NAPOCOR v City of Cabanatuan

GR No. 149110 April 9, 2003

Puno, J.
Facts:
Petitioner is a government-owned and controlled corporation created under
Commonwealth Act No. 120, as amended. It is tasked to undertake the
"development of hydroelectric generations of power and the production of
electricity from nuclear, geothermal and other sources, as well as, the transmission
of electric power on a nationwide basis."
Concomitant to its mandated duty, petitioner has, among others, the power to
construct, operate and maintain power plants, auxiliary plants, power stations and
substations for the purpose of developing hydraulic power and supplying such
power to the inhabitants.
Petitioner sells electric power to the residents of Cabanatuan City, posting a gross
income of P107,814,187.96 in 1992. Pursuant to section 37 of Ordinance No. 16592, the respondent assessed the petitioner a franchise tax amounting to
P808,606.41, representing 75% of 1% of the latter's gross receipts for the
preceding year.
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent
has no authority to impose tax on government entities. Petitioner also contended
that as a non-profit organization, it is exempted from the payment of all forms of
taxes, charges, duties or fees11 in accordance with sec. 13 of Rep. Act No. 6395,
as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes,
Duties, Fees, Imposts and Other Charges by Government and Governmental
Instrumentalities.- The Corporation shall be non-profit and shall devote all its
return from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness
and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby exempt:
o (a) From the payment of all taxes, duties, fees, imposts, charges, costs and
service fees in any court or administrative proceedings in which it may be a
party, restrictions and duties to the Republic of the Philippines, its provinces,
cities, municipalities and other government agencies and instrumentalities;
o (b) From all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
o (c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operations and
projects; and
o (d) From all taxes, duties, fees, imposts, and all other charges imposed by
the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used

by the Corporation in the generation, transmission, utilization, and sale of

electric power."
The respondent filed a collection suit in the RTC of Cabanatuan City, demanding
that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the
amount of tax, and 2% monthly interest.13Respondent alleged that petitioner's
exemption from local taxes has been repealed by section 193 of Rep. Act No.
7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government
owned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code."
January 25, 1996 - the trial court issued an Order dismissing the case. It ruled that
the tax exemption privileges granted to petitioner subsist despite the passage of
Rep. Act No. 7160 for the following reasons:
(1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep.
Act No. 7160 which is a general law;
(2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal
which is not favored; and
(3) local governments have no power to tax instrumentalities of the national
government.
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground
that section 193, in relation to sections 137 and 151 of the LGC, expressly
withdrew the exemptions granted to the petitioner. It ordered the petitioner to pay
the respondent city government the following:
(a) the sum of P808,606.41 representing the franchise tax due based on
gross receipts for the year 1992,
(b) the tax due every year thereafter based in the gross receipts earned by
NPC,
(c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and
(d) the sum of P 10,000.00 as litigation expense.

Issues:
1. Whether NPC is liable to pay franchise tax to the LGU
2. Whether the NPCs exemption from all forms of taxes has been repealed by the LGC
3. Whether an exercise of police power through tax exemption should prevail over the
LGC
Ruling:
1. It is beyond dispute that the respondent city government has the authority to issue
Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise,"
pursuant to section 151 in relation to section 137 of the LGC, viz:

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the
gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city,
may levy the taxes, fees, and charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes."
Taxes are the lifeblood of the government, for without taxes, the government can
neither exist nor endure. A principal attribute of sovereignty, the exercise of
taxing power derives its source from the very existence of the state
whose social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of the power
to tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.
The power to tax is no longer vested exclusively on Congress; local legislative
bodies are now given direct authority to levy taxes, fees and other charges
pursuant to Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own
sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees and charges shall accrue exclusively to the Local
Governments."
Section 3 of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide
for a more responsive and accountable local government structure instituted
through a system of decentralization with effective mechanisms of recall, initiative,
and referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election,
appointment and removal, term, salaries, powers and functions and duties of local
officials, and all other matters relating to the organization and operation of the
local units."

To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959, the Local Autonomy Act of 1959,38
the Decentralization Act of 196739 and the Local Government Code of 1983. Despite
these initiatives, however, the shackles of dependence on the national government
remained. Local government units were faced with the same problems that hamper their
capabilities to participate effectively in the national development efforts, among which
are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c)
limited authority to prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over personnel of
national line agencies.
One of the most significant provisions of the LGC is the removal of the blanket exclusion
of instrumentalities and agencies of the national government from the coverage of local
taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges
of any kind on the National Government, its agencies and instrumentalities,
this rule now admits an exception, i.e., when specific provisions of the LGC
authorize the LGUs to impose taxes, fees or charges on the aforementioned
entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government
Units.- Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:
x
x
x
(o) Taxes, fees, or charges of any kind on the National Government, its agencies
and instrumentalities, and local government units."
Mactan Cebu International Airport Authority (MCIAA) vs. Marcos
- nothing prevents Congress from decreeing that even instrumentalities or agencies of
the government performing governmental functions may be subject to tax. In enacting
the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this
Court held that MCIAA, although an instrumentality of the national government, was
subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that
as a general rule, as laid down in section 133, the taxing power of local
governments cannot extend to the levy of inter alia, 'taxes, fees and charges of
any kind on the national government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces, cities and
municipalities in the Metropolitan Manila Area may impose the real property tax
except on, inter alia, 'real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof has been
granted for consideration or otherwise, to a taxable person as provided in the item
(a) of the first paragraph of section 12.'"

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority,
which does not belong to citizens of the country generally as a matter of common right.
In its specific sense, a franchise may refer to a general or primary franchise, or to a
special or secondary franchise.
1. General Franchise - the right to exist as a corporation, by virtue of duly
approved articles of incorporation, or a charter pursuant to a special law creating
the corporation. The right under a primary or general franchise is vested in the
individuals who compose the corporation and not in the corporation itself.
2. Primary Franchise - refers to the right or privileges conferred upon an existing
corporation such as the right to use the streets of a municipality to lay pipes of
tracks, erect poles or string wires. The rights under a secondary or special
franchise are vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to dispose of its
property, except such special or secondary franchises as are charged with a public
use.
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of
a secondary or special franchise. This is to avoid any confusion when the word franchise
is used in the context of taxation.
Franchise tax is "a tax on the privilege of transacting business in the state and
exercising corporate franchises granted by the state." It is not levied on the corporation
simply for existing as a corporation, upon its property or its income, but on its exercise of
the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise.
To determine whether the petitioner is covered by the franchise tax in question,
the following requisites should concur:
(1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and
(2) that it is exercising its rights or privileges under this franchise within the territory of
the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act
No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the
petitioner's charter, defining its composition, capitalization, the appointment and the
specific duties of its corporate officers, and its corporate life span. As its secondary
franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following
powers which are not available to ordinary corporations, viz:
"x x x

(e) To conduct investigations and surveys for the development of water power in any part
of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of
waters from lands of riparian owners and from persons owning or interested in waters
which are or may be necessary for said purposes, upon payment of just compensation
therefor; to alter, straighten, obstruct or increase the flow of water in streams or water
channels intersecting or connecting therewith or contiguous to its works or any part
thereof: Provided, That just compensation shall be paid to any person or persons whose
property is, directly or indirectly, adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs,
pipes, mains, transmission lines, power stations and substations, and other works for the
purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in
the Philippines and supplying such power to the inhabitants thereof; to acquire,
construct, install, maintain, operate, and improve gas, oil, or steam engines, and/or other
prime movers, generators and machinery in plants and/or auxiliary plants for the
production of electric power; to establish, develop, operate, maintain and administer
power and lighting systems for the transmission and utilization of its power generation;
to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or provincial
systems and other government institutions, (3) electric cooperatives, (4) franchise
holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and
otherwise dispose of property incident to, or necessary, convenient or proper to carry out
the purposes for which the Corporation was created: Provided, That in case a right of way
is necessary for its transmission lines, easement of right of way shall only be sought:
Provided, however, That in case the property itself shall be acquired by purchase, the
cost thereof shall be the fair market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume,
street, avenue, highway or railway of private and public ownership, as the location of
said works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner
provided by law for instituting condemnation proceedings by the national, provincial and
municipal governments;
x
x
x
(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;

(n) To exercise complete jurisdiction and control over watersheds surrounding the
reservoirs of plants and/or projects constructed or proposed to be constructed by the
Corporation. Upon determination by the Corporation of the areas required for watersheds
for a specific project, the Bureau of Forestry, the Reforestation Administration and the
Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender
jurisdiction to the Corporation of all areas embraced within the watersheds, subject to
existing private rights, the needs of waterworks systems, and the requirements of
domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt
measures to prevent environmental pollution and promote the conservation,
development and maximum utilization of natural resources xxx "
With these powers, petitioner eventually had the monopoly in the generation and
distribution of electricity. This monopoly was strengthened with the issuance of Pres.
Decree No. 40, nationalizing the electric power industry. Although Exec. Order No. 215
thereafter allowed private sector participation in the generation of electricity, the
transmission of electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city
government's territorial jurisdiction pursuant to the powers granted to it by
Commonwealth Act No. 120, as amended. From its operations in the City of Cabanatuan,
petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites,
petitioner is, and ought to be, subject of the franchise tax in question.
To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is the
corporation which exercises the franchise, and not the individual stockholders. By
virtue of its charter, petitioner was created as a separate and distinct entity from
the National Government. It can sue and be sued under its own name, and can
exercise all the powers of a corporation under the Corporation Code.
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree
No. 2029 classifies government-owned or controlled corporations (GOCCs) into those
performing governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions, which is
directly chartered by special law or if organized under the general corporation law
is owned or controlled by the government directly, or indirectly through a parent
corporation or subsidiary corporation, to the extent of at least a majority of its
outstanding voting capital stock x x x.

Governmental functions are those pertaining to the administration of government,

and as such, are treated as absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way of advancing the
general interest of society, and are merely optional on the government. Included in the
class of GOCCs performing proprietary functions are "business-like" entities such as the
National Steel Corporation (NSC), the National Development Corporation (NDC), the
Social Security System (SSS), the Government Service Insurance System (GSIS), and the
National Water Sewerage Authority (NAWASA), among others.
Petitioner was created to "undertake the development of hydroelectric generation of
power and the production of electricity from nuclear, geothermal and other sources, as
well as the transmission of electric power on a nationwide basis." Pursuant to this
mandate, petitioner generates power and sells electricity in bulk. Certainly,
these activities do not partake of the sovereign functions of the government.
They are purely private and commercial undertakings, albeit imbued with
public interest. The public interest involved in its activities, however, does not distract
from the true nature of the petitioner as a commercial enterprise, in the same league
with similar public utilities like telephone and telegraph companies, railroad companies,
water supply and irrigation companies, gas, coal or light companies, power plants, ice
plant among others; all of which are declared by this Court as ministrant or proprietary
functions of government aimed at advancing the general interest of society.
2. We also do not find merit in the petitioner's contention that its tax exemptions under
its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and supported by clear
legal provisions. In the case at bar, the petitioner's sole refuge is section 13 of Rep. Act
No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty
taxes to be paid to the National Government, its provinces, cities, municipalities and
other government agencies and instrumentalities." However, section 193 of the LGC
withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed
by private and public corporations. Contrary to the contention of petitioner, section 193
of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions
from local taxes. It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code."
It is a basic precept of statutory construction that the express mention of one person,
thing, act, or consequence excludes all others as expressed in the familiar maxim

expressio unius est exclusio alterius. Not being a local water district, a cooperative
registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational
institution, petitioner clearly does not belong to the exception. It is therefore incumbent
upon the petitioner to point to some provisions of the LGC that expressly grant it
exemption from local taxes.
It is worth mentioning that section 192 of the LGC empowers the LGUs, through
ordinances duly approved, to grant tax exemptions, initiatives or reliefs. But in enacting
section 37 of Ordinance No. 165-92 which imposes an annual franchise tax
"notwithstanding any exemption granted by law or other special law," the respondent
city government clearly did not intend to exempt the petitioner from the coverage
thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of the local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. As this Court observed in the Mactan case,
"the original reasons for the withdrawal of tax exemption privileges granted to
government-owned or controlled corporations and all other units of government were
that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises." With the added burden of devolution, it is
even more imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due from them.

Lutz v Araneta
GR No. L-7859

December 22, 1955

Reyes, J.B L., J.

Facts:
This case was initiated in the Court of First Instance of Negros Occidental to test
the legality of the taxes imposed by Commonwealth Act No. 567, otherwise known
as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of
emergency, due to the threat to our industry by the imminent imposition of export
taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of
its preferential position in the United States market"; wherefore, the national policy
was expressed "to obtain a readjustment of the benefits derived from the sugar
industry by the component elements thereof" and "to stabilize the sugar industry
so as to prepare it for the eventuality of the loss of its preferential position in the
United States market and the imposition of the export taxes."

Section 2, Commonwealth Act 567 provides for an increase of the existing

tax on the manufacture of sugar, on a graduated basis, on each picul of
sugar manufactured;
Section 3 levies on owners or persons in control of lands devoted to the
cultivation of sugar cane and ceded to others for a consideration, on
lease or otherwise
a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the
assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,'
and shall be paid out only for any or all of the following purposes or to attain any or
all of the following objectives, as may be provided by law.
o First, to place the sugar industry in a position to maintain itself,
despite the gradual loss of the preferential position of the Philippine sugar in
the United States market, and ultimately to insure its continued existence
notwithstanding the loss of that market and the consequent necessity of
meeting competition in the free markets of the world;
o Second, to readjust the benefits derived from the sugar industry by
all of the component elements thereof the mill, the landowner, the
planter of the sugar cane, and the laborers in the factory and in the field
so that all might continue profitably to engage therein;
o Third, to limit the production of sugar to areas more economically
suited to the production thereof; and
o Fourth, to afford labor employed in the industry a living wage and to
improve their living and working conditions: Provided, That the
President of the Philippines may, until the adjourment of the next regular
session of the National Assembly, make the necessary disbursements from
the fund herein created
(1) for the establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a) to increase the
recoveries of the centrifugal sugar factories with the view of reducing
manufacturing costs, (b) to produce and propagate higher yielding
varieties of sugar cane more adaptable to different district conditions
in the Philippines, (c) to lower the costs of raising sugar cane, (d) to
improve the buying quality of denatured alcohol from molasses for
motor fuel, (e) to determine the possibility of utilizing the other byproducts of the industry, (f) to determine what crop or crops are
suitable for rotation and for the utilization of excess cane lands, and (g)
on other problems the solution of which would help rehabilitate and
stabilize the industry, and
(2) for the improvement of living and working conditions in sugar mills
and sugar plantations, authorizing him to organize the necessary

agency or agencies to take charge of the expenditure and allocation of

said funds to carry out the purpose hereinbefore enumerated, and,
likewise, authorizing the disbursement from the fund herein created of
the necessary amount or amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses of said
agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate
of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue
the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for
the crop years 1948-1949 and 1949-1950; alleging that such tax is
unconstitutional and void, being levied for the aid and support of the sugar
industry exclusively, which in plaintiff's opinion is not a public purpose for which a
tax may be constitutioally levied.
The action having been dismissed by the Court of First Instance, the plaintifs
appealed the case directly to this Court

Issue:
Whether the imposition of the tax is for general welfare
Ruling:
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act,
and particularly of section 6 (heretofore quoted in full), will show that the tax is levied
with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police
power.
This Court can take judicial notice of the fact that sugar production is one of the
great industries of our nation, sugar occupying a leading position among its export
products; that it gives employment to thousands of laborers in fields and factories;
that it is a great source of the state's wealth, is one of the important sources of
foreign exchange needed by our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its promotion, protection and
advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the
sugar industry should be stabilized in turn; and in the wide field of its police power,
the lawmaking body could provide that the distribution of benefits therefrom be
readjusted among its components to enable it to resist the added strain of the
increase in taxes that it had to sustain
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in
Florida
The protection of a large industry constituting one of the great sources of the
state's wealth and therefore directly or indirectly affecting the welfare of so great a

portion of the population of the State is affected to such an extent by public

interests as to be within the police power of the sovereign.
Once it is conceded, as it must, that the protection and promotion of the sugar
industry is a matter of public concern, it follows that the Legislature may
determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed fully
play, subject only to the test of reasonableness; and it is not contended that the means
provided in section 6 of the law (above quoted) bear no relation to the objective pursued
or are oppressive in character. If objective and methods are alike constitutionally valid,
no reason is seen why the state may not levy taxes to raise funds for their prosecution
and attainment. Taxation may be made the implement of the state's police power.
That the tax to be levied should burden the sugar producers themselves can hardly be a
ground of complaint; indeed, it appears rational that the tax be obtained precisely from
those who are to be benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no
constitutional limitation"
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the
devotion of tax money to experimental stations to seek increase of efficiency in sugar
production, utilization of by-products and solution of allied problems, as well as to the
improvements of living and working conditions in sugar mills or plantations, without any
part of such money being channeled directly to private persons, constitutes expenditure
of tax money for private purposes.

CIR vs Central Luzon Drug Corp.

GR No. 148512 June 26, 2006
Azcuna, J.
Facts:
Central Luzon Drug Corporation has been a retailer of medicines and other
pharmaceutical products since December 19, 1994. In 1995, it opened three (3)
drugstores as a franchisee under the business name and style of "Mercury Drug."
For the period January 1995 to December 1995, in conformity to the mandate of
Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount on the sale of
medicines to qualified senior citizens amounting to P219,778.
Pursuant to Revenue Regulations No. 2-94 implementing R.A. No. 7432, which
states that the discount given to senior citizens shall be deducted by the
establishment from its gross sales for value-added tax and other

percentage tax purposes, respondent deducted the total amount of P219,778

from its gross income for the taxable year 1995. For said taxable period,
respondent reported a net loss of P20,963 in its corporate income tax return. As a
consequence, respondent did not pay income tax for 1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of R.A.
No. 7432, the amount ofP219,778 should be applied as a tax credit, respondent
filed a claim for refund in the amount of P150,193, thus:
Net Sales

P 37,014,807.00

Add:

219,778.00

Cost of 20% Discount to Senior Citizens

Gross Sales
Less:

P 37,234,585.00

Cost of Sales
Merchandise Inventory, beg

P 1,232,740.00

Purchases

41,145,138.00

Merchandise Inventory, end

8,521,557.00

Gross Profit

P 3,377,964.00

Miscellaneous Income

39,014.00

Total Income

3,416,978.00

Operating Expenses

3,199,230.00

Net Income Before Tax

P 217,748.00

Income Tax (35%)

69,585.00

Less:

Tax Credit
(Cost of 20% Discount to Senior Citizens)

33,856,621.00

219,778.00

Income Tax Payable

(P 150,193.00)

Income Tax Actually Paid

-0-

Tax Refundable/Overpaid Income Tax

(P 150,193.00)

The amount of P150,193 claimed as a refund represents the tax credit allegedly
due to respondent under R.A. No. 7432. Since the Commissioner of Internal
Revenue "was not able to decide the claim for refund on time,"2 respondent filed a
Petition for Review with the Court of Tax Appeals (CTA) on March 18, 1998.
April 24, 2000, the CTA dismissed the petition, declaring that even if the law
treats the 20% sales discounts granted to senior citizens as a tax credit, the same
cannot apply when there is no tax liability or the amount of the tax credit is greater

than the tax due. In the latter case, the tax credit will only be to the extent of the
tax liability. Also, no refund can be granted as no tax was erroneously, illegally and
actually collected based on the provisions of Section 230, now Section 229, of the
Tax Code. Furthermore, the law does not state that a refund can be claimed by the
private establishment concerned as an alternative to the tax credit.
May 31, 2001, the CA rendered a Decision stating that Section 229 of the
Tax Code does not apply in this case. It concluded that the 20% discount given
to senior citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. No.
7432 is considered just compensation and, as such, may be carried over to the
next taxable period if there is no current tax liability.

Issue:
Whether the 20% sales discount granted by respondent to qualified senior citizens
pursuant to Sec. 4(a) of R.A. No. 7432 may be claimed as a tax credit or as a deduction
from gross sales in accordance with Sec. 2(1) of Revenue Regulations No. 2-94
Ruling:
Sec. 4(a) of R.A. No. 7432 provides:
Sec. 4. Privileges for the Senior citizens. The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent (20%) discount from all establishments relative to
utilization of transportations services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the country:
Provided, That private establishments may claim the cost as tax credit.
The CA and the CTA correctly ruled that based on the plain wording of the law discounts
given under R.A. No. 7432 should be treated as tax credits, not deductions from income.
It is a fundamental rule in statutory construction that the legislative intent must be
determined from the language of the statute itself especially when the words and
phrases therein are clear and unequivocal. The statute in such a case must be taken to
mean exactly what it says. Its literal meaning should be followed; to depart from the
meaning expressed by the words is to alter the statute.
The above provision explicitly employed the word "tax credit." Nothing in the provision
suggests for it to mean a "deduction" from gross sales. To construe it otherwise would be
a departure from the clear mandate of the law.
Thus, the 20% discount required by the Act to be given to senior citizens is a tax credit,
not a deduction from the gross sales of the establishment concerned. As a corollary to
this, the definition of tax credit found in Section 2(1) of Revenue Regulations No. 2-94 is
erroneous as it refers to tax credit as the amount representing the 20% discount that
"shall be deducted by the said establishment from their gross sales for value added tax

and other percentage tax purposes." This definition is contrary to what our lawmakers
had envisioned with regard to the treatment of the discount granted to senior citizens.
Accordingly, when the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount -- when claimed shall be treated as a reduction from
any tax liability. The law cannot be amended by a mere regulation. The administrative
agencies issuing these regulations may not enlarge, alter or restrict the provisions of the
law they administer. In fact, a regulation that "operates to create a rule out of harmony
with the statute is a mere nullity."
Finally, for purposes of clarity, Sec. 22911 of the Tax Code does not apply to cases that
fall under Sec. 4 of R.A. No. 7432 because the former provision governs exclusively all
kinds of refund or credit of internal revenue taxes that were erroneously or illegally
imposed and collected pursuant to the Tax Code while the latter extends the tax credit
benefit to the private establishments concerned even before tax payments have been
made. The tax credit that is contemplated under the Act is a form of just compensation,
not a remedy for taxes that were erroneously or illegally assessed and collected. In the
same vein, prior payment of any tax liability is not a precondition before a taxable entity
can benefit from the tax credit. The credit may be availed of upon payment of the tax
due, if any. Where there is no tax liability or where a private establishment reports a net
loss for the period, the tax credit can be availed of and carried over to the next taxable
year.
It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the remedy of
refund is available to the taxpayer, Sec. 4 of the law speaks only of a tax credit, not a
refund.
As earlier mentioned, the tax credit benefit granted to the establishments can be
deemed as their just compensation for private property taken by the State for
public use. The privilege enjoyed by the senior citizens does not come directly from the
State, but rather from the private establishments concerned.