G.R. No.

L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal
Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal
Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal
Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister
of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or
prohibition proceeding 1 on the validity of Section I of Batas Pambansa Blg.
135 depends upon a showing of its constitutional infirmity. The assailed
provision further amends Section 21 of the National Internal Revenue Code of
1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other
winnings, (d) interest from bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in the net profits
of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer
alleges that by virtue thereof, "he would be unduly discriminated against by
the imposition of higher rates of tax upon his income arising from the
exercise of his profession vis-a-vis those which are imposed upon fixed
income or salaried individual taxpayers. 4 He characterizes the above sction
as arbitrary amounting to class legislation, oppressive and capricious in
character 5 For petitioner, therefore, there is a transgression of both the
equal protection and due process clauses 6 of the Constitution as well as of
the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an
answer within 10 days from notice. Such an answer, after two extensions
were granted the Office of the Solicitor General, was filed on May 28, 1982. 8
The facts as alleged were admitted but not the allegations which to their
mind are "mere arguments, opinions or conclusions on the part of the
petitioner, the truth [for them] being those stated [in their] Special and
Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big.
135 is a valid exercise of the State's power to tax. The authorities and cases
cited while correctly quoted or paraghraph do not support petitioner's stand."
10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be
dismissed.

1. It is manifest that the field of state activity has assumed a much wider
scope, The reason was so clearly set forth by retired Chief Justice Makalintal
thus: "The areas which used to be left to private enterprise and initiative and
which the government was called upon to enter optionally, and only 'because
it was better equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-defined
boundaries and to be absorbed within activities that the government must
undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times." 11 Hence the need for more revenues. The power to
tax, an inherent prerogative, has to be availed of to assure the performance
of vital state functions. It is the source of the bulk of public funds. To
praphrase a recent decision, taxes being the lifeblood of the government,
their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute
of sovereignty. It is the strongest of all the powers of of government." 13 It is,
of course, to be admitted that for all its plenitude 'the power to tax is not
unconfined. There are restrictions. The Constitution sets forth such limits .
Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate
in appropriate cases a revenue measure. if it were otherwise, there would -be
truth to the 1803 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark
characterized it as "a flourish of rhetoric [attributable to] the intellectual
fashion of the times following] a free use of absolutes." 16 This is merely to
emphasize that it is riot and there cannot be such a constitutional mandate.
Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmess pen: 'The power to tax is not the power to destroy while this Court
sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental
law overrides any legislative or executive, act that runs counter to it. In any
case therefore where it can be demonstrated that the challenged statutory
provision as petitioner here alleges fails to abide by its command, then
this Court must so declare and adjudge it null. The injury thus is centered on
the question of whether the imposition of a higher tax rate on taxable net
income derived from business or profession than on compensation is
constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here. does not suffice. There must be a
factual foundation of such unconstitutional taint. Considering that petitioner
here would condemn such a provision as void or its face, he has not made out
a case. This is merely to adhere to the authoritative doctrine that were the
due process and equal protection clauses are invoked, considering that they
arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.

5. It is undoubted that the due process clause may be invoked where a taxing
statute is so arbitrary that it finds no support in the Constitution. An obvious
example is where it can be shown to amount to the confiscation of property.
That would be a clear abuse of power. It then becomes the duty of this Court
to say that such an arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes dictum. It has
also been held that where the assailed tax measure is beyond the jurisdiction
of the state, or is not for a public purpose, or, in case of a retroactive statute
is so harsh and unreasonable, it is subject to attack on due process grounds.
6. Now for equal protection. The applicable standard to avoid the charge that
there is a denial of this constitutional mandate whether the assailed act is in
the exercise of the lice power or the power of eminent domain is to
demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or
at the very least, discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the
conditions not being different, both in the privileges conferred and the
liabilities imposed. Favoritism and undue preference cannot be allowed. For
the principle is that equal protection and security shall be given to every
person under circumtances which if not Identical are analogous. If law be
looked upon in terms of burden or charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on some in
the group equally binding on the rest." 20 That same formulation applies as
well to taxation measures. The equal protection clause is, of course, inspired
by the noble concept of approximating the Ideal of the laws benefits being
available to all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the Idea of law. There is,
however, wisdom, as well as realism in these words of Justice Frankfurter:
"The equality at which the 'equal protection' clause aims is not a disembodied
equality. The Fourteenth Amendment enjoins 'the equal protection of the
laws,' and laws are not abstract propositions. They do not relate to abstract
units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the use of specific
remedies. The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the same." 21 Hence the
constant reiteration of the view that classification if rational in character is
allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this
Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is
inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from
a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'"
7. Petitioner likewise invoked the kindred concept of uniformity. According to
the Constitution: "The rule of taxation shag be uniform and equitable." 24
This requirement is met according to Justice Laurel in Philippine Trust
Company v. Yatco, 25 decided in 1940, when the tax "operates with the same
force and effect in every place where the subject may be found. " 26 He
likewise added: "The rule of uniformity does not call for perfect uniformity or

perfect equality, because this is hardly attainable." 27 The problem of

classification did not present itself in that case. It did not arise until nine
years later, when the Supreme Court held: "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, ... . 28 As
clarified by Justice Tuason, where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29
There is quite a similarity then to the standard of equal protection for all that
is required is that the tax "applies equally to all persons, firms and
corporations placed in similar situation."
8. Further on this point. Apparently, what misled petitioner is his failure to
take into consideration the distinction between a tax rate and a tax base.
There is no legal objection to a broader tax base or taxable income by
eliminating all deductible items and at the same time reducing the applicable
tax rate. Taxpayers may be classified into different categories. To repeat, it. is
enough that the classification must rest upon substantial distinctions that
make real differences. In the case of the gross income taxation embodied in
Batas Pambansa Blg. 135, the, discernible basis of classification is the
susceptibility of the income to the application of generalized rules removing
all deductible items for all taxpayers within the class and fixing a set of
reduced tax rates to be applied to all of them. Taxpayers who are recipients
of compensation income are set apart as a class. As there is practically no
overhead expense, these taxpayers are e not entitled to make deductions for
income tax purposes because they are in the same situation more or less. On
the other hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the
same tax rates on the basis of gross income. There is ample justification then
for the Batasang Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income taxation as
regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit,
considering the (1) lack of factual foundation to show the arbitrary character
of the assailed provision; 31 (2) the force of controlling doctrines on due
process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net
income of professionals and businessman certainly not a suspect
classification,
WHEREFORE, the petition is dismissed. Costs against petitioner

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the
people and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive
approach to health development which shall endeavor to make essential
goods, health and other social services available to all the people at
affordable cost. There shall be priority for the needs of the underprivileged
sick, elderly, disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish,
maintain, conduct and operate a prepaid group practice health care delivery
system or a health maintenance organization to take care of the sick and
disabled persons enrolled in the health care plan and to provide for the
administrative, legal, and financial responsibilities of the organization."
Individuals enrolled in its health care programs pay an annual membership
fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR]

sent petitioner a formal demand letter and the corresponding assessment
notices demanding the payment of deficiency taxes, including surcharges and
interest, for the taxable years 1996 and 1997 in the total amount of
P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioners health care agreement with the members of its health care

program pursuant to Section 185 of the 1997 Tax Code xxxx

xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As

respondent did not act on the protest, petitioner filed a petition for review in
the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT
and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which
read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT
amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest
from January 20, 1997 until fully paid for the 1996 VAT deficiency and
P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January
20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling
No. [231]-88 is declared void and without force and effect. The 1996 and
1997 deficiency DST assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said
DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar
as it cancelled the DST assessment. He claimed that petitioners health care
agreement was a contract of insurance subject to DST under Section 185 of
the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners
health care agreement was in the nature of a non-life insurance contract
subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of
Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997
deficiency documentary stamp tax assessment and ordered petitioner to
desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and
P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner
filed this case.
xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed

the CAs decision. We held that petitioners health care agreement during the
pertinent period was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare
Health Systems, Inc. v. CA.4 We also ruled that petitioners contention that it
is a health maintenance organization (HMO) and not an insurance company is
irrelevant because contracts between companies like petitioner and the
beneficiaries under their plans are treated as insurance contracts. Moreover,
DST is not a tax on the business transacted but an excise on the privilege,
opportunity or facility offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting the
following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is
imposed only on a company engaged in the business of fidelity bonds and
other insurance policies. Petitioner, as an HMO, is a service provider, not an
insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank,
affirmed in effect the CAs disposition that health care services are not in the
nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to
DST is clear, especially in the light of the amendments made in the DST law
in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of
indemnity, they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health
insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance"
mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the
taxable year 2005 and all prior years. Therefore, the questioned assessments
on the DST are now rendered moot and academic.
Oral arguments were held in Baguio City on April 22, 2009. The parties
submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it
availed of a tax amnesty under RA 94807 (also known as the "Tax Amnesty
Act of 2007") by fully paying the amount of P5,127,149.08 representing 5% of
its net worth as of the year ending December 31, 2005.

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.9 It is engaged in the dispensation of
the following medical services to individuals who enter into health care
agreements with it:
Preventive medical services such as periodic monitoring of health
problems, family planning counseling, consultation and advices on diet,
exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays,
urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other
remedial and therapeutic processes in the event of an injury or sickness on
the part of the enrolled member.
Individuals enrolled in its health care program pay an annual membership
fee. Membership is on a year-to-year basis. The medical services are
dispensed to enrolled members in a hospital or clinic owned, operated or
accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners
regarding payment schemes, financing and other procedures for the delivery
of health services. Except in cases of emergency, the professional services
are to be provided only by petitioner's physicians, i.e. those directly
employed by it11 or whose services are contracted by it.12 Petitioner also
provides hospital services such as room and board accommodation,
laboratory services, operating rooms, x-ray facilities and general nursing
care.13 If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers
for the services rendered, at pre-agreed rates.
To avail of petitioners health care programs, the individual members are
required to sign and execute a standard health care agreement embodying
the terms and conditions for the provision of the health care services. The
same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative
medical services. Except for the curative aspect of the medical service
offered, the enrolled member may actually make use of the health care
services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance
Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an
HMO and not an insurer because its agreements are treated as insurance
contracts and the DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of the business.
Petitioner, however, submits that it is of critical importance to characterize
the business it is engaged in, that is, to determine whether it is an HMO or an

insurance company, as this distinction is indispensable in turn to the issue of

whether or not it is liable for DST on its health care agreements.
A second hard look at the relevant law and jurisprudence convinces the Court
that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all
policies of insurance or bonds or obligations of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances, conditioned for the
performance of the duties of any office or position, for the doing or not doing
of anything therein specified, and on all obligations guaranteeing the validity
or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile
credits, which may be made or renewed by any such person, company or
corporation, there shall be collected a documentary stamp tax of fifty
centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the
premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole
of the statute its every word.
From the language of Section 185, it is evident that two requisites must
concur before the DST can apply, namely: (1) the document must be a policy
of insurance or an obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, employers liability,
plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health
Insurance Act of 1995"), an HMO is "an entity that provides, offers or
arranges for coverage of designated health services needed by plan
members for a fixed prepaid premium."19 The payments do not vary with the
extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of
insurance during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code)
enumerates what constitutes "doing an insurance business" or "transacting

an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or
activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the
meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of
the foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is
derived from the making of insurance contracts, agreements or transactions
or that no separate or direct consideration is received therefore, shall not be
deemed conclusive to show that the making thereof does not constitute the
doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive
effect on our decisions,21 have determined that HMOs are not in the
insurance business. One test that they have applied is whether the
assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization
or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if they are merely
incidental and service is the principal purpose, then the business is not
insurance.
Applying the "principal object and purpose test,"22 there is significant
American case law supporting the argument that a corporation (such as an
HMO, whether or not organized for profit), whose main object is to provide
the members of a group with health services, is not engaged in the insurance
business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the
Court of Appeals of the District of Columbia Circuit held that Group Health
Association should not be considered as engaged in insurance activities since
it was created primarily for the distribution of health care services rather than
the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as
creating security against loss from illness or accident more truly they
constitute the quantity purchase of well-rounded, continuous medical service
by its members. xxx The functions of such an organization are not identical
with those of insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of its descent,
not with service, or its extension in kind, quantity or distribution; with the
unusual occurrence, not the daily routine of living. Hazard is predominant. On
the other hand, the cooperative is concerned principally with getting service

rendered to its members and doing so at lower prices made possible by

quantity purchasing and economies in operation. Its primary purpose is to
reduce the cost rather than the risk of medical care; to broaden the service to
the individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting against the financial
loss caused by extraordinary and unusual occurrences, such as death,
disaster at sea, fire and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary bodily discomforts
as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the
bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost
by quantity purchasing in short, getting the medical job done and paid for;
not, except incidentally to these features, the indemnification for cost after
the services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of service, even
on the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present
should not outweigh all other factors. If attention is focused only on that
feature, the line between insurance or indemnity and other types of legal
arrangement and economic function becomes faint, if not extinct. This is
especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to
regulate all arrangements for assumption or distribution of risk. That view
would cause them to engulf practically all contracts, particularly conditional
sales and contingent service agreements. The fallacy is in looking only at the
risk element, to the exclusion of all others present or their subordination to it.
The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan is
its principal object purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that,
after scrutinizing the plan of operation as a whole of the corporation, it was
service rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is
not engaged in the insurance business. Absence or presence of assumption of
risk or peril is not the sole test to be applied in determining its status. The
question, more broadly, is whether, looking at the plan of operation as a
whole, service rather than indemnity is its principal object and purpose.
Certainly the objects and purposes of the corporation organized and
maintained by the California physicians have a wide scope in the field of
social service. Probably there is no more impelling need than that of
adequate medical care on a voluntary, low-cost basis for persons of small
income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not indemnity.26
(Emphasis supplied)

American courts have pointed out that the main difference between an HMO
and an insurance company is that HMOs undertake to provide or arrange for
the provision of medical services through participating physicians while
insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this
point:
The basic distinction between medical service corporations and ordinary
health and accident insurers is that the former undertake to provide prepaid
medical services through participating physicians, thus relieving subscribers
of any further financial burden, while the latter only undertake to indemnify
an insured for medical expenses up to, but not beyond, the schedule of rates
contained in the policy.
xxx

xxx

xxx

The primary purpose of a medical service corporation, however, is an

undertaking to provide physicians who will render services to subscribers on
a prepaid basis. Hence, if there are no physicians participating in the medical
service corporations plan, not only will the subscribers be deprived of the
protection which they might reasonably have expected would be provided,
but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering
itself subject to the more stringent financial requirements of the General
Insurance Laws.
A participating provider of health care services is one who agrees in writing to
render health care services to or for persons covered by a contract issued by
health service corporation in return for which the health service corporation
agrees to make payment directly to the participating provider.28 (Emphasis
supplied)
Consequently, the mere presence of risk would be insufficient to override the
primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services.29 In short, even if
petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot
be considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for
services rendered in case of emergency by non-participating health providers
would still be incidental to petitioners purpose of providing and arranging for
health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This
indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and
diagnostic medical services intended to keep members from developing
medical conditions or diseases.30 As an HMO, it is its obligation to maintain
the good health of its members. Accordingly, its health care programs are

designed to prevent or to minimize the possibility of any assumption of risk

on its part. Thus, its undertaking under its agreements is not to indemnify its
members against any loss or damage arising from a medical condition but, on
the contrary, to provide the health and medical services needed to prevent
such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members
(with respect to its curative medical services), but these are incidental to the
principal activity of providing them medical care. The "insurance-like" aspect
of petitioners business is miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance
business.
It is important to emphasize that, in adopting the "principal purpose test"
used in the above-quoted U.S. cases, we are not saying that petitioners
operations are identical in every respect to those of the HMOs or health
providers which were parties to those cases. What we are stating is that, for
the purpose of determining what "doing an insurance business" means, we
have to scrutinize the operations of the business as a whole and not its mere
components. This is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we
are also not unmindful that there are other American authorities who have
found particular HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance
industry. This is evident from the fact that it is not supervised by the
Insurance Commission but by the Department of Health.33 In fact, in a letter
dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the
commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a
statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the establishment
of diverse administrative agencies for addressing and satisfying those needs;
it also relates to the accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of
Customs,35 the Court stressed that executive officials are presumed to have
familiarized themselves with all the considerations pertinent to the meaning
and purpose of the law, and to have formed an independent, conscientious
and competent expert opinion thereon. The courts give much weight to the
government agency officials charged with the implementation of the law,
their competence, expertness, experience and informed judgment, and the
fact that they frequently are the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under

Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or
obligations of the nature of indemnity for loss, damage, or liability." In our
decision dated June 12, 2008, we ruled that petitioners health care
agreements are contracts of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or
damage because, under the said agreement, petitioner assumes the liability
and indemnifies its member for hospital, medical and related expenses (such
as professional fees of physicians). The term "loss or damage" is broad
enough to cover the monetary expense or liability a member will incur in case
of illness or injury.
Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or emergency
or his availment of so-called "out-patient services" (including physical
examination, x-ray and laboratory tests, medical consultations, vaccine
administration and family planning counseling) is the contingent event which
gives rise to liability on the part of the member. In case of exposure of the
member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim
that its services are prepaid. The expenses to be incurred by each member
cannot be predicted beforehand, if they can be predicted at all. Petitioner
assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid."
Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the
other members of the health care program. This is insurance.
We reconsider. We shall quote once again the pertinent portion of Section
185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all
policies of insurance or bonds or obligations of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority.38 This is because
taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property
for the support of the government.39 Hence, tax laws may not be extended
by implication beyond the clear import of their language, nor their operation
enlarged so as to embrace matters not specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that
a health care agreement is in the nature of non-life insurance, which is
primarily a contract of indemnity. However, those cases did not involve the
interpretation of a tax provision. Instead, they dealt with the liability of a
health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted
in favor of the member and strictly against the HMO. For this reason, we
reconsider our ruling that Blue Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out
that, even if a contract contains all the elements of an insurance contract, if
its primary purpose is the rendering of service, it is not a contract of
insurance:
It does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance contract. The primary
purpose of the parties in making the contract may negate the existence of an
insurance contract. For example, a law firm which enters into contracts with
clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the
insurance business. Its contracts are simply for the purpose of rendering
personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance,
and the corporation will be deemed as engaged in the business of insurance.
Unlike the lawyers retainer contract, the essential purpose of such a contract
is not to render personal services, but to indemnify against loss and damage
resulting from the defense of actions for malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present
in petitioners agreements. To begin with, there is no loss, damage or liability
on the part of the member that should be indemnified by petitioner as an

HMO. Under the agreement, the member pays petitioner a predetermined

consideration in exchange for the hospital, medical and professional services
rendered by the petitioners physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement, petitioner does
not reimburse or indemnify the member as the latter does not pay any third
party. Instead, it is the petitioner who pays the participating physicians and
other health care providers for the services rendered at pre-agreed rates. The
member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a
monetary liability on the part of the member to any third party-provider of
medical services which might in turn necessitate indemnification from
petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or
claim has already been incurred. There is no indemnity precisely because the
member merely avails of medical services to be paid or already paid in
advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk
of the benefits anytime, e.g. laboratory services, x-ray, routine annual
physical examination and consultations, vaccine administration as well as
family planning counseling, even in the absence of any peril, loss or damage
on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member
who receives care from a non-participating physician or hospital. However,
this is only a very minor part of the list of services available. The assumption
of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program,
Inc.,43 although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor,
this did not make defendant an insurer. Citing Jordan, the Court determined
that "the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such services."44
Since indemnity of the insured was not the focal point of the agreement but
the extension of medical services to the member at an affordable cost, it did
not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish prepaid service contracts
(like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return
on its investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The
amount of premium is calculated on the basis of assumptions made relative

to the insured.45
However, assuming that petitioners commitment to provide medical services
to its members can be construed as an acceptance of the risk that it will shell
out more than the prepaid fees, it still will not qualify as an insurance
contract because petitioners objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us
to conclude that it is not an insurance contract within the context of our
Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements
Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on
petitioners health care agreements under Section 185 of the NIRC of 1997 is
the provisions legislative history. The text of Section 185 came into U.S. law
as early as 1904 when HMOs and health care agreements were not even in
existence in this jurisdiction. It was imposed under Section 116, Article XI of
Act No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46
enacted on July 2, 1904 and became effective on August 1, 1904. Except for
the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of
the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to
the several bonds, debentures, or certificates of stock and indebtedness, and
other documents, instruments, matters, and things mentioned and described
in this section, or for or in respect to the vellum, parchment, or paper upon
which such instrument, matters, or things or any of them shall be written or
printed by any person or persons who shall make, sign, or issue the same, on
and after January first, nineteen hundred and five, the several taxes following:
xxx

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature
of indemnity for loss, damage, or liability made or renewed by any person,
association, company, or corporation transacting the business of accident,
fidelity, employers liability, plate glass, steam boiler, burglar, elevator,
automatic sprinkle, or other branch of insurance (except life, marine, inland,
and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was
enacted revising and consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was thus
retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative
Code). Upon its amendment on March 10, 1917, the pertinent DST provision
became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466
(the NIRC of 1939), which codified all the internal revenue laws of the
Philippines. In an amendment introduced by RA 40 on October 1, 1946, the
DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and
1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST
rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of
the NIRC of 1977 was renumbered as Section 198. And under Section 23 of
EO47 273 dated July 25, 1987, it was again renumbered and became Section
185.
On December 23, 1993, under RA 7660, Section 185 was amended but,
again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA
8424 (or the NIRC of 1997), the subject legal provision was retained as the
present Section 185. In 2004, amendments to the DST provisions were
introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same
pioneer HMO was later reorganized and renamed Integrated Health Care
Services, Inc. (or Intercare). However, there are those who claim that Health
Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed,
HMOs were yet unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were already in existence in
the Philippines and the term had in fact already been defined by RA 7875. If it
had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It had
many opportunities to do so. But it did not. The fact that the NIRC contained
no specific provision on the DST liability of health care agreements of HMOs
at a time they were already known as such, belies any legislative intent to
impose it on them. As a matter of fact, petitioner was assessed its DST
liability only on January 27, 2000, after more than a decade in the business as
an HMO.

Considering that Section 185 did not change since 1904 (except for the rate
of tax), it would be safe to say that health care agreements were never, at
any time, recognized as insurance contracts or deemed engaged in the
business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy."
Petitioner claims that the assessed DST to date which amounts to P376
million53 is way beyond its net worth of P259 million.54 Respondent never
disputed these assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government
ought to encourage private enterprise.55 Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate
business.56 As aptly held in Roxas, et al. v. CTA, et al.:
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg."
Legitimate enterprises enjoy the constitutional protection not to be taxed out
of existence. Incurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and ultimately
subversive of the nations thrust towards a better economy which will
ultimately benefit the majority of our people.
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for
taxable years 1996 and 1997 became moot and academic60 when it availed
of the tax amnesty under RA 9480 on December 10, 2007. It paid
P5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty.
Under Section 6(a) of RA 9480, it is entitled to immunity from payment of
taxes as well as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the 1997 NIRC, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and
prior years.
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a

taxpayer to immunity from payment of the tax involved, including the civil,
criminal, or administrative penalties provided under the 1997 [NIRC], for tax
liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without
conceding the merits of this case as discussed above, respondent concedes
that such tax amnesty extinguishes the tax liabilities of petitioner. This
admission, however, is not meant to preclude a revocation of the amnesty
granted in case it is found to have been granted under circumstances
amounting to tax fraud under Section 10 of said amnesty law.62 (Emphasis
supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by
the tax amnesty program under RA 9480.63 There is no other conclusion to
draw than that petitioners liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax amnesty under RA
9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration:
whether this Court is bound by the ruling of the CA64 in CIR v. Philippine
National Bank65 that a health care agreement of Philamcare Health Systems
is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute
resolution of this Court dismissing the appeal in Philippine National Bank (G.R.
No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by
minute resolution was a judgment on the merits; hence, the Court should
apply the CA ruling there that a health care agreement is not an insurance
contract.
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result,
our ruling in that case has already become final.67 When a minute resolution
denies or dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with its findings
of fact and legal conclusions, are deemed sustained.68 But what is its effect
on other cases?
With respect to the same subject matter and the same issues concerning the
same parties, it constitutes res judicata.69 However, if other parties or
another subject matter (even with the same parties and issues) is involved,
the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70
the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same
parties and the same issues, was previously disposed of by the Court thru a
minute resolution dated February 17, 2003 sustaining the ruling of the CA.
Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the
latter case because the two cases involved different subject matters as they
were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a

minute resolution and a decision. The constitutional requirement under the
first paragraph of Section 14, Article VIII of the Constitution that the facts and
the law on which the judgment is based must be expressed clearly and
distinctly applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the justices,
unlike a decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of
a decision.73 Indeed, as a rule, this Court lays down doctrines or principles of
law which constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since
petitioners liability for DST on its health care agreement was not the subject
matter of G.R. No. 148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding precedent) in its favor.
Nonetheless, in view of the reasons already discussed, this does not detract
in any way from the fact that petitioners health care agreements are not
subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the
ambit of Section 185 of the NIRC and there was never any legislative intent to
impose the same on HMOs like petitioner, the same should not be arbitrarily
and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for
adequate medical services at a cost which the average wage earner can
afford. HMOs arrange, organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies
of scale. They offer advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical services),
including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they play an important
role in society as partners of the State in achieving its constitutional mandate
of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.74 Its imposition will elevate the cost of health care services. This
will in turn necessitate an increase in the membership fees, resulting in either
placing health services beyond the reach of the ordinary wage earner or
driving the industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16,
2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED
and SET ASIDE. The 1996 and 1997 deficiency DST assessment against

petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to

desist from collecting the said tax.
No costs.
SO ORDERED.

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

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC.,
and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be
achieved.
The main issue in this case is whether or not the Collector of Internal Revenue
correctly disallowed the P75,000.00 deduction claimed by private respondent
Algue as legitimate business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent from the decision
of the Collector of Internal Revenue was made on time and in accordance
with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other allied
activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959. 1 On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the
office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy
was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. 3
A search of the protest in the dockets of the case proved fruitless. Atty.
Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara
was finally informed that the BIR was not taking any action on the protest and
it was only then that he accepted the warrant of distraint and levy earlier
sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals.
The above chronology shows that the petition was filed seasonably. According
to Rep. Act No. 1125, the appeal may be made within thirty days after receipt

of the decision or ruling challenged. 7 It is true that as a rule the warrant of

distraint and levy is "proof of the finality of the assessment" 8 and renders
hopeless a request for reconsideration," 9 being "tantamount to an outright
denial thereof and makes the said request deemed rejected." 10 But there is
a special circumstance in the case at bar that prevents application of this
accepted doctrine.
The proven fact is that four days after the private respondent received the
petitioner's notice of assessment, it filed its letter of protest. This was
apparently not taken into account before the warrant of distraint and levy
was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest
that it was, if at all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private
respondent was not pro forma and was based on strong legal considerations.
It thus had the effect of suspending on January 18, 1965, when it was filed,
the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on
April 7, 1965, when the private respondent was definitely informed of the
implied rejection of the said protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was
properly disallowed because it was not an ordinary reasonable or necessary
business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines
and its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed
these promotional fees to be personal holding company income 12 but later
conformed to the decision of the respondent court rejecting this assertion. 13
In fact, as the said court found, the amount was earned through the joint
efforts of the persons among whom it was distributed It has been established
that the Philippine Sugar Estate Development Company had earlier appointed
Algue as its agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked
for the formation of the Vegetable Oil Investment Corporation, inducing other
persons to invest in it. 14 Ultimately, after its incorporation largely through
the promotion of the said persons, this new corporation purchased the PSEDC
properties. 15 For this sale, Algue received as agent a commission of
P126,000.00, and it was from this commission that the P75,000.00

promotional fees were paid to the aforenamed individuals.

There is no dispute that the payees duly reported their respective shares of
the fees in their income tax returns and paid the corresponding taxes
thereon. 17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved.
The petitioner claims that these payments are fictitious because most of the
payees are members of the same family in control of Algue. It is argued that
no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In
short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent
when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus,
testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict business
procedures were not applied and immediate issuance of receipts was not
required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to
make up the total of P75,000.00. 20 Admittedly, everything seemed to be
informal. This arrangement was understandable, however, in view of the
close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees
was not excessive. The total commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was P125,000.00. 21 After
deducting the said fees, Algue still had a balance of P50,000.00 as clear profit
from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable
Oil Investment Corporation to the actual purchase by it of the Sugar Estate
properties. This finding of the respondent court is in accord with the following
provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall
be allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services
actually rendered; ...
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or business may
be included a reasonable allowance for salaries or other compensation for

personal services actually rendered. The test of deductibility in the case of

compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and deductibility in the case of
compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be
further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase
price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on stock. This is likely to occur
in the case of a corporation having few stockholders, Practically all of whom
draw salaries. If in such a case the salaries are in excess of those ordinarily
paid for similar services, and the excessive payment correspond or bear a
close relationship to the stockholdings of the officers of employees, it would
seem likely that the salaries are not paid wholly for services rendered, but the
excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular
employ of Algue nor were they its controlling stockholders.
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present case,
however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary
and reasonable in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of
pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government
for its part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is
a requirement in all democratic regimes that it be exercised reasonably and
in accordance with the prescribed procedure. If it is not, then the taxpayer
has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been
observed.
We hold that the appeal of the private respondent from the decision of the

petitioner was filed on time with the respondent court in accordance with
Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED
in toto, without costs.
SO ORDERED.

G.R. No. 149110

April 9, 2003

NATIONAL POWER CORPORATION, petitioner, vs. CITY OF

CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively,
finding petitioner National Power Corporation (NPC) liable to pay franchise tax
to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under
Commonwealth Act No. 120, as amended.4 It is tasked to undertake the
"development of hydroelectric generations of power and the production of
electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its
mandated duty, petitioner has, among others, the power to construct,
operate and maintain power plants, auxiliary plants, power stations and
substations for the purpose of developing hydraulic power and supplying
such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of
Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.7
Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed
the petitioner a franchise tax amounting to P808,606.41, representing 75% of
1% of the latter's gross receipts for the preceding year.
Petitioner, whose capital stock was subscribed and paid wholly by the
Philippine Government,10 refused to pay the tax assessment. It argued that
the respondent has no authority to impose tax on government entities.
Petitioner also contended that as a non-profit organization, it is exempted
from the payment of all forms of taxes, charges, duties or fees11 in
accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes,
Duties, Fees, Imposts and Other Charges by Government and Governmental
Instrumentalities.- The Corporation shall be non-profit and shall devote all its
return from its capital investment, as well as excess revenues from its
operation, for expansion. To enable the Corporation to pay its indebtedness
and obligations and in furtherance and effective implementation of the policy

enunciated in Section one of this Act, the Corporation is hereby exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and
service fees in any court or administrative proceedings in which it may be a
party, restrictions and duties to the Republic of the Philippines, its provinces,
cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and
wharfage fees on import of foreign goods required for its operations and
projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the
Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used
by the Corporation in the generation, transmission, utilization, and sale of
electric power."
The respondent filed a collection suit in the Regional Trial Court of
Cabanatuan City, demanding that petitioner pay the assessed tax due, plus a
surcharge equivalent to 25% of the amount of tax, and 2% monthly
interest.13 Respondent alleged that petitioner's exemption from local taxes
has been repealed by section 193 of Rep. Act No. 7160,14 which reads as
follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government
owned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It
ruled that the tax exemption privileges granted to petitioner subsist despite
the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No.
6395 is a particular law and it may not be repealed by Rep. Act No. 7160
which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of
an implied repeal which is not favored; and (3) local governments have no
power to tax instrumentalities of the national government. Pertinent portion
of the Order reads:
"The question of whether a particular law has been repealed or not by a
subsequent law is a matter of legislative intent. The lawmakers may
expressly repeal a law by incorporating therein repealing provisions which
expressly and specifically cite(s) the particular law or laws, and portions
thereof, that are intended to be repealed. A declaration in a statute, usually
in its repealing clause, that a particular and specific law, identified by its
number or title is repealed is an express repeal; all others are implied repeal.

Sec. 193 of R.A. No. 7160 is an implied repealing clause because it fails to
identify the act or acts that are intended to be repealed. It is a well-settled
rule of statutory construction that repeals of statutes by implication are not
favored. The presumption is against inconsistency and repugnancy for the
legislative is presumed to know the existing laws on the subject and not to
have enacted inconsistent or conflicting statutes. It is also a well-settled rule
that, generally, general law does not repeal a special law unless it clearly
appears that the legislative has intended by the latter general act to modify
or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160
from which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme
Court in the case of Basco vs. Philippine Amusement and Gaming
Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with
an original charter, PD 1869. All of its shares of stocks are owned by the
National Government. xxx Being an instrumentality of the government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its
operation might be burdened, impeded or subjected to control by mere local
government.'
Like PAGCOR, NPC, being a government owned and controlled corporation
with an original charter and its shares of stocks owned by the National
Government, is beyond the taxing power of the Local Government. Corollary
to this, it should be noted here that in the NPC Charter's declaration of Policy,
Congress declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are
primary objectives of the nations which shall be pursued coordinately and
supported by all instrumentalities and agencies of the government, including
its financial institutions.' (underscoring supplied). To allow plaintiff to subject
defendant to its tax-ordinance would be to impede the avowed goal of this
government instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its
taxing power is limited to that which is provided for in its charter or other
statute. Any grant of taxing power is to be construed strictly, with doubts
resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very
clear that the plaintiff could not impose the subject tax on the defendant."
On appeal, the Court of Appeals reversed the trial court's Order17 on the
ground that section 193, in relation to sections 137 and 151 of the LGC,
expressly withdrew the exemptions granted to the petitioner.18 It ordered the
petitioner to pay the respondent city government the following: (a) the sum
of P808,606.41 representing the franchise tax due based on gross receipts for
the year 1992, (b) the tax due every year thereafter based in the gross

receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax
due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the
Court of Appeal's Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments
reiterated therein that the taxing power of the province under Art. 137 (sic) of
the Local Government Code refers merely to private persons or corporations
in which category it (NPC) does not belong, and that the LGC (RA 7160) which
is a general law may not impliedly repeal the NPC Charter which is a special
lawfinds the answer in Section 193 of the LGC to the effect that 'tax
exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations except local water districts xxx are hereby withdrawn.' The
repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC
NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED
TO CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN
RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR
CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S
EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE
PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A
LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO
HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN
EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL
OVER THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to
issue Ordinance No. 165-92 and impose an annual tax on "businesses
enjoying a franchise," pursuant to section 151 in relation to section 137 of the
LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any
law or other special law, the province may impose a tax on businesses
enjoying a franchise, at a rate not exceeding fifty percent (50%) of one
percent (1%) of the gross annual receipts for the preceding calendar year
based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed onetwentieth (1/20) of one percent (1%) of the capital investment. In the
succeeding calendar year, regardless of when the business started to

operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein." (emphasis
supplied)
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code,
the city, may levy the taxes, fees, and charges which the province or
municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates
allowed for the province or municipality by not more than fifty percent (50%)
except the rates of professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise
tax to the respondent city government. It contends that sections 137 and 151
of the LGC in relation to section 131, limit the taxing power of the respondent
city government to private entities that are engaged in trade or occupation
for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege,
affected with public interest which is conferred upon private persons or
corporations, under such terms and conditions as the government and its
political subdivisions may impose in the interest of the public welfare,
security and safety." From the phraseology of this provision, the petitioner
claims that the word "private" modifies the terms "persons" and
"corporations." Hence, when the LGC uses the term "franchise," petitioner
submits that it should refer specifically to franchises granted to private
natural persons and to private corporations.23 Ergo, its charter should not be
considered a "franchise" for the purpose of imposing the franchise tax in
question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or
commercial activity regularly engaged in as means of livelihood or with a
view to profit." Petitioner claims that it is not engaged in an activity for profit,
in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is
merely incidental to its operation; all these profits are required by law to be
channeled for expansion and improvement of its facilities and services.
Petitioner also alleges that it is an instrumentality of the National
Government,25 and as such, may not be taxed by the respondent city
government. It cites the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation26 where this Court held that local governments have no
power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National
Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter
role is governmental, which places it in the category of an agency or

instrumentality of the Government. Being an instrumentality of the

Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control
by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede,
burden or in any manner control the operation of constitutional laws enacted
by Congress to carry into execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government
over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent
it from consummating its federal responsibilities, or even seriously burden it
from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2, p.
140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as ' a tool regulation' (U.S. v.
Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to
destroy' (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to
wield it."
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the
tax privileges of government-owned or controlled corporations, is in the
nature of an implied repeal. A special law, its charter cannot be amended or
modified impliedly by the local government code which is a general law.
Consequently, petitioner claims that its exemption from all taxes, fees or
charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored and as much as possible, effect must be given to
all enactments of the legislature. Moreover, it has to be conceded that the
charter of the NPC constitutes a special law. Republic Act No. 7160, is a
general law. It is a basic rule in statutory construction that the enactment of a
later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special
statute, the special statute should prevail since it evinces the legislative
intent more clearly than the general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise
of police power, should prevail over the LGC. It alleges that the power of the
local government to impose franchise tax is subordinate to petitioner's

exemption from taxation; "police power being the most pervasive, the least
limitable and most demanding of all powers, including the power of taxation."
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from the very
existence of the state whose social contract with its citizens obliges it to
promote public interest and common good. The theory behind the exercise of
the power to tax emanates from necessity;32 without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of
the people.
In recent years, the increasing social challenges of the times expanded the
scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification
of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges34 pursuant to Article X,
section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its
own sources of revenue, to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees and charges shall accrue
exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can
be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country's highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders."35 The
only way to shatter this culture of dependence is to give the LGUs a wider
role in the delivery of basic services, and confer them sufficient powers to
generate their own sources for the purpose. To achieve this goal, section 3 of
Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy,
set the guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization with effective mechanisms of
recall, initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources, and provide
for the qualifications, election, appointment and removal, term, salaries,
powers and functions and duties of local officials, and all other matters

relating to the organization and operation of the local units."

To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as
the Local Government Code of 1991 (LGC), various measures have been
enacted to promote local autonomy. These include the Barrio Charter of
1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these initiatives,
however, the shackles of dependence on the national government remained.
Local government units were faced with the same problems that hamper their
capabilities to participate effectively in the national development efforts,
among which are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and approve
development projects, (d) heavy dependence on external sources of income,
and (e) limited supervisory control over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local
autonomy,42 the LGC effectively deals with the fiscal constraints faced by
LGUs. It widens the tax base of LGUs to include taxes which were prohibited
by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC
likewise provides enough flexibility to impose tax rates in accordance with
their needs and capabilities. It does not prescribe graduated fixed rates but
merely specifies the minimum and maximum tax rates and leaves the
determination of the actual rates to the respective sanggunian.
One of the most significant provisions of the LGC is the removal of the
blanket exclusion of instrumentalities and agencies of the national
government from the coverage of local taxation. Although as a general rule,
LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an
exception, i.e., when specific provisions of the LGC authorize the LGUs to
impose taxes, fees or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local
Government Units.- Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
x

(o) Taxes, fees, or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units." (emphasis
supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation44 relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco
case was decided prior to the effectivity of the LGC, when no law empowering
the local government units to tax instrumentalities of the National
Government was in effect. However, as this Court ruled in the case of Mactan
Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents
Congress from decreeing that even instrumentalities or agencies of the

government performing governmental functions may be subject to tax.46 In

enacting the LGC, Congress exercised its prerogative to tax instrumentalities
and agencies of government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an instrumentality
of the national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude
that as a general rule, as laid down in section 133, the taxing power of local
governments cannot extend to the levy of inter alia, 'taxes, fees and charges
of any kind on the national government, its agencies and instrumentalities,
and local government units'; however, pursuant to section 232, provinces,
cities and municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, 'real property owned by the Republic of the
Philippines or any of its political subdivisions except when the beneficial use
thereof has been granted for consideration or otherwise, to a taxable person
as provided in the item (a) of the first paragraph of section 12.'"
In the case at bar, section 151 in relation to section 137 of the LGC clearly
authorizes the respondent city government to impose on the petitioner the
franchise tax in question.
In its general signification, a franchise is a privilege conferred by government
authority, which does not belong to citizens of the country generally as a
matter of common right.48 In its specific sense, a franchise may refer to a
general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly
approved articles of incorporation, or a charter pursuant to a special law
creating the corporation.49 The right under a primary or general franchise is
vested in the individuals who compose the corporation and not in the
corporation itself.50 On the other hand, the latter refers to the right or
privileges conferred upon an existing corporation such as the right to use the
streets of a municipality to lay pipes of tracks, erect poles or string wires.51
The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general
power granted to a corporation to dispose of its property, except such special
or secondary franchises as are charged with a public use.
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in
the sense of a secondary or special franchise. This is to avoid any confusion
when the word franchise is used in the context of taxation. As commonly
used, a franchise tax is "a tax on the privilege of transacting business in the
state and exercising corporate franchises granted by the state."53 It is not
levied on the corporation simply for existing as a corporation, upon its
property54 or its income,55 but on its exercise of the rights or privileges
granted to it by the government. Hence, a corporation need not pay franchise
tax from the time it ceased to do business and exercise its franchise.56 It is
within this context that the phrase "tax on businesses enjoying a franchise" in
section 137 of the LGC should be interpreted and understood. Verily, to
determine whether the petitioner is covered by the franchise tax in question,
the following requisites should concur: (1) that petitioner has a "franchise" in
the sense of a secondary or special franchise; and (2) that it is exercising its

rights or privileges under this franchise within the territory of the respondent
city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended
by Rep. Act No. 7395, constitutes petitioner's primary and secondary
franchises. It serves as the petitioner's charter, defining its composition,
capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise,
Commonwealth Act No. 120, as amended, vests the petitioner the following
powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power
in any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall
in the Philippines, for the purposes specified in this Act; to intercept and
divert the flow of waters from lands of riparian owners and from persons
owning or interested in waters which are or may be necessary for said
purposes, upon payment of just compensation therefor; to alter, straighten,
obstruct or increase the flow of water in streams or water channels
intersecting or connecting therewith or contiguous to its works or any part
thereof: Provided, That just compensation shall be paid to any person or
persons whose property is, directly or indirectly, adversely affected or
damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams,
reservoirs, pipes, mains, transmission lines, power stations and substations,
and other works for the purpose of developing hydraulic power from any
river, creek, lake, spring and waterfall in the Philippines and supplying such
power to the inhabitants thereof; to acquire, construct, install, maintain,
operate, and improve gas, oil, or steam engines, and/or other prime movers,
generators and machinery in plants and/or auxiliary plants for the production
of electric power; to establish, develop, operate, maintain and administer
power and lighting systems for the transmission and utilization of its power
generation; to sell electric power in bulk to (1) industrial enterprises, (2) city,
municipal or provincial systems and other government institutions, (3)
electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x
x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber
and otherwise dispose of property incident to, or necessary, convenient or
proper to carry out the purposes for which the Corporation was created:
Provided, That in case a right of way is necessary for its transmission lines,
easement of right of way shall only be sought: Provided, however, That in
case the property itself shall be acquired by purchase, the cost thereof shall
be the fair market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal,
ditch, flume, street, avenue, highway or railway of private and public
ownership, as the location of said works may require xxx;

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

(m) To cooperate with, and to coordinate its operations with those of the
National Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding
the reservoirs of plants and/or projects constructed or proposed to be
constructed by the Corporation. Upon determination by the Corporation of
the areas required for watersheds for a specific project, the Bureau of
Forestry, the Reforestation Administration and the Bureau of Lands shall,
upon written advice by the Corporation, forthwith surrender jurisdiction to the
Corporation of all areas embraced within the watersheds, subject to existing
private rights, the needs of waterworks systems, and the requirements of
domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall
adopt measures to prevent environmental pollution and promote the
conservation, development and maximum utilization of natural resources xxx
"
With these powers, petitioner eventually had the monopoly in the generation
and distribution of electricity. This monopoly was strengthened with the
issuance of Pres. Decree No. 40,59 nationalizing the electric power industry.
Although Exec. Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity
remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the
respondent city government's territorial jurisdiction pursuant to the powers
granted to it by Commonwealth Act No. 120, as amended. From its operations
in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to
be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the
franchise tax simply because its stocks are wholly owned by the National
Government, and its charter characterized it as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is
the corporation which exercises the franchise, and not the individual
stockholders. By virtue of its charter, petitioner was created as a separate
and distinct entity from the National Government. It can sue and be sued
under its own name,61 and can exercise all the powers of a corporation under
the Corporation Code.62

To be sure, the ownership by the National Government of its entire capital

stock does not necessarily imply that petitioner is not engaged in business.
Section 2 of Pres. Decree No. 202963 classifies government-owned or
controlled corporations (GOCCs) into those performing governmental
functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions,
which is directly chartered by special law or if organized under the general
corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the
extent of at least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
Governmental functions are those pertaining to the administration of
government, and as such, are treated as absolute obligation on the part of
the state to perform while proprietary functions are those that are undertaken
only by way of advancing the general interest of society, and are merely
optional on the government.64 Included in the class of GOCCs performing
proprietary functions are "business-like" entities such as the National Steel
Corporation (NSC), the National Development Corporation (NDC), the Social
Security System (SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric
generation of power and the production of electricity from nuclear,
geothermal and other sources, as well as the transmission of electric power
on a nationwide basis."66 Pursuant to this mandate, petitioner generates
power and sells electricity in bulk. Certainly, these activities do not partake of
the sovereign functions of the government. They are purely private and
commercial undertakings, albeit imbued with public interest. The public
interest involved in its activities, however, does not distract from the true
nature of the petitioner as a commercial enterprise, in the same league with
similar public utilities like telephone and telegraph companies, railroad
companies, water supply and irrigation companies, gas, coal or light
companies, power plants, ice plant among others; all of which are declared by
this Court as ministrant or proprietary functions of government aimed at
advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the
character of the petitioner's enterprise as a "business," although it limits
petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or
necessary for the proper transaction of its business or to carry out the
purposes for which it was organized, to contract indebtedness and issue
bonds subject to approval of the President upon recommendation of the
Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably
necessary to carry out the business and purposes for which it was organized,

or which, from time to time, may be declared by the Board to be necessary,

useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases
supplied)
It is worthy to note that all other private franchise holders receiving at least
sixty percent (60%) of its electricity requirement from the petitioner are
likewise imposed the cap of twelve percent (12%) on profits.69 The main
difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for
expansion"70 while other franchise holders have the option to distribute their
profits to its stockholders by declaring dividends. We do not see why this fact
can be a source of difference in tax treatment. In both instances, the taxable
entity is the corporation, which exercises the franchise, and not the individual
stockholders.
We also do not find merit in the petitioner's contention that its tax
exemptions under its charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant.
Exemptions must be shown to exist clearly and categorically, and supported
by clear legal provisions.71 In the case at bar, the petitioner's sole refuge is
section 13 of Rep. Act No. 6395 exempting from, among others, "all income
taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government
agencies and instrumentalities." However, section 193 of the LGC withdrew,
subject to limited exceptions, the sweeping tax privileges previously enjoyed
by private and public corporations. Contrary to the contention of petitioner,
section 193 of the LGC is an express, albeit general, repeal of all statutes
granting tax exemptions from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one
person, thing, act, or consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius.73 Not being a local
water district, a cooperative registered under R.A. No. 6938, or a non-stock
and non-profit hospital or educational institution, petitioner clearly does not
belong to the exception. It is therefore incumbent upon the petitioner to point
to some provisions of the LGC that expressly grant it exemption from local
taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states
that the LGUs can impose franchise tax "notwithstanding any exemption
granted by any law or other special law." This particular provision of the LGC
does not admit any exception. In City Government of San Pablo, Laguna v.

Reyes,74 MERALCO's exemption from the payment of franchise taxes was

brought as an issue before this Court. The same issue was involved in the
subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling
in favor of the local government in both instances, we ruled that the franchise
tax in question is imposable despite any exemption enjoyed by MERALCO
under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and
193 of the LGC to support their position that MERALCO's tax exemption has
been withdrawn. The explicit language of section 137 which authorizes the
province to impose franchise tax 'notwithstanding any exemption granted by
any law or other special law' is all-encompassing and clear. The franchise tax
is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By
stating that unless otherwise provided in this Code, tax exemptions or
incentives granted to or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations except (1)
local water districts, (2) cooperatives duly registered under R.A. 6938, (3)
non-stock and non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the exemptions
to the three enumerated entities. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim
expressio unius est exclusio alterius. In the absence of any provision of the
Code to the contrary, and we find no other provision in point, any existing tax
exemption or incentive enjoyed by MERALCO under existing law was clearly
intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under
the LGC the local government unit may now impose a local tax at a rate not
exceeding 50% of 1% of the gross annual receipts for the preceding calendar
based on the incoming receipts realized within its territorial jurisdiction. The
legislative purpose to withdraw tax privileges enjoyed under existing law or
charter is clearly manifested by the language used on (sic) Sections 137 and
193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to
enumerate all the existing statutes providing for special tax exemptions or
privileges, the LGC provided for an express, albeit general, withdrawal of
such exemptions or privileges. No more unequivocal language could have
been used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs,
through ordinances duly approved, to grant tax exemptions, initiatives or
reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes
an annual franchise tax "notwithstanding any exemption granted by law or
other special law," the respondent city government clearly did not intend to
exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of the local government

units for the delivery of basic services essential to the promotion of the
general welfare and the enhancement of peace, progress, and prosperity of
the people. As this Court observed in the Mactan case, "the original reasons
for the withdrawal of tax exemption privileges granted to government-owned
or controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises."78 With the added burden of
devolution, it is even more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying taxes or other
charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision
and Resolution of the Court of Appeals dated March 12, 2001 and July 10,
2001, respectively, are hereby AFFIRMED.
SO ORDERED.

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs. ROMEO F. EDU in
his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendantsappellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or
regulatory fees?
This question has been brought before this Court in the past. The parties are,
in effect, asking for a re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the
Court of Appeals in a case where the then Court of First Instance of Rizal
dismissed the portion-about complaint for refund of registration fees paid
under protest.
The disputed registration fees were imposed by the appellee, Commissioner
Romeo F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise
known as the Land Transportation and Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the
laws of the Philippines and engaged in the air transportation business under a
legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25).
and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The
pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the
grantee shall pay to the National Government during the life of this franchise
a tax of two per cent of the gross revenue or gross earning derived by the
grantee from its operations under this franchise. Such tax shall be due and
payable quarterly and shall be in lieu of all taxes of any kind, nature or
description, levied, established or collected by any municipal, provincial or
national automobiles, Provided, that if, after the audit of the accounts of the
grantee by the Commissioner of Internal Revenue, a deficiency tax is shown
to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property
in conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series
of 1956) PAL has, since 1956, not been paying motor vehicle registration
fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued
a regulation requiring all tax exempt entities, among them PAL to pay motor
vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's
motor vehicles unless the amounts imposed under Republic Act 4136 were
paid. The appellant thus paid, under protest, the amount of P19,529.75 as
registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May
19,1971, to Commissioner Edu demanding a refund of the amounts paid,
invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was
held that motor vehicle registration fees are in reality taxes from the payment
of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision
in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970)
to the effect that motor vehicle registration fees are regulatory exceptional.
and not revenue measures and, therefore, do not come within the exemption
granted to PAL? under its franchise. Hence, PAL filed the complaint against
Land Transportation Commissioner Romeo F. Edu and National Treasurer
Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it
was docketed as Civil Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI
Carbonell in his capacity as National Treasurer, filed a motion to dismiss
alleging that the complaint states no cause of action. In support of the motion
to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit
Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes,
but regulatory fees imposed as an incident of the exercise of the police power
of the state. They contended that while Act 4271 exempts PAL from the
payment of any tax except two per cent on its gross revenue or earnings, it
does not exempt the plaintiff from paying regulatory fees, such as motor
vehicle registration fees. The resolution of the motion to dismiss was deferred
by the Court until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the
appellant's complaint "moved by the later ruling laid down by the Supreme
Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)."
From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc.
(supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss
the main points of contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court held
"The registration fee which defendant-appellee had to pay was imposed by
Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its
heading speaks of "registration fees." The term is repeated four times in the
body thereof. Equally so, mention is made of the "fee for registration." (Ibid.,
Subsection G) A subsection starts with a categorical statement "No fees shall
be charged." (lbid., Subsection H) The conclusion is difficult to resist therefore
that the Motor Vehicle Act requires the payment not of a tax but of a
registration fee under the police power. Hence the incipient, of the section
relied upon by defendant-appellee under the Back Pay Law, It is not held
liable for a tax but for a registration fee. It therefore cannot make use of a
backpay certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion should
be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the
imposition of additional tax on privately-owned passenger automobiles,
motorcycles and scooters was amended by Republic Act No. 5470 which is
(sic) approved on May 30, 1969.) A special science fund was thereby created
and its title expressly sets forth that a tax on privately-owned passenger
automobiles, motorcycles and scooters was imposed. The rates thereof were
provided for in its Section 3 which clearly specifies the" Philippine
tax."(Cooley to be paid as distinguished from the registration fee under the
Motor Vehicle Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier legislation could by
subdivision the point be susceptible of the interpretation that a tax rather
than a fee was levied. What is thus most apparent is that where the
legislative body relies on its authority to tax it expressly so states, and where
it is enacting a regulatory measure, it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the
Court, on the other hand, held:
The charges prescribed by the Revised Motor Vehicle Law for the registration
of motor vehicles are in section 8 of that law called "fees". But the appellation
is no impediment to their being considered taxes if taxes they really are. For
not the name but the object of the charge determines whether it is a tax or a
fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional. for
purposes of regulation and inspection and are for that reason limited in
amount to what is necessary to cover the cost of the services rendered in
that connection. Hence, a charge fixed by statute for the service to be

person,-When by an officer, where the charge has no relation to the value of

the services performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose officer or
officers collected the chauffeur, is not a fee but a tax."(Cooley on Taxation,
Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that the expenditures
of the Motor Vehicle Office are but a small portionabout 5 per centumof
the total collections from motor vehicle registration fees. And as proof that
the money collected is not intended for the expenditures of that office, the
law itself provides that all such money shall accrue to the funds for the
construction and maintenance of public roads, streets and bridges. It is thus
obvious that the fees are not collected for regulatory purposes, that is to say,
as an incident to the enforcement of regulations governing the operation of
motor vehicles on public highways, for their express object is to provide
revenue with which the Government is to discharge one of its principal
functionsthe construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those
fees as taxes, for it provides that "no other taxes or fees than those
prescribed in this Act shall be imposed," thus implying that the charges
therein imposedthough called feesare of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as amended
by section 17 of Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be
imposed for the registration or operation or on the ownership of any motor
vehicle, or for the exercise of the profession of chauffeur, by any municipal
corporation, the provisions of any city charter to the contrary
notwithstanding: Provided, however, That any provincial board, city or
municipal council or board, or other competent authority may exact and
collect such reasonable and equitable toll fees for the use of such bridges and
ferries, within their respective jurisdiction, as may be authorized and
approved by the Secretary of Public Works and Communications, and also for
the use of such public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public Works and
Communications, but in none of these cases, shall any toll fee." be charged or
collected until and unless the approved schedule of tolls shall have been
posted levied, in a conspicuous place at such toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the
Revised Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth
Act 123 and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as
the Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 6467, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992
and remained unsegregated, by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.Twenty per centum of the money

collected under the provisions of this Act shall accrue to the road and bridge
funds of the different provinces and chartered cities in proportion to the
centum shall during the next previous year and the remaining eighty per
centum shall be deposited in the Philippine Treasury to create a special fund
for the construction and maintenance of national and provincial roads and
bridges. as well as the streets and bridges in the chartered cities to be alloted
by the Secretary of Public Works and Communications for projects
recommended by the Director of Public Works in the different provinces and
chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. CollectedMonies collected under the
provisions of this Act shall be deposited in a special trust account in the
National Treasury to constitute the Highway Special Fund, which shall be
apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount
necessary to maintain and equip the Land Transportation Commission but not
to exceed twenty per cent of the total collection during one year, shall be set
aside for the purpose. (As amended by RA 64-67, approved August 6, 1971).
It appears clear from the above provisions that the legislative intent and
purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of
highways and to a much lesser degree, pay for the operating expenses of the
administering agency. On the other hand, the Philippine Rabbit case mentions
a presumption arising from the use of the term "fees," which appears to have
been favored by the legislature to distinguish fees from other taxes such as
those mentioned in Section 13 of Rep. Act 4136 which reads:
Sec. 13. Payment of taxes upon registration.No original registration of
motor vehicles subject to payment of taxes, customs s duties or other
charges shall be accepted unless proof of payment of the taxes due thereon
has been presented to the Commission.
referring to taxes other than those imposed on the registration, operation or
ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an
instrument of regulation, As stated by a former presiding judge of the Court
of Tax Appeals and writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees are
changes. looked to as a source of revenue as well as a means of regulation
(Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile
license fees. Isabela such case, the fees may properly be regarded as taxes
even though they also serve as an instrument of regulation. If the purpose is
primarily revenue, or if revenue is at least one of the real and substantial
purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax
Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v.
Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are

sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811,
4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on
tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980,
pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power
(Lutz v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax (Umali,
Id.) Such is the case of motor vehicle registration fees. The conclusions
become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the
Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a
regulatory tax as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a "tax or fee." Though nowhere
in Rep. Act 4136 does the law specifically state that the imposition is a tax,
Section 591-593). speaks of "taxes." or fees ... for the registration or
operation or on the ownership of any motor vehicle, or for the exercise of the
profession of chauffeur ..." making the intent to impose a tax more apparent.
Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional"
tax," where the law could have referred to an original tax and not one in
addition to the tax already imposed on the registration, operation, or
ownership of a motor vehicle under Rep. Act 41383. Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in
Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of
other "fees," such as the special permit fees for certain types of motor
vehicles (Sec. 10) and additional fees for change of registration (Sec. 11).
These are not to be understood as taxes because such fees are very minimal
to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the
Code as taxes like the motor vehicle registration fee and chauffers' license
fee. Such fees are to go into the expenditures of the Land Transportation
Commission as provided for in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple
exceptional. intended only for rigidly purposes in the exercise of the State's
police powers. Over the years, however, as vehicular traffic exploded in
number and motor vehicles became absolute necessities without which
modem life as we know it would stand still, Congress found the registration of
vehicles a very convenient way of raising much needed revenues. Without
changing the earlier deputy. of registration payments as "fees," their nature
has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at
present exacted pursuant to the Land Transportation and Traffic Code are
actually taxes intended for additional revenues. of government even if one
fifth or less of the amount collected is set aside for the operating expenses of
the agency administering the program.
May the respondent administrative agency be required to refund the amounts
stated in the complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from
the records as to what payments were made in succeeding years. We have
ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all
earlier tax exemptions Of corporate taxpayers found in legislative franchises
similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al.
(G.R. No. 615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner
Radio Communications of the Philippines, Inc., was subject to both the
franchise tax and income tax. In 1964, however, petitioner's franchise was
amended by Republic Act No. 41-42). to the effect that its franchise tax of
one and one-half percentum (1-1/2%) of all gross receipts was provided as "in
lieu of any and all taxes of any kind, nature, or description levied,
established, or collected by any authority whatsoever, municipal, provincial,
or national from which taxes the grantee is hereby expressly exempted." The
issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was
repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which
reads:
"(d) The provisions of existing special or general laws to the contrary
notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this section. All
corporations, agencies, or instrumentalities owned or controlled by the
government, including the Government Service Insurance System and the
Social Security System but excluding educational institutions, shall pay such
rate of tax upon their taxable net income as are imposed by this section upon
associations or corporations engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly that
the law intended all corporate taxpayers to pay income tax as provided by
the statute. There can be no doubt as to the power of Congress to repeal the
earlier exemption it granted. Article XIV, Section 8 of the 1935 Constitution
and Article XIV, Section 5 of the Constitution as amended in 1973 expressly
provide that no franchise shall be granted to any individual, firm, or
corporation except under the condition that it shall be subject to amendment,
alteration, or repeal by the legislature when the public interest so requires.
There is no question as to the public interest involved. The country needs
increased revenues. The repealing clause is clear and unambiguous. There is
a listing of entities entitled to tax exemption. The petitioner is not covered by
the provision. Considering the foregoing, the Court Resolved to DENY the
petition for lack of merit. The decision of the respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were
correctly imposed because the tax exemption in the franchise of PAL was
repealed during the period. However, an amended franchise was given to PAL
in 1979. Section 13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall
pay to the Philippine Government during the lifetime of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower taxes.)
(a) The basic corporate income tax based on the grantee's annual net taxable
income computed in accordance with the provisions of the Internal Revenue
Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the
grantees from all specific. without distinction as to transport or nontransport
corporations; provided that with respect to international airtransport service,
only the gross passengers, mail, and freight revenues. from its outgoing
flights shall be subject to this law.
The tax paid by the grantee under either of the above alternatives shall be in
lieu of all other taxes, duties, royalties, registration, license and other fees
and charges of any kind, nature or description imposed, levied, established,
assessed, or collected by any municipal, city, provincial, or national authority
or government, agency, now or in the future, including but not limited to the
following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license, acquisition,
and transfer of airtransport equipment, motor vehicles, and all other personal
or real property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259,
April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity
found in the earlier law. PAL is now exempt from the payment of any tax, fee,
or other charge on the registration and licensing of motor vehicles. Such
payments are already included in the basic tax or franchise tax provided in
Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be
exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund
of registration fees paid in 1971 is DENIED. The Land Transportation
Franchising and Regulatory Board (LTFRB) is enjoined functions-the collecting
any tax, fee, or other charge on the registration and licensing of the
petitioner's motor vehicles from April 9, 1979 as provided in Presidential
Decree No. 1590.
SO ORDERED.

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the

deceased Antonio Jayme Ledesma, plaintiff-appellant, vs. J. ANTONIO
ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor

General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to
test the legality of the taxes imposed by Commonwealth Act No. 567,
otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration
of emergency, due to the threat to our industry by the imminent imposition of
export taxes upon sugar as provided in the Tydings-McDuffe Act, and the
"eventual loss of its preferential position in the United States market";
wherefore, the national policy was expressed "to obtain a readjustment of the
benefits derived from the sugar industry by the component elements thereof"
and "to stabilize the sugar industry so as to prepare it for the eventuality of
the loss of its preferential position in the United States market and the
imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing
tax on the manufacture of sugar, on a graduated basis, on each picul of sugar
manufactured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a
consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the
assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in
the Philippine Treasury, to be known as the 'Sugar Adjustment and
Stabilization Fund,' and shall be paid out only for any or all of the following
purposes or to attain any or all of the following objectives, as may be
provided by law.
First, to place the sugar industry in a position to maintain itself, despite the
gradual loss of the preferntial position of the Philippine sugar in the United
States market, and ultimately to insure its continued existence
notwithstanding the loss of that market and the consequent necessity of
meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof the mill, the landowner, the planter of the
sugar cane, and the laborers in the factory and in the field so that all might
continue profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to
the production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve
their living and working conditions: Provided, That the President of the

Philippines may, until the adjourment of the next regular session of the
National Assembly, make the necessary disbursements from the fund herein
created (1) for the establishment and operation of sugar experiment station
or stations and the undertaking of researchers (a) to increase the recoveries
of the centrifugal sugar factories with the view of reducing manufacturing
costs, (b) to produce and propagate higher yielding varieties of sugar cane
more adaptable to different district conditions in the Philippines, (c) to lower
the costs of raising sugar cane, (d) to improve the buying quality of
denatured alcohol from molasses for motor fuel, (e) to determine the
possibility of utilizing the other by-products of the industry, (f) to determine
what crop or crops are suitable for rotation and for the utilization of excess
cane lands, and (g) on other problems the solution of which would help
rehabilitate and stabilize the industry, and (2) for the improvement of living
and working conditions in sugar mills and sugar plantations, authorizing him
to organize the necessary agency or agencies to take charge of the
expenditure and allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise, authorizing the disbursement from
the fund herein created of the necessary amount or amounts needed for
salaries, wages, travelling expenses, equipment, and other sundry expenses
of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate
Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of
Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging
that such tax is unconstitutional and void, being levied for the aid and
support of the sugar industry exclusively, which in plaintiff's opinion is not a
public purpose for which a tax may be constitutioally levied. The action
having been dismissed by the Court of First Instance, the plaintifs appealed
the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing
power. Analysis of the Act, and particularly of section 6 (heretofore quoted in
full), will show that the tax is levied with a regulatory purpose, to provide
means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of
the great industries of our nation, sugar occupying a leading position among
its export products; that it gives employment to thousands of laborers in
fields and factories; that it is a great source of the state's wealth, is one of
the important sources of foreign exchange needed by our government, and is
thus pivotal in the plans of a regime committed to a policy of currency
stability. Its promotion, protection and advancement, therefore redounds
greatly to the general welfare. Hence it was competent for the legislature to
find that the general welfare demanded that the sugar industry should be
stabilized in turn; and in the wide field of its police power, the lawmaking
body could provide that the distribution of benefits therefrom be readjusted
among its components to enable it to resist the added strain of the increase
in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835;

Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs.
Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus
industry in Florida
The protection of a large industry constituting one of the great sources of the
state's wealth and therefore directly or indirectly affecting the welfare of so
great a portion of the population of the State is affected to such an extent by
public interests as to be within the police power of the sovereign. (128 Sp.
857).
Once it is conceded, as it must, that the protection and promotion of the
sugar industry is a matter of public concern, it follows that the Legislature
may determine within reasonable bounds what is necessary for its protection
and expedient for its promotion. Here, the legislative discretion must be
allowed fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law (above quoted)
bear no relation to the objective pursued or are oppressive in character. If
objective and methods are alike constitutionally valid, no reason is seen why
the state may not levy taxes to raise funds for their prosecution and
attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs.
Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L.
Ed. 579).
That the tax to be levied should burden the sugar producers themselves can
hardly be a ground of complaint; indeed, it appears rational that the tax be
obtained precisely from those who are to be benefited from the expenditure
of the funds derived from it. At any rate, it is inherent in the power to tax that
a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequalities which result from a singling out of one particular class
for taxation, or exemption infringe no constitutional limitation" (Carmichael
vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds
raised under the Sugar Stabilization Act, now in question, should be
exclusively spent in aid of the sugar industry, since it is that very enterprise
that is being protected. It may be that other industries are also in need of
similar protection; that the legislature is not required by the Constitution to
adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs.
Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the
evil where it is most felt, it is not to be overthrown because there are other
instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within
its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed.
893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said
that the devotion of tax money to experimental stations to seek increase of

efficiency in sugar production, utilization of by-products and solution of allied

problems, as well as to the improvements of living and working conditions in
sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR
1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So
ordered.

G.R. No. 159647

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CENTRAL
LUZON DRUG Promulgated: CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
DECISION
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is a
tax credit, not merely a tax deduction from the gross income or gross sale of
the establishment concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction, before the tax is
computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend
or revoke the law.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
seeking to set aside the August 29, 2002 Decision[2] and the August 11,
2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 67439. The
assailed Decision reads as follows:
WHEREFORE, premises considered, the Resolution appealed from is
AFFIRMED in toto. No costs.
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
Respondent is a domestic corporation primarily engaged in retailing of
medicines and other pharmaceutical products. In 1996, it operated six (6)
drugstores under the business name and style Mercury Drug.

From January to December 1996, respondent granted twenty (20%) percent

sales discount to qualified senior citizens on their purchases of medicines
pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and
Regulations. For the said period, the amount allegedly representing the 20%
sales discount granted by respondent to qualified senior citizens totaled
P904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable
year 1996 declaring therein that it incurred net losses from its operations.
On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of P904,769.00 allegedly arising from the 20%
sales discount granted by respondent to qualified senior citizens in
compliance with [R.A.] 7432. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or
Tax Court)] via a Petition for Review.
On February 12, 2001, the Tax Court rendered a Decision[5] dismissing
respondents Petition for lack of merit. In said decision, the [CTA] justified its
ruling with the following ratiocination:
x x x, if no tax has been paid to the government, erroneously or illegally, or if
no amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a
claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the
government of the tax sought to be recovered. x x x.
xxxxxxxxx
Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other
words, if there is no tax liability, tax credit is not available.
Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed
resolution,[6] granted respondents motion for reconsideration and ordered
herein petitioner to issue a Tax Credit Certificate in favor of respondent citing
the decision of the then Special Fourth Division of [the CA] in CA G.R. SP No.
60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue promulgated on May 31, 2001, to wit:
However, Sec. 229 clearly does not apply in the instant case because the tax
sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTAs sweeping but unfounded
statement that both tax refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the government. Tax refunds
or credits do not exclusively pertain to illegally collected or erroneously paid
taxes as they may be other circumstances where a refund is warranted. The
tax refund provided under Section 229 deals exclusively with illegally
collected or erroneously paid taxes but there are other possible situations,
such as the refund of excess estimated corporate quarterly income tax paid,
or that of excess input tax paid by a VAT-registered person, or that of excise

tax paid on goods locally produced or manufactured but actually exported.

The standards and mechanics for the grant of a refund or credit under these
situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is
yet another instance of a tax credit and it does not in any way refer to
illegally collected or erroneously paid taxes, x x x.[7]
Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA)
ordering petitioner to issue a tax credit certificate in favor of respondent in
the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA)
7432 required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such credit is
not tantamount to an unintended benefit from the law, but rather a just
compensation for the taking of private property for public use.
Hence this Petition.[8]
The Issues
Petitioner raises the following issues for our consideration:
Whether the Court of Appeals erred in holding that respondent may claim the
20% sales discount as a tax credit instead of as a deduction from gross
income or gross sales.
Whether the Court of Appeals erred in holding that respondent is entitled to a
refund.[9]
These two issues may be summed up in only one: whether respondent,
despite incurring a net loss, may still claim the 20 percent sales discount as a
tax credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining
a 20 percent discount on their purchase of medicine from any private
establishment in the country.[11] The latter may then claim the cost of the
discount as a tax credit.[12] But can such credit be claimed, even though an
establishment operates at a loss?
We answer in the affirmative.
Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax Code,[13] tax credit

generally refers to an amount that is subtracted directly from ones total tax
liability.[14] It is an allowance against the tax itself[15] or a deduction from
what is owed[16] by a taxpayer to the government. Examples of tax credits
are withheld taxes, payments of estimated tax, and investment tax credits.
[17]
Tax credit should be understood in relation to other tax concepts. One of
these is tax deduction -- defined as a subtraction from income for tax
purposes,[18] or an amount that is allowed by law to reduce income prior to
[the] application of the tax rate to compute the amount of tax which is due.
[19] An example of a tax deduction is any of the allowable deductions
enumerated in Section 34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit
reduces the tax due, including -- whenever applicable -- the income tax that
is determined after applying the corresponding tax rates to taxable income.
[21] A tax deduction, on the other, reduces the income that is subject to
tax[22] in order to arrive at taxable income.[23] To think of the former as the
latter is to avoid, if not entirely confuse, the issue. A tax credit is used only
after the tax has been computed; a tax deduction, before.
Tax Liability Required for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to
be a tax liability before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no reason for
deducting the latter when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly, the existence of a tax
credit or its grant by law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which
any tax credit can be applied.[24] For the establishment to choose the
immediate availment of a tax credit will be premature and impracticable.
Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing
ventures, since there is no tax liability that calls for its application. Neither
can it be reduced to nil by the quick yet callow stroke of an administrative
pen, simply because no reduction of taxes can instantly be effected. By its
nature, the tax credit may still be deducted from a future, not a present, tax
liability, without which it does not have any use. In the meantime, it need not
move. But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of

such credit, neither a tax liability nor a prior tax payment is needed. The Tax
Code is in fact replete with provisions granting or allowing tax credits, even
though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax
credit -- subject to certain limitations -- for estate taxes paid to a foreign
country. Also found in Section 101(C) is a similar provision for donors taxes -again when paid to a foreign country -- in computing for the donors tax due.
The tax credits in both instances allude to the prior payment of taxes, even if
not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in
transactions -- whether or not subject to the VAT -- is also allowed a tax credit
that includes a ratable portion of any input tax not directly attributable to
either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from -- not necessarily
paid by -- such VAT-registered person in the course of trade or business; or
the transitional input tax determined in accordance with Section 111(A). The
latter type may in fact be an amount equivalent to only eight percent of the
value of a VAT-registered persons beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the actual VAT
paid on the said items.[25] Clearly from this provision, the tax credit refers to
an input tax that is either due only or given a value by mere comparison with
the VAT actually paid -- then later prorated. No tax is actually paid prior to the
availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely
presumptive is allowed. For the purchase of primary agricultural products
used as inputs -- either in the processing of sardines, mackerel and milk, or in
the manufacture of refined sugar and cooking oil -- and for the contract price
of public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or
effectively zero-rated may, under Section 112(A), apply for the issuance of a
tax credit certificate for the amount of creditable input taxes merely due -again not necessarily paid to -- the government and attributable to such
sales, to the extent that the input taxes have not been applied against output
taxes.[26] Where a taxpayer is engaged in zero-rated or effectively zerorated sales and also in taxable or exempt sales, the amount of creditable
input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the
volume of sales. Indeed, in availing of such tax credit for VAT purposes, this
provision -- as well as the one earlier mentioned -- shows that the prior
payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another
illustration of a tax credit allowed, even though no prior tax payments are not
required. Specifically, in this provision, the imposition of a final withholding
tax rate on cash and/or property dividends received by a nonresident foreign
corporation from a domestic corporation is subjected to the condition that a

foreign tax credit will be given by the domiciliary country in an amount

equivalent to taxes that are merely deemed paid.[27] Although true, this
provision actually refers to the tax credit as a condition only for the
imposition of a lower tax rate, not as a deduction from the corresponding tax
liability. Besides, it is not our government but the domiciliary country that
credits against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically
allows as credits, against the income tax imposable under Title II, the amount
of income taxes merely incurred -- not necessarily paid -- by a domestic
corporation during a taxable year in any foreign country. Moreover, Section
34(C)(5) provides that for such taxes incurred but not paid, a tax credit may
be allowed, subject to the condition precedent that the taxpayer shall simply
give a bond with sureties satisfactory to and approved by petitioner, in such
sum as may be required; and further conditioned upon payment by the
taxpayer of any tax found due, upon petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax
treaties and special laws that grant or allow tax credits, even though no prior
tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid
double taxation, income that is taxed in the state of source is also taxable in
the state of residence, but the tax paid in the former is merely allowed as a
credit against the tax levied in the latter.[29] Apparently, payment is made to
the state of source, not the state of residence. No tax, therefore, has been
previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax
credit incentives. To illustrate, the incentives provided for in Article 48 of
Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)
391, include tax credits equivalent to either five percent of the net value
earned, or five or ten percent of the net local content of exports.[30] In order
to avail of such credits under the said law and still achieve its objectives, no
prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not
indispensable to the availment of a tax credit. Thus, the CA correctly held
that the availment under RA 7432 did not require prior tax payments by
private establishments concerned.[31] However, we do not agree with its
finding[32] that the carry-over of tax credits under the said special law to
succeeding taxable periods, and even their application against internal
revenue taxes, did not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in the
availment or use, not the existence or grant, of a tax credit. Regarding this
matter, a private establishment reporting a net loss in its financial statements
is no different from another that presents a net income. Both are entitled to
the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately

apply such credit, where no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the
amount of discounts they grant.[33] In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures for its
availment.[34] To deny such credit, despite the plain mandate of the law and
the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as
the amount representing the 20 percent discount that shall be deducted by
the said establishments from their gross income for income tax purposes and
from their gross sales for value-added tax or other percentage tax purposes.
[35] In ordinary business language, the tax credit represents the amount of
such discount. However, the manner by which the discount shall be credited
against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from
the gross amount or value of anything.[36] To be more precise, it is in
business parlance a deduction or lowering of an amount of money;[37] or a
reduction from the full amount or value of something, especially a price.[38]
In business there are many kinds of discount, the most common of which is
that affecting the income statement[39] or financial report upon which the
income tax is based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to
credit customers for their prompt payment.[40] It is a reduction in price
offered to the purchaser if payment is made within a shorter period of time
than the maximum time specified.[41] Also referred to as a sales discount on
the part of the seller and a purchase discount on the part of the buyer, it may
be expressed in such terms as 5/10, n/30.
A quantity discount, however, is a reduction in price allowed for purchases
made in large quantities, justified by savings in packaging, shipping, and
handling.[43] It is also called a volume or bulk discount.
A percentage reduction from the list price x x x allowed by manufacturers to
wholesalers and by wholesalers to retailers[45] is known as a trade discount.
No entry for it need be made in the manual or computerized books of
accounts, since the purchase or sale is already valued at the net price
actually charged the buyer.[46] The purpose for the discount is to encourage
trading or increase sales, and the prices at which the purchased goods may
be resold are also suggested.[47] Even a chain discount -- a series of
discounts from one list price -- is recorded at net.
Finally, akin to a trade discount is a functional discount. It is a suppliers price

discount given to a purchaser based on the [latters] role in the [formers]

distribution system.[49] This role usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is
peculiar. Applying generally accepted accounting principles (GAAP) in the
country, this type of discount is reflected in the income statement[50] as a
line item deducted -- along with returns, allowances, rebates and other
similar expenses -- from gross sales to arrive at net sales.[51] This type of
presentation is resorted to, because the accounts receivable and sales figures
that arise from sales discounts, -- as well as from quantity, volume or bulk
discounts -- are recorded in the manual and computerized books of accounts
and reflected in the financial statements at the gross amounts of the
invoices.[52] This manner of recording credit sales -- known as the gross
method -- is most widely used, because it is simple, more convenient to apply
than the net method, and produces no material errors over time.
However, under the net method used in recording trade, chain or functional
discounts, only the net amounts of the invoices -- after the discounts have
been deducted -- are recorded in the books of accounts[54] and reflected in
the financial statements. A separate line item cannot be shown,[55] because
the transactions themselves involving both accounts receivable and sales
have already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one
provision adverts to amounts whose sum -- along with sales returns,
allowances and cost of goods sold[56] -- is deducted from gross sales to come
up with the gross income, profit or margin[57] derived from business.[58] In
another provision therein, sales discounts that are granted and indicated in
the invoices at the time of sale -- and that do not depend upon the happening
of any future event -- may be excluded from the gross sales within the same
quarter they were given.[59] While determinative only of the VAT, the latter
provision also appears as a suitable reference point for income tax purposes
already embraced in the former. After all, these two provisions affirm that
sales discounts are amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private
establishments outright deduction of the discount from the invoice price of
the medicine sold to the senior citizen.[60] It is, therefore, expected that for
each retail sale made under this law, the discount period lasts no more than a
day, because such discount is given -- and the net amount thereof collected -immediately upon perfection of the sale.[61] Although prompt payment is
made for an arms-length transaction by the senior citizen, the real and
compelling reason for the private establishment giving the discount is that
the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a
sales discount or any of the above discounts in particular. Prompt payment is
not the reason for (although a necessary consequence of) such grant. To be

sure, the privilege enjoyed by the senior citizen must be equivalent to the tax
credit benefit enjoyed by the private establishment granting the discount.
Yet, under the revenue regulations promulgated by our tax authorities, this
benefit has been erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as
that resulting from a sales discount. However, to a private establishment, the
effect is different from a simple reduction in price that results from such
discount. In other words, the tax credit benefit is not the same as a sales
discount. To repeat from our earlier discourse, this benefit cannot and should
not be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income
tax return of an establishment covered by RA 7432 is different from that
resulting from the availment or use of its tax credit benefit. While the former
is a deduction before, the latter is a deduction after, the income tax is
computed. As mentioned earlier, a discount is not necessarily a sales
discount, and a tax credit for a simple discount privilege should not be
automatically treated like a sales discount. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to
distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as
the 20 percent discount deductible from gross income for income tax
purposes, or from gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount. This
contrived definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross income in the
income statement and cannot be deducted again, even for purposes of
computing the income tax.
When the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount -- when claimed -- shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of the
tax credit benefit depends upon the existence of a tax liability, but to limit
the benefit to a sales discount -- which is not even identical to the discount
privilege that is granted by law -- does not define it at all and serves no
useful purpose. The definition must, therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a
regulation that operates to create a rule out of harmony with the statute is a
mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the contemporaneous
construction placed upon a statute by the executive officers whose duty it is
to enforce it x x x.[63] In the scheme of judicial tax administration, the need
for certainty and predictability in the implementation of tax laws is crucial.
[64] Our tax authorities fill in the details that Congress may not have the
opportunity or competence to provide.[65] The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be followed

by the courts.[66] Courts, however, will not uphold these authorities

interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax credit in
Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432
provides. Their interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or restrict the
provisions of the law it administers; it cannot engraft additional requirements
not contemplated by the legislature.
In case of conflict, the law must prevail.[68] A regulation adopted pursuant to
law is law.[69] Conversely, a regulation or any portion thereof not adopted
pursuant to law is no law and has neither the force nor the effect of law.
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor mandatory.[72]
There is no absolute right conferred upon respondent, or any similar
taxpayer, to avail itself of the tax credit remedy whenever it chooses; neither
does it impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the
taxpayer.[73] For the tax authorities to compel respondent to deduct the 20
percent discount from either its gross income or its gross sales[74] is,
therefore, not only to make an imposition without basis in law, but also to
blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely
permissive, not imperative. Respondent is given two options -- either to claim
or not to claim the cost of the discounts as a tax credit. In fact, it may even
ignore the credit and simply consider the gesture as an act of beneficence, an
expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax
credit, then the tax credit can easily be applied. If there is none, the credit
cannot be used and will just have to be carried over and revalidated[75]
accordingly. If, however, the business continues to operate at a loss and no
other taxes are due, thus compelling it to close shop, the credit can never be
applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines
whether the cost of the discounts can be used as a tax credit. RA 7432 does
not give respondent the unfettered right to avail itself of the credit whenever
it pleases. Neither does it allow our tax administrators to expand or contract
the legislative mandate. The plain meaning rule or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation.

Tax Credit Benefit

Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its
power of eminent domain. Be it stressed that the privilege enjoyed by senior
citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to
these establishments can be deemed as their just compensation for private
property taken by the State for public use.
The concept of public use is no longer confined to the traditional notion of use
by the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience.[78] The discount privilege to which our
senior citizens are entitled is actually a benefit enjoyed by the general public
to which these citizens belong. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments
concerned, were it not for RA 7432. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of private property
for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done
within a reasonable time from the grant of the discounts -- cannot be
considered as just compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while awaiting
actual receipt, through the certificate, of the equivalent amount it needs to
cope with the reduction in its revenues.
Besides, the taxation power can also be used as an implement for the
exercise of the power of eminent domain.[80] Tax measures are but enforced
contributions exacted on pain of penal sanctions[81] and clearly imposed for
a public purpose.[82] In recent years, the power to tax has indeed become a
most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.
While it is a declared commitment under Section 1 of RA 7432, social justice
cannot be invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a
person and give them to another who is not entitled thereto.[84] For this
reason, a just compensation for income that is taken away from respondent
becomes necessary. It is in the tax credit that our legislators find support to
realize social justice, and no administrative body can alter that fact.
To put it differently, a private establishment that merely breaks even[85] -without the discounts yet -- will surely start to incur losses because of such
discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside from

the observation we have already raised earlier, it will also be grossly unfair to
an establishment if the discounts will be treated merely as deductions from
either its gross income or its gross sales. Operating at a loss through no fault
of its own, it will realize that the tax credit limitation under RR 2-94 is inutile,
if not improper. Worse, profit-generating businesses will be put in a better
position if they avail themselves of tax credits denied those that are losing,
because no taxes are due from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are
assisted by the community as a whole and to establish a program beneficial
to them.[86] These objectives are consonant with the constitutional policy of
making health x x x services available to all the people at affordable cost[87]
and of giving priority for the needs of the x x x elderly.[88] Sections 2.i and 4
of RR 2-94, however, contradict these constitutional policies and statutory
objectives.
Furthermore, Congress has allowed all private establishments a simple tax
credit, not a deduction. In fact, no cash outlay is required from the
government for the availment or use of such credit. The deliberations on
February 5, 1992 of the Bicameral Conference Committee Meeting on Social
Justice, which finalized RA 7432, disclose the true intent of our legislators to
treat the sales discounts as a tax credit, rather than as a deduction from
gross income. We quote from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions
from taxable income. I think we incorporated there a provision na - on the
responsibility of the private hospitals and drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision
here about the deductions from taxable income of that private hospitals, di
ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting
government and public institutions, so, puwede na po nating hindi isama
yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals.
Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15%
discount, provided that, the private hospitals can claim the expense as a tax
credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of
(inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng
establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung
ganon. Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
discount from all establishments et cetera, et cetera, provided that said
establishments - provided that private establishments may claim the cost as
a tax credit. Ganon ba 'yon?
REP. AQUINO. Yah
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".
Special Law
Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code
-- a general law. x x x [T]he rule is that on a specific matter the special law
shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former.[90] In addition,
[w]here there are two statutes, the earlier special and the later general -- the
terms of the general broad enough to include the matter provided for in the

special -- the fact that one is special and the other is general creates a
presumption that the special is to be considered as remaining an exception to
the general,[91] one as a general law of the land, the other as the law of a
particular case.[92] It is a canon of statutory construction that a later statute,
general in its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute.
RA 7432 is an earlier law not expressly repealed by, and therefore remains an
exception to, the Tax Code -- a later law. When the former states that a tax
credit may be claimed, then the requirement of prior tax payments under
certain provisions of the latter, as discussed above, cannot be made to apply.
Neither can the instances of or references to a tax deduction under the Tax
Code[94] be made to restrict RA 7432. No provision of any revenue regulation
can supplant or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and
Resolution of the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.

G.R. No. 193007

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners, Present: versus - PERALTA, BERSAMIN,*DEL CASTILLO,ABAD,VILLARAMA,
JR.PEREZ,MENDOZA, andSERENO,** JJ. THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated: INTERNAL REVENUE,
Respondents. July 19, 2011
x ---------------------------------------------------------------------------------------- x
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief[1] assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR)
on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they
have an interest as regular users of tollways in stopping the BIR action.
Additionally, Diaz claims that he sponsored the approval of Republic Act 7716
(the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997
National Internal Revenue Code or the NIRC) at the House of Representatives.
Timbol, on the other hand, claims that she served as Assistant Secretary of

the Department of Trade and Industry and consultant of the Toll Regulatory
Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition
was deferred, however, in view of the consistent opposition of Diaz and other
sectors to such move. But, upon President Benigno C. Aquino IIIs assumption
of office in 2010, the BIR revived the idea and would impose the challenged
tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of sale of services that are
subject to VAT; that a toll fee is a users tax, not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution.
The government also argues that petitioners have no right to invoke the nonimpairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and
tollway operators. At any rate, the non-impairment clause cannot limit the
States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the
parametric formula for computing toll rates cannot exempt tollway operators
from VAT. In any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the VAT since this
is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.
In their reply[6] to the governments comment, petitioners point out that
tollway operators cannot be regarded as franchise grantees under the NIRC
since they do not hold legislative franchises. Further, the BIR intends to
collect the VAT by rounding off the toll rate and putting any excess collection
in an escrow account. But this would be illegal since only the Congress can
modify VAT rates and authorize its disbursement. Finally, BIR Revenue
Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll
companies to record an accumulated input VAT of zero balance in their books
as of August 16, 2010, contravenes Section 111 of the NIRC which grants
entities that first become liable to VAT a transitional input tax credit of 2% on
beginning inventory. For this reason, the VAT on toll fees cannot be
implemented.
The Issues Presented
1. Whether or not the Court may treat the petition for declaratory relief as
one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the
action.
The case also presents two substantive issues:

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

including tollway operators and tollway operations in the terms franchise
grantees and sale of services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a
tax on tax and not a tax on services; b) will impair the tollway operators right
to a reasonable return of investment under their TOAs; and c) is not
administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one
for prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought
reconsideration of the Courts resolution,[7] however, arguing that petitioners
allegations clearly made out a case for declaratory relief, an action over
which the Court has no original jurisdiction. The government adds, moreover,
that the petition does not meet the requirements of Rule 65 for actions for
prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial
functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary course
of law against the BIR action in the form of an appeal to the Secretary of
Finance.
But there are precedents for treating a petition for declaratory relief as one
for prohibition if the case has far-reaching implications and raises questions
that need to be resolved for the public good.[8] The Court has also held that
a petition for prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative authority.[9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists
who use the tollways everyday, but more so on the governments effort to
raise revenue for funding various projects and for reducing budgetary
deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT
has been imposed, could cause more mischief both to the tax-paying public
and the government. A belated declaration of nullity of the BIR action would
make any attempt to refund to the motorists what they paid an
administrative nightmare with no solution. Consequently, it is not only the
right, but the duty of the Court to take cognizance of and resolve the issues
that the petition raises.
Although the petition does not strictly comply with the requirements of Rule
65, the Court has ample power to waive such technical requirements when
the legal questions to be resolved are of great importance to the public. The
same may be said of the requirement of locus standi which is a mere
procedural requisite.

B. On the Substantive Issues:

One. The relevant law in this case is Section 108 of the NIRC, as amended.
VAT is levied, assessed, and collected, according to Section 108, on the gross
receipts derived from the sale or exchange of services as well as from the use
or lease of properties. The third paragraph of Section 108 defines sale or
exchange of services as follows:
The phrase sale or exchange of services means the performance of all kinds
of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of
electric utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of this Code
and non-life insurance companies (except their crop insurances), including
surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of services
rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive.[11] By qualifying services
with the words all kinds, Congress has given the term services an allencompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as
a form of service rendered for a fee should be deemed included unless some
provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.)
1112 or the Toll Operation Decree establishes the legal basis for the services
that tollway operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads. Traffic in the
regular public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways until such

operators could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect
for the latters use of the tollway facilities over which the operator enjoys
private proprietary rights[12] that its contract and the law recognize. In this
sense, the tollway operator is no different from the following service
providers under Section 108 who allow others to use their properties or
facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds of
services rendered for a fee regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of
human knowledge and skills.
And not only do tollway operators come under the broad term all kinds of
services, they also come under the specific class described in Section 108 as
all other franchise grantees who are subject to VAT, except those under
Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting companies
with gross annual incomes of less than P10 million and gas and water
utilities) that Section 119[13] spares from the payment of VAT. The word
franchise broadly covers government grants of a special right to do an act or
series of acts of public concern.[14]
Petitioners of course contend that tollway operators cannot be considered
franchise grantees under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the franchise grantees it
speaks of are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a distinction between

franchises granted by Congress and franchises granted by some other

government agency. The latter, properly constituted, may grant franchises.
Indeed, franchises conferred or granted by local authorities, as agents of the
state, constitute as much a legislative franchise as though the grant had
been made by Congress itself.[15] The term franchise has been broadly
construed as referring, not only to authorizations that Congress directly
issues in the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has been
delegated by Congress.[16]
Tollway operators are, owing to the nature and object of their business,
franchise grantees. The construction, operation, and maintenance of toll
facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway concessionaire
for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its
delegated powers under P.D. 1112.[17] The franchise in this case is
evidenced by a Toll Operation Certificate.
Petitioners contend that the public nature of the services rendered by tollway
operators excludes such services from the term sale of services under Section
108 of the Code. But, again, nothing in Section 108 supports this contention.
The reverse is true. In specifically including by way of example electric
utilities, telephone, telegraph, and broadcasting companies in its list of VATcovered businesses, Section 108 opens other companies rendering public
service for a fee to the imposition of VAT. Businesses of a public nature such
as public utilities and the collection of tolls or charges for its use or service is
a franchise.
Nor can petitioners cite as binding on the Court statements made by certain
lawmakers in the course of congressional deliberations of the would-be law.
As the Court said in South African Airways v. Commissioner of Internal
Revenue,[20] statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and
are, consequently, not controlling in the interpretation of law. The
congressional will is ultimately determined by the language of the law that
the lawmakers voted on. Consequently, the meaning and intention of the law
must first be sought in the words of the statute itself, read and considered in
their natural, ordinary, commonly accepted and most obvious significations,
according to good and approved usage and without resorting to forced or
subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll
fees is tantamount to taxing a tax.[21] Actually, petitioners base this
argument on the following discussion in Manila International Airport Authority
(MIAA) v. Court of Appeals:
No one can dispute that properties of public dominion mentioned in Article
420 of the Civil Code, like roads, canals, rivers, torrents, ports and bridges

constructed by the State, are owned by the State. The term ports includes
seaports and airports. The MIAA Airport Lands and Buildings constitute a port
constructed by the State. Under Article 420 of the Civil Code, the MIAA
Airport Lands and Buildings are properties of public dominion and thus owned
by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the
character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they
pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system
is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the
property whether it is for public dominion or not. Article 420 of the Civil Code
defines property of public dominion as one intended for public use. Even if
the government collects toll fees, the road is still intended for public use if
anyone can use the road under the same terms and conditions as the rest of
the public. The charging of fees, the limitation on the kind of vehicles that
can use the road, the speed restrictions and other conditions for the use of
the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees
MIAA charges to airlines, constitute the bulk of the income that maintains the
operations of MIAA. The collection of such fees does not change the character
of MIAA as an airport for public use. Such fees are often termed users tax.
This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular
public facility. A users tax is more equitable a principle of taxation mandated
in the 1987 Constitution.[23] (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to
a users tax must also pertain to tollway fees. But the main issue in the MIAA
case was whether or not Paraaque City could sell airport lands and buildings
under MIAA administration at public auction to satisfy unpaid real estate
taxes. Since local governments have no power to tax the national
government, the Court held that the City could not proceed with the auction
sale. MIAA forms part of the national government although not integrated in
the department framework.[24] Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man under Article
420(1)[25] of the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are users tax, but to make
the point that airport lands and buildings are properties of public dominion
and that the collection of terminal fees for their use does not make them
private properties. Tollway fees are not taxes. Indeed, they are not assessed
and collected by the BIR and do not go to the general coffers of the
government.

It would of course be another matter if Congress enacts a law imposing a

users tax, collectible from motorists, for the construction and maintenance of
certain roadways. The tax in such a case goes directly to the government for
the replenishment of resources it spends for the roadways. This is not the
case here. What the government seeks to tax here are fees collected from
tollways that are constructed, maintained, and operated by private tollway
operators at their own expense under the build, operate, and transfer scheme
that the government has adopted for expressways.[26] Except for a fraction
given to the government, the toll fees essentially end up as earnings of the
tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures.[27] Toll fees, on the other hand, are collected by private
tollway operators as reimbursement for the costs and expenses incurred in
the construction, maintenance and operation of the tollways, as well as to
assure them a reasonable margin of income. Although toll fees are charged
for the use of public facilities, therefore, they are not government exactions
that can be properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be demanded by
either the government or private individuals or entities, as an attribute of
ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due
to the nature of VAT as an indirect tax. In indirect taxation, a distinction is
made between the liability for the tax and burden of the tax. The seller who is
liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not
the sellers liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT, but
the buyer bears its burden since the amount of VAT paid by the former is
added to the selling price. Once shifted, the VAT ceases to be a tax[30] and
simply becomes part of the cost that the buyer must pay in order to purchase
the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway
user, but on the tollway operator. Under Section 105 of the Code, [31] VAT is
imposed on any person who, in the course of trade or business, sells or
renders services for a fee. In other words, the seller of services, who in this
case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll
fees were deemed as a users tax. VAT is assessed against the tollway
operators gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not make
the latter directly liable for the VAT. The shifted VAT burden simply becomes
part of the toll fees that one has to pay in order to use the tollways.[32]

Three. Petitioner Timbol has no personality to invoke the non-impairment of

contract clause on behalf of private investors in the tollway projects. She will
neither be prejudiced by nor be affected by the alleged diminution in return
of investments that may result from the VAT imposition. She has no interest
at all in the profits to be earned under the TOAs. The interest in and right to
recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion that a stipulation in the
TOAs known as the Material Adverse Grantor Action will be activated if VAT is
thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign
taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for
claiming input VAT make the VAT on tollway operations impractical and
incapable of implementation. They cite the fact that, in order to claim input
VAT, the name, address and tax identification number of the tollway user
must be indicated in the VAT receipt or invoice. The manner by which the BIR
intends to implement the VAT by rounding off the toll rate and putting any
excess collection in an escrow account is also illegal, while the alternative of
giving change to thousands of motorists in order to meet the exact toll rate
would be a logistical nightmare. Thus, according to them, the VAT on tollway
operations is not administratively feasible.[33]
Administrative feasibility is one of the canons of a sound tax system. It simply
means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer. Nonobservance of the canon, however, will not render a tax imposition invalid
except to the extent that specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on tollway operations may
seem burdensome to implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement
the VAT on tollway operations. Any declaration by the Court that the manner
of its implementation is illegal or unconstitutional would be premature.
Although the transcript of the August 12, 2010 Senate hearing provides some
clue as to how the BIR intends to go about it,[35] the facts pertaining to the
matter are not sufficiently established for the Court to pass judgment on.
Besides, any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot
preempt the BIRs discretion on the matter, absent any clear violation of law
or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR
RMC 63-2010 which directs toll companies to record an accumulated input
VAT of zero balance in their books as of August 16, 2010, the date when the
VAT imposition was supposed to take effect. The issuance allegedly violates

Section 111(A)[36] of the Code which grants first time VAT payers a
transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed VAT
as early as 2005, but failed to charge VAT-inclusive toll fees which by now can
no longer be collected. The tollway operators agreed to waive the 2%
transitional input VAT, in exchange for cancellation of their past due VAT
liabilities. Notably, the right to claim the 2% transitional input VAT belongs to
the tollway operators who have not questioned the circulars validity. They are
thus the ones who have a right to challenge the circular in a direct and proper
action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT laws coverage when she sought to impose VAT
on tollway operations. Section 108(A) of the Code clearly states that services
of all other franchise grantees are subject to VAT, except as may be provided
under Section 119 of the Code. Tollway operators are not among the
franchise grantees subject to franchise tax under the latter provision. Neither
are their services among the VAT-exempt transactions under Section 109 of
the Code.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law to
clearly say so. Tax exemptions must be justified by clear statutory grant and
based on language in the law too plain to be mistaken.[37] But as the law is
written, no such exemption obtains for tollway operators. The Court is thus
duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is
within the exclusive prerogative of Congress. The Courts role is to merely
uphold this legislative policy, as reflected first and foremost in the language
of the tax statute. Thus, any unwarranted burden that may be perceived to
result from enforcing such policy must be properly referred to Congress. The
Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994
when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only
now, however, that the executive has earnestly pursued the VAT imposition
against tollway operators. The executive exercises exclusive discretion in
matters pertaining to the implementation and execution of tax laws.
Consequently, the executive is more properly suited to deal with the
immediate and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenues motion for reconsideration of its August
24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma.
F. Timbols petition for lack of merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.

SO ORDERED.

G.R. No. L-75697 June 18, 1987

VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner, vs. VIDEOGRAM REGULATORY BOARD,
MINISTER OF FINANCE, METRO MANILA COMMISSION, CITY MAYOR
and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.
The City Legal Officer for respondents City Mayor and City Treasurer.
MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf
and purportedly on behalf of other videogram operators adversely affected. It
assails the constitutionality of Presidential Decree No. 1987 entitled "An Act
Creating the Videogram Regulatory Board" with broad powers to regulate and
supervise the videogram industry (hereinafter briefly referred to as the
BOARD). The Decree was promulgated on October 5, 1985 and took effect on
April 10, 1986, fifteen (15) days after completion of its publication in the
Official Gazette.
On November 5, 1985, a month after the promulgation of the
abovementioned decree, Presidential Decree No. 1994 amended the National
Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each processed videotape cassette, ready for playback, regardless of length, an annual tax of five
pesos; Provided, That locally manufactured or imported blank video tapes
shall be subject to sales tax.
On October 23, 1986, the Greater Manila Theaters Association, Integrated
Movie Producers, Importers and Distributors Association of the Philippines,
and Philippine Motion Pictures Producers Association, hereinafter collectively
referred to as the Intervenors, were permitted by the Court to intervene in
the case, over petitioner's opposition, upon the allegations that intervention
was necessary for the complete protection of their rights and that their
"survival and very existence is threatened by the unregulated proliferation of
film piracy." The Intervenors were thereafter allowed to file their Comment in
Intervention.
The rationale behind the enactment of the DECREE, is set out in its
preambular clauses as follows:
1. WHEREAS, the proliferation and unregulated circulation of videograms
including, among others, videotapes, discs, cassettes or any technical
improvement or variation thereof, have greatly prejudiced the operations of
moviehouses and theaters, and have caused a sharp decline in theatrical
attendance by at least forty percent (40%) and a tremendous drop in the

collection of sales, contractor's specific, amusement and other taxes, thereby

resulting in substantial losses estimated at P450 Million annually in
government revenues;
2. WHEREAS, videogram(s) establishments collectively earn around P600
Million per annum from rentals, sales and disposition of videograms, and such
earnings have not been subjected to tax, thereby depriving the Government
of approximately P180 Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram establishments have
also affected the viability of the movie industry, particularly the more than
1,200 movie houses and theaters throughout the country, and occasioned
industry-wide displacement and unemployment due to the shutdown of
numerous moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is imperative
for the Government to create an environment conducive to growth and
development of all business industries, including the movie industry which
has an accumulated investment of about P3 Billion;
5. WHEREAS, proper taxation of the activities of videogram establishments
will not only alleviate the dire financial condition of the movie industry upon
which more than 75,000 families and 500,000 workers depend for their
livelihood, but also provide an additional source of revenue for the
Government, and at the same time rationalize the heretofore uncontrolled
distribution of videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram
features constitutes a clear and present danger to the moral and spiritual
well-being of the youth, and impairs the mandate of the Constitution for the
State to support the rearing of the youth for civic efficiency and the
development of moral character and promote their physical, intellectual, and
social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial
measures to curb these blatant malpractices which have flaunted our
censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral
values of the people and betraying the national economic recovery program,
bold emergency measures must be adopted with dispatch; ... (Numbering of
paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the
following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross receipts
payable to the local government is a RIDER and the same is not germane to
the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful
restraint of trade in violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the
vast powers conferred upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance,
which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one
subject which shall be expressed in the title thereof" 1 is sufficiently complied
with if the title be comprehensive enough to include the general purpose
which a statute seeks to achieve. It is not necessary that the title express
each and every end that the statute wishes to accomplish. The requirement is
satisfied if all the parts of the statute are related, and are germane to the
subject matter expressed in the title, or as long as they are not inconsistent
with or foreign to the general subject and title. 2 An act having a single
general subject, indicated in the title, may contain any number of provisions,
no matter how diverse they may be, so long as they are not inconsistent with
or foreign to the general subject, and may be considered in furtherance of
such subject by providing for the method and means of carrying out the
general object." 3 The rule also is that the constitutional requirement as to
the title of a bill should not be so narrowly construed as to cripple or impede
the power of legislation. 4 It should be given practical rather than technical
construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision
of the DECREE is a rider is without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms.
Notwithstanding any provision of law to the contrary, the province shall
collect a tax of thirty percent (30%) of the purchase price or rental rate, as
the case may be, for every sale, lease or disposition of a videogram
containing a reproduction of any motion picture or audiovisual program. Fifty
percent (50%) of the proceeds of the tax collected shall accrue to the
province, and the other fifty percent (50%) shall acrrue to the municipality
where the tax is collected; PROVIDED, That in Metropolitan Manila, the tax
shall be shared equally by the City/Municipality and the Metropolitan Manila
Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably necessary
for the accomplishment of, the general object of the DECREE, which is the
regulation of the video industry through the Videogram Regulatory Board as
expressed in its title. The tax provision is not inconsistent with, nor foreign to
that general subject and title. As a tool for regulation 6 it is simply one of the
regulatory and control mechanisms scattered throughout the DECREE. The
express purpose of the DECREE to include taxation of the video industry in

order to regulate and rationalize the heretofore uncontrolled distribution of

videograms is evident from Preambles 2 and 5, supra. Those preambles
explain the motives of the lawmaker in presenting the measure. The title of
the DECREE, which is the creation of the Videogram Regulatory Board, is
comprehensive enough to include the purposes expressed in its Preamble
and reasonably covers all its provisions. It is unnecessary to express all those
objectives in the title or that the latter be an index to the body of the
DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh
and oppressive, confiscatory, and in restraint of trade. However, it is beyond
serious question that a tax does not cease to be valid merely because it
regulates, discourages, or even definitely deters the activities taxed. 8 The
power to impose taxes is one so unlimited in force and so searching in extent,
that the courts scarcely venture to declare that it is subject to any restrictions
whatever, except such as rest in the discretion of the authority which
exercises it. 9 In imposing a tax, the legislature acts upon its constituents.
This is, in general, a sufficient security against erroneous and oppressive
taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue
measure prompted by the realization that earnings of videogram
establishments of around P600 million per annum have not been subjected to
tax, thereby depriving the Government of an additional source of revenue. It
is an end-user tax, imposed on retailers for every videogram they make
available for public viewing. It is similar to the 30% amusement tax imposed
or borne by the movie industry which the theater-owners pay to the
government, but which is passed on to the entire cost of the admission ticket,
thus shifting the tax burden on the buying or the viewing public. It is a tax
that is imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to
answer the need for regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual property rights, and
the proliferation of pornographic video tapes. And while it was also an
objective of the DECREE to protect the movie industry, the tax remains a
valid imposition.
The public purpose of a tax may legally exist even if the motive which
impelled the legislature to impose the tax was to favor one industry over
another. 11
It is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequities which result from a
singling out of one particular class for taxation or exemption infringe no
constitutional limitation". 12 Taxation has been made the implement of the
state's police power. 13
At bottom, the rate of tax is a matter better addressed to the taxing
legislature.
3. Petitioner argues that there was no legal nor factual basis for the

promulgation of the DECREE by the former President under Amendment No. 6

of the 1973 Constitution providing that "whenever in the judgment of the
President ... , there exists a grave emergency or a threat or imminence
thereof, or whenever the interim Batasang Pambansa or the regular National
Assembly fails or is unable to act adequately on any matter for any reason
that in his judgment requires immediate action, he may, in order to meet the
exigency, issue the necessary decrees, orders, or letters of instructions,
which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the
8th "whereas" clause sufficiently summarizes the justification in that grave
emergencies corroding the moral values of the people and betraying the
national economic recovery program necessitated bold emergency measures
to be adopted with dispatch. Whatever the reasons "in the judgment" of the
then President, considering that the issue of the validity of the exercise of
legislative power under the said Amendment still pends resolution in several
other cases, we reserve resolution of the question raised at the proper time.
4. Neither can it be successfully argued that the DECREE contains an undue
delegation of legislative power. The grant in Section 11 of the DECREE of
authority to the BOARD to "solicit the direct assistance of other agencies and
units of the government and deputize, for a fixed and limited period, the
heads or personnel of such agencies and units to perform enforcement
functions for the Board" is not a delegation of the power to legislate but
merely a conferment of authority or discretion as to its execution,
enforcement, and implementation. "The true distinction is between the
delegation of power to make the law, which necessarily involves a discretion
as to what it shall be, and conferring authority or discretion as to its
execution to be exercised under and in pursuance of the law. The first cannot
be done; to the latter, no valid objection can be made." 14 Besides, in the
very language of the decree, the authority of the BOARD to solicit such
assistance is for a "fixed and limited period" with the deputized agencies
concerned being "subject to the direction and control of the BOARD." That the
grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the
aggrieved parties will not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto
law is, among other categories, one which "alters the legal rules of evidence,
and authorizes conviction upon less or different testimony than the law
required at the time of the commission of the offense." It is petitioner's
position that Section 15 of the DECREE in providing that:
All videogram establishments in the Philippines are hereby given a period of
forty-five (45) days after the effectivity of this Decree within which to register
with and secure a permit from the BOARD to engage in the videogram
business and to register with the BOARD all their inventories of videograms,
including videotapes, discs, cassettes or other technical improvements or
variations thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any person engaged
in the videogram business without the required proof of registration by the

BOARD, shall be prima facie evidence of violation of the Decree, whether the
possession of such videogram be for private showing and/or public exhibition.
raises immediately a prima facie evidence of violation of the DECREE when
the required proof of registration of any videogram cannot be presented and
thus partakes of the nature of an ex post facto law.
The argument is untenable. As this Court held in the recent case of Vallarta
vs. Court of Appeals, et al.
... it is now well settled that "there is no constitutional objection to the
passage of a law providing that the presumption of innocence may be
overcome by a contrary presumption founded upon the experience of human
conduct, and enacting what evidence shall be sufficient to overcome such
presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59,
citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639641). And the "legislature may enact that when certain facts have been
proved that they shall be prima facie evidence of the existence of the guilt of
the accused and shift the burden of proof provided there be a rational
connection between the facts proved and the ultimate facts presumed so that
the inference of the one from proof of the others is not unreasonable and
arbitrary because of lack of connection between the two in common
experience".
Applied to the challenged provision, there is no question that there is a
rational connection between the fact proved, which is non-registration, and
the ultimate fact presumed which is violation of the DECREE, besides the fact
that the prima facie presumption of violation of the DECREE attaches only
after a forty-five-day period counted from its effectivity and is, therefore,
neither retrospective in character.
6. We do not share petitioner's fears that the video industry is being overregulated and being eased out of existence as if it were a nuisance. Being a
relatively new industry, the need for its regulation was apparent. While the
underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its
enactment, considering "the unfair competition posed by rampant film piracy;
the erosion of the moral fiber of the viewing public brought about by the
availability of unclassified and unreviewed video tapes containing
pornographic films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees
are required to engage in business.
The enactment of the Decree since April 10, 1986 has not brought about the
"demise" of the video industry. On the contrary, video establishments are
seen to have proliferated in many places notwithstanding the 30% tax
imposed.
In the last analysis, what petitioner basically questions is the necessity,
wisdom and expediency of the DECREE. These considerations, however, are

primarily and exclusively a matter of legislative concern.

Only congressional power or competence, not the wisdom of the action taken,
may be the basis for declaring a statute invalid. This is as it ought to be. The
principle of separation of powers has in the main wisely allocated the
respective authority of each department and confined its jurisdiction to such
a sphere. There would then be intrusion not allowable under the Constitution
if on a matter left to the discretion of a coordinate branch, the judiciary would
substitute its own. If there be adherence to the rule of law, as there ought to
be, the last offender should be courts of justice, to which rightly litigants
submit their controversy precisely to maintain unimpaired the supremacy of
legal norms and prescriptions. The attack on the validity of the challenged
provision likewise insofar as there may be objections, even if valid and cogent
on its wisdom cannot be sustained.
In fine, petitioner has not overcome the presumption of validity which
attaches to a challenged statute. We find no clear violation of the Constitution
which would justify us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
SO ORDERED.