval thereof that the Oversight Committee would direct the DBM to release the funds for the projects. To the Courts mind, the entire process involving the distribution and release of the LGSEF is constitutionally impermissible. The LGSEF is part of the IRA or just share of the LGUs in the national taxes. To subject its distribution and release to the vagaries of the implementing rules and regulations, including the guidelines and mechanisms unilaterally prescribed by the Oversight Committee from time to time, as sanctioned by the assailed provisos in the GAAs of 1999, 2000 and 2001 and the OCD resolutions, makes the releasenot automatic, a flagrant violation of the constitutional and statutory

mandate that the just share of the LGUs shall be automatically released to them. The LGUs are, thus, placed at the mercy of the Oversight Committee. Where the law, the Constitution in this case, is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.[27] Moreover, as correctly posited by the petitioner, the use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion.[28] Indeed, the Oversight Committee exercising discretion, even control, over the distribution and release of a portion of the IRA, the LGSEF, is an anathema to and subversive of the principle of local autonomy as embodied in the Constitution. Moreover, it finds no statutory basis at all as the Oversight Committee was created merely to formulate the rules and regulations for the efficient and effective implementation of the Local Government Code of 1991 to ensure compliance with the principles of local autonomy as defined under the Constitution.[29] In fact, its creation was placed under the title of Transitory Provisions, signifying its ad hoc character. According to Senator Aquilino Q. Pimentel, the principal author and sponsor of the bill that eventually became Rep. Act No. 7 160, the Committees work was supposed to be done a year from the approval of the Code, or on October 10, 1992.[30] The Oversight Committees authority is undoubtedly limited to the implementation of the Local Government Code of 1991, not to supplant or subvert the same. Neither can it exercise control over the IRA, or even a portion thereof, of the LGUs. That the automatic release of the IRA was precisely intended to guarantee and promote local autonomy can be gleaned from the discussion below between Messrs. Jose N. Nolledo and Regalado M. Maambong, then members of the 1986 Constitutional Commission, to wit:

MR. MAAMBONG. Unfortunately, under Section 198 of the Local Government Code, the existence of subprovinces is still acknowledged by the law, but the statement of the Gentleman on this point will have to be taken up probably by the Committee on Legislation. A second point, Mr. Presiding Officer, is that under Article 2, Section 10 of the 1973 Constitution, we have a provision which states: The State shall guarantee and promote the autonomy of local government units, especially the barrio, to insure their fullest development as self-reliant communities. This provision no longer appears in the present configuration; does this mean that the concept of giving local autonomy to local governments is no longer adopted as far as this Article is concerned? MR. NOLLEDO. No. In the report of the Committee on Preamble, National Territory, and Declaration of Principles, that concept is included and widened upon the initiative of Commissioner Bennagen. MR. MAAMBONG. Thank you for that.

With regard to Section 6, sources of revenue, the creation of sources as provided by previous law was subject to limitations as may be provided by law, but now, we are using the term subject to such guidelines as may be fixed by law. In Section 7, mention is made about the unique, distinct and exclusive charges and contributions, and in Section 8, we talk about exclusivity of local taxes and the share in the national wealth. Incidentally, I was one of the authors of this provision, and I am very thankful. Does this indicate local autonomy, or was the wording of the law changed to give more autonomy to the local government units?
[31]

MR. NOLLEDO. Yes. In effect, those words indicate also decentralization because local political units can collect taxes, fees and charges subject merely to guidelines, as recommended by the league of governors and city mayors, with whom I had a dialogue for almost two hours. They told me that limitations may be questionable in the sense that Congress may limit and in effect deny the right later on. MR. MAAMBONG. Also, this provision on automatic release of national tax share points to more local autonomy. Is this the intention? MR. NOLLEDO. Yes, the Commissioner is perfectly right.
[32]

The concept of local autonomy was explained in Ganzon v. Court of Appeals[33] in this wise:

As the Constitution itself declares, local autonomy means a more responsive and accountable local government structure instituted through a system of decentralization. The Constitution, as we observed, does nothing more than to break up the monopoly of the national government over the affairs of local governments and as put by political adherents, to liberate the local governments from the imperialism of Manila. Autonomy, however, is not meant to end the relation of partnership and interdependence between the central administration and local government units, or otherwise, to usher in a regime of federalism. The Charter has not taken such a radical step. Local governments, under the Constitution, are subject to regulation, however limited, and for no other purpose than precisely, albeit paradoxically, to enhance self-government. As we observed in one case, decentralization means devolution of national administration but not power to the local levels. Thus: Now, autonomy is either decentralization of administration or decentralization of power. There is decentralization of administration when the central government delegates administrative powers to political subdivisions in order to broaden the base of government power and in the process to make local governments more responsive and accountable and ensure their fullest development as self-reliant communities and make them more effective partners in the pursuit of national development and social progress. At the same time, it relieves the central government of the burden of

managing local affairs and enables it to concentrate on national concerns. The President exercises general supervision over them, but only to ensure that local affairs are administered according to law. He has no control over their acts in the sense that he can substitute their judgments with his own. Decentralization of power, on the other hand, involves an abdication of political power in the [sic] favor of local governments [sic] units declared to be autonomous. In that case, the autonomous government is free to chart its own destiny and shape its future with minimum intervention from central authorities. According to a constitutional author, decentralization of power amounts to self-immolation, since in that event, the autonomous government becomes accountable not to the central authorities but to its constituency.
[34]

Local autonomy includes both administrative and fiscal autonomy. The fairly recent case of Pimentel v. Aguirre[35] is particularly instructive. The Court declared therein that local fiscal autonomy includes the power of the LGUs to, inter alia, allocate their resources in accordance with their own priorities:

Under existing law, local government units, in addition to having administrative autonomy in the exercise of their functions, enjoy fiscal autonomy as well. Fiscal autonomy means that local governments have the power to create their own sources of revenue in addition to their equitable share in the national taxes released by the national government, as well as the power to allocate their resources in accordance with their own priorities. It extends to the preparation of their budgets, and local officials in turn have to work within the constraints thereof. They are not formulated at the national level and imposed on local governments, whether they are relevant to local needs and resources or not ...
[36]

Further, a basic feature of local fiscal autonomy is the constitutionally mandated automatic release of the shares of LGUs in the national internal revenue. [37] Following this ratiocination, the Court in Pimentel struck down as unconstitutional Section 4 of Administrative Order (A.O.) No. 372 which ordered the withholding, effective January 1, 1998, of ten percent of the LGUs IRA pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation. In like manner, the assailed provisos in the GAAs of 1999, 2000 and 2001, and the OCD resolutions constitute a withholding of a portion of the IRA. They put on hold the distribution and release of the five billion pesos LGSEF and subject the same to the implementing rules and regulations, including the guidelines and mechanisms prescribed by the Oversight Committee from time to time. Like Section 4 of A.O. 372, the assailed provisos in the GAAs of 1999, 2000 and 2001 and the OCD resolutions effectively encroach on the fiscal autonomy enjoyed by the LGUs and must be struck down. They cannot, therefore, be upheld.

The assailed provisos in the GAAs of 1999, 2000

and 2001 and the OCD resolutions cannot amend Section 285 of the Local Government Code of 1991 Section 284[38] of the Local Government Code provides that, beginning the third year of its effectivity, the LGUs share in the national internal revenue taxes shall be 40%. This percentage is fixed and may not be reduced except in the event the national government incurs an unmanageable public sector deficit" and only upon compliance with stringent requirements set forth in the same section:

Sec. 284.

...

Provided, That in the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the liga, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of the national internal revenue taxes of the third fiscal year preceding the current fiscal year; Provided, further That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personnel services.
Thus, from the above provision, the only possible exception to the mandatory automatic release of the LGUs IRA is if the national internal revenue collections for the current fiscal year is less than 40 percent of the collections of the preceding third fiscal year, in which case what should be automatically released shall be a proportionate amount of the collections for the current fiscal year. The adjustment may even be made on a quarterly basis depending on the actual collections of national internal revenue taxes for the quarter of the current fiscal year. In the instant case, however, there is no allegation that the national internal revenue tax collections for the fiscal years 1999, 2000 and 2001 have fallen compared to the preceding three fiscal years. Section 285 then specifies how the IRA shall be allocated among the LGUs:

Sec. 285. Allocation to Local Government Units. The share of local government units in the internal revenue allotment shall be allocated in the following manner: Provinces Twenty-three (23%) (b) Cities Twenty-three percent (23%); (c) Municipalities Thirty-four (34%); and (d) Barangays Twenty percent (20%). (a)
However, this percentage sharing is not followed with respect to the five billion pesos LGSEF as the assailed OCD resolutions, implementing the assailed provisos in

the GAAs of 1999, 2000 and 2001, provided for a different sharing scheme. For example, for 1999, P2 billion of the LGSEF was allocated as follows: Provinces 40%; Cities 20%; Municipalities 40%.[39] For 2000, P3.5 billion of the LGSEF was allocated in this manner: Provinces 26%; Cities 23%; Municipalities 35%; Barangays 26%.[40] For 2001, P3 billion of the LGSEF was allocated, thus: Provinces 25%; Cities 25%; Municipalities 35%; Barangays 15%.[41] The respondents argue that this modification is allowed since the Constitution does not specify that the just share of the LGUs shall only be determined by the Local Government Code of 1991. That it is within the power of Congress to enact other laws, including the GAAs, to increase or decrease the just share of the LGUs. This contention is untenable. The Local Government Code of 1991 is a substantive law. And while it is conceded that Congress may amend any of the provisions therein, it may not do so through appropriations laws or GAAs. Any amendment to the Local Government Code of 1991 should be done in a separate law, not in the appropriations law, because Congress cannot include in a general appropriation bill matters that should be more properly enacted in a separate legislation.[42] A general appropriations bill is a special type of legislation, whose content is limited to specified sums of money dedicated to a specific purpose or a separate fiscal unit.[43] Any provision therein which is intended to amend another law is considered an inappropriate provision. The category of inappropriate provisions i ncludes unconstitutional provisions and provisions which are intended to amend other laws, because clearly these kinds of laws have no place in an appropriations bill. [44] Increasing or decreasing the IRA of the LGUs or modifying their percentage sharing therein, which are fixed in the Local Government Code of 1991, are matters of general and substantive law. To permit Congress to undertake these amendments through the GAAs, as the respondents contend, would be to give Congress the unbridled authority to unduly infringe the fiscal autonomy of the LGUs, and thus put the same in jeopardy every year. This, the Court cannot sanction. It is relevant to point out at this juncture that, unlike those of 1999, 2000 and 2001, the GAAs of 2002 and 2003 do not contain provisos similar to the herein assailed provisos. In other words, the GAAs of 2002 and 2003 have not earmarked any amount of the IRA for the LGSEF. Congress had perhaps seen fit to discontinue the practice as it recognizes its infirmity. Nonetheless, as earlier mentioned, this Court has deemed it necessary to make a definitive ruling on the matter in order to prevent its recurrence in future appropriations laws and that the principles enunciated herein would serve to guide the bench, bar and public.

Conclusion In closing, it is well to note that the principle of local autonomy, while concededly expounded in greater detail in the present Constitution, dates back to the turn of the century when President William McKinley, in his Instructions to the Second Philippine Commission dated April 7, 1900, ordered the new Government to devote their attention in the first instance to the establishment of municipal governments in which the natives of the Islands, both in the cities and in the rural communities, shall be afforded the opportunity to manage their own affairs to the fullest extent of which they are capable,

and subject to the least degree of supervision and control in which a careful study of their capacities and observation of the workings of native control show to be consistent with the maintenance of law, order and loyalty.[45] While the 1935 Constitution had no specific article on local autonomy, nonetheless, it limited the executive power over local governments to general supervision ... as may be provided by law.[46] Subsequently, the 1973 Constitution explicitly stated that [t]he State shall guarantee and promote the autonomy of local government units, especially the barangay to ensure their fullest development as self-reliant communities.[47] An entire article on Local Government was incorporated therein. The present Constitution, as earlier opined, has broadened the principle of local autonomy. The 14 sections in Article X thereof markedly increased the powers of the local governments in order to accomplish the goal of a more meaningful local autonomy. Indeed, the value of local governments as institutions of democracy is measured by the degree of autonomy that they enjoy.[48] As eloquently put by M. De Tocqueville, a distinguished French political writer, [l]ocal assemblies of citizens constitute the strength of free nations. Township meetings are to liberty what primary schools are to science; they bring it within the peoples reach; they teach men how to use and enjoy it. A nation may establish a system of free governments but without the spirit of municipal institutions, it cannot have the spirit of liberty.[49] Our national officials should not only comply with the constitutional provisions on local autonomy but should also appreciate the spirit and liberty upon which these provisions are based.[50] WHEREFORE, the petition is GRANTED. The assailed provisos in the General Appropriations Acts of 1999, 2000 and 2001, and the assailed OCD Resolutions, are declared UNCONSTITUTIONAL. SO ORDERED. Vitug, (Acting Chief Justice), Panganiban, Quisumbing, Ynares-Santiago, SandovalGutierrez, Carpio, Austria-Martinez, Corona, Carpio-Morales, Azcuna, and Tinga, JJ.,concur. Davide, Jr., C.J., and Puno, J., on official leave.

[1]

Section 1, E.O. No. 48. Section 2, id. Section 4, id. Ibid. Id. Id. Id. Infra.

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

Baker v. Carr, 369 U.S. 186, 7 L.Ed. 2d 633 cited in, among others, Agan, Jr. v. PIATCO, G.R. Nos. 155001, 155547 and 155661, May 5, 2003 and Farias v. Executive Secretary, G.R. Nos. 147387 and 152161, December 10, 2003. Agan, Jr. v. PIATCO, supra. Ibid. Id. Chavez v. Public Estates Authority, 384 SCRA 152 (2002). Ibid, citing, among others, Salonga v. Pao, 134 SCRA 438 (1995). Southern Pac. Terminal Co. v. ICC, 219 U.S. 498, 55 L.Ed. 310 (1911) cited in, among others, Viola v. Alunan III, 277 SCRA 409 (1997); Acop v. Guingona, Jr., 383 SCRA 577 (2002). San Juan v. Civil Service Commission, 196 SCRA 69 (1991). Section 4, Article X. 235 SCRA 135 (1994). Id. at 142. Rep. Act No. 7160 was signed into law by then President Corazon C. Aquino on October 10, 1991. It took effect on January 1, 1992. Section 3, Article X reads: 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, terms, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of local government units.

[10]

[11]

[12]

[13]

[14]

[15]

[16]

[17]

[18]

[19]

[20]

[21]

[22]

336 SCRA 201 (2000). Id. at 220-221. (Emphasis supplied.) Per OCD-99-005, 99-006, 99-003. Per OCD-2000-023 and 2001-029. Per OCD-2002-001. Quisumbing v. Manila Electric Co., 380 SCRA 195 (2002). Codoy v. Calugay, 312 SCRA 333 (1999). Section 533 of Rep. Act 7160 reads in part: Sec. 533. Formulation of Implementing Rules and Regulations . (a) Within one (1) month after the approval of this Code, the President shall convene the Oversight Committee as herein provided for. The said Committee shall formulate and issue the appropriate rules and regulations necessary for the efficient and effective implementation of any and all provisions of this Code, thereby ensuring compliance with the principles of local autonomy as defined under the Constitution. ...

[23]

[24]

[25]

[26]

[27]

[28]

[29]

(c) The Committee shall submit its report and recommendation to the President within two (2) months after its organization. If the President fails to act within thirty (30) days from receipt thereof, the recommendation of the Oversight Committee shall be deemed approved. Thereafter, the Committee shall supervise the transfer of such powers and functions mandated under this Code to the local government units, together with the corresponding personnel, properties, assets and liabilities of the offices or agencies concerned, with the least possible disruptions to existing

programs and projects. The Committee shall, likewise, recommend the corresponding appropriations necessary to effect the said transfer.
[30]

Pimentel, The Local Government Code of 1991: The Key to National Development, p. 576. The Committee Report No. 21 submitted by the Committee on Local Governments of the Constitutional Commission, headed by Commissioner Jose N. Nolledo, proposed to incorporate the following provisions: SEC. 6. Each government unit shall have the power to create its own sources of revenue and to levy taxes, fees and charges subject to such guidelines as may be fixed by law. SEC. 7. Local governments shall have the power to levy and collect charges or contributions unique, distinct and exclusive to them. SEC. 8. Local taxes shall belong exclusively to local governments and they shall, likewise, be entitled to share in the proceeds of the exploitation and development of the national wealth within their respective areas. The share of local governments in the national taxes shall be released to them automatically.

[31]

[32]

3 RECORD OF THE CONSTITUTIONAL COMMISSION 231. 200 SCRA 271 (1991). Id. at 286-287. (Citations omitted.) Supra at note 22. Id. at 218. Id. at 220. The provision reads in part: Sec. 284. Allotment of Internal Revenue Taxes. Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows: (a) (b) (c)(c) On the first year of the effectivity of this Code, thirty percent (30%); On the second year, thirty-five percent (35%); and On the third year and, thereafter, forty percent (40%).

[33]

[34]

[35]

[36]

[37]

[38]

[39]

Per OCD Res.-99-005, 99-006, 99-003. Per OCD-2000-023 and 2001-029. Per OCD-2002-001. Philippine Constitutional Association v. Enriquez, 235 SCRA 506 (1994). Ibid, citing Beckman, The Item Veto Power of the Executive, 31 Temple Law Quarterly 27 (1957). Id. Mendoza, From McKinleys Instructions to the New Constitution: Documents on the Philippine Constitutional System, pp. 67-68. Paragraph (1), Section 11, Article VII of the 1935 Constitution reads: Sec. 11(1). The President shall have control of all the executive departments, bureaus or offices, exercise general supervision over all local governments as may be provided by law, and take care that the laws be faithfully executed.

[40]

[41]

[42]

[43]

[44]

[45]

[46]

[47]

Section 10, Article II thereof. Sinco, Philippine Political Law, 10th ed., pp. 681-682.

[48]

[49]

Ibid. San Juan v. Civil Service Commission, supra.

[50]

EN BANC

[G.R. No. 132988. July 19, 2000]

AQUILINO Q. PIMENTEL JR., petitioner, vs. Hon. ALEXANDER AGUIRRE in his capacity as Executive Secretary, Hon. EMILIA BONCODIN in her capacity as Secretary of the Department of Budget and Management, respondents. ROBERTO PAGDANGANAN, intervenor. DECISION
PANGANIBAN, J.:

The Constitution vests the President with the power of supervision, not control, over local government units (LGUs). Such power enables him to see to it that LGUs and their officials execute their tasks in accordance with law. While he may issue advisories and seek their cooperation in solving economic difficulties, he cannot prevent them from performing their tasks and using available resources to achieve their goals. He may not withhold or alter any authority or power given them by the law. Thus, the withholding of a portion of internal revenue allotments legally due them cannot be directed by administrative fiat.
The Case

Before us is an original Petition for Certiorari and Prohibition seeking (1) to annul Section 1 of Administrative Order (AO) No. 372, insofar as it requires local government units to reduce their expenditures by 25 percent of their authorized regular appropriations for non-personal services; and (2) to enjoin respondents from implementing Section 4 of the Order, which withholds a portion of their internal revenue allotments. On November 17, 1998, Roberto Pagdanganan, through Counsel Alberto C. Agra, filed a Motion for Intervention/Motion to Admit Petition for Intervention,[1] attaching thereto his Petition in Intervention[2] joining petitioner in the reliefs sought. At the time, intervenor was the provincial governor of Bulacan, national president of the League of Provinces of the Philippines and chairman of the League of Leagues of Local Governments. In a Resolution dated December 15, 1998, the Court noted said Motion and Petition.
The Facts and the Arguments

On December 27, 1997, the President of the Philippines issued AO 372. Its full text, with emphasis on the assailed provisions, is as follows:

"ADMINISTRATIVE ORDER NO. 372 ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998 WHEREAS, the current economic difficulties brought about by the peso depreciation requires continued prudence in government fiscal management to maintain economic stability and sustain the country's growth momentum; WHEREAS, it is imperative that all government agencies adopt cash management measures to match expenditures with available resources; NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and direct: SECTION 1. All government departments and agencies, including state universities and colleges, government-owned and controlled corporations and local governments units will identify and implement measures in FY 1998 that will reduce total expenditures for the year by at least 25% of authorized regular appropriations for non-personal services items, along the following suggested areas:
1. Continued implementation of the streamlining policy on organization and staffing by deferring action on the following:

a. b. c.

Operationalization of new agencies; Expansion of organizational units and/or creation of positions; Filling of positions; and

d. Hiring of additional/new consultants, contractual and casual personnel, regardless of funding source.
2. Suspension of the following activities:

a. b. c.

Implementation of new capital/infrastructure projects, except those which have already been contracted out; Acquisition of new equipment and motor vehicles; All foreign travels of government personnel, except those associated with scholarships and trainings funded by grants;

d.

Attendance in conferences abroad where the cost is charged to the government except those clearly essential to Philippine commitments in the international field as may be determined by the Cabinet; Conduct of trainings/workshops/seminars, except those conducted by government training institutions and agencies in the performance of their regular functions and those that are funded by grants; Conduct of cultural and social celebrations and sports activities, except those associated with the Philippine Centennial celebration and those involving regular competitions/events; Grant of honoraria, except in cases where it constitutes the only source of compensation from government received by the person concerned; Publications, media advertisements and related items, except those required by law or those already being undertaken on a regular basis; Grant of new/additional benefits to employees, except those expressly and specifically authorized by law; and Donations, contributions, grants and gifts, except those given by institutions to victims of calamities.

e.

f.

g.

h.

i. j.

3. Suspension of all tax expenditure subsidies to all GOCCs and LGUs 4. Reduction in the volume of consumption of fuel, water, office supplies, electricity and other utilities 5. Deferment of projects that are encountering significant implementation problems 6. Suspension of all realignment of funds and the use of savings and reserves

SECTION 2. Agencies are given the flexibility to identify the specific sources of cost-savings, provided the 25% minimum savings under Section 1 is complied with. SECTION 3. A report on the estimated savings generated from these measures shall be submitted to the Office of the President, through the Department of Budget and Management, on a quarterly basis using the attached format.
SECTION 4. Pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation, the amount

equivalent to 10% of the internal revenue allotment to local government units shall be withheld. SECTION 5. The Development Budget Coordination Committee shall conduct a monthly review of the fiscal position of the National Government and if necessary, shall recommend to the President the imposition of additional reserves or the lifting of previously imposed reserves. SECTION 6. This Administrative Order shall take effect January 1, 1998 and shall remain valid for the entire year unless otherwise lifted.

DONE in the City of Manila, this 27th day of December, in the year of our Lord, nineteen hundred and ninety-seven."
Subsequently, on December 10, 1998, President Joseph E. Estrada issued AO 43, amending Section 4 of AO 372, by reducing to five percent (5%) the amount of internal revenue allotment (IRA) to be withheld from the LGUs. Petitioner contends that the President, in issuing AO 372, was in effect exercising the power of control over LGUs. The Constitution vests in the President, however, only the power of general supervision over LGUs, consistent with the principle of local autonomy. Petitioner further argues that the directive to withhold ten percent (10%) of their IRA is in contravention of Section 286 of the Local Government Code and of Section 6, Article X of the Constitution, providing for the automatic release to each of these units its share in the national internal revenue. The solicitor general, on behalf of the respondents, claims on the other hand that AO 372 was issued to alleviate the "economic difficulties brought about by the peso devaluation" and constituted merely an exercise of the President's power of supervision over LGUs. It allegedly does not violate local fiscal autonomy, because it merely directs local governments to identify measures that will reduce their total expenditures for non-personal services by at least 25 percent. Likewise, the withholding of 10 percent of the LGUs IRA does not violate the statutory prohibition on the imposition of any lien or holdback on their revenue shares, because such withholding is "temporary in nature pending the assessment and evaluation by the Development Coordination Committee of the emerging fiscal situation."
The Issues

The Petition[3] submits the following issues for the Court's resolution:

"A. Whether or not the president committed grave abuse of discretion [in] ordering all LGUS to adopt a 25% cost reduction program in violation of the LGU[']S fiscal autonomy "B. Whether or not the president committed grave abuse of discretion in ordering the withholding of 10% of the LGU[']S IRA"

In sum, the main issue is whether (a) Section 1 of AO 372, insofar as it "directs" LGUs to reduce their expenditures by 25 percent; and (b) Section 4 of the same issuance, which withholds 10 percent of their internal revenue allotments, are valid exercises of the President's power of general supervision over local governments. Additionally, the Court deliberated on the question whether petitioner had the locus standi to bring this suit, despite respondents' failure to raise the issue. [4] However, the intervention of Roberto Pagdanganan has rendered academic any further discussion on this matter.
The Court's Ruling

The Petition is partly meritorious.

Main Issue: Validity of AO 372 Insofar as LGUs Are Concerned

Before resolving the main issue, we deem it important and appropriate to define certain crucial concepts: (1) the scope of the President's power of general supervision over local governments and (2) the extent of the local governments' autonomy.
Scope of President's Power of Supervision Over LGUs

Section 4 of Article X of the Constitution confines the President's power over local governments to one of general supervision. It reads as follows:

"Sec. 4. The President of the Philippines shall exercise general supervision over local governments. x x x"
This provision has been interpreted to exclude the power of control. In Mondano v. Silvosa,[5] the Court contrasted the President's power of supervision over local government officials with that of his power of control over executive officials of the national government. It was emphasized that the two terms -- supervision and control -differed in meaning and extent. The Court distinguished them as follows:

"x x x In administrative law, supervision means overseeing or the power or authority of an officer to see that subordinate officers perform their duties. If the latter fail or neglect to fulfill them, the former may take such action or step as prescribed by law to make them perform their duties. Control, on the other hand, means the power of an officer to alter or modify or nullify or set aside what a subordinate officer ha[s] done in the performance of his duties and to substitute the judgment of the former for that of the latter."[6]
In Taule v. Santos,[7] we further stated that the Chief Executive wielded no more authority than that of checking whether local governments or their officials were

performing their duties as provided by the fundamental law and by statutes. He cannot interfere with local governments, so long as they act within the scope of their authority. "Supervisory power, when contrasted with control, is the power of mere oversight over an inferior body; it does not include any restraining authority over such body,"[8] we said. In a more recent case, Drilon v. Lim,[9] the difference between control and supervision was further delineated. Officers in control lay down the rules in the performance or accomplishment of an act. If these rules are not followed, they may, in their discretion, order the act undone or redone by their subordinates or even decide to do it themselves. On the other hand, supervision does not cover such authority. Supervising officials merely see to it that the rules are followed, but they themselves do not lay down such rules, nor do they have the discretion to modify or replace them. If the rules are not observed, they may order the work done or redone, but only to conform to such rules. They may not prescribe their own manner of execution of the act. They have no discretion on this matter except to see to it that the rules are followed. Under our present system of government, executive power is vested in the President.[10] The members of the Cabinet and other executive officials are merely alter egos. As such, they are subject to the power of control of the President, at whose will and behest they can be removed from office; or their actions and decisions changed, suspended or reversed.[11] In contrast, the heads of political subdivisions are elected by the people. Their sovereign powers emanate from the electorate, to whom they are directly accountable. By constitutional fiat, they are subject to the Presidents supervision only, not control, so long as their acts are exercised within the sphere of their legitimate powers. By the same token, the President may not withhold or alter any authority or power given them by the Constitution and the law.
Extent of Local Autonomy

Hand in hand with the constitutional restraint on the President's power over local governments is the state policy of ensuring local autonomy.[12] In Ganzon v. Court of Appeals,[13] we said that local autonomy signified "a more responsive and accountable local government structure instituted through a system of decentralization." The grant of autonomy is intended to "break up the monopoly of the national government over the affairs of local governments, x x x not x x x to end the relation of partnership and interdependence between the central administration and local government units x x x." Paradoxically, local governments are still subject to regulation, however limited, for the purpose of enhancing self-government.[14] Decentralization simply means the devolution of national administration, not power, to local governments. Local officials remain accountable to the central government as the law may provide.[15] The difference between decentralization of administration and that of power was explained in detail in Limbona v. Mangelin[16] as follows:

"Now, autonomy is either decentralization of administration or decentralization of power. There is decentralization of administration when the central

government delegates administrative powers to political subdivisions in order to broaden the base of government power and in the process to make local governments 'more responsive and accountable,'[17] and 'ensure their fullest
development as self-reliant communities and make them more effective partners in the pursuit of national [18] development and social progress.' At the same time, it relieves the central government of the burden of managing local affairs and enables it to concentrate on national concerns. The President exercises [19] 'general supervision' over them, but only to 'ensure that local affairs are administered according to [20] law.' He has no control over their acts in the sense that he can substitute their judgments with his [21] own.

Decentralization of power, on the other hand, involves an abdication of political power in the favor of local government units declared to be autonomous. In that case, the autonomous government is free to chart its own destiny and shape its future with minimum intervention from central authorities. According to a constitutional author, decentralization of power amounts to 'self-immolation,' since in that event, the autonomous government becomes accountable not to the central authorities but to its constituency."[22]
Under the Philippine concept of local autonomy, the national government has not completely relinquished all its powers over local governments, including autonomous regions. Only administrative powers over local affairs are delegated to political subdivisions. The purpose of the delegation is to make governance more directly responsive and effective at the local levels. In turn, economic, political and social development at the smaller political units are expected to propel social and economic growth and development. But to enable the country to develop as a whole, the programs and policies effected locally must be integrated and coordinated towards a common national goal. Thus, policy-setting for the entire country still lies in the President and Congress. As we stated in Magtajas v. Pryce Properties Corp., Inc., municipal governments are still agents of the national government. [23]
The Nature of AO 372

Consistent with the foregoing jurisprudential precepts, let us now look into the nature of AO 372. As its preambular clauses declare, the Order was a "cash management measure" adopted by the government "to match expenditures with available resources," which were presumably depleted at the time due to "economic difficulties brought about by the peso depreciation." Because of a looming financial crisis, the President deemed it necessary to "direct all government agencies, state universities and colleges, government-owned and controlled corporations as well as local governments to reduce their total expenditures by at least 25 percent along suggested areas mentioned in AO 372. Under existing law, local government units, in addition to having administrative autonomy in the exercise of their functions, enjoy fiscal autonomy as well. Fiscal autonomy means that local governments have the power to create their own sources of revenue in addition to their equitable share in the national taxes released by the national government, as well as the power to allocate their resources in accordance with their own priorities. It extends to the preparation of their budgets, and local officials in turn

have to work within the constraints thereof. They are not formulated at the national level and imposed on local governments, whether they are relevant to local needs and resources or not. Hence, the necessity of a balancing of viewpoints and the harmonization of proposals from both local and national officials, [24] who in any case are partners in the attainment of national goals. Local fiscal autonomy does not however rule out any manner of national government intervention by way of supervision, in order to ensure that local programs, fiscal and otherwise, are consistent with national goals. Significantly, the President, by constitutional fiat, is the head of the economic and planning agency of the government,[25] primarily responsible for formulating and implementing continuing, coordinated and integrated social and economic policies, plans and programs [26] for the entire country. However, under the Constitution, the formulation and the implementation of such policies and programs are subject to "consultations with the appropriate public agencies, various private sectors, and local government units." The President cannot do so unilaterally. Consequently, the Local Government Code provides:[27]

"x x x [I]n the event the national government incurs an unmanaged public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of [the] Secretary of Finance, Secretary of the Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the liga, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year x x x."
There are therefore several requisites before the President may interfere in local fiscal matters: (1) an unmanaged public sector deficit of the national government; (2) consultations with the presiding officers of the Senate and the House of Representatives and the presidents of the various local leagues; and (3) the corresponding recommendation of the secretaries of the Department of Finance, Interior and Local Government, and Budget and Management. Furthermore, any adjustment in the allotment shall in no case be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current one. Petitioner points out that respondents failed to comply with these requisites before the issuance and the implementation of AO 372. At the very least, they did not even try to show that the national government was suffering from an unmanageable public sector deficit. Neither did they claim having conducted consultations with the different leagues of local governments. Without these requisites, the President has no authority to adjust, much less to reduce, unilaterally the LGU's internal revenue allotment. The solicitor general insists, however, that AO 372 is merely directory and has been issued by the President consistent with his power of supervision over local governments. It is intended only to advise all government agencies and instrumentalities to undertake cost-reduction measures that will help maintain economic stability in the country, which is facing economic difficulties. Besides, it does not contain

any sanction in case of noncompliance. Being merely an advisory, therefore, Section 1 of AO 372 is well within the powers of the President. Since it is not a mandatory imposition, the directive cannot be characterized as an exercise of the power of control. While the wordings of Section 1 of AO 372 have a rather commanding tone, and while we agree with petitioner that the requirements of Section 284 of the Local Government Code have not been satisfied, we are prepared to accept the solicitor general's assurance that the directive to "identify and implement measures x x x that will reduce total expenditures x x x by at least 25% of authorized regular appropriation" is merely advisory in character, and does not constitute a mandatory or binding order that interferes with local autonomy. The language used, while authoritative, does not amount to a command that emanates from a boss to a subaltern. Rather, the provision is merely an advisory to prevail upon local executives to recognize the need for fiscal restraint in a period of economic difficulty. Indeed, all concerned would do well to heed the President's call to unity, solidarity and teamwork to help alleviate the crisis. It is understood, however, that no legal sanction may be imposed upon LGUs and their officials who do not follow such advice. It is in this light that we sustain the solicitor general's contention in regard to Section 1.
Withholding a Part of LGUs' IRA

Section 4 of AO 372 cannot, however, be upheld. A basic feature of local fiscal autonomy is the automatic release of the shares of LGUs in the national internal revenue. This is mandated by no less than the Constitution.[28] The Local Government Code[29] specifies further that the release shall be made directly to the LGU concerned within five (5) days after every quarter of the year and " shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose. "[30] As a rule, the term "shall" is a word of command that must be given a compulsory meaning.[31] The provision is, therefore, imperative. Section 4 of AO 372, however, orders the withholding, effective January 1, 1998, of 10 percent of the LGUs' IRA "pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation" in the country. Such withholding clearly contravenes the Constitution and the law. Although temporary, it is equivalent to a holdback, which means "something held back or withheld, often temporarily."[32] Hence, the "temporary" nature of the retention by the national government does not matter. Any retention is prohibited. In sum, while Section 1 of AO 372 may be upheld as an advisory effected in times of national crisis, Section 4 thereof has no color of validity at all. The latter provision effectively encroaches on the fiscal autonomy of local governments. Concededly, the President was well-intentioned in issuing his Order to withhold the LGUs IRA, but the rule of law requires that even the best intentions must be carried out within the parameters of the Constitution and the law. Verily, laudable purposes must be carried out by legal methods.
Refutation of Justice Kapunan's Dissent

Mr. Justice Santiago M. Kapunan dissents from our Decision on the grounds that, allegedly, (1) the Petition is premature; (2) AO 372 falls within the powers of the President as chief fiscal officer; and (3) the withholding of the LGUs IRA is implied in the President's authority to adjust it in case of an unmanageable public sector deficit. First, on prematurity. According to the Dissent, when "the conduct has not yet occurred and the challenged construction has not yet been adopted by the agency charged with administering the administrative order, the determination of the scope and constitutionality of the executive action in advance of its immediate adverse effect involves too remote and abstract an inquiry for the proper exercise of judicial function." This is a rather novel theory -- that people should await the implementing evil to befall on them before they can question acts that are illegal or unconstitutional. Be it remembered that the real issue here is whether the Constitution and the law are contravened by Section 4 of AO 372, not whether they are violated by the acts implementing it. In the unanimous en banc case Taada v. Angara,[33] this Court held that when an act of the legislative department is seriously alleged to have infringed the Constitution, settling the controversy becomes the duty of this Court. By the mere enactment of the questioned law or the approval of the challenged action, the dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty. Said the Court:

"In seeking to nullify an act of the Philippine Senate on the ground that it contravenes the Constitution, the petition no doubt raises a justiciable controversy. Where an action of the legislative branch is seriously alleged to have infringed the Constitution, it becomes not only the right but in fact the duty of the judiciary to settle the dispute. 'The question thus posed is judicial rather than political. The duty (to adjudicate) remains to assure that the supremacy of the Constitution is upheld.'[34] Once a 'controversy as to the application or
interpretation of a constitutional provision is raised before this Court x x x , it becomes a legal issue [35] which the Court is bound by constitutional mandate to decide.'

xxx

xxx

xxx

"As this Court has repeatedly and firmly emphasized in many cases,[36] it will not
shirk, digress from or abandon its sacred duty and authority to uphold the Constitution in matters that involve grave abuse of discretion brought before it in appropriate cases, committed by any officer, agency, instrumentality or department of the government."

In the same vein, the Court also held in Tatad v. Secretary of the Department of Energy:[37]

"x x x Judicial power includes not only the duty of the courts to settle actual controversies involving rights which are legally demandable and enforceable, but also the duty to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of government. The courts, as guardians of the Constitution, have the inherent authority to determine whether a statute

enacted by the legislature transcends the limit imposed by the fundamental law. Where the statute violates the Constitution, it is not only the right but the duty of the judiciary to declare such act unconstitutional and void."
By the same token, when an act of the President, who in our constitutional scheme is a coequal of Congress, is seriously alleged to have infringed the Constitution and the laws, as in the present case, settling the dispute becomes the duty and the responsibility of the courts. Besides, the issue that the Petition is premature has not been raised by the parties; hence it is deemed waived. Considerations of due process really prevents its use against a party that has not been given sufficient notice of its presentation, and thus has not been given the opportunity to refute it.[38] Second, on the President's power as chief fiscal officer of the country. Justice Kapunan posits that Section 4 of AO 372 conforms with the President's role as chief fiscal officer, who allegedly "is clothed by law with certain powers to ensure the observance of safeguards and auditing requirements, as well as the legal prerequisites in the release and use of IRAs, taking into account the constitutional and statutory mandates."[39] He cites instances when the President may lawfully intervene in the fiscal affairs of LGUs. Precisely, such powers referred to in the Dissent have specifically been authorized by law and have not been challenged as violative of the Constitution. On the other hand, Section 4 of AO 372, as explained earlier, contravenes explicit provisions of the Local Government Code (LGC) and the Constitution. In other words, the acts alluded to in the Dissent are indeed authorized by law; but, quite the opposite, Section 4 of AO 372 is bereft of any legal or constitutional basis. Third, on the President's authority to adjust the IRA of LGUs in case of an unmanageable public sector deficit. It must be emphasized that in striking down Section 4 of AO 372, this Court is not ruling out any form of reduction in the IRAs of LGUs. Indeed, as the President may make necessary adjustments in case of an unmanageable public sector deficit, as stated in the main part of this Decision, and in line with Section 284 of the LGC, which Justice Kapunan cites. He, however, merely glances over a specific requirement in the same provision -- that such reduction is subject to consultation with the presiding officers of both Houses of Congress and, more importantly, with the presidents of the leagues of local governments. Notably, Justice Kapunan recognizes the need for "interaction between the national government and the LGUs at the planning level," in order to ensure that "local development plans x x x hew to national policies and standards." The problem is that no such interaction or consultation was ever held prior to the issuance of AO 372. This is why the petitioner and the intervenor (who was a provincial governor and at the same time president of the League of Provinces of the Philippines and chairman of the League of Leagues of Local Governments) have protested and instituted this action. Significantly, respondents do not deny the lack of consultation. In addition, Justice Kapunan cites Section 287[40] of the LGC as impliedly authorizing the President to withhold the IRA of an LGU, pending its compliance with certain requirements. Even a cursory reading of the provision reveals that it is totally inapplicable to the issue at bar. It directs LGUs to appropriate in their annual budgets

20 percent of their respective IRAs for development projects. It speaks of no positive power granted the President to priorly withhold any amount. Not at all. WHEREFORE, the Petition is GRANTED. Respondents and their successors are hereby permanently PROHIBITED from implementing Administrative Order Nos. 372 and 43, respectively dated December 27, 1997 and December 10, 1998, insofar as local government units are concerned. SO ORDERED. Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Mendoza, Quisumbing, Pardo, Buena, Gonzaga-Reyes, and De Leon, Jr., JJ., concur. Kapunan, J., see dissenting opinion. Purisima, and Ynares-Santiago, JJ., join J. Kapunan in his dissenting opinion.
DISSENTING OPINION

KAPUNAN, J.:

In striking down as unconstitutional and illegal Section 4 of Administrative Order No. 372 ("AO No. 372"), the majority opinion posits that the President exercised power of control over the local government units ("LGU), which he does not have, and violated the provisions of Section 6, Article X of the Constitution, which states:

SEC. 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.
and Section 286(a) of the Local Government Code, which provides:

SEC. 286. Automatic Release of Shares. - (a) The share of each local government unit shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer, as the case may be, on a quarterly basis within five (5) days after the end of each quarter, and which shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose.
The share of the LGUs in the national internal revenue taxes is defined in Section 284 of the same Local Government Code, to wit:

SEC. 284. Allotment of Internal Revenue Taxes. - Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows: (a) On the first year of the effectivity of this Code, thirty percent (30%); (b) On the second year, thirty-five (35%) percent; and

(c) On the third year and thereafter, forty percent (40%). Provided, That in the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the liga, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year: Provided, further, That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personal services.
xxx The majority opinion takes the view that the withholding of ten percent (10%) of the internal revenue allotment ("IRA") to the LGUs pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation as called for in Section 4 of AO No. 372 transgresses against the above-quoted provisions which mandate the "automatic" release of the shares of the LGUs in the national internal revenue in consonance with local fiscal autonomy. The pertinent portions of AO No. 372 are reproduced hereunder:
ADMINISTRATIVE ORDER NO. 372

ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998 WHEREAS, the current economic difficulties brought about by the peso depreciation requires continued prudence in government fiscal management to maintain economic stability and sustain the countrys growth momentum; WHEREAS, it is imperative that all government agencies adopt cash management measures to match expenditures with available resources; NOW THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and direct: SECTION 1. All government departments and agencies, including x x x local government units will identify and implement measures in FY 1998 that will reduce total appropriations for non-personal services items, along the following suggested areas:

xxx

SECTION 4. Pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation the amount equivalent to 10% of the internal revenue allotment to local government units shall be withheld.
xxx Subsequently, on December 10, 1998, President Joseph E. Estrada issued Administrative Order No. 43 (AO No. 43), amending Section 4 of AO No. 372, by reducing to five percent (5%) the IRA to be withheld from the LGUs, thus:
ADMINISTRATIVE ORDER NO. 43

AMENDING ADMINISTRATIVE ORDER NO. 372 DATED 27 DECEMBER 1997 ENTITLED "ADOPTION OF ECONOMY MEASURES IN GOVERNMENT FOR FY 1998" WHEREAS, Administrative Order No. 372 dated 27 December 1997 entitled "Adoption of Economy Measures in Government for FY 1998" was issued to address the economic difficulties brought about by the peso devaluation in 1997; WHEREAS, Section 4 of Administrative Order No. 372 provided that the amount equivalent to 10% of the internal revenue allotment to local government units shall be withheld; and, WHEREAS, there is a need to release additional funds to local government units for vital projects and expenditures. NOW, THEREFORE, I, JOSEPH EJERCITO ESTRADA, President of the Republic of the Philippines, by virtue of the powers vested in me by law, do hereby order the reduction of the withheld Internal Revenue Allotment (IRA) of local government units from ten percent to five percent. The five percent reduction in the IRA withheld for 1998 shall be released before 25 December 1998. DONE in the City of Manila, this 10th day of December, in the year of our Lord, nineteen hundred and ninety eight.
With all due respect, I beg to disagree with the majority opinion. Section 4 of AO No. 372 does not present a case ripe for adjudication. The language of Section 4 does not conclusively show that, on its face, the constitutional

provision on the automatic release of the IRA shares of the LGUs has been violated. Section 4, as worded, expresses the idea that the withholding is merely temporary which fact alone would not merit an outright conclusion of its unconstitutionality, especially in light of the reasonable presumption that administrative agencies act in conformity with the law and the Constitution. Where the conduct has not yet occurred and the challenged construction has not yet been adopted by the agency charged with administering the administrative order, the determination of the scope and constitutionality of the executive action in advance of its immediate adverse effect involves too remote and abstract an inquiry for the proper exercise of judicial function. Petitioners have not shown that the alleged 5% IRA share of LGUs that was temporarily withheld has not yet been released, or that the Department of Budget and Management (DBM) has refused and continues to refuse its release. In view thereof, the Court should not decide as this case suggests an abstract proposition on constitutional issues. The President is the chief fiscal officer of the country. He is ultimately responsible for the collection and distribution of public money: SECTION 3. Powers and Functions. - The Department of Budget and Management shall assist the President in the preparation of a national resources and expenditures budget, preparation, execution and control of the National Budget, preparation and maintenance of accounting systems essential to the budgetary process, achievement of more economy and efficiency in the management of government operations, administration of compensation and position classification systems, assessment of organizational effectiveness and review and evaluation of legislative proposals having budgetary or organizational implications.1 In a larger context, his role as chief fiscal officer is directed towards "the nation's efforts at economic and social upliftment"2 for which more specific economic powers are delegated. Within statutory limits, the President can, thus, fix "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, 3 as he is also responsible for enlisting the country in international economic agreements.4 More than this, to achieve "economy and efficiency in the management of government operations," the President is empowered to create appropriation reserves,5 suspend expenditure appropriations,6 and institute cost reduction schemes.7 As chief fiscal officer of the country, the President supervises fiscal development in the local government units and ensures that laws are faithfully executed.8 For this reason, he can set aside tax ordinances if he finds them contrary to the Local Government Code.9 Ordinances cannot contravene statutes and public policy as declared by the national govemment.10 The goal of local economy is not to "end the relation of partnership and inter-dependence between the central administration and local government units,"11 but to make local governments "more responsive and accountable" [to] "ensure their fullest development as self-reliant communities and make them more effective partners in the pursuit of national development and social progress."12 The interaction between the national government and the local government units is mandatory at the planning level. Local development plans must thus hew to "national policies and standards13 as these are integrated into the regional development plans for submission to the National Economic Development Authority. " 14 Local budget plans and

goals must also be harmonized, as far as practicable, with "national development goals and strategies in order to optimize the utilization of resources and to avoid duplication in the use of fiscal and physical resources."15 Section 4 of AO No. 372 was issued in the exercise by the President not only of his power of general supervision, but also in conformity with his role as chief fiscal officer of the country in the discharge of which he is clothed by law with certain powers to ensure the observance of safeguards and auditing requirements, as well as the legal prerequisites in the release and use of IRAs, taking into account the constitutional 16 and statutory17 mandates. However, the phrase "automatic release" of the LGUs' shares does not mean that the release of the funds is mechanical, spontaneous, self-operating or reflex. IRAs must first be determined, and the money for their payment collected.18 In this regard, administrative documentations are also undertaken to ascertain their availability, limits and extent. The phrase, thus, should be used in the context of the whole budgetary process and in relation to pertinent laws relating to audit and accounting requirements. In the workings of the budget for the fiscal year, appropriations for expenditures are supported by existing funds in the national coffers and by proposals for revenue raising. The money, therefore, available for IRA release may not be existing but merely inchoate, or a mere expectation. It is not infrequent that the Executive Department's proposals for raising revenue in the form of proposed legislation may not be passed by the legislature. As such, the release of IRA should not mean release of absolute amounts based merely on mathematical computations. There must be a prior determination of what exact amount the local government units are actually entitled in light of the economic factors which affect the fiscal situation in the country. Foremost of these is where, due to an unmanageable public sector deficit, the President may make the necessary adjustments in the IRA of LGUs. Thus, as expressly provided in Article 284 of the Local Government Code:

x x x (I)n the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the "liga," to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year. x x x.
Under the aforecited provision, if facts reveal that the economy has sustained or will likely sustain such "unmanageable public sector deficit," then the LGUs cannot assert absolute right of entitlement to the full amount of forty percent (40%) share in the IRA, because the President is authorized to make an adjustment and to reduce the amount to not less than thirty percent (30%). It is, therefore, impractical to immediately release the full amount of the IRAs and subsequently require the local government units to return at most ten percent (10%) once the President has ascertained that there exists an unmanageable public sector deficit.

By necessary implication, the power to make necessary adjustments (including reduction) in the IRA in case of an unmanageable public sector deficit, includes the discretion to withhold the IRAs temporarily until such time that the determination of the actual fiscal situation is made. The test in determining whether one power is necessarily included in a stated authority is: "The exercise of a more absolute power necessarily includes the lesser power especially where it is needed to make the first power effective."19 If the discretion to suspend temporarily the release of the IRA pending such examination is withheld from the President, his authority to make the necessary IRA adjustments brought about by the unmanageable public sector deficit would be emasculated in the midst of serious economic crisis. In the situation conjured by the majority opinion, the money would already have been gone even before it is determined that fiscal crisis is indeed happening. The majority opinion overstates the requirement in Section 286 of the Local Government Code that the IRAs "shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose" as proof that no withholding of the release of the IRAs is allowed albeit temporary in nature. It is worthy to note that this provision does not appear in the Constitution. Section 6, Art X of the Constitution merely directs that LGUs "shall have a just share" in the national taxes "as determined by law" and which share shall be automatically released to them. This means that before the LGUs share is released, there should be first a determination, which requires a process, of what is the correct amount as dictated by existing laws. For one, the Implementing Rules of the Local Government Code allows deductions from the IRAs, to wit:

Article 384. Automatic Release of IRA Shares of LGUs:

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(c) The IRA share of LGUs shall not be subject to any lien or hold back that may be imposed by the National Government for whatever purpose unless otherwise provided in the Code or other applicable laws and loan contract on project agreements arising from foreign loans and international commitments, such as premium contributions of LGUs to the Government Service Insurance System and loans contracted by LGUs under foreignassisted projects.
Apart from the above, other mandatory deductions are made from the IRAs prior to their release, such as: (1) total actual cost of devolution and the cost of city-funded hospitals;20and (2) compulsory contributions21 and other remittances.22 It follows, therefore, that the President can withhold portions of IRAs in order to set-off or compensate legitimately incurred obligations and remittances of LGUs. Significantly, Section 286 of the Local Government Code does not make mention of the exact amount that should be automatically released to the LGUs. The provision does not mandate that the entire 40% share mentioned in Section 284 shall be released. It merely provides that the "share" of each LGU shall be released and which "shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose." The provision on automatic release of IRA share

should, thus, be read together with Section 284, including the proviso on adjustment or reduction of IRAs, as well as other relevant laws. It may happen that the share of the LGUs may amount to the full forty percent (40%) or the reduced amount of thirty percent (30%) as adjusted without any law being violated. In other words, all that Section 286 requires is the automatic release of the amount that the LGUs are rightfully and legally entitled to, which, as the same section provides, should not be less than thirty percent (30%) of the collection of the national revenue taxes. So that even if five percent (5%) or ten percent (10%) is either temporarily or permanently withheld, but the minimum of thirty percent (30%) allotment for the LGUs is released pursuant to the President's authority to make the necessary adjustment in the LGUS' share, there is still full compliance with the requirements of the automatic release of the LGUs' share. Finally, the majority insists that the withholding of ten percent (10%) or five percent (5%) of the IRAs could not have been done pursuant to the power of the President to adjust or reduce such shares under Section 284 of the Local Government Code because there was no showing of an unmanageable public sector deficit by the national government, nor was there evidence that consultations with the presiding officers of both Houses of Congress and the presidents of the various leagues had taken place and the corresponding recommendations of the Secretary of Finance, Secretary of Interior and Local Government and the Budget Secretary were made. I beg to differ. The power to determine whether there is an unmanageable public sector deficit is lodged in the President. The President's determination, as fiscal manager of the country, of the existence of economic difficulties which could amount to "unmanageable public sector deficit" should be accorded respect. In fact, the withholding of the ten percent (10%) of the LGUs' share was further justified by the current economic difficulties brought about by the peso depreciation as shown by one of the "WHEREASES" of AO No. 372.23In the absence of any showing to the contrary, it is presumed that the President had made prior consultations with the officials thus mentioned and had acted upon the recommendations of the Secretaries of Finance, Interior and Local Government and Budget.24 Therefore, even assuming hypothetically that there was effectively a deduction of five percent (5%) of the LGUs' share, which was in accordance with the President's prerogative in view of the pronouncement of the existence of an unmanageable public sector deficit, the deduction would still be valid in the absence of any proof that the LGUs' allotment was less than the thirty percent (30%) limit provided for in Section 284 of the Local Government Code. In resume, the withholding of the amount equivalent to five percent (5%) of the IRA to the LGUs was temporary pending determination by the Executive of the actual share which the LGUs are rightfully entitled to on the basis of the applicable laws, particularly Section 284 of the Local Government Code, authorizing the President to make the necessary adjustments in the IRA of LGUs in the event of an unmanageable public sector deficit. And assuming that the said five percent (5%) of the IRA pertaining to the 1998 Fiscal Year has been permanently withheld, there is no showing that the amount actually released to the LGUs that same year was less than thirty percent (30%) of the national internal revenue taxes collected, without even considering the proper deductions allowed by law. WHEREFORE, I vote to DISMISS the petition.

1 2

Executive Order No. 292, Book IV, Title XVII, Chapter 1. Garcia v. Corona, G.R. No. 132451, December 17, 1999. 3 1987 CONSTITUTION, Article VI, Section 28 (2). 4 Taada v. Angara, 272 SCRA 18 (1997). 5 Executive Order No. 292, Book VI, Chapter 5, Section 37. 6 Id., at Section 38. 7 Id., at Section 48. 8 San Juan v. CSC, 196 SCRA 69 (1991). 9 Drilon v. Lim, 235 SCRA 135 (1994). 10 Magtajas v. Pryce Properties Corp., Inc. and PAGCOR, 234 SCRA 255 (1994). 11 Ganzon v. CA, 200 SCRA 271, 286 (1991). 12 Id., at 287. 13 Rules and Regulations Implementing the Local Government code of 1991, Rule XXIII, Article 182 (1) (3). 14 Rules and Regulations Implementing the Local Government Code of 1991, Rule XXIII, Article 182 (j) (1) (2).
15 16 17

Rules and Regulations Implementing the Local Government Code of 1991, Rule XXXIV, Article 405 (b).

1987 CONSTITUTION, Art. X, Section 6. Republic Act No. 7160, Title III, Section 286. 18 Hector De Leon, PHILIPPINE CONSTITUTIONAL LAW: PRINCIPLES AND CASES, p. 505 (1991). 19 Separate Opinion of J. Esguerra in Aquino v. Enrile, 59 SCRA 183 (1974). 20 Republic Act No. 8760 (General Appropriations ACT for FY 2000). 21 See Eexecutive Order No. 190 (1999), Directing The Department of Budget And Management To Remit directly The Contributions And Other Remittances Of Local Government Units To the Concerned National Government Agencies (NGA), Government Financial Institutions (GFI), And Government Owned And/Or Controlled Corporations (GOCC).
22

Republic Act No. 8760 (General Appropriations Act for FY 2000). Includes debt write-offs under Sec. 531 of the Local Government Code: Debt Relief for Local Government Units.-- xxx (e) Recovery schemes for the national government.---xxx The national government is hereby authorized to deduct from the quarterly share of each local government unit in the internal revenue collections an amount to be determined on the basis of the amortization schedule of the local unit concerned: Provided, That such amount shall not exceed five percent (5%) of the monthly internal revenue allotment of the local government unit concerned. 23 WHEREAS, the current economic difficulties brought about by the peso depreciation requires continued prudence in government fiscal management to maintain economic stability and sustain the countrys growth momentum.
24

Section 3, Rule 131 of the RULES OF COURT provides:

SEC. 3 Disputable presumptions. The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: xxx (m) That official duty has been regularly performed; xxx.

[1] [2] [3]

Rollo, pp. 48-55. Ibid., pp. 56-75.

This case was deemed submitted for decision on September 27, 1999, upon receipt by this Court of respondents' 10-page Memorandum, which was signed by Asst. Sol. Gen. Mariano M. Martinez and Sol. Ofelia B.

Cajigal. Petitioner's Memorandum was filed earlier, on September 21, 1999. Intervenor failed, despite due notice, to submit a memorandum within the alloted time; thus, he is deemed to have waived the filing of one. Issues of mootness and locus standi were not raised by the respondents. However, the intervention of Roberto Pagdanganan, as explained in the main text, has stopped any further discussion of petitioner's standing. On the other hand, by the failure of respondents to raise mootness as an issue, the Court thus understands that the main issue is still justiciable. In any case, respondents are deemed to have waived this defense or, at the very least, to have submitted the Petition for resolution on the merits, for the future guidance of the government, the bench and the bar.
[5] [6] [4]

97 Phil. 143, May 30, 1955; per Padilla, J.

Ibid., pp. 147-148. Reiterated in Ganzon v. Kayanan, 104 Phil. 484 (1985); Ganzon v. Court of Appeals, 200 SCRA 271, August 5, 1991; Taule v. Santos, 200 SCRA 512, August 12, 1991. Ibid.; citing Pelaez v. Auditor General, 15 SCRA 569, December 24, 1965; Hebron v. Reyes, 104 Phil. 175 (1958); and Mondano v. Silvosa, supra.
[8] [9] [7]

Ibid., p. 522; citing Hebron v. Reyes, ibid., per Concepcion, J. 235 SCRA 135, 142, August 4, 1994. 1, Art. VII of the Constitution.

[10] [11]

Joaquin G. Bernas, SJ, The 1987 Constitution of the Republic of the Philippines: A Commentary, 1996 ed., p. 739.
[12]

The Constitution provides:

"Sec. 25[, Art. II]. The State shall ensure the autonomy of local governments." "Sec. 2[, Art. X]. The territorial and political subdivisions shall enjoy local autonomy."
[13] [14] [15] [16] [17] [18] [19] [20] [21] [22] [23] [24] [25] [26] [27] [28]

200 SCRA 271, 286, August 5, 1991, per Sarmiento, J.; citing 3, Art. X of the Constitution. Ibid. Ibid. 170 SCRA 786, 794-795, February 28, 1989, per Sarmiento, J. Citing 3, Art. X, 1987 Const. Citing 2, BP 337. Citing 4, Art. X, 1987 Const. Citing BP 337; and Hebron v. Reyes, supra. Citing Hebron v. Reyes, supra. Citing Bernas, "Brewing storm over autonomy," The Manila Chronicle, pp. 4-5. 234 SCRA 255, 272, July 20,1994. San Juan v. Civil Service Commission, 196 SCRA 69, 79, April 19, 1991. 9, Art. XII of the Constitution. 3, Chapter 1, Subtitle C, Title II, Book V, EO 292 (Administrative Code of 1987). 284. See also Art. 379 of the Rules and Regulations Implementing the Local Government Code of 1991. 6 of Art. X of the Constitution reads:

"Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them."
[29]

286 (a) provides:

"Automatic Release of Shares. -- (a) The share of each local government unit shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer, as the case may be, on a quarterly

basis within (5) days after the end of each quarter, and which shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose."
[30] [31] [32] [33] [34] [35] [36] [37] [38]

Emphasis supplied. Ruben E. Agpalo, Statutory Construction, 1990 ed., p. 239. Webster's Third New International Dictionary, 1993 ed. 272 SCRA 18, May 2, 1997, per Panganiban, J. Citing Aquino Jr. v. Ponce Enrile, 59 SCRA 183, 196, September 17, 1974. Citing Guingona Jr. v. Gonzales, 219 SCRA 326, 337, March 1, 1993. Cf. Daza v. Singson, 180 SCRA 496, December 21, 1989. 281 SCRA 330, 347-48, November 5, 1997, per Puno, J.

See Philippine National Bank v. Sayo, Jr., 292 SCRA 202, July 9, 1998; Vinta Maritime Co., Inc. v. NLRC, 284 SCRA 656, January 23, 1998.
[39] [40]

Footnotes omitted.

"Sec. 287. Local Development Projects. -- Each local government unit shall appropriate in its annual budget no less than twenty percent (20%) of its annual internal revenue allotment for development projects. Copies of the development plans of local government units shall be furnished the Department of Interior and Local Government."

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. 2464274 2484651 2536134 8354906 48756 67352 Total Date 7/18/1995 10/20/1995 1/22/1996 1/23/1997 1/23/1997 4/3/1997 Amount Paid P 1,489,977.28 1,489,977.28 2,880,975.65 8,621,470.83 2,731,135.81 2,731,135.81 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. 2536134 8354906 0048756 Total Date 1-22-96 1-23-97 1-23-97 Amount Paid P 2,880,975.65 8,621,470.83 2,731,135.81 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. 2464274 2484651 2536134 8354906 0048756 0067352 Total Date 7-18-95 10-20-95 1-22-96 1-23-97 1-23-97 4-03-97 Amount Paid P 1,489,977.28 1,489,977.28 2,880,975.65 8,621,470.83 2,731,135.81 2,731,135.81 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. SP91, 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 ABSCBN 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.17Consequently, 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. RUBEN T. REYES Associate Justice

WE CONCUR: CONSUELO YNARES-SANTIAGO Associate Justice

Chairperson MA. ALICIA AUSTRIA-MARTINEZ Associate Justice MINITA V. CHICO-NAZARIO Associate Justice

ANTONIO EDUARDO B. NACHURA Associate Justice

ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. REYNATO S. PUNO Chief Justice

G.R. No. 158881

April 16, 2008

PETRON CORPORATION, petitioner, vs. MAYOR TOBIAS M. TIANGCO, and MUNICIPAL TREASURER MANUEL T. ENRIQUEZ of the MUNICIPALITY OF NAVOTAS, METRO MANILA, respondents. DECISION TINGA, J.: The novel but important issue before us is whether a local government unit is empowered under the Local Government Code (the LGC) to impose business taxes on persons or entities engaged in the sale of petroleum products. I. The present Petition for Review on Certiorari under Rule 45 filed by petitioner Petron Corporation (Petron) directly assails the Decision of the Regional Trial Court (RTC) of Malabon, Branch 74, which dismissed petitioners complaint for cancellation of assessment made by the then municipality (now City) of Navotas (Navotas) for deficiency taxes, and ordering the payment of P10,204,916.17 pesos in business taxes to Navotas. As the issues raised are pure questions of law, we need not dwell on the facts at length. Petron maintains a depot or bulk plant at the Navotas Fishport Complex in Navotas. Through that depot, it has engaged in the selling of diesel fuels to vessels used in commercial fishing in and around Manila Bay.1 On 1 March 2002, Petron received a letter from the office of Navotas Mayor, respondent Toby Tiangco, wherein the corporation was assessed taxes "relative to the figures covering sale of diesel declared by your Navotas Terminal from 1997 to 2001."2 The stated total amount due was P6,259,087.62, a figure derived from the gross sales of the depot during the years in question. The computation sheets3 that were attached to the letter made reference to Ordinance 92-03, or the New Navotas Revenue Code (Navotas Revenue Code), though such enactment was not cited in the letter itself. Petron duly filed with Navotas a letter-protest to the notice of assessment pursuant to Section 195 of the Code. It argued that it was exempt from local business taxes in view of Art. 232(h) of the Implementing Rules (IRR) of the Code, as well as a ruling of the Bureau of Local Government Finance of the Department of Finance dated 31 July 1995, the latter stating that sales of petroleum fuels are not subject to local taxation. The letter-protest was denied by the Navotas Municipal Treasurer, respondent Manuel T. Enriquez, in a letter dated 8 May 2002.4 This was followed by a letter from the Mayor dated 15 May 2002, captioned "Final Demand to Pay," requiring that Petron pay the assessed amount within five (5) days from receipt thereof, with a threat of closure of Petrons operations within Navotas should there be no payment.5 Petron, through counsel, replied to the Mayor by another letter posing objections to the threat of closure. The Mayor did not respond to this last letter.6 Thus, on 20 May 2002, Petron filed with the Malabon RTC a Complaint for Cancellation of Assessment for Deficiency Taxes with Prayer for the Issuance of a Temporary Restraining Order (TRO) and/or Preliminary Injunction. The quested TRO was not issued by the Malabon RTC upon manifestation of respondents that they would not proceed with the closure of Petrons Navotas bulk plant until after the RTC shall have decided the case on the merits.7 However, while the case was pending decision, respondents refused to issue a business permit to Petron,

thus prompting Petron to file a Supplemental Complaint with Prayer for Preliminary Mandatory Injunction against respondents.8 On 5 May 2003, the Malabon RTC rendered its Decision dismissing Petrons complaint and ordering the payment of the assessed amount.9 Eleven days later, Petron received a Closure Order from the Mayor, directing Petron to cease and desist from operating the bulk plant. Petron sought a TRO from the Malabon RTC, but this was denied.10 Petron also filed a motion for reconsideration of the order of denial, but this was likewise denied.11 On 4 August 2003, this Court issued a TRO, enjoining the respondents from closing Petrons Navotas bulk plant or otherwise interfering in its operations.12 II. As earlier stated, Petron has opted to assail the RTC Decision directly before this Court since the matter at hand involves pure questions of law, a characterization conceded by the RTC Decision itself. Particularly, the controversy hinges on the correct interpretation of Section 133(h) of the LGC, and the applicability of Article 232 (h) of the IRR. Section 133(h) of the LGC reads as follows: Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and Barangays shall not extend to the levy of the following: xxx (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products; Evidently, Section 133 prescribes the limitations on the capacity of local government units to exercise their taxing powers otherwise granted to them under the LGC. Apparently, paragraph (h) of the Section mentions two kinds of taxes which cannot be imposed by local government units, namely: "excise taxes on articles enumerated under the National Internal Revenue Code [(NIRC)], as amended;" and "taxes, fees or charges on petroleum products." The power of a municipality to impose business taxes is provided for in Section 143 of the LGC. Under the provision, a municipality is authorized to impose business taxes on a whole host of business activities. Suffice it to say, unless there is another provision of law which states otherwise, Section 143, broad in scope as it is, would undoubtedly cover the business of selling diesel fuels, or any other petroleum product for that matter. Nonetheless, Article 232 of the IRR defines with more particularity the capacity of a municipality to impose taxes on businesses. The enumeration that follows is generally a positive list of businesses which may be subjected to business taxes, and paragraph (h) of Article 232 does allow the imposition of local business taxes "[o]n any business not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax," but subject to this important qualification, thus: "xxx provided further, that in line with existing national policy, any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax imposed on this article.

Notably, the Malabon RTC declared Art. 232(h) of the IRR void because the Code purportedly does not contain a provision prohibiting the imposition of business taxes on petroleum products.13 This submission warrants close examination as well. With all the relevant provisions of law laid out, we address the core issues submitted by Petron, namely: first, is the challenged tax on sale of the diesel fuels an excise tax on an article enumerated under the NIRC, thusly prohibited under Section 133(h) of the Code?; second, is the challenged tax prohibited by Section 133(h) under the proviso, "taxes, fees or charges on petroleum products"? and; third, does Art. 232(h) of the IRR similarly prohibit the imposition of the challenged tax? III. As earlier observed, Section 133(h) provides two kinds of taxes which cannot be imposed by local government units: "excise taxes on articles enumerated" under the NIRC, as amended; and "taxes, fees or charges on petroleum products." There is no doubt that among the excise taxes on articles enumerated under the NIRC are those levied on petroleum products, per Section 148 of the NIRC. We first consider Petrons argument that the "business taxes" on its sale of diesel fuels partakes of an excise tax, which if true, could invalidate the challenged tax solely on the basis of the phrase "excise taxes on articles enumerated under the [NIRC]." To support this argument, it cites Cordero v. Conda,14 Allied Thread Co. Inc. v. City Mayor of Manila,15 and Iloilo Bottlers, Inc. v. City of Iloilo,16 as having explained that "an excise tax is a tax upon the performance, carrying on, or the exercise of an activity."17 Respondents, on the other hand, argue that what the provision prohibits is the imposition of excise taxes on petroleum products, but not the imposition of business taxes on the same. They cite Philippine Petroleum Corporation v. Municipality of Pililia,18 where the Court had noted, "[a] tax on business is distinct from a tax on the article itself."19 Petrons argument is fraught with far-reaching implications, for if it were sustained, it would mean that local government units are barred from imposing business taxes on any of the articles subject to excise taxes under the NIRC. These would include alcohol products,20 tobacco products,21 mineral products22 automobiles,23 and such non-essential goods as jewelry, goods made of precious metals, perfumes, and yachts and other vessels intended for pleasure or sports.24 Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or exercise of some right, privilege, activity, calling or occupation" derives from the compendium American Jurisprudence, popularly referred to as Am Jur,,25 and has been cited in previous decisions of this Court, including those cited by Petron itself. Such a definition would not have been inconsistent with previous incarnations of our Tax Code, such as the NIRC of 1939,26 as amended, or the NIRC of 197727 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature used in those prior laws in referring to taxes imposed on specific articles was "specific tax."28 Yet beginning with the National Internal Revenue Code of 1986, as amended, the term "excise taxes" was used and defined as applicable "to goods manufactured or produced in the Philippines and to things imported."29 This definition was carried over into the present NIRC of 1997.30 Further, these two latest codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based on weight or volume capacity or any other physical unit of measurement; and "ad valorem tax" which is imposed and based on the selling price or other specified value of the goods. In other words, the meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition to its current signification which is a tax on certain specified goods or articles.

The change in perspective brought forth by the use of the term "excise tax" in a different connotation was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973 and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur definition of "excise tax," Nolledo observed: Are specific taxes, taxes on property or excise taxes In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that the value of the property taxed is taken into account will not change the nature of the tax. It is correct to say that specific taxes are taxes on the privilege to import, manufacture and remove from storage certain articles specified by law.31 In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes, Nolledo, in his 1994 commentaries, wrote: 1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified goods or articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines. They are either specific or ad valorem. 2. Nature of excise taxes. They are imposed directly on certain specified goods. (infra) They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.) A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an incident to, or in connection with, the business to be taxed.32 In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and observe that the term is "synonymous with privilege tax and [both terms] are often used interchangeably."33 At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is not to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured or produced in, or imported into, the Philippines, for domestic sale or consumption or for any other disposition."34 It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a specific article, rather than one "upon the performance, carrying on, or the exercise of an activity." This current definition was already in place when the Code was enacted in 1991, and we can only presume that it was what the Congress had intended as it specified that local government units could not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition must pertain to the same kind of excise taxes as imposed by the NIRC, and not those previously defined "excise taxes" which were not integrated or denominated as such in our present tax law. It is quite apparent, therefore, that our current body of taxation law does not explicitly accommodate the traditional definition of excise tax offered by Petron. In fact, absent any statutory adoption of the traditional definition, it may be said that starting in 1986 excise taxes in this jurisdiction refer exclusively to specific or ad valorem taxes imposed under the NIRC. At the very least, it is this concept of excise tax which we can reasonably assume that Congress had in mind and actually adopted when it crafted the Code. The palpable absurdity that ensues should the alternative interpretation prevail all but strengthens this position.

Thus, Petrons argument concerning excise taxes is founded not on what the NIRC or the Code actually provides, but on a non-statutory definition sourced from a legal paradigm that is no longer applicable in this jurisdiction. That such definition was referred to again in our 1998 decision in Province of Bulacan v. Court of Appeals35 is ultimately of little consequence, and so is Petrons reliance on such ruling. The Court therein had correctly nullified, on the basis of Section 133(h) of the Code, a province-imposed tax "of 10% of the fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth and other quarry resources xxx extracted from public lands," because it noted that under Section 151 of the NIRC, all nonmetallic minerals and quarry resources were assessed with excise taxes of "two percent (2%) based on the actual market value of the gross output thereof at the time of removal, in case of those locally extracted or produced".36 Additionally, the Court also observed that the case had emanated from an attempt to impose the said tax on quarry resources from private lands, despite the clear language of the tax ordinance limiting the tax to such resources extracted from public lands.37 On that score alone, the case could have been correctly decided. It is true that the Court had additionally reasoned in Province of Bulacan that "[t]he tax imposed by the Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, or exercise of an activity." As earlier noted, such definition of excise tax however was not explicitly carried over into the NIRC and was even superseded beginning with the 1986 amendments thereto. To insist on utilizing this definition simply because it had been reiterated in Province of Bulacan, unnecessary as such reiteration may have been to the resolution of that case, would have the unfortunate effect of infusing life into a concept that is diametrically inconsistent with the present state of the law. We thus can assert with clear comfort that excise taxes, as imposed under the NIRC, do not pertain to "the performance, carrying on, or exercise of an activity," at least not to the extent of equating excise with business taxes. IV. We next consider whether the clause "taxes, fees or charges on petroleum products" in Section 133(h) precludes local government units from imposing business taxes based on the sale of petroleum products. The power of a municipality to impose business taxes derives from Section 143 of the Code that specifically enumerates several types of business on which it may impose taxes, including manufacturers, wholesalers, distributors, dealers of any article of commerce of whatever nature;38 those engaged in the export or commerce of essential commodities;39 retailers;40 contractors and other independent contractors;41 banks and financial institutions;42 and peddlers engaged in the sale of any merchandise or article of commerce.43 This obviously broad power is further supplemented by paragraph (h) of Section 143 which authorizes the sanggunian to impose taxes on any other businesses not otherwise specified under Section 143 which the sanggunian concerned may deem proper to tax.44 This ability of local government units to impose business or other local taxes is ultimately rooted in the 1987 Constitution. Section 5, Article X assures that "[e]ach local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges," though the power is "subject to such guidelines and limitations as the Congress may provide." There is no doubt that following the 1987 Constitution and the Code, the fiscal autonomy of local government units has received greater affirmation than ever. Previous decisions that have been skeptical of the viability, if not the wisdom of reposing fiscal autonomy to local government units have fallen by the wayside.

Respondents cite our declaration in City Government of San Pablo v. Reyes45 that following the 1987 Constitution the rule thenceforth "in interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations."46 Such policy is also echoed in Section 5(a) of the Code, which states that "[a]ny provision on a power of a local government unit shall be liberally interpreted in its favor, and in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the lower local government unit." But somewhat conversely, Section 5(b) then proceeds to assert that "[i]n case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local government unit enacting it, and liberally in favor of the taxpayer."47 And this latter qualification has to be respected as a constitutionally authorized limitation which Congress has seen fit to provide. Evidently, local fiscal autonomy should not necessarily translate into abject deference to the power of local government units to impose taxes. Congress has the constitutional authority to impose limitations on the power to tax of local government units, and Section 133 of the Code is one such limitation. Indeed, the provision is the explicit statutory impediment to the enjoyment of absolute taxing power by local government units, not to mention the reality that such power is a delegated power. To cite one example, under Section 133(g), local government units are disallowed from levying business taxes on "business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and (4) four years, respectively from the date of registration." Section 133(h) states that local government units "shall not extend to the levy of xxx taxes, fees or charges on petroleum products." Respondents assert that the phrase "taxes, fees or charges on petroleum products" pertains to the imposition of direct or excise taxes on petroleum products, and not business taxes. If the phrase actually pertains to excise taxes, then it would be an exercise in utter redundancy, since the preceding phrase already prohibits the imposition of excise taxes on articles already subject to such taxes under the NIRC, such as petroleum products. There would be no sense on the part of the legislature to twice emphasize in the same sentence that excise taxes on petroleum products are beyond the pale of local government taxation. It appears that this argument of respondents was fashioned on the basis of the pronouncement of the Court inPhilippine Petroleum Corporation v. Municipality of Pililla, thus:48 xxx [W]hile Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum products, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as amended by P.D. 426, wherein the municipality is granted the right to levy taxes on business of manufacturers, importers, producers of any article of commerce of whatever kind or nature. A tax on business is distinct from a tax on the article itself. Thus, if the imposition of tax on business of manufacturers, etc. in petroleum products contravenes a declared national policy, it should have been expressly stated in P.D. No. 436. The dicta that "[a] tax on a business is distinct from a tax on the article itself" might at first blush somehow lend support to respondents position, yet that dicta has not since been reprised by this Court. It is likewise worth observing that Pililla did involve a tax ordinance that imposed business taxes on an enterprise engaged in the manufacture and storage of petroleum products. Significantly, the legal milieu governing Pililla is vastly different from that existing at bar, to the extent that the earlier case could not be presently controlling. At the time the taxes sought to be collected in Pililla were imposed, there was no national law in place similar to Section 133(h) of the Code that barred local "taxes, fees or charges on

petroleum products." There were circulars to that effect issued by the Finance Department, yet the Court could not validate such issuances since under the tax laws then in place "no exemptions were given to manufacturers, wholesalers, retailers, or dealers in petroleum products."49 In fact, the Court tellingly observed that "if the imposition of tax on business of manufacturers, etc. in petroleum products contravenes a declared national policy, it should have been expressly stated in P.D. No. 436."50 Such expression conspiciously missing in P.D. No. 436 is now found in Section 133(h). In view of the difference in statutory paradigm between this case and Pililla, the latter case is severely diminished as applicable precedent at bar. The Court then was correct in observing that a mere administrative circular could not prohibit a local tax that is not otherwise barred under a national statute, yet in this case that conflict is not present since the Code explicitly prohibits the imposition of several classes of local taxes, including those on petroleum products. The final and only straw Pililla provides that respondents can still grasp at is the bare statement that "[a] tax on a business is distinct from a tax on the article itself,"51 a sentence which could have been omitted from that decision without any effect. We can concede that a tax on a business is distinct from a tax on the article itself, or for that matter, that a business tax is distinct from an excise tax. However, such distinction is immaterial insofar as the latter part of Section 133(h) is concerned, for the phrase "taxes, fees or charges on petroleum products" does not qualify the kind of taxes, fees or charges that could withstand the absolute prohibition imposed by the provision. It would have been a different matter had Congress, in crafting Section 133(h), barred "excise taxes" or "direct taxes," or any category of taxes only, for then it would be understood that only such specified taxes on petroleum products could not be imposed under the prohibition. The absence of such a qualification leads to the conclusion that all sorts of taxes on petroleum products, including business taxes, are prohibited by Section 133(h). Where the law does not distinguish, we should not distinguish. The language of Section 133(h) makes plain that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all "taxes, fees and charges." The earlier reference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation: all articles already covered by excise taxation under the NIRC, such as alcohol products, tobacco products, mineral products, automobiles, and such non-essential goods as jewelry, goods made of precious metals, perfumes, and yachts and other vessels intended for pleasure or sports. In contrast, the later reference to "taxes, fees and charges" pertains only to one class of articles of the many subjects of excise taxes, specifically, "petroleum products". While local government units are authorized to burden all such other class of goods with "taxes, fees and charges," excepting excise taxes, a specific prohibition is imposed barring the levying of any other type of taxes with respect to petroleum products. V. We no longer need to dwell on the arguments centering on Article 232 of the IRR. As earlier stated, the provision explicitly stipulates that "in line with existing national policy, any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax imposed on this article [on business taxes]." The RTC went as far as to declare Article 232 as "invalid" on the premise that the prohibition was not similarly warranted under the Code. Assuming that the Code does not, in fact, prohibit the imposition of business taxes on petroleum products, we would agree that the IRR could not impose such a prohibition. With our ruling that Section 133(h) does indeed prohibit the imposition of local business taxes on petroleum products, however, the RTC declaration that Article 232 was invalid is, in turn, itself invalid.

Even absent Article 232, local government units cannot impose business taxes on petroleum products. If anything, Article 232 merely reiterates what the Code itself already provides, with the additional explanation that such prohibition was "in line with existing national policy." VI. We have said all that need be said for the resolution of this case, but there is one more line of argument raised by respondents that deserves a remark. Respondents argue, "assuming... that the Oversight Committee [that drafted the IRR] can legislate, that the "existing national policy" referred to in Article 232 had been superseded by Republic Act No. 8180, or the Oil Deregulation Law. Boiled down to its essence, the argument is that since the oil industry is presently deregulated the basis for exempting petroleum products from business taxes no longer exists. Of course, the starting premise for this argument, that the IRR can establish a tax or an exemption, is false and has been flatly rejected by this Court before.52 The Code itself does not connect its prohibition on taxation of petroleum products with any existing or future national oil policy, so the change in such national policy with the regime of oil deregulation is ultimately of no moment. Still, we can divine the reasoning behind singling out petroleum products, among all other commodities, as beyond the power of local government units to levy local taxes. Why the special concern over petroleum products? The answer is quite evident to all sentient persons. In this age where unfortunately dependence on petroleum as fuel has yet no equally feasible alternative, the cost of petroleum products, though fully controlled by private enterprise, remains an area of public concern. To be blunt about it, there is an inevitable link between the fluctuation of oil prices and the prices of every other commodity. The reality, indeed, is oil is a political commodity. Such fact has received recognition from this Court. "[O]il [is] a commodity whose supply and price affect the ebb and flow of the lifeblood of the nation. Its shortage of supply or a slight, upward spiral in its price shakes our economic foundation. Studies show that the areas most impacted by the movement of oil are food manufacture, land transport, trade, electricity and water."53 "[T]he upswing and downswing of our economy materially depend on the oscillation of oil."54 "Fluctuations in the supply and price of oil products have a dramatic effect on economic development and public welfare."55 It can be reasonably presumed that if municipalities, cities and provinces were authorized to impose business taxes on manufacturers and retailers of petroleum products, the resulting losses to these enterprises would be passed on to the consumers, triggering the chain of increases that normally accompany the increase in oil prices. No similarly massive trigger effect would ensue upon the imposition of business taxes on other commodities, including those already subject to excise taxation under the NIRC. It may very well be that the policy of deregulation, which was not yet in effect at the time of the enactment of the Local Government Code, has changed the complexion of the issue, for unlike before, oil companies are free at will to increase oil prices, thus mitigating the similarly arbitrary consequences that could develop if petroleum products were subject to local taxes. Still, it cannot be denied that subjecting petroleum products to business taxes apart from the taxes already imposed by Congress in this age of deregulation would lead to the same result had they been so taxed during the era of oil regulation the increase of oil prices. We do not discount the authority of Congress to enact measures that facilitate the increase in oil prices; witness the Oil Deregulation Law and the most recent Expanded VAT Law. Yet these hard choices are presumably made by Congress with the expectation that the negative effects of increased oil prices are offset by the other economic benefits promised by those new laws (i.e., a more vibrant oil industry; increased government revenue).

The Court defers to the other branches of government in the formulation of oil policy, but when the choices are made through legislation, the Court expects that the choices are deliberate, considering that the stakes are virtually all-in. Herein, respondents may be bolstered by the constitutional and statutory policy favoring local fiscal autonomy, but it would be utter indolence to reflexively affirm such policy when the inevitable effect is an increase in oil prices. Any prudent adjudication should fully ascertain the mandate of local government units to impose taxes on petroleum products, and such mandate should be cast in so specific terms as to leave no dispute as to the legislative intendment to extend such power in the name of local autonomy. What we have found instead, from the plain letter of the law is an explicit disinclination on the part of the legislature to impart that particular taxing power to local government units. While Section 133(h) does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from extending the levy of any kind of "taxes, fees or charges on petroleum products." Accordingly, the subject tax assessment is ultra vires and void. WHEREFORE, the Petition is GRANTED. The Decision of the Regional Trial Court of Malabon City in Civil Case No. 3380-MN is REVERSED and SET ASIDE and the subject assessment for deficiency taxes on petitioner is ordered CANCELLED. The Temporary Restraining Order dated 4 August 2003 is hereby made PERMANENT. No pronouncement as to costs. SO ORDERED. DANTE O. TINGA Associate Justice

WE CONCUR: LEONARDO A. QUISUMBING Associate Justice Chairperson CONCHITA CARPIO MORALES Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice

ARTURO D. BRION Associate Justice

ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. LEONARDO A. QUISUMBING Associate Justice Chairperson, Second Division

CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Chief Justice