Republic of the Philippines

SUPREME COURT
Manila

Internal Revenue issued a letter of authority to examine the

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

FIRST DIVISION
G.R. No. 137377

December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.
PUNO, J.:

On March 1, 1986, petitioner's revenue examiners recommended

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

In this petition for review, the Commissioner of Internal

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

On August 27, 1986, respondent corporation received a letter

dated August 15, 1986 from petitioner assessing respondent
several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as
follows:
I. DEFICIENCY INCOME TAX

Respondent Marubeni Corporation is a foreign corporation

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

FY ended March 31, 1985

Undeclared gross income (Philphos and
NDC construction projects)
P967,269,811.14

Sometime in November 1985, petitioner Commissioner of

TAXATION

Less: Cost and expenses (50%)

483,634,905.57

Net undeclared income

483,634,905.57

Income tax due thereon

Add:

169,272,217.00

50% surcharge

Sub-total

84,636,108.50
Add:

20% int. p.a.fr. 7-15-85 to 8-1586

TOTAL AMOUNT DUE

36,675,646.90

67,708,886.00

20% int. p.a.fr. 4-21-85 to 8-1586

TOTAL AMOUNT DUE

P290,583,972.40

P85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKER'S TAX

II. DEFICIENCY BRANCH PROFIT REMITTANCE

TAX

FY ended March 31, 1985

Undeclared gross income from Philphos

and NDC construction projects
P483,634,905.57

Undeclared share from commission

income
(denominated as "subsidy from Home
Office")

Less: Income tax thereon

169,272,217.00

Tax due thereon

Amount subject to Tax

314,362,688.57

FY ended March 31, 1985

Tax due thereon

47,154,403.00

Add:

50% surcharge

23,577,201.50

20% int. p.a.fr. 4-26-85 to 8-1586

12,305,360.66

TOTAL AMOUNT DUE

17,854,739.46

Add:

1,628,569.00

50%
surcharge
declaration

for

non-

20% surcharge for late payment

Sub-total
Add:

P83,036,965.16

III. DEFICIENCY CONTRACTOR'S TAX

P24,683,114.50

814,284.50
407,142.25
2,849,995.75

20% int. p.a.fr. 4-21-85 to 8-1586

TOTAL AMOUNT DUE

751,539.98
P3,600,535.6
8

FY ended March 31, 1985

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

Undeclared gross receipts/gross income

from Philphos and NDC construction
projects
P967,269,811.14
Contractor's tax due thereon (4%)
Add:

50%
surcharge
declaration

for

38,690,792.00
non-

20% surcharge for late payment

TAXATION

xxx

19,345,396.00

xxx

xxx"1

Petitioner found that the NDC and Philphos contracts were made
on a "turn-key" basis and that the gross income from the two

9,672,698.00

projects amounted to P967,269,811.14. Each contract was for a

piece of work and since the projects called for the construction
and installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further
stated that the same was petitioner's final decision and that if
respondent disagreed with it, respondent may file an appeal with
the Court of Tax Appeals within thirty (30) days from receipt of
the assessment.

Fiscal Year (FY) 1981 and FY 1986. The return was received by
the BIR on November 3, 1986 and respondent paid the amount
of P2,891,273.00 equivalent to ten percent (10%) of its net
worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended
from October 31, 1986 to December 5, 1986 by E.O. No. 54
dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41
was expanded by Executive Order (E.O.) No. 64. In addition to
the income tax amnesty granted by E.O. No. 41 for the years
1981 to 1985, E.O. No. 64 3 included estate and donor's taxes
under Title III and the tax on business under Chapter II, Title V
of the National Internal Revenue Code, also covering the years
1981 to 1985. E.O. No. 64 further provided that the immunities
and privileges under E.O. No. 41 were extended to the foregoing
tax liabilities, and the period within which the taxpayer could
avail of the amnesty was extended to December 15, 1986. Those
taxpayers who already filed their amnesty return under E.O. No.
41, as amended, could avail themselves of the benefits,
immunities and privileges under the new E.O. by filing an
amended return and paying an additional 5% on the increase in
net worth to cover business, estate and donor's tax liabilities.

On September 26, 1986, respondent filed two (2) petitions for

review with the Court of Tax Appeals. The first petition, CTA
Case No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's
assessment letter. The second, CTA Case No. 4110, questioned
the deficiency commercial broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2
declaring a one-time amnesty covering unpaid income taxes for
the years 1981 to 1985 was issued. Under this E.O., a taxpayer
who wished to avail of the income tax amnesty should, on or
before October 31, 1986: (a) file a sworn statement declaring his
net worth as of December 31, 1985; (b) file a certified true copy
of his statement declaring his net worth as of December 31, 1980
on record with the Bureau of Internal Revenue (BIR), or if no
such record exists, file a statement of said net worth subject to
verification by the BIR; and (c) file a return and pay a tax
equivalent to ten per cent (10%) of the increase in net worth
from December 31, 1980 to December 31, 1985.

The period of amnesty under E.O. No. 64 was extended to

January 31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax
amnesty return under the benefit of E.O. No. 64 and paid a
further amount of P1,445,637.00 to the BIR equivalent to five
percent (5%) of the increase of its net worth between 1981 and
1986.

In accordance with the terms of E.O. No. 41, respondent filed its
tax amnesty return dated October 30, 1986 and attached thereto
its sworn statement of assets and liabilities and net worth as of

TAXATION

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

The main controversy in this case lies in the interpretation of the

exception to the amnesty coverage of E.O. Nos. 41 and 64.
There are three (3) types of taxes involved herein income tax,
branch profit remittance tax and contractor's tax. These taxes are
covered by the amnesties granted by E.O. Nos. 41 and 64.
Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the
exception in Section 4 (b) of E.O. No. 41.

"WHEREFORE, the respondent Commissioner of Internal

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

Section 4 of E.O. No. 41 enumerates which taxpayers cannot

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

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

a) Those falling under the provisions of Executive Order Nos. 1,

2 and 14;

On January 15, 1999, the Court of Appeals dismissed the

petition and affirmed the decision of the Court of Tax Appeals.
Hence, this recourse.

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

effectivity hereof;

Before us, petitioner raises the following issues:

c) Those with criminal cases involving violations of the income

tax law already filed in court as of the effectivity hereof;

"(1) Whether or not the Court of Appeals erred in affirming the

Decision of the Court of Tax Appeals which ruled that herein
respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders
Nos. 41 and 64.

d) Those that have withholding tax liabilities under the National

Internal Revenue Code, as amended, insofar as the said
liabilities are concerned;

(2) Whether or not respondent is liable to pay the income,

branch profit remittance, and contractor's taxes assessed by
petitioner."5

e) Those with tax cases pending investigation by the Bureau of

Internal Revenue as of the effectivity hereof as a result of
information furnished under Section 316 of the National Internal
Revenue Code, as amended;

TAXATION

f) Those with pending cases involving unexplained or

unlawfully acquired wealth before the Sandiganbayan;

corporation did not fall under the said exception in Section 4 (b),
hence, respondent was not disqualified from availing of the
amnesty for income tax under E.O. No. 41.

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal

Exactions and Transactions) and Chapter Four (Malversation of
Public Funds and Property) of the Revised Penal Code, as
amended."

The same ruling also applies to the deficiency branch profit

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

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

The difficulty herein is with respect to the contractor's tax

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

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No.

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

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

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit
remittance and contractor's tax assessments was filed by
respondent with the Court of Tax Appeals on September 26,
1986. When E.O. No. 41 became effective on August 22, 1986,
CTA Case No. 4109 had not yet been filed in court. Respondent

TAXATION

"Section 8. The provisions of Executive Orders Nos. 41 and 54

which are not contrary to or inconsistent with this amendatory
Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O.

No. 41 not contrary to or inconsistent with the amendatory act

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

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax

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

In view of the amendment introduced by E.O. No. 64, Section 4

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

In the instant case, the vagueness in Section 4 (b) brought about

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

There is nothing in E.O. No. 64 that provides that it should

retroact to the date of effectivity of E.O. No. 41, the original
issuance. Neither is it necessarily implied from E.O. No. 64 that
it or any of its provisions should apply retroactively. Executive
Order No. 64 is a substantive amendment of E.O. No. 41. It does
not merely change provisions in E.O. No. 41. It supplements the
original act by adding other taxes not covered in the first. 12 It has
been held that where a statute amending a tax law is silent as to
whether it operates retroactively, the amendment will not be
given a retroactive effect so as to subject to tax past transactions
not subject to tax under the original act.13 In an amendatory act,
every case of doubt must be resolved against its retroactive
effect.14

TAXATION

Respondent filed CTA Case No. 4109 on September 26, 1986.

When E.O. No. 64 took effect on November 17, 1986, CTA Case
No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on
December 15, 1986, respondent already fell under the exception

in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified

from availing of the business tax amnesty granted therein.

for the handling of phosphate rock, bagged or bulk fertilizer

products, liquid materials and other products of Philphos, the
Philippine Associated Smelting and Refining Corporation
(Pasar),21and other industrial plants within the Estate. The
bidding was participated in by Marubeni Head Office in Japan.

It is respondent's other argument that assuming it did not validly

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

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC

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

Before going into respondent's arguments, it is necessary to

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

". . . the design and engineering, supply and delivery,

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

In 1982, the NDC opened for public bidding a project to

construct and install a modern, reliable, efficient and integrated
wharf/port complex at the Leyte Industrial Development Estate.
The wharf/port complex was intended to be one of the major
facilities for the industrial plants at the Leyte Industrial
Development Estate. It was to be specifically adapted to the site

TAXATION

The contract price for the wharf/port complex was

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

Contract for Ammonia Storage Complex Between Philippine

Phosphate Fertilizer Corporation and Marubeni Corporation."30
The object of the contract was to establish and place in operating
condition a modern, reliable, efficient and integrated ammonia
storage complex adapted to the site for the receipt and storage of
liquid anhydrous ammonia31 and for the delivery of ammonia to
an integrated fertilizer plant adjacent to the storage complex and
to vessels at the dock.32 The storage complex was to consist of
ammonia storage tanks, refrigeration system, ship unloading
system, transfer pumps, ammonia heating system, fire-fighting
system, area lighting, spare parts, and other related facilities. 33
The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants
of licenses and transfer of technology and know-how,34 and:
". . . the design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and
control of testing and commissioning of the Ammonia Storage
Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a
part or the whole of the Ammonia Storage Complex through the
Owner with the design and construction of other facilities at and
around the Site. The scope of works shall also include any
activity, work and supply necessary for, incidental to or
appropriate under present international industrial practice, for
the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the
abovementioned Annex I."35

Under the financing schemes, the Japanese Yen Portions I and II

and the Philippine Pesos Portion were further broken down and
subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the
corresponding materials, equipment and services were contained
in a list attached as Annex III to the contract.29
A few months after execution of the NDC contract, Philphos
opened for public bidding a project to construct and install two
ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the
bidding. Thus, on May 2, 1982, Philphos and respondent
corporation entered into an agreement entitled "Turn-Key

TAXATION

The contract price for the project was 3,255,751,000.00 and

P17,406,000.00. Like the NDC contract, the price was divided
into three portions. The price in Japanese currency was broken
down into the Japanese Yen Portion I and Japanese Yen Portion

II while the price in Philippine currency was classified as the

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

the contracts, including its receipts from the Offshore Portion,

constitute income from Philippine sources. The total gross
receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner
of Internal Revenue v. Engineering Equipment & Supply Co.42

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

"Sec. 205. Contractors, proprietors or operators of dockyards,

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

A contractor's tax is imposed in the National Internal Revenue

Code (NIRC) as follows:

(a) General engineering, general building and specialty

contractors, as defined in Republic Act No. 4566;

Under the Philippine Onshore Portion, respondent does not deny

its liability for the contractor's tax on the income from the two
projects. In fact respondent claims, which petitioner has not
denied, that the income it derived from the Onshore Portion of
the two projects had been declared for tax purposes and the taxes
thereon already paid to the Philippine government.39 It is with
regard to the gross receipts from the Foreign Offshore Portion of
the two contracts that the liabilities involved in the assessments
subject of this case arose. Petitioner argues that since the two
agreements are turn-key,40 they call for the supply of both
materials and services to the client, they are contracts for a piece
of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered
were all done and completed within the territorial jurisdiction of
the Philippines.41 Accordingly, respondent's entire receipts from

TAXATION

xxx

xxx

xxx

(q) Other independent contractors. The term "independent

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

centers for their affiliates, subsidiaries or branches in the AsiaPacific Region.

xxx

xxx

An examination of Annex III to the two contracts reveals that the

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

xxx43

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

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

"Japanese Yen Portion I of the Contract Price has been

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

xxx50

The subdivision of Japanese Yen Portion I covers materials and

equipment while Japanese Yen Portion II and the Philippine
Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words,
the supplies for the project are listed under Portion I while labor
and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the
Industrial Plant Section II of the Industrial Plant Department of
Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the
machines and equipment listed under Japanese Yen Portion I in
Annex III were manufactured in Japan.51 The machines and
equipment were designed, engineered and fabricated by
Japanese firms sub-contracted by Marubeni from the list of subcontractors in the technical appendices to each contract. 52
Marubeni sub-contracted a majority of the equipment and
supplies to Kawasaki Steel Corporation which did the design,
fabrication, engineering and manufacture thereof; 53 Yashima &

A contractor's tax is a tax imposed upon the privilege of

engaging in business.45 It is generally in the nature of an excise
tax on the exercise of a privilege of selling services or labor
rather than a sale on products; 46 and is directly collectible from
the person exercising the privilege.47 Being an excise tax, it can
be levied by the taxing authority only when the acts, privileges
or business are done or performed within the jurisdiction of said
authority.48 Like property taxes, it cannot be imposed on an
occupation or privilege outside the taxing district.49
In the case at bar, it is undisputed that respondent was an
independent contractor under the terms of the two subject
contracts. Respondent, however, argues that the work therein
were not all performed in the Philippines because some of them
were completed in Japan in accordance with the provisions of
the contracts.

TAXATION

xxx

10

driven and perform what they were designed to do.62

Co. Ltd. which manufactured the mobile equipment;

Bridgestone which provided the rubber fenders of the mobile
equipment;54 and B.S. Japan for the supply of radio equipment. 55
The engineering and design works made by Kawasaki Steel
Corporation included the lay-out of the plant facility and
calculation of the design in accordance with the specifications
given by respondent.56 All sub-contractors and manufacturers are
Japanese corporations and are based in Japan and all engineering
and design works were performed in that country.57

In addition to the foregoing, there are other items listed in

Japanese Yen Portion I in Annex III to the NDC contract. These
other items consist of supplies and materials for five (5) berths,
two (2) roads, a causeway, a warehouse, a transit shed, an
administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams
and other steel structures, navigational and communication as
well as electrical equipment.63

The materials and equipment under Portion I of the NDC Port

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

In connection with the Philphos contract, the major pieces of

equipment supplied by respondent were the ammonia storage
tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and
specifications and then shipped to Isabel. Once there,
respondent's employees put the steel plates together to form the
storage tank. As to the refrigeration units, they were completed
and assembled in Japan and thereafter shipped to Isabel. The
units were simply installed there. 65 Annex III to the Philphos
contract lists down under the Japanese Yen Portion I the
materials for the ammonia storage tank, incidental equipment,
piping facilities, electrical and instrumental apparatus,
foundation material and spare parts.

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

All the materials and equipment transported to the Philippines

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

TAXATION

11

The sub-contractors of the materials and equipment under

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

and loader, the boats and mobile equipment for the NDC project
and the ammonia storage tanks and refrigeration units were
made and completed in Japan. They were already finished
products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel
sheets, pipes and structures, electrical and instrumental
apparatus, these were not finished products when shipped to the
Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for
the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered
outside the taxing jurisdiction of the Philippines and are
therefore not subject to contractor's tax.

Between Marubeni and the two Philippine corporations,

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

Contrary to petitioner's claim, the case of Commissioner of

Internal Revenue v. Engineering Equipment & Supply Co 73 is not
in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not
engaged in the manufacture of air conditioning units in the
Philippines. Engineering Equipment designed, supplied and
installed centralized air-conditioning systems for clients who
contracted its services. Engineering, however, did not
manufacture all the materials for the air-conditioning system. It
imported some items for the system it designed and installed. 74
The issues in that case dealt with services performed within the
local taxing jurisdiction. There was no foreign element involved
in the supply of materials and services.

Clearly, the service of "design and engineering, supply and

delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning,
coordination. . . "72 of the two projects involved two taxing
jurisdictions. These acts occurred in two countries Japan and
the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that
some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets of ship unloader

TAXATION

With the foregoing discussion, it is unnecessary to discuss the

other issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in

12

CA-G.R. SP No. 42518 is affirmed.

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

CIR vs. MARUBENI

TAXATION

13

GR No. 137377| J. Puno

tax amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41s scope to include
estate and donors taxes under Title 3 and business tax under
Chap 2, Title 5 of NIRC, extended the period of availment to
Dec 15, 1986 and stated those who already availed amnesty
under EO 41 should file an amended return to avail of the new
benefits. Marubeni filed a supplemental tax amnesty return on
Dec 15, 1986.

Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR
to desist from collecting the 1985 deficiency income, branch
profit remittance and contractors taxes from Marubeni Corp
after finding the latter to have properly availed of the tax
amnesty under EO 41 & 64, as amended.

CTA found that Marubeni properly availed of the tax amnesty

and deemed cancelled the deficiency taxes. CA affirmed on
appeal.

Marubeni, a Japanese corporation, engaged in general import

and export trading, financing and construction, is duly registered
in the Philippines with Manila branch office. CIR examined the
Manila branchs books of accounts for fiscal year ending March
1985, and found that respondent had undeclared income from
contracts with NDC and Philphos for construction of a
wharf/port complex and ammonia storage complex respectively.

Issue:
W/N Marubeni is exempted from paying tax

On August 27, 1986, Marubeni received a letter from CIR

assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine
sources, hence subject to internal revenue taxes. On Sept 1986,
respondent filed 2 petitions for review with CTA: the first,
questioned the deficiency income, branch profit remittance and
contractors tax assessments and second questioned the
deficiency commercial brokers assessment.

Held:

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid

income taxes for 1981-85, and that taxpayers who wished to
avail this should on or before Oct 31, 1986. Marubeni filed its

Sec. 4. Exceptions.The following taxpayers may not avail

themselves of the amnesty herein granted: xxx b) Those with
income tax cases already filed in Court as of the effectivity

TAXATION

Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty
because it falls under the exception in Sec 4b of EO 41:

14

hereof;

necessary implication and no vested right or obligations of

contract are thereby impaired.

Petitioner argues that at the time respondent filed for income tax
amnesty on Oct 30, 1986, a case had already been filed and was
pending before the CTA and Marubeni therefore fell under the
exception. However, the point of reference is the date of
effectivity of EO 41 and that the filing of income tax cases must
have been made before and as of its effectivity.

2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the
amnesty, it is still not liable for the deficiency tax because the
income from the projects came from the Offshore Portion as
opposed to Onshore Portion. It claims all materials and
equipment in the contract under the Offshore Portion
were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes.

EO 41 took effect on Aug 22, 1986. The case questioning the

1985 deficiency was filed with CTA on Sept 26, 1986. When EO
41 became effective, the case had not yet been filed. Marubeni
does not fall in the exception and is thus, not disqualified from
availing of the amnesty under EO 41 for taxes on income and
branch profit remittance.

(BG: Marubeni won in the public bidding for projects with

government corporations NDC and Philphos. In the contracts,
the prices were broken down into a Japanese Yen Portion (I and
II) and Philippine Pesos Portion and financed either by OECF or
by suppliers credit. The Japanese Yen Portion I corresponds to
the Foreign Offshore Portion, while Japanese Yen Portion II and
the Philippine Pesos Portion correspond to the Philippine
Onshore Portion. Marubeni has already paid the Onshore
Portion, a fact that CIR does not deny.)

The difficulty herein is with respect to the contractors tax

assessment (business tax) and respondents availment of the
amnesty under EO 64, which expanded EO 41s coverage. When
EO 64 took effect on Nov 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate
and donors taxes. Instead, Section 8 said EO provided that:
Section 8. The provisions of Executive Orders Nos. 41 and 54
which are not contrary to or inconsistent with this amendatory
Executive Order shall remain in full force and effect.

CIR argues that since the two agreements are turn-key, they call
for the supply of both materials and services to the client, they
are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided
and services rendered were all done and completed within the
territorial jurisdiction of the Philippines. Accordingly,
respondents entire receipts from the contracts, including its
receipts from the Offshore Portion, constitute income from

Due to the EO 64 amendment, Sec 4b cannot be construed to

refer to EO 41 and its date of effectivity. The general rule is that
an amendatory act operates prospectively. It may not be given a
retroactive effect unless it is so provided expressly or by

TAXATION

15

Philippine sources. The total gross receipts covering both labor

and materials should be subjected to contractors tax (a tax on
the exercise of a privilege of selling services or labor rather than
a sale on products).
Marubeni, however, was able to sufficiently prove in trial that
not all its work was performed in the Philippines because some
of them were completed in Japan (and in fact subcontracted) in
accordance with the provisions of the contracts. All services for
the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered
outside Philippines taxing jurisdiction and are therefore not
subject to contractors tax. Petition denied.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-24756

October 31, 1968

CITY OF BAGUIO, plaintiff-appellee,

vs.
FORTUNATO DE LEON, defendant-appellant.
The City Attorney for plaintiff-appellee.
Fortunato de Leon for and in his own behalf as defendantappellant.
FERNANDO, J.:
In this appeal, a lower court decision upholding the validity of
an ordinance1 of the City of Baguio imposing a license fee on
any person, firm, entity or corporation doing business in the City
of Baguio is assailed by defendant-appellant Fortunato de Leon.
He was held liable as a real estate dealer with a property therein
worth more than P10,000, but not in excess of P50,000, and

TAXATION

16

therefore obligated to pay under such ordinance the P50 annual

fee. That is the principal question. In addition, there has been a
firm and unyielding insistence by defendant-appellant of the lack
of jurisdiction of the City Court of Baguio, where the suit
originated, a complaint having been filed against him by the City
Attorney of Baguio for his failure to pay the amount of P300 as
license fee covering the period from the first quarter of 1958 to
the fourth quarter of 1962, allegedly, inspite of repeated
demands. Nor was defendant-appellant agreeable to such a suit
being instituted by the City Treasurer without the consent of the
Mayor, which for him was indispensable. The lower court was of
a different mind.

confronting defendant-appellant, therefore, was far from easy.

Why he failed is understandable, considering that even a cursory
reading of the above amendment readily discloses that the
enactment of the ordinance in question finds support in the
power thus conferred.
Nor is the question raised by him as to the validity thereof novel
in character. In Medina v. City of Baguio,3 the effect of the
amendatory section insofar as it would expand the previous
power vested by the city charter was clarified in these terms:
"Appellants apparently have in mind section 2553, paragraph (c)
of the Revised Administrative Code, which empowers the City
of Baguio merely to impose a license fee for the purpose of
rating the business that may be established in the city. The power
as thus conferred is indeed limited, as it does not include the
power to levy a tax. But on July 15, 1948, Republic Act No. 329
was enacted amending the charter of said city and adding to its
power to license the power to tax and to regulate. And it is
precisely having in view this amendment that Ordinance No. 99
was approved in order to increase the revenues of the city. In our
opinion, the amendment above adverted to empowers the city
council not only to impose a license fee but also to levy a tax for
purposes of revenue, more so when in amending section 2553
(b), the phrase 'as provided by law' has been removed by section
2 of Republic Act No. 329. The city council of Baguio,
therefore, has now the power to tax, to license and to regulate
provided that the subjects affected be one of those included in
the charter. In this sense, the ordinance under consideration
cannot be considered ultra vires whether its purpose be to levy a
tax or impose a license fee. The terminology used is of no
consequence."

In its decision of December 19, 1964, it declared the above

ordinance as amended, valid and subsisting, and held defendantappellant liable for the fees therein prescribed as a real estate
dealer. Hence, this appeal. Assume the validity of such
ordinance, and there would be no question about the liability of
defendant-appellant for the above license fee, it being shown in
the partial stipulation of facts, that he was "engaged in the rental
of his property in Baguio" deriving income therefrom during the
period covered by the first quarter of 1958 to the fourth quarter
of 1962.
The source of authority for the challenged ordinance is supplied
by Republic Act No. 329, amending the city charter of Baguio 2
empowering it to fix the license fee and regulate "businesses,
trades and occupations as may be established or practiced in the
City."
Unless it can be shown then that such a grant of authority is not
broad enough to justify the enactment of the ordinance now
assailed, the decision appealed from must be affirmed. The task

TAXATION

It would be an undue and unwarranted emasculation of the

17

above power thus granted if defendant-appellant were to be

sustained in his contention that no such statutory authority for
the enactment of the challenged ordinance could be discerned
from the language used in the amendatory act. That is about all
that needs to be said in upholding the lower court, considering
that the City of Baguio was not devoid of authority in enacting
this particular ordinance. As mentioned at the outset, however,
defendant-appellant likewise alleged procedural missteps and
asserted that the challenged ordinance suffered from certain
constitutional infirmities. To such points raised by him, we shall
now turn.

by Us, as what was involved was "an ordinary money claim" and
therefore "within the original jurisdiction of the Justice of the
Peace Court where it was filed, considering the amount
involved." Such is likewise the situation here.
Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to
collect from a defendant this license fee corresponding to the
years 1951 and 1952 was filed with the Municipal Court of
Manila, in view of the amount involved. The thought that the
municipal court lacked jurisdiction apparently was not even in
the minds of the parties and did not receive any consideration by
this Court.

1. Defendant-appellant makes much of the alleged lack of

jurisdiction of the City Court of Baguio in the suit for the
collection of the real estate dealer's fee from him in the amount
of P300. He contended before the lower court, and it is his
contention now, that while the amount of P300 sought was
within the jurisdiction of the City Court of Baguio where this
action originated, since the principal issue was the legality and
constitutionality of the challenged ordinance, it is not such City
Court but the Court of First Instance that has original
jurisdiction.

Evidently, the fear is entertained by defendant-appellant that

whenever a constitutional question is raised, it is the Court of
First Instance that should have original jurisdiction on the
matter. It does not admit of doubt, however, that what confers
jurisdiction is the amount set forth in the complaint. Here, the
sum sought to be recovered was clearly within the jurisdiction of
the City Court of Baguio.
Nor could it be plausibly maintained that the validity of such
ordinance being open to question as a defense against its
enforcement from one adversely affected, the matter should be
elevated to the Court of First Instance. For the City Court could
rely on the presumption of the validity of such ordinance, 6 and
the mere fact, however, that in the answer to such a complaint a
constitutional question was raised did not suffice to oust the City
Court of its jurisdiction. The suit remains one for collection, the
lack of validity being only a defense to such an attempt at
recovery. Since the City Court is possessed of judicial power and
it is likewise axiomatic that the judicial power embraces the
ascertainment of facts and the application of the law, the

There is here a misapprehension of the Judiciary Act. The City

Court has jurisdiction. Only recently, on September 7, 1968 to
be exact, we rejected a contention similar in character in
Nemenzo v. Sabillano.4 The plaintiff in that case filed a claim for
the payment of his salary before the Justice of the Peace Court of
Pagadian, Zamboanga del Sur. The question of jurisdiction was
raised; the defendant Mayor asserted that what was in issue was
the enforcement of the decision of the Commission of Civil
Service; the Justice of the Peace Court was thus without
jurisdiction to try the case. The above plea was curtly dismissed

TAXATION

18

Constitution as the highest law superseding any statute or

ordinance in conflict therewith, it cannot be said that a City
Court is bereft of competence to proceed on the matter. In the
exercise of such delicate power, however, the admonition of
Cooley on inferior tribunals is well worth remembering. Thus:
"It must be evident to any one that the power to declare a
legislative enactment void is one which the judge, conscious of
the fallibility of the human judgment, will shrink from
exercising in any case where he can conscientiously and with
due regard to duty and official oath decline the responsibility." 7
While it remains undoubted that such a power to pass on the
validity of an ordinance alleged to infringe certain constitutional
rights of a litigant exists, still it should be exercised with due
care and circumspection, considering not only the presumption
of validity but also the relatively modest rank of a city court in
the judicial hierarchy.

than just a persuasive effect. To some, it delivered the coup de

grace to the bogey of double taxation as a constitutional bar to
the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost as noted by an eminent
critic, still stalks the juridical state. In a 1947 decision, however,9
we quoted with approval this excerpt from a leading American
decision:10 "Where, as here, Congress has clearly expressed its
intention, the statute must be sustained even though double
taxation results."
At any rate, it has been expressly affirmed by us that such an
"argument against double taxation may not be invoked where
one tax is imposed by the state and the other is imposed by the
city ..., it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or
taxes be exacted with respect to the same occupation, calling or
activity by both the state and the political subdivisions thereof."11

2. To repeat the challenged ordinance cannot be considered ultra

vires as there is more than ample statutory authority for the
enactment thereof. Nonetheless, its validity on constitutional
grounds is challenged because of the allegation that it imposed
double taxation, which is repugnant to the due process clause,
and that it violated the requirement of uniformity. We do not
view the matter thus.

The above would clearly indicate how lacking in merit is this

argument based on double taxation.
Now, as to the claim that there was a violation of the rule of
uniformity established by the constitution. According to the
challenged ordinance, a real estate dealer who leases property
worth P50,000 or above must pay an annual fee of P100. If the
property is worth P10,000 but not over P50,000, then he pays
P50 and P24 if the value is less than P10,000. On its face,
therefore, the above ordinance cannot be assailed as violative of
the constitutional requirement of uniformity. In Philippine Trust
Company v. Yatco,12 Justice Laurel, speaking for the Court,
stated: "A tax is considered uniform when it operates with the
same force and effect in every place where the subject may be
found."

As to why double taxation is not violative of due process, Justice

Holmes made clear in this language: "The objection to the
taxation as double may be laid down on one side. ... The 14th
Amendment [the due process clause] no more forbids double
taxation than it does doubling the amount of a tax, short of
confiscation or proceedings unconstitutional on other
grounds."8With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more

TAXATION

19

There was no occasion in that case to consider the possible effect

on such a constitutional requirement where there is a
classification. The opportunity came in Eastern Theatrical Co. v.
Alfonso.13 Thus: "Equality and uniformity in taxation means that
all taxable articles or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of
taxation; ..." About two years later, Justice Tuason, speaking for
this Court in Manila Race Horses Trainers Assn. v. De la
Fuente14 incorporated the above excerpt in his opinion and
continued: "Taking everything into account, the differentiation
against which the plaintiffs complain conforms to the practical
dictates of justice and equity and is not discriminatory within the
meaning of the Constitution."

plausibility.
3. That would dispose of all the errors assigned, except the last
two, which would predicate a grievance on the complaint having
been started by the City Treasurer rather than the City Mayor of
Baguio. These alleged errors, as was the case with the others
assigned, lack merit.
In much the same way that an act of a department head of the
national government, performed within the limits of his
authority, is presumptively the act of the President unless
reprobated or disapproved,18 similarly the act of the City
Treasurer, whose position is roughly analogous, may be assumed
to carry the seal of approval of the City Mayor unless repudiated
or set aside. This should be the case considering that such city
official is called upon to see to it that revenues due the City are
collected. When administrative steps are futile and unavailing,
given the stubbornness and obduracy of a taxpayer, convinced in
good faith that no tax was due, judicial remedy may be resorted
to by him. It would be a reflection on the state of the law if such
fidelity to duty would be met by condemnation rather than
commendation.

To satisfy this requirement then, all that is needed as held in

another case decided two years later, 15 is that the statute or
ordinance in question "applies equally to all persons, firms and
corporations placed in similar situation." This Court is on record
as accepting the view in a leading American case16 that
"inequalities which result from a singling out of one particular
class for taxation or exemption infringe no constitutional
limitation."17

So, much for the analytical approach. The conclusion thus

reached has a reinforcement that comes to it from the functional
and pragmatic test. If a city treasurer has to await the nod from
the city mayor before a municipal ordinance is enforced, then
opportunity exists for favoritism and undue discrimination to
come into play. Whatever valid reason may exist as to why one
taxpayer is to be accorded a treatment denied another, the
suspicion is unavoidable that such a manifestation of official
favor could have been induced by unnamed but not unknown
consideration. It would not be going too far to assert that even

It is thus apparent from the above that in much the same way
that the plea of double taxation is unavailing, the allegation that
there was a violation of the principle of uniformity is inherently
lacking in persuasiveness. There is no need to pass upon the
other allegations to assail the validity of the above ordinance, it
being maintained that the license fees therein imposed "is
excessive, unreasonable and oppressive" and that there is a
failure to observe the mandate of equal protection. A reading of
the ordinance will readily disclose their inherent lack of

TAXATION

20

defendant-appellant would find no satisfaction in such a sad

state of affairs. The more desirable legal doctrine therefore, on
the assumption that a choice exists, is one that would do away
with such temptation on the part of both taxpayer and public
official alike.

no statury authority which expressly grants the City of Baguio to

levy such tax, and that there it imposed double taxation, and
violates the requirement of uniformity.

WHEREFORE, the lower court decision of December 19, 1964,

is hereby affirmed. Costs against defendant-appellant.

Are the contentions of the defendant-appellant tenable?

ISSUE:

HELD:
Concepcion, CJ., Reyes, J.B.L., Dizon, Makalintal, Sanchez,
Castro, Angeles and Capistrano, JJ., concur.
Zaldivar, J., is on leave.

No. First, RA 329 was enacted amending Section 2553 of the

Revised Administrative Code empowering the City Council not
only to impose a license fee but to levy a tax for purposes of
revenue, thus the ordinance cannot be considered ultra vires for
there is more than ample statury authority for the enactment
thereof.

CITY OF BAGUIO vs. DE LEON

25 SCRA 938
GR No. L-24756, October 31, 1968

Second, an argument against double taxation may not be

invoked where one tax is imposed by the state and the other is
imposed by the city, so that where, as here, Congress has clearly
expressed its intention, the statute must be sustained even though
double taxation results.

"There is no double taxation where one tax is imposed by the

state and the other is imposed by the city."
FACTS:
The City of Baguio passed an ordinance imposing a license fee
on any person, entity or corporation doing business in the City.
The ordinance sourced its authority from RA No. 329, thereby
amending the city charter empowering it to fix the license fee
and regulate businesses, trades and occupations as may be
established or practiced in the City. De Leon was assessed for
P50 annual fee it being shown that he was engaged in property
rental and deriving income therefrom. The latter assailed the
validity of the ordinance arguing that it is ultra vires for there is

TAXATION

And third, violation of uniformity is out of place it being widely

recognized that there is nothing inherently obnoxious in the
requirement that license fees or taxes be exacted with respect to
the same occupation, calling or activity by both the state and the
political subdivisions thereof.

21

of Pangasinan, pursuant to the municipal franchise granted it by

their respective municipal councils, under Resolution Nos. 14
and 25 of June 29 and July 2, 1946, respectively. Section 10 of
these franchises provide that:

Republic of the Philippines

SUPREME COURT
Manila

...The said grantee in consideration of the franchise hereby

granted, shall pay quarterly into the Provincial Treasury of
Pangasinan, one per centum of the gross earnings obtained thru
this privilege during the first twenty years and two per centum
during the remaining fifteen years of the life of said franchise.

EN BANC
G.R. No. L-23771 August 4, 1988
THE COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and
THE COURT OF TAX APPEALS, respondents.

On February 24, 1948, the President of the Philippines approved

the franchises granted to the private respondent.
On November 21, 1955, the Bureau of Internal Revenue (BIR)
assessed against and demanded from the private respondent the
total amount of P19,293.41 representing deficiency franchise
taxes and surcharges for the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from March 1, 1948 to
December 31, 1954 as prescribed in Section 259 of the National
Internal Revenue Code, instead of the lower rates as provided in
the municipal franchises. On September 29, 1956, the private
respondent requested for a reinvestigation of the case on the
ground that instead of incurring a deficiency liability, it made an
overpayment of the franchise tax. On April 30, 1957, the BIR
through its regional director, denied the private respondent's
request for reinvestigation and reiterated the demand for
payment of the same. In its letters dated July 2, and August 9,
1958 to the petitioner Commissioner, the private respondent
protested the said assessment and requested for a conference
with a view to settling the liability amicably. In his letters dated
July 25 and August 28, 1958, the Commissioner denied the
request of the private respondent. Thus, the appeal to the

Angel Sanchez for Lingayen Electric Power Co., Inc.

SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax
Appeals (C.T.A., for brevity) dated September 15, 1964 in
C.T.A. Cases Nos. 581 and 1302, which were jointly heard upon
agreement of the parties, absolving the respondent taxpayer from
liability for the deficiency percentage, franchise, and fixed taxes
and surcharge assessed against it in the sums of P19,293.41 and
P3,616.86 for the years 1946 to 1954 and 1959 to 1961,
respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co.,
Inc., operates an electric power plant serving the adjoining
municipalities of Lingayen and Binmaley, both in the province

TAXATION

22

respondent Court of Tax Appeals on September 19, 1958,

docketed as C.T.A. Case No. 581.

granted, no other tax and/or licenses other than the franchise tax
of two per centum on the gross receipts as provided for in the
original franchise shall be collected, any provision of law to the
contrary notwithstanding.

In a letter dated August 21, 1962, the Commissioner demanded

from the private respondent the payment of P3,616.86
representing deficiency franchise tax and surcharges for the
years 1959 to 1961 again applying the franchise tax rate of 5%
on gross receipts as prescribed in Section 259 of the National
Internal Revenue Code. In a letter dated October 5, 1962, the
private respondent protested the assessment and requested
reconsideration thereof The same was denied on November 9,
1962. Thus, the appeal to the respondent Court of Appeals on
November 29, 1962, docketed as C.T.A. No. 1302.

On September 15, 1964, the respondent court ruled that the

provisions of R.A. No. 3843 should apply and accordingly
dismissed the claim of the Commissioner of Internal Revenue.
The said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259
of the National Internal Revenue Code assessed against the
private respondent on its gross receipts realized before the
effectivity of R.A- No. 3843 is collectible.

Pending the hearing of the said cases, Republic Act (R.A.) No.
3843 was passed on June 22, 1 963, granting to the private
respondent a legislative franchise for the operation of the electric
light, heat, and power system in the same municipalities of
Pangasinan. Section 4 thereof provides that:

2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional

for being violative of the "uniformity and equality of taxation"
clause of the Constitution.

In consideration of the franchise and rights hereby granted, the

grantee shall pay into the Internal Revenue office of each
Municipality in which it is supplying electric current to the
public under this franchise, a tax equal to two per centum of the
gross receipts from electric current sold or supplied under this
franchise. Said tax shall be due and payable quarterly and shall
be in lieu of any and all taxes and/or licenses of any kind, nature
or description levied, established, or collected by any authority
whatsoever, municipal, provincial or national, now or in the
future, on its poles, wires, insulator ... and on its franchise,
rights, privileges, receipts, revenues and profits, from which
taxes and/or licenses, the grantee is hereby expressly exempted
and effective further upon the date the original franchise was

TAXATION

3. If the abovementioned Section 4 of R.A. No. 3843 is valid,

whether or not it could be given retroactive effect so as to render
uncollectible the taxes in question which were assessed before
its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed
and deficiency percentage taxes in the amount of P3,025.96 for
the period from January 1, 1946 to February 29, 1948, the period
before the approval of its municipal franchises.
The first issue raised by the petitioner before us is whether or not
the five percent (5%) franchise tax prescribed in Section 259 of
23

the National Internal Revenue Code (Commonwealth Act No.

466 as amended by R.A. No. 39) assessed against the private
respondent on its gross receipts realized before the effectivity of
R.A- No. 3843 is collectible. It is the contention of the petitioner
Commissioner of Internal Revenue that the private respondent
should have been held liable for the 5% franchise tax on gross
receipts prescribed in Section 259 of the Tax Code, instead of
the lower franchise tax rates provided in the municipal
franchises (1% of gross earnings for the first twenty years and
2% for the remaining fifteen years of the life of the franchises)
because Section 259 of the Tax Code, as amended by RA No. 39
of October 1, 1946, applied to existing and future franchises.
The franchises of the private respondent were already in
existence at the time of the adoption of the said amendment,
since the franchises were accepted on March 1, 1948 after
approval by the President of the Philippines on February 24,
1948. The private respondent's original franchises did not
contain the proviso that the tax provided therein "shall be in lieu
of all taxes;" moreover, the franchises contained a reservation
clause that they shag be subject to amendment, alteration, or
repeal, but even in the absence of such cause, the power of the
Legislature to alter, amend, or repeal any franchise is always
deemed reserved. The franchise of the private respondent have
been modified or amended by Section 259 of the Tax Code, the
petitioner submits.

whatsoever, municipal, provincial, or national, now or in the

future ... and effective further upon the date the original
franchise was granted, no other tax and/or licenses other than
the franchise tax of two per centum on the gross receipts ... shall
be collected, any provision of law to the contrary
notwithstanding." Thus, by virtue of R.A- No. 3843, the private
respondent was liable to pay only the 2% franchise tax, effective
from the date the original municipal franchise was granted.
On the question as to whether or not Section 4 of R.A. No. 3843
is unconstitutional for being violative of the "uniformity and
equality of taxation" clause of the Constitution, and, if adjudged
valid, whether or not it should be given retroactive effect, the
petitioner submits that the said law is unconstitutional insofar as
it provides for the payment by the private respondent of a
franchise tax of 2% of its gross receipts, while other taxpayers
similarly situated were subject to the 5% franchise tax imposed
in Section 259 of the Tax Code, thereby discriminatory and
violative of the rule on uniformity and equality of taxation.
A tax is uniform when it operates with the same force and effect
in every place where the subject of it is found. Uniformity means
that all property belonging to the same class shall be taxed alike
The Legislature has the inherent power not only to select the
subjects of taxation but to grant exemptions. Tax exemptions
have never been deemed violative of the equal protection clause.
1
It is true that the private respondents municipal franchises were
obtained under Act No. 667 2 of the Philippine Commission, but
these original franchises have been replaced by a new legislative
franchise, i.e. R.A. No. 3843. As correctly held by the
respondent court, the latter was granted subject to the terms and
conditions established in Act No. 3636, 3 as amended by C.A.
No. 132. These conditions Identify the private respondent's

We find no merit in petitioner's contention. R.A. No. 3843

granted the private respondent a legislative franchise in June,
1963, amending, altering, or even repealing the original
municipal franchises, and providing that the private respondent
should pay only a 2% franchise tax on its gross receipts, "in lieu
of any and all taxes and/or licenses of any kind, nature or
description levied, established, or collected by any authority

TAXATION

24

power plant as falling within that class of power plants created

by Act No. 3636, as amended. The benefits of the tax reduction
provided by law (Act No. 3636 as amended by C.A. No. 132 and
R.A. No. 3843) apply to the respondent's power plant and others
circumscribed within this class. R.A-No. 3843 merely
transferred the petitioner's power plant from that class provided
for in Act No. 667, as amended, to which it belonged until the
approval of R.A- No. 3843, and placed it within the class falling
under Act No. 3636, as amended. Thus, it only effected the
transfer of a taxable property from one class to another.

constitutionality of the law in question.

Given its validity, should the said law be applied retroactively so
as to render uncollectible the taxes in question which were
assessed before its enactment? The question of whether a statute
operates retrospectively or only prospectively depends on the
legislative intent. In the instant case, Act No. 3843 provides that
"effective ... upon the date the original franchise was granted, no
other tax and/or licenses other than the franchise tax of two per
centum on the gross receipts ... shall be collected, any provision
to the contrary notwithstanding." Republic Act No. 3843
therefore specifically provided for the retroactive effect of the
law.

We do not have the authority to inquire into the wisdom of such

act. Furthermore, the 5% franchise tax rate provided in Section
259 of the Tax Code was never intended to have a universal
application. 4 We note that the said Section 259 of the Tax Code
expressly allows the payment of taxes at rates lower than 5%
when the charter granting the franchise of a grantee, like the one
granted to the private respondent under Section 4 of R.A. No.
3843, precludes the imposition of a higher tax. R.A. No. 3843
did not only fix and specify a franchise tax of 2% on its gross
receipts, but made it "in lieu of any and all taxes, all laws to the
contrary notwithstanding," thus, leaving no room for doubt
regarding the legislative intent. "Charters or special laws granted
and enacted by the Legislature are in the nature of private
contracts. They do not constitute a part of the machinery of the
general government. They are usually adopted after careful
consideration of the private rights in relation with resultant
benefits to the State ... in passing a special charter the attention
of the Legislature is directed to the facts and circumstances
which the act or charter is intended to meet. The Legislature
consider (sic) and make (sic) provision for all the circumstances
of a particular case." 5 In view of the foregoing, we find no
reason to disturb the respondent court's ruling upholding the

TAXATION

The last issue to be resolved is whether or not the private

respondent is liable for the fixed and deficiency percentage taxes
in the amount of P3,025.96 (i.e. for the period from January 1,
1946 to February 29, 1948) before the approval of its municipal
franchises. As aforestated, the franchises were approved by the
President only on February 24, 1948. Therefore, before the said
date, the private respondent was liable for the payment of
percentage and fixed taxes as seller of light, heat, and power
which as the petitioner claims, amounted to P3,025.96. The
legislative franchise (R.A. No. 3843) exempted the grantee from
all kinds of taxes other than the 2% tax from the date the
original franchise was granted. The exemption, therefore, did
not cover the period before the franchise was granted, i.e. before
February 24, 1948. However, as pointed out by the respondent
court in its findings, during the period covered by the instant
case, that is from January 1, 1946 to December 31, 1961, the
private respondent paid the amount of P34,184.36, which was
very much more than the amount rightfully due from it. Hence,
the private respondent should no longer be made to pay for the

25

deficiency tax in the amount of P3,025.98 for the period from

January 1, 1946 to February 29, 1948.

1. Whether the Court can inquire into the wisdom of the

franchise
2. Whether a rate below 5% is violative of the uniformity clause
in the Constitution

WHEREFORE, the appealed decision of the respondent Court of

Tax Appeals is hereby AFFIRMED. No pronouncement as to
costs. SO ORDERED.

RULING:
1. No, the Court does not have the authority to inquire into the
wisdom of the Act. Charters or special laws granted and enacted
by the legislature are in the nature of private contracts. They do
not constitute a part of the machinery of the general government.
Also, the Court ought not to disturb the ruling of the Court of
Tax Appeals on the constitutionality of the law in question.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz,

Paras, Feliciano, Gancayco, Padilla, Bidin, Cortes, GrioAquino and Medialdea, JJ., concur.

Commissioner v Lingayen Gulf Electric GR No L-23771,

August 4, 1988

2. No. The legislature has the inherent power not only to

select the subjects of taxation but to grant exemptions. Tax
exemptions have never been deemed violative of the equal
protection clause. Herein, the 5% franchise tax rate provided
in Section 259 of the Tax Code was never intended to have
universal application. Section 259 expressly allows the
payment of taxes at rates lower than 5% when the charter
granting the franchise precludes the imposition of a higher
tax. RA 3843, the law granting the franchise, did not only fix
and specify a franchise tax of 2% on its gross receipts but
made it in lieu of any and all taxes, all laws to the contrary
notwithstanding. The company, hence, is not liable for
deficiency taxes.

FACTS:
Lingayen Gulf Electric Power operates an electric power plant
serving the municipalities of Lingayen and Binmaley,
Pangasinan, pursuant to municipal franchise granted it by the
respective municipal councils. The franchises provided that the
grantee shall pay quarterly to the provincial treasury of
Pangasinan 1% of the gross earnings obtained through the
privilege for the first 20 years (from 1946) and 2% during the
remaining 15 years of the life of the franchise. In 1955, the BIR
assessed and demanded against the company deficiency
franchise taxes and surcharges from the years 1946 to 1954
applying the franchise tax rate of 5% on gross receipts from
1948 to 1954. The company asked for a reinvestigation, which
was denied. CTA, however, ruled for Lingayen. Hence, this
petition.
ISSUES:

TAXATION

26

vs.
THE MUNICIPALITY BOARD, THE CITY TREASURER,
THE CITY ASSESSOR and THE CITY MAYOR, all of the
City of Manila, respondents-appellees.
Teotimo A. Roja for appellants.
City Fiscal Eugenio Angeles and Assistant Fiscal Eulogio S.
Serrano for appellees.
SYLLABUS
1. TAXATION; TAXES ON MOTOR VEHICLES; NO FEES
OTHER THAN PROPERTY TAX AND THOSE PROVIDED
IN ACT No. 3992 MAY BE EXACTED ON MOTOR
VEHICLES. Under section 70-b of Act No. 3992 as
amended, no fees may be exacted or demanded for the operation
of any motor vehicle other than those therein provided, the only
exception being that which refers to property tax which may be
imposed by a municipal corporation. This provision is allinclusive in the sense that it applies to all motor vehicles. In this
sense, this provision should be construed as limiting the broad
grant of power conferred upon the City of Manila by its Charter
to impose taxes. When Section 18 of said Charter provides that
the City of Manila can impose a tax on motor vehicles operating
within its limits, it can only refer to property tax, as a different
interpretation would make it repugnant to the Motor Vehicle
Law.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-4376

2. ID.; CONSTITUTIONAL LAW; ORDINANCE No. 3379 OF

MANILA, INVALID; PROPERTY TAX, DISTINGUISHED
FROM EXCISE TAX OR LICENSE FEE. While Ordinance
No. 3379 of the City of Manila refers to property tax and it is

May 22, 1953

ASSOCIATION OF CUSTOMS BROKERS, INC. and G.

MANLAPIT, INC., petitioners-appellants,
TAXATION

27

fixed ad volorem yet we can not reject the idea that it is merely
levied on motor vehicles operating within the said city with the
main purpose of raising funds to be expended exclusively for the
repair, maintenance and improvement of the streets and bridges
in said city. This is precisely what the Motor Vehicle Law (Act
No. 3992) intends to prevent, for the reason that, under said Act,
municipal corporations already participate in the distribution of
the proceeds that are raised for the same purpose of repairing,
maintaining and improving bridges and public highways (Motor
Vehicle Law, sec. 73). This prohibition is intended to prevent
duplication in the imposition of fees for the same purpose. It is
for this reason that it is believed that the ordinance in question
merely imposes a license fee although under the cloak of an ad
valorem tax to circumvent the prohibition adverted to.

BAUTISTA ANGELO, J.:

This is a petition for declaratory relief to test the validity of
Ordinance No. 3379 passed by the Municipal Board of the City
of Manila on March 24, 1950.
The Association of Customs Brokers, Inc., which is composed of
all brokers and public service operators of motor vehicles in the
City of Manila, and G. Manlapit, Inc., a member of said
association, also a public service operator of the trucks in said
City, challenge the validity of said ordinance on the ground that
(1) while it levies a so-called property tax it is in reality a license
tax which is beyond the power of the Municipal Board of the
City of Manila; (2) said ordinance offends against the rule of
uniformity of taxation; and (3) it constitutes double taxation.

3. ID.; ID.; ID.; UNIFORMITY OF TAXATION. The said

ordinance infringes also the rule of uniformity of taxation
ordained by our Constitution. It exacts the tax upon all motor
vehicles operating within the City of Manila. It does not
distinguish between a motor vehicle for hire and one which is
purely for private use. Neither does it distinguish between a
motor vehicle registered in the City of Manila and one registered
in another place but occasionally comes to Manila and uses its
streets and public highways. There is no pretense that the
ordinance equally applies to motor vehicles which come to
Manila for a temporary stay or for short errands, and it cannot be
denied that they contribute in no small degree to the
deterioration of the streets and public highways. As they are
benefited by their use they should also be made to share the
corresponding burden. This is an inequality which is found in the
ordinance in question end which renders it offensive to the
Constitution.

TAXATION

The respondents, represented by the city fiscal, contend on their

part that the challenged ordinance imposes a property tax which
is within the power of the City of Manila to impose under its
Revised Charter [Section 18 (p) of Republic Act No. 409], and
that the tax in question does not violate the rule of uniformity of
taxation, nor does it constitute double taxation.
The issues having been joined, the Court of First Instance of
Manila sustained the validity of the ordinance and dismissed the
petition. Hence this appeal.
The disputed ordinance was passed by the Municipal Board of
the City of Manila under the authority conferred by section 18
(p) of Republic Act No. 409. Said section confers upon the
municipal board the power "to tax motor and other vehicles
operating within the City of Manila the provisions of any
existing law to the contrary notwithstanding." It is contended

28

that this power is broad enough to confer upon the City of

Manila the power to enact an ordinance imposing the property
tax on motor vehicles operating within the city limits.

refers to it as "An Ordinance Levying a Property Tax on All

Motor Vehicles Operating Within the City of Manila", and that
in its section 1 it provides that the tax should be 1 per cent ad
valorem per annum. It also provides that the proceeds of the tax
"shall accrue to the Streets and Bridges Funds of the City and
shall be expended exclusively for the repair, maintenance and
improvement of its streets and bridges." Considering the
wording used in the ordinance in the light in the purpose for
which the tax is created, can we consider the tax thus imposed as
property tax, as claimed by respondents?

In the deciding the issue before us it is necessary to bear in mind

the pertinent provisions of the Motor Vehicles Law, as amended,
(Act No. 3992) which has a bearing on the power of the
municipal corporation to impose tax on motor vehicles operating
in any highway in the Philippines. The pertinent provisions are
contained in section 70 (b) which provide in part:

While as a rule an ad valorem tax is a property tax, and this rule

is supported by some authorities, the rule should not be taken in
its absolute sense if the nature and purpose of the tax as gathered
from the context show that it is in effect an excise or a license
tax. Thus, it has been held that "If a tax is in its nature an excise,
it does not become a property tax because it is proportioned in
amount to the value of the property used in connection with the
occupation, privilege or act which is taxed. Every excise
necessarily must finally fall upon and be paid by property and so
may be indirectly a tax upon property; but if it is really imposed
upon the performance of an act, enjoyment of a privilege, or the
engaging in an occupation, it will be considered an excise." (26
R. C. L., 35-36.) It has also been held that

No further fees than those fixed in this Act shall be exacted or

demanded by any public highway, bridge or ferry, or for the
exercise of the profession of chauffeur, or for the operation of
any motor vehicle by the owner thereof: Provided, however,
That nothing in this Act shall be construed to exempt any motor
vehicle from the payment of any lawful and equitable insular,
local or municipal property tax imposed thereupon. . . .
Note that under the above section no fees may be exacted or
demanded for the operation of any motor vehicle other than
those therein provided, the only exception being that which
refers to the property tax which may be imposed by a municipal
corporation. This provision is all-inclusive in that sense that it
applies to all motor vehicles. In this sense, this provision should
be construed as limiting the broad grant of power conferred upon
the City of Manila by its Charter to impose taxes. When section
18 of said Charter provides that the City of Manila can impose a
tax on motor vehicles operating within its limit, it can only refers
to property tax as a different interpretation would make it
repugnant to the Motor Vehicle Law.

The character of the tax as a property tax or a license or

occupation tax must be determined by its incidents, and from the
natural and legal effect of the language employed in the act or
ordinance, and not by the name by which it is described, or by
the mode adopted in fixing its amount. If it is clearly a property
tax, it will be so regarded, even though nominally and in form it
is a license or occupation tax; and, on the other hand, if the tax is
levied upon persons on account of their business, it will be

Coming now to the ordinance in question, we find that its title

TAXATION

29

construed as a license or occupation tax, even though it is

graduated according to the property used in such business, or on
the gross receipts of the business. (37 C.J., 172)

used therein. The word "operating" denotes a connotation which

is akin to a registration, for under the Motor Vehicle Law no
motor vehicle can be operated without previous payment of the
registration fees. There is no pretense that the ordinance equally
applies to motor vehicles who come to Manila for a temporary
stay or for short errands, and it cannot be denied that they
contribute in no small degree to the deterioration of the streets
and public highway. The fact that they are benefited by their use
they should also be made to share the corresponding burden.
And yet such is not the case. This is an inequality which we find
in the ordinance, and which renders it offensive to the
Constitution.

The ordinance in question falls under the foregoing rules. While

it refers to property tax and it is fixed ad valoremyet we cannot
reject the idea that it is merely levied on motor vehicles
operating within the City of Manila with the main purpose of
raising funds to be expended exclusively for the repair,
maintenance and improvement of the streets and bridges in said
city. This is precisely what the Motor Vehicle Law (Act No.
3992) intends to prevent, for the reason that, under said Act,
municipal corporation already participate in the distribution of
the proceeds that are raised for the same purpose of repairing,
maintaining and improving bridges and public highway (section
73 of the Motor Vehicle Law). This prohibition is intended to
prevent duplication in the imposition of fees for the same
purpose. It is for this reason that we believe that the ordinance in
question merely imposes a license fee although under the cloak
of an ad valorem tax to circumvent the prohibition above
adverted to.

Wherefore, reversing the decision appealed from, we hereby

declare the ordinance null and void.
Paras, C.J., Bengzon and Tuason, JJ., concur.
Montemayor, Reyes, Jugo and Labrador, JJ., concur in the
result.
Separate Opinions

It is also our opinion that the ordinance infringes the rule of the
uniformity of taxation ordained by our Constitution. Note that
the ordinance exacts the tax upon all motor vehicles operating
within the City of Manila. It does not distinguish between a
motor vehicle for hire and one which is purely for private use.
Neither does it distinguish between a motor vehicle registered in
the City of Manila and one registered in another place but
occasionally comes to Manila and uses its streets and public
highways. The distinction is important if we note that the
ordinance intends to burden with the tax only those registered in
the City of Manila as may be inferred from the word "operating"

TAXATION

FERIA, J., concurring:

I concur on the ground that it is a license tax.
Associaiton of Customs Brokers vs Manila
GRN L-4376 May 22, 1953
FACTS:
The Municipal Board of Manila passed ordinance No. 3379 which

30

imposes a property tax that is within the power of the City under its
revised charter. The ordinance was passed by the Municipal Board
under the authority conferred by section 18 of RA 409

vs.
E. E. VAO, as Municipal Treasurer of the Municipality of
Cordova, Province of Cebu, defendant-appellee.
C.J. Johnston and A.P. Deen for appellant.
Provincial Fiscal Jose C. Borromeo and Assistant Provincial
Fiscal Ananias V. Maribao for appellee.

ISSUE:
Whether or not the ordinance infringes on the uniformity of taxes as
ordained by the Constitution.

PADILLA, J.:

RULING:

The Municipal Council of Cordova, Province of Cebu, adopted

the following ordinances: No. 10, series of 1946, which imposes
an annual tax of P150 on occupation or the exercise of the
privilege of installation manager; No. 9, series of 1947, which
imposes an annual tax of P40 for local deposits in drums of
combustible and inflammable materials and an annual tax of
P200 for tin can factories; and No. 11, series of 1948, which
imposes an annual tax of P150 on tin can factories having a
maximum output capacity of 30,000 tin cans. The Shell Co. of
P.I. Ltd., a foreign corporation, filed suit for the refund of the
taxes paid by it, on the ground that the ordinances imposing such
taxes are ultra vires. The defendant denies that they are so. The
controversy was submitted for judgment upon stipulation of
facts which reads as follows:

The Ordinance exacts the tax upon all motor vehicles operating within
Manila and does not distinguish between a motor vehicle registered in
the City and one registered in another place nor does it distinguish
private of vehicle for hire. The distinction is important if we note that
the ordinance intends to burden with the tax only those registered in
Manila. There is no pretense that the Ordinance equally applies to
vehicles who come to Manila for a temporary purpose.

Republic of the Philippines

SUPREME COURT
Manila

Come now the parties in the above-entitled case by their

undersigned attorneys and hereby agree to the following
stipulation of facts:

EN BANC
G.R. No. L-6093

1. That the parties admit the allegations contained in Paragraph 1

of the Amended Complaint referring to residence, personality,
and capacity of the parties except the fact that E.E. Vao is now
replaced by F.A. Corbo as Municipal Treasurer of Cordova,

February 24, 1954

THE SHELL CO. OF P.I., LTD., plaintiff-appellant,

TAXATION

31

Cebu;

approved by the Provincial Board of Cebu in its Resolution No.

115, series of 1949, and same was approved by the Honorable
Secretary of Finance under the provisions of section 4 of
Commonwealth Act No. 472. Copy of said Ordinance No. 11,
series of 1948 is herein marked as Exhibit "G" for the plaintiff,
and Exhibit "3" for the defendant. Copy of the approval of the
Honorable Secretary of Finance of the same Ordinance is herein
marked as Exhibit "4" for the defendant.

2. That the parties admit the allegations contained in paragraph 2

of the Amended Complaint. Official Receipts Nos. A-1280606,
A-37607422, A-3769852 and A-21030388 are herein marked as
Exhibits A, B, C, and D, respectively for the plaintiff;
3. That the parties admit that payments made under Exhibits B,
C, and D were all under protest and plaintiff admits that Exhibit
A was not paid under protest;

Wherefore, aside from oral evidence which may be offered by

the parties and other points not covered by this stipulation, this
case is hereby submitted upon the foregoing agreed facts and
record of evidence.

4. That the parties admit that Official Receipt No. A-1280606 for
P40 and Official Receipt No. A-3760742 for P200 were
collected by the defendant by virtue of Ordinance No. 9, (Secs.
E-4 and E-6, respectively) under Resolution No. 31, series of
1947, enacted December 15, 1947, approved by the Provincial
Board of Cebu in its Resolution No. 644, series of 1948. Copy of
said Ordinance No. 9, series of 1947, is herein marked as Exhibit
"E" for the plaintiff, and as Exhibit "I" for the defendant;

Cebu City, Philippines, January 20, 1950.

5. That the parties admit that Official Receipt No. A-3760852 for
P150 was paid for taxes imposed on Installation Managers,
collected by the defendant by virtue of Ordinance No. 10
(section 3, E-12) under Resolution No. 38, series of 1946,
approved by the Provincial Board of Cebu in its Resolution No.
1070, series of 1946. Copy of .said Ordinance No. 10, series of
1946 is marked as Exhibit "F" for the plaintiff and as Exhibit "2"
for the defendant;

C.D. JOHNSTON & A.P.

DEEN
(Sgd.) A.P. DEEN
Attys. for the plaintiff

THE MUNICIPALITY OF
CORDOVA
(Sgd.) F.A. CORBO
Defendant

(Sgd.) JOSE C.
BORROMEO
Provincial Fiscal
Attorney for the defendant

(Record on Appeal, pp. 15-18.)

The parties reserved the right to introduce parole evidence but
no such evidence was submitted by either party. From the
judgment holding the ordinances valid and dismissing the
complaint the plaintiff has appealed.

6. That the parties admit that Official Receipt No. A-21030388

for P5,450 was paid by plaintiff and that said amount was
collected by defendant by virtue of Ordinance No. 11, series of
1948 (under Resolution No. 46) enacted August 31, 1948 and

TAXATION

THE SHELL CO. OF P.I. LTD.

(Sgd.) L. DE BLECHYNDEN
Plaintiff

32

It is contended that as the municipal ordinance imposing an

annual tax of P40 for "minor local deposit in drums of
combustible and inflammable materials," and of P200 "for tin
factory" was adopted under and pursuant to section 2244 of the
Revised Administrative Code, which provides that the municipal
council in the exercise of the regulative authority may require
any person engaged in any business or occupation, such as
"storing combustible or explosive materials" or "the conducting
of any other business of an unwholesome, obnoxious, offensive,
or dangerous character," to obtain a permit for which a
reasonable fee, in no case to exceed P10 per annum, may be
charged, the annual tax of P40 and P200 are unauthorized and
illegal. The permit and the fee referred to may be required and
charged by the Municipal Council of Cordova in the exercise of
its regulative authority, whereas the ordinance which imposes
the taxes in question was adopted under and pursuant to the
provisions of Commonwealth Act No. 472, which authorizes
municipal councils and municipal district councils "to impose
license taxes upon persons engaged in any occupation or
business, or exercising privileges in the municipality or
municipal district, by requiring them to secure licenses at rates
fixed by the municipal council or municipal district council,"
which shall be just and uniform but not "percentage taxes and
taxes on specified articles." Likewise, Ordinance No. 10, series
of 1946, which imposes an annual tax of P150 on "installation
manager" comes under the provisions of Commonwealth Act
No. 472. But it is claimed that "installation manager" is a
designation made by the plaintiff and such designation cannot be
deemed to be a "calling" as defined in section 178 of the
National Internal Revenue Code (Com. Act No. 466), and that
the installation manager employed by the plaintiff is a salaried
employee which may not be taxed by the municipal council
under the provisions of Commonwealth Act No. 472. This

TAXATION

contention is without merit, because even if the installation

manager is a salaried employee of the plaintiff, still it is an
occupation "and one occupation or line of business does not
become exempt by being conducted with some other occupation
or business for which such tax has been paid' 1 and the
occupation tax must be paid "by each individual engaged in a
calling subject thereto."2 And pursuant to section 179 of the
National Internal Revenue Code, "The payment of . . .
occupation tax shall not exempt any person from any tax, . . .
provided by law or ordinance in places where such . . .
occupation in . . . regulated by municipal law, nor shall the
payment of any such tax be held to prohibit any municipality
from placing a tax upon the same . . . occupation, for local
purposes, where the imposition of such tax is authorized by law."
It is true that, according to the stipulation of facts, Ordinance
No. 10, series of 1946, was approved by the Provincial Board of
Cebu in its Resolution No. 1070, series of 1946, and that it does
not appear that it was approved by the Department of Finance, as
provided for and required in section 4, paragraph 2, of
Commonwealth Act No. 472, the rate of municipal tax being in
excess of P50 per annum. But at this point on the approval of the
Department of Finance was not raised in the court below, it
cannot be raised for the first time on appeal. The issue joined by
the parties in their pleadings and the point raised by the plaintiff
is that the municipal council was not empowered to adopt the
ordinance and not that it was not approved by the Department of
Finance. The fact that it was not stated in the stipulation of facts
justifies the presumption that the ordinance was approved in
accordance with law.
The contention that the ordinance is discriminatory and hostile
because there is no other person in the locality who exercises
such "designation" or occupation is also without merit, because

33

the fact that there is no other person in the locality who exercises
such a "designation" or calling does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be
applicable to any person or firm who exercises such calling or
occupation named or designated as "installation manager."

interest is not the municipal treasurer but the municipality

concerned that is empowered to sue and be sued.4

Lastly, Ordinance No. 11, series of 1948, which imposes a

municipal tax of P150 on tin can factories having a maximum
annual output capacity of 30,000 tin cans which, according to
the stipulation of facts, was approved by the Provincial Board of
Cebu and the Department of Finance, is valid and lawful,
because it is neither a percentage tax nor one on specified
articles which are the only exceptions provided in section 1,
Commonwealth Act No. 472. Neither does it fall under any of
the prohibitions provided for in section 3 of the same Act.
Specific taxes enumerated in the National Internal Revenue
Code are those that are imposed upon "things manufactured or
produced in the Philippines for domestic sale or consumption"
and upon "things imported from the United States and foreign
countries," such as distilled spirits, domestic denatured alcohol,
fermented liquors, products of tobacco, cigars and cigarettes,
matches, mechanical lighters, firecrackers, skimmed milk,
manufactured oils and other fuels, coal, bunker fuel oil, diesel
fuel oil, cinematographic films, playing cards, sacharine. 3 And it
is not a percentage tax because it is tax on business and the
maximum annual output capacity is not a percentage, because it
is not a share or a tax based on the amount of the proceeds
realized out of the sale of the tin cans manufactured therein but
on the business of manufacturing tin cans having a maximum
annual output capacity of 30,000 tin cans.

Paras, C.J., Pablo, Bengzon, Montemayor, Reyes, Jugo, Bautista

Angelo, Labrador, Concepcion and Diokno, JJ.,concur.

In an action for refund of municipal taxes claimed to have been

paid and collected under an illegal ordinance, the real party in

HELD: No. The fact that there is no other person or company

with a position for an installation manager does not make the
ordinance discriminatory. The law is and will be applicable to

TAXATION

The judgment appealed from is hereby affirmed, with costs

against the appellant.

Shell Company vs E.E. Vao

94 Phil. 387 Taxation Scope and Limitation of Taxation
Equal Protection Clause
In 1946, the municipal council of Cordova, Cebu issued an
ordinance which imposed, among others, an annual tax of
P150.00 upon the occupation or the exercise of the privilege of
an installation manager.
Shell Company assailed the validity of the said ordinance on the
ground that it violates the equal protection clause. It appears that
only Shell had, at that time, an installation manager. In short,
there is only one installation manager in Cordova, Cebu. So
Shell felt like the tax ordinance was merely targeting Shell. Shell
now wants the Treasurer of Cordova, E.E. Vao to be enjoined
from implementing the law.
ISSUE: Whether or not the tax ordinance is not valid for being
violative of the equal protection clause.

34

any person or firm who exercises such calling or occupation

named or designated as installation manager. In short, the law
is applicable to present and future conditions.

Angel A. Sison for petitioners.

Jaime Agloro for respondent.
CONCEPCION, J.:

Note again the requisites for a valid classification (not

mentioned in this particular case but mentioned in other relevant
cases):

Appeal, by petitioners Jose V. Herrera and Ester Ochangco

Herrera, from a decision of the Court of Tax Appeals affirming
that of the Board of Assessment Appeals of Quezon City, which
held that certain properties of said petitioners are subject to
assessment for purposes of real estate tax.

1. must rest on substantial distinctions;

2. must be germane to the purposes of the law;
3. must not be limited to existing conditions only; and
4. must apply equally to all members of the same class.

The facts and the issue are set forth in the aforementioned
decision of the Court of Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of Hospitals
authorized the petitioners to establish and operate the "St.
Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa
Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or
about January 3, 1953, the petitioners sent a letter to the Quezon
City Assessor requesting exemption from payment of real estate
tax on the lot, building and other improvements comprising the
hospital stating that the same was established for charitable and
humanitarian purposes and not for commercial gain (Exhibit "F2", pp. 8-9, BIR rec.). After an inspection of the premises in
question and after a careful study of the case, the exemption
from real property taxes was granted effective the years 1953,
1954 and 1955.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-15270

September 30, 1961

JOSE V. HERRERA and ESTER OCHANGCO HERRERA,

petitioners,
vs.
THE QUEZON CITY BOARD OF ASSESSMENT
APPEALS, respondent.

TAXATION

Subsequently, however, in a letter dated August 10, 1955

(Exhibit "E", p. 65, CTA rec.) the Quezon City Assessor notified
the petitioners that the aforesaid properties were re-classified
from exempt to "taxable" and thus assessed for real property
taxes effective 1956, enclosing therewith copies of Tax

35

Declarations Nos. 19321 to 19322 covering the said properties.

The petitioners appealed the assessment to the Quezon City
Board of Assessment Appeals, which, in a decision dated March
31, 1956 and received by the former on May 17, 1956, affirmed
the decision of the City Assessor. A motion for reconsideration
thereof was denied on March 8, 1957. From this decision, the
petitioners instituted the instant appeal.1awphl.nt

directress. As such directress, the latter does not receive any

salary.
Petitioners also operate within the premises of the hospital the
"St. Catherine's School of Midwifery" which was granted
government recognition by the Secretary of Education on
February 1, 1955 (Exhibit "F-3", p. 10, BIR rec.) This school has
an enrollment of about two hundred students. The students are
charged a matriculation fee of P300.00 for 1- years, plus
P50.00 a month for board and lodging, which includes
transportation to the St. Mary's Hospital. The students practice in
the St. Catherine's Hospital, as well as in the St. Mary's Hospital,
which is also owned by the petitioners. A separate set of
accounting books is maintained by the school for midwifery
distinct from that kept by the hospital. The petitioners alleged
that the accounts of the school are not included in Exhibits "A",
"A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which
relate to the hospital only. However, the petitioners have refused
to submit a separate statement of accounts of the school. A brief
tabulation indicating the amount of income of the hospital for
the years 1954, 1955 and 1956, and its operational expenses, is
as follows:

The building involved in this case is principally used as a

hospital. It is mainly a surgical and orthopedic hospital with
emphasis on obstetrical cases, the latter constituting 90% of the
total number of cases registered therein. The hospital has thirtytwo (32) beds, of which twenty (20) are for charity-patients and
twelve (12) for pay-patients. From the evidence presented by
petitioners, it is made to appear that there are two kinds of
charity patients (a) those who come for consultation only
("out-charity patients"); and (b) those who remain in the hospital
for treatment ("lying-in-patients"). The out-charity patients are
given free consultation and prescription, although sometimes
they are furnished with free medicines which are not costly like
aspirin, sulfatiazole, etc. The charity lying-in-patients are given
free medical service and medicine although the food served to
the pay-patients is very much better than that given to the
former. Although no condition is imposed by the hospital on the
admission of charity lying-in-patients, they however, usually
give donations to the hospital. On the other hand, the paypatients are required to pay for hospital services ranging from
the minimum charge of P5.00 to the maximum of P40.00 for
each day of stay in the hospital. The income realized from paypatients is spent for the improvement of the charity wards. The
hospital personnel is composed of three nurses, two graduate
midwives, a resident physician receiving a salary of P170.00 a
month and the petitioner, Dr. Ester Ochangco Herrera, as

TAXATION

1954
Income
Charity Ward
P14,779.50
Pay Ward

Expenses

Deficit

P 5,280.04
P10,803.26
P16,083.30

(Exhibits "A", "A-1" and "A-2")

36

P1,303.80

The only issue raised, is whether or not the lot, building and
other improvements occupied by the St. Catherine Hospital are
exempt from the real property tax. The resolution of this
question boils down to the corollary issue as to whether or not
the said properties are used exclusively for charitable or
educational purposes. (Petitioners' brief, pp. 24-29).

1955
Income
Charity Ward
P17,433.30
Pay Ward

Expenses

Deficit

P 6,859.32
14,038.92

P3,464.94
The Court of Tax Appeals decided the issue in the negative, upon
the ground that the St. Catherine's Hospital "has a pay ward
for ... pay-patients, who are charged for the use of the private
rooms, operating room, laboratory room, delivery room, etc.,
like other hospitals operated for profit" and that "petitioners and
their family occupy a portion of the building for their residence."
With respect to petitioners' claim for exemption based upon the
operation of the school of midwifery, the Court conceded that
"the proposition might be proper if the property used for the
school of midwifery were separate and distinct from the
hospital." It added, however, that, "in the instant case, the
portions of the building used for classrooms of the school of
midwifery have not been shown to be exclusively for school
purposes"; that said portions "rather ... have a dual use, i.e., for
classroom and for hospital use, the latter not being a purpose that
renders the property tax exempt;" that part of the building and
lot in question "is used as a hospital, part as residence of the
petitioners, part as garage, part as dormitory and part as school";
and that "the portion dedicated to educational and charitable
purposes can not be identified from those destined to other uses;
and the building is itself an indivisible unit of property."

P20,898.24
(Exhibits "B", "B-1" and "B-2")
1956
Income

Charity Ward
P21,467.40
Pay Ward

Expenses

Deficit

P 5,559.89
16,249.04

P 341.53

P21,809.93
(Exhibits "C", "C-1" and "C-2")

Aside from the St. Catherine and St. Mary hospitals, the
petitioners declared that they also own lands and coconut
plantations in Quezon Province, and other real estate in the City
of Manila consisting of apartments for rent. The petitioner, Jose
V. Herrera, is an architect, actively engaged in the practice of his
profession, with office at Tuason Building, Escolta, Manila. He
was formerly Chairman, Board of Examiners for Architects and
Chairman, Board of Architects connected with the United
Nations. He was also connected with the Allied Technologists
which constructed the Veterans Hospital in Quezon City.

TAXATION

It should be noted, however, that, according to the very

statement of facts made in the decision appealed from, of the
thirty-two (32) beds in the hospital, twenty (20) are for charitypatients; that "the income realized from pay-patients is spent for

37

improvement of the charity wards;" and that "petitioners, Dr.

Ester Ochangco Herrera, as directress" of said hospital, "does
not receive any salary," although its resident physician gets a
monthly salary of P170.00. It is well settled, in this connection,
that the admission of pay-patients does not detract from the
charitable character of a hospital, if all its funds are devoted
"exclusively to the maintenance of the institution" as a "public
charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on
Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In other
words, where rendering charity is its primary object, and the
funds derived from payments made by patients able to pay are
devoted to the benevolent purposes of the institution, the mere
fact that a profit has been made will not deprive the hospital of
its benevolent character" (Prairie Du Chien Sanitarium Co. vs.
City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144
A.L.R. 1480).

of the original non-stock corporation in terms of shares of stock,

as well as the subsequent move of its board of trustees to double
the stock dividends of the corporation, in view of a gain of
P200,000.00 in property, besides good-will, which was not
carried out, does not justify the inference that the corporation
has become one for business and profit, none of its profits
having inured to the benefit of any stockholder or individual
(Collector of Internal Revenue vs. University of Visayas, L13554, February 28, 1961).
Moreover, the exemption in favor of property used exclusively
for charitable or educational purposes is "not limited to property
actually indispensable" therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are "incidental to and
reasonably necessary for" the accomplishment of said purposes,
such as, in the case of hospitals, "a school for training nurses, a
nurses' home, property use to provide housing facilities for
interns, resident doctors, superintendents, and other members of
the hospital staff, and recreational facilities for student nurses,
interns and residents" (84 C.J.S., 621), such as "athletic fields,"
including "a farm used for the inmates of the institution"
(Cooley on Taxation, Vol. 2, p. 1430).

Thus, we have held that the U.S.T. Hospital was not established
for profit-making purposes, although it had 140 paying beds
maintained only to partly finance the expenses of the free wards,
containing 203 beds for charity patients (U.S.T. Hospital
Employees Association vs. Sto. Tomas University Hospital, L6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a
corporation organized for "charitable educational and religious
purposes" can not be considered as engaged in business merely
because its pharmacy department charges paying patients the
cost of their medicine, plus 10% thereof, to partly offset the cost
of medicines supplied free of charge to charity patients
(Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo,
L-12127, May 25, 1959), and that the amendment of the original
articles of incorporation of the University of Visayas to convert
it from a non-stock to a stock corporation and the increase of its
assets from P9,000 to P50,000, distributed among the members

TAXATION

Within the purview of the Constitutional exemption from

taxation, the St. Catherine's Hospital is, therefore, a charitable
institution, and the fact that it admits pay-patients does not bar it
from claiming that it is devoted exclusively to benevolent
purposes, it being admitted that the income derived from paypatients is devoted to the improvement of the charity wards,
which represent almost two-thirds (2/3) of the bed capacity of
the hospital, aside from "out-charity patients" who come only for
consultation.

38

Again, the existence of "St. Catherine's School of Midwifery",

with an enrollment of about 200 students, who practice partly in
St. Catherine's Hospital and partly in St. Mary's Hospital, which,
likewise, belongs to petitioners herein, does not, and cannot,
affect the exemption to which St. Catherine's Hospital is entitled
under our fundamental law. On the contrary, it furnishes another
ground for exemption. Seemingly, the Court of Tax Appeals was
impressed by the fact that the size of said enrollment and the
matriculation fee charged from the students of midwifery, aside
from the amount they paid for board and lodging, including
transportation to St. Mary's Hospital, warrants the belief that
petitioners derive a substantial profit from the operation of the
school aforementioned. Such factor is, however, immaterial to
the issue in the case at bar, for "all lands, building and
improvements used exclusively for religious, charitable or
educational purposes shall be exempt from taxation," pursuant to
the Constitution, regardless of whether or not material profits are
derived from the operation of the institutions in question. In
other words, Congress may, if it deems fit to do so, impose taxes
upon such "profits", but said "lands, buildings and
improvements" are beyond its taxing power.

WHEREFORE, the decision of the Court of Tax Appeals, as well

as that of the Assessment Board of Appeals of Quezon City, are
hereby reversed and set aside, and another one entered declaring
that the lot, building and improvements constituting the St.
Catherine's Hospital are exempt from taxation under the
provisions of the Constitution, without special pronouncement as
to costs. It is so ordered.
Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Paredes and De
Leon, JJ., concur.
Herrera vs. Quezon City Board of Assessment Appeals
GR L-15270, 30 September 1961
First Division, Concepcion (J): 6 concur
Facts:
In 1952, the Director of the Bureau of Hospitals authorized Jose
V. Herrera and Ester Ochangco Herrera to establish and operate
the St. Catherines Hospital. In 1953, the Herreras sent a letter to
the Quezon City Assessor requesting exemption from payment
of real estate tax on the hospital, stating that the same was
established for charitable and humanitarian purposes and not for
commercial gain. The exemption was granted effective years
1953 to 1955. In 1955, however, the Assessor reclassified the
properties from exempt to taxable effective 1956, as it was
ascertained that out 32 beds in the hospital, 12 of which are for
pay-patients. A school of midwifery is also operated within the
premises of the hospital.

Similarly, the garage in the building above referred to which

was obviously essential to the operation of the school of
midwifery, for the students therein enrolled practiced, not only in
St. Catherine's Hospital, but, also, in St. Mary's Hospital, and
were entitled to transportation thereto for Mrs. Herrera
received no compensation as directress of St. Catherine's
Hospital were incidental to the operation of the latter and of
said school, and, accordingly, did not affect the charitable
character of said hospital and the educational nature of said
school.

Issue:

TAXATION

39

Whether St. Catherines Hospital is exempt from reallty tax.

Held:
The admission of pay-patients does not detract from the
charitable character of a hospital, if all its funds are devoted
exclusively to the maintenance of the institution as a public
charity. The exemption in favor of property used exclusively for
charitable or educational purpose is not limited to property
actually indispensable therefore, but extends to facilities which
are incidental to and reasonably necessary for the
accomplishment of said purpose, such as in the case of hospitals
a school for training nurses; a nurses home; property used to
provide housing facilities for interns, resident doctors,
superintendents and other members of the hospital staff; and
recreational facilities for student nurses, interns and residents.
Within the purview of the Constitution, St. Catherines Hospital
is a charitable institution exempt from taxation.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by PEDRO
V. BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance,
Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra;
GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra;
HEIRS OF PATERNO MILLARE,respondents.
PARAS, J.:
This is a petition for review on certiorari of the decision * of the
defunct Court of First Instance of Abra, Branch I, dated June 14,
1974, rendered in Civil Case No. 656, entitled "Abra Valley
Junior College, Inc., represented by Pedro V. Borgonia, plaintiff
vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V.
Bosque as Municipal Treasurer of Bangued, Abra and Paterno
Millare, defendants," the decretal portion of which reads:

TAXATION

40

IN VIEW OF ALL THE FOREGOING, the Court hereby

declares:

July 10, 1972 in the court a quo to annul and declare void the
"Notice of Seizure' and the "Notice of Sale" of its lot and
building located at Bangued, Abra, for non-payment of real
estate taxes and penalties amounting to P5,140.31. Said "Notice
of Seizure" of the college lot and building covered by Original
Certificate of Title No. Q-83 duly registered in the name of
petitioner, plaintiff below, on July 6, 1972, by respondents
Municipal Treasurer and Provincial Treasurer, defendants below,
was issued for the satisfaction of the said taxes thereon. The
"Notice of Sale" was caused to be served upon the petitioner by
the respondent treasurers on July 8, 1972 for the sale at public
auction of said college lot and building, which sale was held on
the same date. Dr. Paterno Millare, then Municipal Mayor of
Bangued, Abra, offered the highest bid of P6,000.00 which was
duly accepted. The certificate of sale was correspondingly issued
to him.

That the distraint seizure and sale by the Municipal Treasurer of

Bangued, Abra, the Provincial Treasurer of said province against
the lot and building of the Abra Valley Junior College, Inc.,
represented by Director Pedro Borgonia located at Bangued,
Abra, is valid;
That since the school is not exempt from paying taxes, it should
therefore pay all back taxes in the amount of P5,140.31 and back
taxes and penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of
P60,000.00 before the trial, be confiscated to apply for the
payment of the back taxes and for the redemption of the property
in question, if the amount is less than P6,000.00, the remainder
must be returned to the Director of Pedro Borgonia, who
represents the plaintiff herein;

On August 10, 1972, the respondent Paterno Millare (now

deceased) filed through counstel a motion to dismiss the
complaint.

That the deposit of the Municipal Treasurer in the amount of

P6,000.00 also before the trial must be returned to said
Municipal Treasurer of Bangued, Abra;

On August 23, 1972, the respondent Provincial Treasurer and

Municipal Treasurer, through then Provincial Fiscal Loreto C.
Roldan, filed their answer (Annex "2" of Answer by the
respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the
complaint. This was followed by an amended answer (Annex
"3," ibid, Rollo, pp. 101-103) on August 31, 1972.

And finally the case is hereby ordered dismissed with costs

against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)

On September 1, 1972 the respondent Paterno Millare filed his

answer (Annex "5," ibid; Rollo, pp. 106-108).

Petitioner, an educational corporation and institution of higher

learning duly incorporated with the Securities and Exchange
Commission in 1948, filed a complaint (Annex "1" of Answer by
the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on
TAXATION

On October 12, 1972, with the aforesaid sale of the school

premises at public auction, the respondent Judge, Hon. Juan P.

41

Aquino of the Court of First Instance of Abra, Branch I, ordered

(Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial
and municipal treasurers to deliver to the Clerk of Court the
proceeds of the auction sale. Hence, on December 14, 1972,
petitioner, through Director Borgonia, deposited with the trial
court the sum of P6,000.00 evidenced by PNB Check No.
904369.

P5,140.31; the Notice of Seizure being the one attached to the

complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley
Junior College, Inc. was sold at public auction for the
satisfaction of the unpaid real property taxes thereon and the
same was sold to defendant Paterno Millare who offered the
highest bid of P6,000.00 and a Certificate of Sale in his favor
was issued by the defendant Municipal Treasurer.

On April 12, 1973, the parties entered into a stipulation of facts

adopted and embodied by the trial court in its questioned
decision. Said Stipulations reads:
STIPULATION OF FACTS

5. That all other matters not particularly and specially covered

by this stipulation of facts will be the subject of evidence by the
parties.

COME NOW the parties, assisted by counsels, and to this

Honorable Court respectfully enter into the following agreed
stipulation of facts:

WHEREFORE, it is respectfully prayed of the Honorable Court

to consider and admit this stipulation of facts on the point agreed
upon by the parties.

1. That the personal circumstances of the parties as stated in

paragraph 1 of the complaint is admitted; but the particular
person of Mr. Armin M. Cariaga is to be substituted, however,
by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;

Bangued, Abra, April 12, 1973.

2. That the plaintiff Abra Valley Junior College, Inc. is the owner
of the lot and buildings thereon located in Bangued, Abra under
Original Certificate of Title No. 0-83;

Sgd. Loreto Roldan

Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra

Sgd. Agripino Brillantes

Typ AGRIPINO BRILLANTES
Attorney for Plaintiff

3. That the defendant Gaspar V. Bosque, as Municipal treasurer

of Bangued, Abra caused to be served upon the Abra Valley
Junior College, Inc. a Notice of Seizure on the property of said
school under Original Certificate of Title No. 0-83 for the
satisfaction of real property taxes thereon, amounting to
TAXATION

Sgd. Demetrio V. Pre

42

Typ. DEMETRIO V. PRE

Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)

Nonetheless, the trial court disagreed because of the use of the

second floor by the Director of petitioner school for residential
purposes. He thus ruled for the government and rendered the
assailed decision.

Aside from the Stipulation of Facts, the trial court among others,
found the following: (a) that the school is recognized by the
government and is offering Primary, High School and College
Courses, and has a school population of more than one thousand
students all in all; (b) that it is located right in the heart of the
town of Bangued, a few meters from the plaza and about 120
meters from the Court of First Instance building; (c) that the
elementary pupils are housed in a two-storey building across the
street; (d) that the high school and college students are housed in
the main building; (e) that the Director with his family is in the
second floor of the main building; and (f) that the annual gross
income of the school reaches more than one hundred thousand
pesos.

After having been granted by the trial court ten (10) days from
August 6, 1974 within which to perfect its appeal (Per Order
dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57)
petitioner instead availed of the instant petition for review on
certiorari with prayer for preliminary injunction before this
Court, which petition was filed on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to
give DUE COURSE to the petition (Rollo, p. 58). Respondents
were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:

From all the foregoing, the only issue left for the Court to
determine and as agreed by the parties, is whether or not the lot
and building in question are used exclusively for educational
purposes. (Rollo, p. 20)

I
THE COURT A QUO ERRED IN SUSTAINING AS VALID
THE SEIZURE AND SALE OF THE COLLEGE LOT AND
BUILDING USED FOR EDUCATIONAL PURPOSES OF THE
PETITIONER.

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his

Assistant, Hon. Eustaquio Z. Montero, filed a Memorandum for
the Government on March 25, 1974, and a Supplemental
Memorandum on May 7, 1974, wherein they opined "that based
on the evidence, the laws applicable, court decisions and
jurisprudence, the school building and school lot used for
educational purposes of the Abra Valley College, Inc., are
exempted from the payment of taxes." (Annexes "B," "B-1" of
Petition; Rollo, pp. 24-49; 44 and 49).

TAXATION

II
THE COURT A QUO ERRED IN DECLARING THAT THE
COLLEGE LOT AND BUILDING OF THE PETITIONER
ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL
PURPOSES
MERELY BECAUSE
THE
COLLEGE
PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE
BUILDING.
43

III

family including the in-laws and grandchildren; and (3) for

commercial purposes because the ground floor of the college
building is being used and rented by a commercial
establishment, the Northern Marketing Corporation (See
photograph attached as Annex "8" (Comment; Rollo, p. 90]).

THE COURT A QUO ERRED IN DECLARING THAT THE

COLLEGE LOT AND BUILDING OF THE PETITIONER
ARE NOT EXEMPT FROM PROPERTY TAXES AND IN
ORDERING PETITIONER TO PAY P5,140.31 AS REALTY
TAXES.

Due to its time frame, the constitutional provision which finds

application in the case at bar is Section 22, paragraph 3, Article
VI, of the then 1935 Philippine Constitution, which expressly
grants exemption from realty taxes for "Cemeteries, churches
and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious,
charitable or educational purposes ...

IV
THE COURT A QUO ERRED IN ORDERING THE
CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN
THE COURT BY PETITIONER AS PAYMENT OF THE
P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 12)

Relative thereto, Section 54, paragraph c, Commonwealth Act

No. 470 as amended by Republic Act No. 409, otherwise known
as the Assessment Law, provides:

The main issue in this case is the proper interpretation of the

phrase "used exclusively for educational purposes."

The following are exempted from real property tax under the
Assessment Law:

Petitioner contends that the primary use of the lot and building
for educational purposes, and not the incidental use thereof,
determines and exemption from property taxes under Section 22
(3), Article VI of the 1935 Constitution. Hence, the seizure and
sale of subject college lot and building, which are contrary
thereto as well as to the provision of Commonwealth Act No.
470, otherwise known as the Assessment Law, are without legal
basis and therefore void.

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto,
and all lands, buildings, and improvements used exclusively for
religious, charitable, scientific or educational purposes.
xxx xxx xxx

On the other hand, private respondents maintain that the college

lot and building in question which were subjected to seizure and
sale to answer for the unpaid tax are used: (1) for the educational
purposes of the college; (2) as the permanent residence of the
President and Director thereof, Mr. Pedro V. Borgonia, and his
TAXATION

In this regard petitioner argues that the primary use of the school
lot and building is the basic and controlling guide, norm and
standard to determine tax exemption, and not the mere incidental
use thereof.
44

As early as 1916 in YMCA of Manila vs. Collector of lnternal

Revenue, 33 Phil. 217 [1916], this Court ruled that while it may
be true that the YMCA keeps a lodging and a boarding house
and maintains a restaurant for its members, still these do not
constitute business in the ordinary acceptance of the word, but
an institution used exclusively for religious, charitable and
educational purposes, and as such, it is entitled to be exempted
from taxation.

nurses' home, property use to provide housing facilities for

interns, resident doctors, superintendents, and other members of
the hospital staff, and recreational facilities for student nurses,
interns, and residents' (84 CJS 6621), such as "Athletic fields"
including "a firm used for the inmates of the institution. (Cooley
on Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution (Apostolic Prefect v.
City Treasurer of Baguio, 71 Phil, 547 [1941]).

In the case of Bishop of Nueva Segovia v. Provincial Board of

Ilocos Norte, 51 Phil. 352 [1972], this Court included in the
exemption a vegetable garden in an adjacent lot and another lot
formerly used as a cemetery. It was clarified that the term "used
exclusively" considers incidental use also. Thus, the exemption
from payment of land tax in favor of the convent includes, not
only the land actually occupied by the building but also the
adjacent garden devoted to the incidental use of the parish priest.
The lot which is not used for commercial purposes but serves
solely as a sort of lodging place, also qualifies for exemption
because this constitutes incidental use in religious functions.

It must be stressed however, that while this Court allows a more

liberal and non-restrictive interpretation of the phrase
"exclusively used for educational purposes" as provided for in
Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main
purposes. Otherwise stated, the use of the school building or lot
for commercial purposes is neither contemplated by law, nor by
jurisprudence. Thus, while the use of the second floor of the
main building in the case at bar for residential purposes of the
Director and his family, may find justification under the concept
of incidental use, which is complimentary to the main or primary
purposeeducational, the lease of the first floor thereof to the
Northern Marketing Corporation cannot by any stretch of the
imagination be considered incidental to the purpose of
education.

The phrase "exclusively used for educational purposes" was

further clarified by this Court in the cases of Herrera vs. Quezon
City Board of assessment Appeals, 3 SCRA 186 [1961] and
Commissioner of Internal Revenue vs. Bishop of the Missionary
District, 14 SCRA 991 [1965], thus
Moreover, the exemption in favor of property used exclusively
for charitable or educational purposes is 'not limited to property
actually indispensable' therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes,
such as in the case of hospitals, "a school for training nurses, a

TAXATION

It will be noted however that the aforementioned lease appears

to have been raised for the first time in this Court. That the
matter was not taken up in the to court is really apparent in the
decision of respondent Judge. No mention thereof was made in

45

the stipulation of facts, not even in the description of the school

building by the trial judge, both embodied in the decision nor as
one of the issues to resolve in order to determine whether or not
said properly may be exempted from payment of real estate
taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that
such fact was not disputed even after it was raised in this Court.

Yap, C.J., Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

Abra Valley College v. Aquino
[GR L-39086, 15 June 1988]
Facts:

Indeed, it is axiomatic that facts not raised in the lower court

cannot be taken up for the first time on appeal. Nonetheless, as
an exception to the rule, this Court has held that although a
factual issue is not squarely raised below, still in the interest of
substantial justice, this Court is not prevented from considering a
pivotal factual matter. "The Supreme Court is clothed with
ample authority to review palpable errors not assigned as such if
it finds that their consideration is necessary in arriving at a just
decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Petitioner Abra Valley College is an educational corporation and

institution of higher learning duly incorporated with the SEC in 1948.
On 6 July 1972, the Municipal and Provincial treasurers (Gaspar
Bosque and Armin Cariaga, respectively) and issued a Notice of
Seizure upon the petitioner for the college lot and building (OCT Q-83)
for the satisfaction of said taxes thereon. The treasurers served upon
the petitioner a Notice of Sale on 8 July 1972, the sale being held on
the same day. Dr. Paterno Millare, then municipal mayor of Bangued,
Abra, offered the highest bid of P 6,000 on public auction involving the
sale of the college lot and building. The certificate of sale was
correspondingly issued to him.

Under the 1935 Constitution, the trial court correctly arrived at

the conclusion that the school building as well as the lot where it
is built, should be taxed, not because the second floor of the
same is being used by the Director and his family for residential
purposes, but because the first floor thereof is being used for
commercial purposes. However, since only a portion is used for
purposes of commerce, it is only fair that half of the assessed tax
be returned to the school involved.

The petitioner filed a complaint on 10 July 1972 in the court a quo to

annul and declare void the Notice of Seizure and the Notice of Sale
of its lot and building located at Bangued, Abra, for non-payment of
real estate taxes and penalties amounting to P5,140.31. On 12 April
1973, the parties entered into a stipulation of facts adopted and
embodied by the trial court in its questioned decision. The trial court
ruled for the government, holding that the second floor of the building
is being used by the director for residential purposes and that the
ground floor used and rented by Northern Marketing Corporation, a
commercial establishment, and thus the property is not being used
exclusively for educational purposes. Instead of perfecting an appeal,
petitioner availed of the instant petition for review on certiorari with
prayer for preliminary injunction before the Supreme Court, by filing
said petition on 17 August 1974.

PREMISES CONSIDERED, the decision of the Court of First

Instance of Abra, Branch I, is hereby AFFIRMED subject to the
modification that half of the assessed tax be returned to the
petitioner.

The Supreme Court affirmed the decision of the CFI Abra (Branch I)
subject to the modification that half of the assessed tax be returned to
the petitioner. The modification is derived from the fact that the ground

SO ORDERED.

TAXATION

46

floor is being used for commercial purposes (leased) and the second
floor being used as incidental to education (residence of the director).

Abra Valley College vs Aquino (G.R. No. L-39086)

FACTS: Petitioner, an educational corporation and institution of
higher learning duly incorporated with the Securities and
Exchange Commission in 1948, filed a complaint to annul and
declare void the Notice of Seizure and the Notice of Sale of
its lot and building located at Bangued, Abra, for non-payment
of real estate taxes and penalties amounting to P5,140.31. Said
Notice of Seizure by respondents Municipal Treasurer and
Provincial Treasurer, defendants below, was issued for the
satisfaction of the said taxes thereon.

Issue: Should there be tax exemption?

Interpretation of the phrase used exclusively for educational
purposes
Section 22, paragraph 3, Article VI, of the then 1935 Philippine
Constitution, expressly grants exemption from realty taxes for
Cemeteries, churches and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable or educational purposes. This constitution is
relative to Section 54, paragraph c, Commonwealth Act 470 as
amended by RA 409 (Assessment Law). An institution used
exclusively for religious, charitable and educational purposes, and as
such, it is entitled to be exempted from taxation; notwithstanding that it
keeps a lodging and a boarding house and maintains a restaurant for
its members (YMCA case). A lot which is not used for commercial
purposes but serves solely as a sort of lodging place, also qualifies for
exemption because this constitutes incidental use in religious
functions (Bishop of Nueva Segovia case).

The parties entered into a stipulation of facts adopted and

embodied by the trial court in its questioned decision. The trial
court ruled for the government, holding that the second floor of
the building is being used by the director for residential purposes
and that the ground floor used and rented by Northern Marketing
Corporation, a commercial establishment, and thus the property
is not being used exclusively for educational purposes. Instead
of perfecting an appeal, petitioner availed of the instant petition
for review on certiorari with prayer for preliminary injunction
before the Supreme Court, by filing said petition on 17 August
1974.

Exemption in favour of property used exclusively for charitable or

educational purposes is not limited to property actually indispensable
therefor but extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes (Herrera v.
Quezon City Board of Assessment Appeals). While the Court allows a
more liberal and non-restrictive interpretation of the phrase
exclusively used for educational purposes, reasonable emphasis has
always been made that exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the
main purposes. The use of the school building or lot for commercial
purposes is neither contemplated by law, nor by jurisprudence. In the
case at bar, the lease of the first floor of the building to the Northern
Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.

TAXATION

ISSUE: Whether or not the lot and building are used exclusively
for educational purposes.
HELD: Section 22, paragraph 3, Article VI, of the then 1935
Philippine Constitution, expressly grants exemption from realty
taxes for cemeteries, churches and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable or educational
purposes. Reasonable emphasis has always been made that the

47

exemption extends to facilities which are incidental to and

reasonably necessary for the accomplishment of the main
purposes. The use of the school building or lot for commercial
purposes is neither contemplated by law, nor by jurisprudence.
In the case at bar, the lease of the first floor of the building to the
Northern Marketing Corporation cannot by any stretch of the
imagination be considered incidental to the purpose of
education. The test of exemption from taxation is the use of the
property for purposes mentioned in the Constitution.

REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR

COMMISSION, and SUGAR REGULATORY
ADMINISTRATION, respondents, ANGEL H. SEVERINO,
JR., GLICERIO JAVELLANA, GLORIA P. DE LA PAZ,
JOEY P. DE LA PAZ, ET AL., and NATIONAL
FEDERATION OF SUGARCANE PLANTERS, intervenors.
MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers,
who have come to this Court in their individual capacities and in
representation of other sugar producers, planters and millers,
said to be so numerous that it is impracticable to bring them all
before the Court although the subject matter of the present
controversy is of common interest to all sugar producers,
whether parties in this action or not.

The decision of the CFI Abra (Branch I) is affirmed subject to

the modification that half of the assessed tax be returned to the
petitioner. The modification is derived from the fact that the
ground floor is being used for commercial purposes (leased) and
the second floor being used as incidental to education (residence
of the director).
Republic of the Philippines
SUPREME COURT
Manila

Respondent Philippine Sugar Commission (PHILSUCOM, for

short) was formerly the government office tasked with the
function of regulating and supervising the sugar industry until it
was superseded by its co-respondent Sugar Regulatory
Administration (SRA, for brevity) under Executive Order No. 18
on May 28, 1986. Although said Executive Order abolished the
PHILSUCOM, its existence as a juridical entity was mandated to
continue for three (3) more years "for the purpose of prosecuting
and defending suits by or against it and enables it to settle and
close its affairs, to dispose of and convey its property and to
distribute its assets."

EN BANC
G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO
GUANZON, OSCAR VILLANUEVA, JOSE ABELLO,
REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI,
MANUEL LACSON, JAVIER LACSON, TITO TAGARAO,
EDUARDO SUATENGCO, AUGUSTO LLAMAS,
RODOLFO SIASON, PACIFICO MAGHARI, JR., JOSE
JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.

TAXATION

Respondent Republic Planters Bank (briefly, the Bank) is a

commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters

48

planting and milling their sugarcane in different mill districts of

Negros Occidental, were allowed to intervene by the Court,
since they have common cause with petitioners and respondents
having interposed no objection to their intervention.
Subsequently, on January 14,1988, the National Federation of
Sugar Planters (NFSP) also moved to intervene, which the Court
allowed on February 16,1988.

Respondents PHILSUCOM and SRA, for their part, squarely

traverse the petition arguing that no trust results from Section 7
of P.D. No. 388; that the stabilization fees collected are
considered government funds under the Government Auditing
Code; that the transfer of shares of stock from PHILSUCOM to
the sugar producers would be irregular, if not illegal; and that
this suit is barred by laches.

Petitioners and Intervenors have come to this Court praying for a

Writ of mandamus commanding respondents:

The Solicitor General aptly summarizes the basic issues thus: (1)
whether the stabilization fees collected from sugar planters and
millers pursuant to Section 7 of P.D. No. 388 are funds in trust
for them, or public funds; and (2) whether shares of stock in
respondent Bank paid for with said stabilization fees belong to
the PHILSUCOM or to the different sugar planters and millers
from whom the fees were collected or levied.

TO
IMPLEMENT
AND
ACCOMPLISH
THE
PRIVATIZATION OF REPUBLIC PLANTERS BANK BY
THE TRANSFER AND DISTRIBUTION OF THE SHARES
OF STOCK IN THE SAID BANK; NOW HELD BY AND
STILL CARRIED IN THE NAME OF THE PHILIPPINE
SUGAR COMMISSION, TO THE SUGAR PRODUCERS,
PLANTERS AND MILLERS, WHO ARE THE TRUE
BENEFICIAL OWNERS OF THE 761,416 COMMON
SHARES VALUED AT P36,548.000.00, AND 53,005,045
PREFERRED SHARES (A, B & C) WITH A TOTAL PAR
VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT
OF P290,972,224.72, THE SAID INVESTMENT HAVING
BEEN FUNDED BY THE DEDUCTION OF Pl.00 PER PICUL
FROM SUGAR PROCEEDS OF THE SUGAR PRODUCERS
COMMENCING THE YEAR 1978-79 UNTIL THE PRESENT
AS STABILIZATION FUND PURSUANT TO P.D. # 388.

P. D. No. 388, promulgated on February 2,1974, which created

the PHILSUCOM, provided for the collection of a Stabilization
Fund as follows:
SEC. 7. Capitalization, Special Fund of the Commission,
Development and Stabilization Fund. There is hereby
established a fund for the commission for the purpose of
financing the growth and development of the sugar industry and
all its components, stabilization of the domestic market
including the foreign market to be administered in trust by the
Commission and deposited in the Philippine National Bank
derived in the manner herein below cited from the following
sources:

Respondent Bank does not take issue with either petitioners or

its correspondents as it has no beneficial or equitable interest
that may be affected by the ruling in this Petition, but welcomes
the filing of the Petition since it will settle finally the issue of
legal ownership of the questioned shares of stock.

TAXATION

a. Stabilization fund shall be collected as provided for in the

various provisions of this Decree.

49

b. Stabilization fees shall be collected from planters and millers

in the amount of Two (P2.00) Pesos for every picul produced
and milled for a period of five years from the approval of this
Decree and One (Pl.00) Peso for every picul produced and
milled every year thereafter.

be established (89 C.J.S. 947).

No implied trust in favor of the sugar producers either can be
deduced from the imposition of the levy. "The essential Idea of
an implied trust involves a certain antagonism between the
cestui que trust and the trustee even when the trust has not arisen
out of fraud nor out of any transaction of a fraudulent or
immoral character (65 CJ 222). It is not clearly shown from the
statute itself that the PHILSUCOM imposed on itself the
obligation of holding the stabilization fund for the benefit of the
sugar producers. It must be categorically demonstrated that the
very administrative agency which is the source of such
regulation would place a burden on itself (Batchelder v. Central
Bank of the Philippines, L-25071, July 29,1972,46 SCRA 102,
citing People v. Que Po Lay, 94 Phil. 640 [1954]).

Provided: That fifty (P0.50) centavos per picul of the amount

levied on planters, millers and traders under Section 4(c) of this
Decree will be used for the payment of salaries and wages of
personnel, fringe benefits and allowances of officers and
employees for the purpose of accomplishing and employees for
the purpose of accomplishing the efficient performance of the
duties of the Commission.
Provided, further: That said amount shall constitute a lien on the
sugar quedan and/or warehouse receipts and shall be paid
immediately by the planters and mill companies, sugar centrals
and refineries to the Commission. (paragraphing and bold
supplied).

Neither can petitioners place reliance on the history of

respondents Bank. They recite that at the beginning, the Bank
was owned by the Roman-Rojas Group. Because it underwent
difficulties early in the year 1978, Mr. Roberto S. Benedicto,
then Chairman of the PHILSUCOM, submitted a proposal to the
Central Bank for the rehabilitation of the Bank. The Central
Bank acted favorably on the proposal at the meeting of the
Monetary Board on March 31, 1978 subject to the infusion of
fresh capital by the Benedicto Group. Petitioners maintain that
this infusion of fresh capital was accomplished, not by any
capital investment by Mr. Benedicto, but by PHILSUCOM,
which set aside the proceeds of the P1.00 per picul stabilization
fund to pay for its subscription in shares of stock of respondent
Bank. It is petitioners' submission that all shares were placed in
PHILSUCOM's name only out of convenience and necessity and
that they are the true and beneficial owners thereof.

Section 7 of P.D. No. 388 does provide that the stabilization fees
collected "shall be administered in trust by the Commission."
However, while the element of an intent to create a trust is
present, a resulting trust in favor of the sugar producers, millers
and planters cannot be said to have ensued because the
presumptive intention of the parties is not reasonably
ascertainable from the language of the statute itself.
The doctrine of resulting trusts is founded on the presumed
intention of the parties; and as a general rule, it arises where, and
only where such may be reasonably presumed to be the intention
of the parties, as determined from the facts and circumstances
existing at the time of the transaction out of which it is sought to

TAXATION

50

In point of fact, we cannot see our way clear to upholding

petitioners' position that the investment of the proceeds from the
stabilization fund in subscriptions to the capital stock of the
Bank were being made for and on their behalf. That could have
been clarified by the Trust Agreement, dated May 28, 1986,
entered into between PHILSUCOM, as "Trustor" acting through
Mr. Fred J. Elizalde as Officer-in-Charge, and respondent RPBTrust Department' as "Trustee," acknowledging that
PHILSUCOM holds said shares for and in behalf of the sugar
producers," the latter "being the true and beneficial owners
thereof." The Agreement, however, did not get off the ground
because it failed to receive the approval of the PHILSUCOM
Board of Commissioners as required in the Agreement itself.

milled which accrued to PHILSUCOM under PD 338, as

amended. ...
The stabilization fees collected are in the nature of a tax, which
is within the power of the State to impose for the promotion of
the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They
constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections
made accrue to a "Special Fund," a "Development and
Stabilization Fund," almost Identical to the "Sugar Adjustment
and Stabilization Fund" created under Section 6 of
Commonwealth Act 567. 1 The tax collected is not in a pure
exercise of the taxing power. It is levied with a regulatory
purpose, to provide means for the stabilization of the sugar
industry. The levy is primarily in the exercise of the police
power of the State (Lutz vs. Araneta, supra.).

The SRA, which succeeded PHILSUCOM, neither approved the

Agreement because of the adverse opinion of the SRA, Resident
Auditor, dated June 25,1986, which was aimed by the Chairman
of the Commission on Audit, on January 26,1987.

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. (Johnson vs. State ex
rel. Marey, 128 So. 857, cited in Lutz vs. Araneta, supra).

On February 19, 1987, the SRA, resolved to revoke the Trust

Agreement "in the light of the ruling of the Commission on
Audit that the aforementioned Agreement is of doubtful
validity."

The stabilization fees in question are levied by the State upon

sugar millers, planters and producers for a special purpose
that of "financing the growth and development of the sugar
industry and all its components, stabilization of the domestic
market including the foreign market the fact that the State has
taken possession of moneys pursuant to law is sufficient to
constitute them state funds, even though they are held for a
special purpose (Lawrence vs. American Surety Co., 263 Mich
586, 249 ALR 535, cited in 42 Am. Jur. Sec. 2, p. 718). Having
been levied for a special purpose, the revenues collected are to

From the legal standpoint, we find basis for the opinion of the
Commission on Audit reading:
That the government, PHILSUCOM or its successor-in-interest,
Sugar Regulatory Administration, in particular, owns and stocks.
While it is true that the collected stabilization fees were set aside
by PHILSUCOM to pay its subscription to RPB, it did not
collect said fees for the account of the sugar producers. That
stabilization fees are charges/levies on sugar produced and

TAXATION

51

be treated as a special fund, to be, in the language of the statute,

"administered in trust' for the purpose intended. Once the
purpose has been fulfilled or abandoned, the balance, if any, is to
be transferred to the general funds of the Government. That is
the essence of the trust intended (See 1987 Constitution, Article
VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI,
Sec. 23(l]). 2

To rule in petitioners' favor would contravene the general

principle that revenues derived from taxes cannot be used for
purely private purposes or for the exclusive benefit of private
persons. The Stabilization Fund is to be utilized for the benefit
of the entire sugar industry, "and all its components, stabilization
of the domestic market," including the foreign market the
industry being of vital importance to the country's economy and
to national interest.

The character of the Stabilization Fund as a special fund is

emphasized by the fact that the funds are deposited in the
Philippine National Bank and not in the Philippine Treasury,
moneys from which may be paid out only in pursuance of an
appropriation made by law (1987) Constitution, Article VI, Sec.
29[1],1973 Constitution, Article VIII, Sec. 18[l]).

WHEREFORE, the Writ of mandamus is denied and the Petition

hereby dismissed. No costs.
This Decision is immediately executory.
SO ORDERED.

That the fees were collected from sugar producers, planters and
millers, and that the funds were channeled to the purchase of
shares of stock in respondent Bank do not convert the funds into
a trust fired for their benefit nor make them the beneficial
owners of the shares so purchased. It is but rational that the fees
be collected from them since it is also they who are to be
benefited from the expenditure of the funds derived from it. The
investment in shares of respondent Bank is not alien to the
purpose intended because of the Bank's character as a
commodity bank for sugar conceived for the industry's growth
and development. Furthermore, of note is the fact that one-half,
(1/2) or PO.50 per picul, of the amount levied under P.D. No.
388 is to be utilized for the "payment of salaries and wages of
personnel, fringe benefits and allowances of officers and
employees of PHILSUCOM" thereby immediately negating the
claim that the entire amount levied is in trust for sugar,
producers, planters and millers.

TAXATION

Teehankee, C.J., Yap, Narvasa, Gutierrez, Jr., Cruz, Paras,

Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes and
Grio-Aquino, JJ., concur.
Fernan, J., took no part.

Footnotes
1 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

52

all of the following objectives, as may be provided by law.

xxx xxx xxx

Gaston vs. Republic Planters Bank

2 (5) All money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such purpose
only. If the purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government." (1987
Constitution, Art. VI, Sec. 28[3]).

Facts: Petitioners are sugar producers and planters and millers

filed a MANDAMUS to implement the privatization of Republic
Planters Bank, and for the transfer of the shares in the
government bank to sugar producers and planters. (because they
are allegedly the true beneficial owners of the bank since they
pay P1.00 per picul of sugar from the proceeds of sugar
producers as STABILIZATION FEES)
The shares are currently held by Philsucom / Sugar Regulatory
Admin. The Solgen countered that the stabilization fees are
considered government funds and that the transfer of shares to
from Philsucom to the sugar producers would be irregular.
Issue: What is the nature of the P1.00 stabilization fees collected
from sugar producers? Are they funds held in trust for them, or
are they public funds? Are the shares in the bank (paid using
these fees) owned by the government Philsucom or privately by
the different sugar planters from whom such fees were
collected?
Held: PUBLIC FUNDS. While it is true that the collected fees
were used to buy shares in RPB, it did not collect said fees for
the account of sugar producers. The stabilization fees were
charged on sugar produced and milled which ACCRUED TO
PHILSUCOM, under PD 338.
The fees collected ARE IN THE NATURE OF A TAX., which is
within the power of the state to impose FOR THE
PROMOTION OF THE SUGAR INDUSTRY. They constitute
sugar liens. The collections accrue to a SPECIAL FUNDS. It is

TAXATION

53

levied not purely for taxation, but for regulation, to provide

means TO STABILIZE THE SUGAR INDUSTRY. The levy is
primarily an exercise of police powers.
The fact that the State has taken money pursuant to law is
sufficient to constitute them as STATE FUNDS, even though
held for a special purpose. Having been levied for a special
purpose, the revenues are treated as a special fund, administered
in trust for the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance will be transferred to the
general funds of govt.
It is a special fund since the funds are deposited in PNB, not in
the National Treasury.
The sugar planters are NOT BENEFICIAL OWNERS. The
money is collected from them only because they it is also they
who are to be benefited from the expenditure of funds derived
from it. The investing of the funds in RPB is not alien to the
purpose since the Bank is a commodity bank for sugar,
conceived for the sugar industry growth and development.

Gaston vs. Republic Planter Bank| Melencio-Herrera (1988)

Keywords: [special fund, sugar producers]

FACTS

Revenues derived from taxes cannot be used purely for private

purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the ENTIRE
SUGAR INDUSTRY, and all its components, stabilization of
domestic and foreign markets, since the sugar industry is of vital
importance to the countrys economy and national interest.

On 2 February 1974, PD 3881 was promulgated, which created

the Philippine Sugar Commission (PHILSUCOM) and provided
for the collection of a Stabilization Fund, primarily, from the
production of sugar planters and millers.

Sometime in 1978, as the Republic Planters Bank (Bank) was

undergoing difficulties, Mr. Roberto Benedicto, then Chairman of

Sec. 7. Capitalization, Special Fund of the Commission, Development and

Stabilization Fund. There is hereby established a fund for the commission
for the purpose of financing the growth and development of the sugar
industry and all its components, stabilization of the domestic market
including the foreign market to be administered in trust by the Commission
and deposited in the Philippine National Bank derived.

TAXATION

54

the PHILSUCOM submitted a proposal to the Central Bank for the

rehabilitation of the bank.

The Central Bank approved the proposal subject to the infusion of

fresh capital by the Benedicto Group.

The capital investment was made by PHILSUCOM which used

money from the stabilization fund to pay for its subscription
in shares of stock of the Bank.

presumptive intention of the parties is not reasonably

ascertainable from the language of the statute itself.

The petitioners who are sugar producers, sugarcane planters

and millers brought this class suit praying for the issuance
of a Writ of Mandamus commanding the respondents,
PHILSUCOM and its successor Sugar Regulatory Administration
(SRA), to transfer and distribute the shares of stock in the
said bank, which are held in the respondents name, to the sugar
producers, planters, and millers, who are the true beneficial
owners thereof, because their contributions to the stabilization
fund were used in the purchase of said stocks.

There is no implied trusted that can be deduced either

because it is not categorically demonstrated that the
PHILSUCOM imposed on itself the obligation of holding the
stabilization fund for the benefit of the sugar producers.

The historical background also does not show that the

investment of the proceeds form the stabilization fund in
subscriptions to the capital stock of the Bank were being made
for and on behalf of the petitioners.

The fact is that the stabilization fees collected are in the nature
of a tax, which is within the power of the State to impose for the
promotion of the sugar industry; they constitute sugar liens.

However, the tax collected is not a pure exercise of the taxing

power; it is levied with a regulatory purpose (to provide means
for the stabilization of the sugar industry) and is, primarily in the
exercise of the police power of the State.

PHILSUCOM and SRA oppose the petition arguing that there was
no resulting trust from Sec. 7 of PD 388 and that the stabilization
fees collected are considered government funds.

The fact that the State has taken possession of moneys

pursuant to law is sufficient to constitute them state
funds, even though they are held for a special purpose.

Having been levied for a special purpose, the revenues

collected are to be treated as a special fund, to be
administered in trust for the purpose intended; once the
purpose has been fulfilled or abandoned, the balance, if
any, is to be transferred to the general funds of the
Government (Art. VI, Sec. 29 [3], Constitution).

ISSUES/HELD
Are the stabilization fees public funds or funds in trust for the sugar
planters and millers? PUBLIC FUNDS.
RATIONALE

There was no trust that was created by PD 388.

o

While the element of an intent to create a trust is present, a

resulting trust in favor of the sugar producers, millers and
planters cannot be said to have ensued because the

TAXATION

55

The character of the Stabilization Fund as a special fund is

emphasized by the fact that the funds are deposited in the PNB
and not in the Philippine Treasure, which means that there is no
need for an appropriation from Congress to be used.

Also, the fact that half of the amount levied is to be used to pay
the officers and employees of PHILSUCOM immediately negated
the claim that the fund is held in trust for petitioners.

To grant the petition would contravene the general principle

that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private
persons because the Stabilization fund is to be utilized for the
benefit of the entire sugar industry.

TAXATION

56