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Republic of the Philippines

SUPREME COURT
Baguio
EN BANC
G.R. Nos. 147036-37

April 10, 2012

Petitioner-Organizations, namely: PAMBANSANG KOALISYON NG MGA SAMAHANG


MAGSASAKA AT MANGGAGAWA SA NIYUGAN (PKSMMN), COCONUT INDUSTRY REFORM
MOVEMENT (COIR), BUKLOD NG MALAYANG MAGBUBUKID, PAMBANSANG KILUSAN NG
MGA SAMAHANG MAGSASAKA (PAKISAMA), CENTER FOR AGRARIAN REFORM,
EMPOWERMENT AND TRANSFORMATION (CARET), PAMBANSANG KATIPUNAN NG MGA
SAMAHAN SA KANAYUNAN (PKSK); Petitioner-Legislator: REPRESENTATIVE LORETA ANN
ROSALES; and Petitioner-Individuals, namely: VIRGILIO V. DAVID, JOSE MARIE FAUSTINO,
JOSE CONCEPCION, ROMEO ROYANDOYAN, JOSE V. ROMERO, JR., ATTY. CAMILO L.
SABIO,
and
ATTY.
ANTONIO
T.
CARPIO, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE, SECRETARY OF AGRARIAN
REFORM, PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, THE SOLICITOR
GENERAL, PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED), and UNITED
COCONUT PLANTERS BANK (UCPB), Respondents.
x-----------------------x
G.R. No. 147811
TEODORO J. AMOR, representing the Peasant Alliance of Samar and Leyte (PASALEY),
DOMINGO C. ENCALLADO, representing AnibanngMagsasaka at ManggagawasaNiyugan
(AMMANI), and VIDAL M. PILIIN, representing the Laguna Coalition, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE, SECRETARY OF AGRARIAN
REFORM, PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, THE SOLICITOR
GENERAL, PHILIPPINE COCONUT PRODUCERS FEDERATION, UNITED COCONUT
PLANTERS BANK, Respondents.
DECISION
ABAD, J.:
These are consolidated petitions to declare unconstitutional certain presidential decrees and
executive orders of the martial law era relating to the raising and use of coco-levy funds.
The Facts and the Case
On June 19, 1971 Congress enacted Republic Act (R.A.) 6260 1 that established a Coconut
Investment Fund (CI Fund) for the development of the coconut industry through capital
financing.2 Coconut farmers were to capitalize and administer the Fund through the Coconut
Investment Company (CIC)3 whose objective was, among others, to advance the coconut farmers
interests. For this purpose, the law imposed a levy of P0.55 on the coconut farmers first domestic
sale of every 100 kilograms of copra, or its equivalent, for which levy he was to get a receipt
convertible into CIC shares of stock.4
About a year following his proclamation of martial law in the country or on August 20, 1973 President
Ferdinand E. Marcos issued Presidential Decree (P.D.) 276, 5which established a Coconut
Consumers Stabilization Fund (CCS Fund), to address the crisis at that time in the domestic market
for coconut-based consumer goods. The CCS Fund was to be built up through the imposition of

a P15.00-levy for every first sale of 100 kilograms of copra resecada. 6 The levy was to cease after a
year or earlier provided the crisis was over. Any remaining balance of the Fund was to revert to the
CI Fund established under R.A. 6260.7
A year later or on November 14, 1974 President Marcos issued P.D. 582, 8 creating a permanent fund
called the Coconut Industry Development Fund (CID Fund) to channel for the ultimate direct benefit
of coconut farmers part of the levies that they were already paying. The Philippine Coconut Authority
(PCA) was to provideP100 million as initial capital of the CID Fund and, thereafter, give the Fund at
least P0.20 per kilogram of copra resecada out of the PCAs collection of coconut consumers
stabilization levy. In case of the lifting of this levy, the PCA was then to impose a permanent levy
of P0.20 on the first sale of every kilogram of copra to form part of the CID Fund. 9 Also, under P.D.
582, the Philippine National Bank (PNB), then owned by the Government, was to receive on deposit,
administer, and use the CID Fund. 10 P.D. 582 authorized the PNB to invest the unused portion of the
CID Fund in easily convertible investments, the earnings of which were to form part of the Fund. 11
In 1975 President Marcos enacted P.D. 755 12 which approved the acquisition of a commercial bank
for the benefit of the coconut farmers to enable such bank to promptly and efficiently realize the
industrys credit policy.13 Thus, the PCA bought 72.2% of the shares of stock of First United Bank,
headed by PedroCojuangco.14 Due to changes in its corporate identity and purpose, the banks
articles of incorporation were amended in July 1975, resulting in a change in the banks name from
First United Bank to United Coconut Planters Bank (UCPB).15
On July 14, 1976 President Marcos enacted P.D. 961, 16 the Coconut Industry Code, which
consolidated and codified existing laws relating to the coconut industry. The Code provided that
surpluses from the CCS Fund and the CID Fund collections, not used for replanting and other
authorized purposes, were to be invested by acquiring shares of stock of corporations, including the
San Miguel Corporation (SMC), engaged in undertakings related to the coconut and palm oil
industries.17UCPB was to make such investments and equitably distribute these for free to coconut
farmers.18 These investments constituted the Coconut Industry Investment Fund (CIIF). P.D. 961 also
provided that the coconut levy funds (coco-levy funds) shall be owned by the coconut farmers in
their private capacities.19 This was reiterated in the PD 146820 amendment of June 11, 1978.
In 1980, President Marcos issued P.D. 1699, 21 suspending the collections of the CCS Fund and the
CID Fund. But in 1981 he issued P.D. 1841 22 which revived the collection of coconut levies. P.D.
1841 renamed the CCS Fund into the Coconut Industry Stabilization Fund (CIS Fund). 23 This Fund
was to be earmarked proportionately among several development programs, such as coconut hybrid
replanting program, insurance coverage for the coconut farmers, and scholarship program for their
children.24
In November 2000 then President Joseph Estrada issued Executive Order (E.O.) 312, 25 establishing
a SagipNiyugan Program which sought to provide immediate income supplement to coconut farmers
and encourage the creation of a sustainable local market demand for coconut oil and other coconut
products.26 The Executive Order sought to establish a P1-billion fund by disposing of assets acquired
using coco-levy funds or assets of entities supported by those funds. 27 A committee was created to
manage the fund under this program. 28 A majority vote of its members could engage the services of a
reputable auditing firm to conduct periodic audits.29
At about the same time, President Estrada issued E.O. 313, 30 which created an irrevocable trust fund
known as the Coconut Trust Fund (the Trust Fund). This aimed to provide financial assistance to
coconut farmers, to the coconut industry, and to other agri-related programs. 31 The shares of stock of
SMC were to serve as the Trust Funds initial capital. 32 These shares were acquired with CII Funds
and constituted approximately 27% of the outstanding capital stock of SMC. E.O. 313 designated
UCPB, through its Trust Department, as the Trust Funds trustee bank. The Trust Fund Committee
would administer, manage, and supervise the operations of the Trust Fund. 33 The Committee would
designate an external auditor to do an annual audit or as often as needed but it may also request the
Commission on Audit (COA) to intervene.34

To implement its mandate, E.O. 313 directed the Presidential Commission on Good Government, the
Office of the Solicitor General, and other government agencies to exclude the 27% CIIF SMC shares
from Civil Case 0033, entitled Republic of the Philippines v. Eduardo Cojuangco, Jr., et al., which
was then pending before the Sandiganbayan and to lift the sequestration over those shares. 35
On January 26, 2001, however, former President Gloria Macapagal-Arroyo ordered the suspension
of E.O.s 312 and 313.36 This notwithstanding, on March 1, 2001 petitioner organizations and
individuals brought the present action in G.R. 147036-37 to declare E.O.s 312 and 313 as well as
Article III, Section 5 of P.D. 1468 unconstitutional. On April 24, 2001 the other sets of petitioner
organizations and individuals instituted G.R. 147811 to nullify Section 2 of P.D. 755 and Article III,
Section 5 of P.D.s 961 and 1468 also for being unconstitutional.
The Issues Presented
The parties submit the following issues for adjudication:
Procedurally
1. Whether or not petitioners special civil actions of certiorari under Rule 65 constituted the
proper remedy for their actions; and
2. Whether or not petitioners have legal standing to bring the same to court.
On the substance
3. Whether or not the coco-levy funds are public funds; and
4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of P.D.s 961 and 1468,
(c) E.O. 312, and (d) E.O. 313 are unconstitutional.
The Rulings of the Court
First. UCPB questions the propriety of the present petitions for certiorari and mandamus under Rule
65 on the ground that there are no ongoing proceedings in any tribunal or board or before a
government official exercising judicial, quasi-judicial, or ministerial functions. 37 UCPB insists that the
Court exercises appellate jurisdiction with respect to issues of constitutionality or validity of laws and
presidential orders.38
But, as the Court previously held, where there are serious allegations that a law has infringed the
Constitution, it becomes not only the right but the duty of the Court to look into such allegations and,
when warranted, uphold the supremacy of the Constitution. 39 Moreover, where the issues raised are
of paramount importance to the public, as in this case, the Court has the discretion to brush aside
technicalities of procedure.40
Second. The Court has to uphold petitioners right to institute these petitions. The petitioner
organizations in these cases represent coconut farmers on whom the burden of the coco-levies
attaches. It is also primarily for their benefit that the levies were imposed.
The individual petitioners, on the other hand, join the petitions as taxpayers. The Court recognizes
their right to restrain officials from wasting public funds through the enforcement of an
unconstitutional statute.41 This so-called taxpayers suit is based on the theory that expenditure of
public funds for the purpose of executing an unconstitutional act is a misapplication of such funds. 42
Besides, the 1987 Constitution accords to the citizens a greater participation in the affairs of
government. Indeed, it provides for people's initiative, the right to information on matters of public
concern (including the right to know the state of health of their President), as well as the right to file
cases questioning the factual bases for the suspension of the privilege of writ of habeas corpus or

declaration of martial law. These provisions enlarge the peoples right in the political as well as the
judicial field. It grants them the right to interfere in the affairs of government and challenge any act
tending to prejudice their interest.
Third. For some time, different and conflicting notions had been formed as to the nature and
ownership of the coco-levy funds. The Court, however, finally put an end to the dispute when it
categorically ruled in Republic of the Philippines v. COCOFED 43 that these funds are not only
affected with public interest; they are, in fact, prima facie public funds. Prima facie means a fact
presumed to be true unless disproved by some evidence to the contrary.44
The Court was satisfied that the coco-levy funds were raised pursuant to law to support a proper
governmental purpose. They were raised with the use of the police and taxing powers of the State
for the benefit of the coconut industry and its farmers in general. The COA reviewed the use of the
funds. The Bureau of Internal Revenue (BIR) treated them as public funds and the very laws
governing coconut levies recognize their public character.45
The Court has also recently declared that the coco-levy funds are in the nature of taxes and can only
be used for public purpose.46 Taxes are enforced proportional contributions from persons and
property, levied by the State by virtue of its sovereignty for the support of the government and for all
its public needs.47Here, the coco-levy funds were imposed pursuant to law, namely, R.A. 6260 and
P.D. 276. The funds were collected and managed by the PCA, an independent government
corporation directly under the President. 48 And, as the respondent public officials pointed out, the
pertinent laws used the term levy,49 which means to tax,50 in describing the exaction.
Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not raise money to boost the
governments general funds but to provide means for the rehabilitation and stabilization of a
threatened industry, the coconut industry, which is so affected with public interest as to be within the
police power of the State.51The funds sought to support the coconut industry, one of the main
economic backbones of the country, and to secure economic benefits for the coconut farmers and
farm workers. The subject laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388, 52 and
the oil price stabilization funds under P.D. 1956,53 as amended by E.O. 137.54
Respondent UCPB suggests that the coco-levy funds are closely similar to the Social Security
System (SSS) funds, which have been declared to be not public funds but properties of the SSS
members and held merely in trust by the government. 55 But the SSS Law56 collects premium
contributions. It does not collect taxes from members for a specific public purpose. They pay
contributions in exchange for insurance protection and benefits like loans, medical or health
services, and retirement packages. The benefits accrue to every SSS member, not to the public, in
general.57
Furthermore, SSS members do not lose ownership of their contributions. The government merely
holds these in trust, together with his employers contribution, to answer for his future benefits. 58 The
coco-levy funds, on the other hand, belong to the government and are subject to its administration
and disposition. Thus, these funds, including its incomes, interests, proceeds, or profits, as well as
all its assets, properties, and shares of stocks procured with such funds must be treated, used,
administered, and managed as public funds.59
Lastly, the coco-levy funds are evidently special funds. In Gaston v. Republic Planters Bank,60 the
Court held that the State collected stabilization fees from sugar millers, planters, and producers for a
special purpose: to finance the growth and development of the sugar industry and all its
components. The fees were levied for a special purpose and, therefore, constituted special fund
when collected. Its character as such fund was made clear by the fact that they were deposited in
the PNB (then a wholly owned government bank) and not in the Philippine Treasury. In Osmea v.
Orbos,61 the Court held that the oil price stabilization fund was a special fund mainly because this
was segregated from the general fund and placed in what the law referred to as a trust account. Yet
it remained subject to COA scrutiny and review. The Court finds no substantial distinction between
these funds and the coco-levy funds, except as to the industry they each support.

Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above is void and
unconstitutional for disregarding the public character of coco-levy funds. The subject section
provides:
Section 2. Financial Assistance. x xx and since the operations, and activities of the Philippine
Coconut Authority are all in accord with the present social economic plans and programs of the
Government, all collections and levies which the Philippine Coconut Authority is authorized to levy
and collect such as but not limited to the Coconut Consumers Stabilization Levy, and the Coconut
Industry Development Fund as prescribed by Presidential Decree No. 582 shall not be considered or
construed, under any law or regulation, special and/or fiduciary funds and do not form part of the
general funds of the national government within the contemplation of Presidential Decree No. 711.
(Emphasis ours)
The Court has, however, already passed upon this question in Philippine Coconut Producers
Federation, Inc. (COCOFED) v. Republic of the Philippines.62 It held as unconstitutional Section 2 of
P.D. 755 for "effectively authorizing the PCA to utilize portions of the CCS Fund to pay the financial
commitment of the farmers to acquire UCPB and to deposit portions of the CCS Fund levies with
UCPB interest free. And as there also provided, the CCS Fund, CID Fund and like levies that PCA is
authorized to collect shall be considered as non-special or fiduciary funds to be transferred to the
general fund of the Government, meaning they shall be deemed private funds."
Identical provisions of subsequent presidential decrees likewise declared coco-levy funds private
properties of coconut farmers. Article III, Section 5 of P.D. 961 reads:
Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the Coconut Industry
Development Fund as well as all disbursements of said funds for the benefit of the coconut farmers
as herein authorized shall not be construed or interpreted, under any law or regulation, as special
and/or fiduciary funds, or as part of the general funds of the national government within the
contemplation of P.D. No. 711; nor as a subsidy, donation, levy, government funded investment, or
government share within the contemplation of P.D. 898, the intention being that said Fund and the
disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned by
them in their own private capacities. (Emphasis ours)
Section 5 of P.D. 1468 basically reproduces the above provision, thus
Section 5.Exemption. The Coconut Consumers Stabilization Fund and the Coconut Industry
Development Fund, as well as all disbursements as herein authorized, shall not be construed or
interpreted, under any law or regulation, as special and/or fiduciary funds, or as part of the
general funds of the national government within the contemplation of P.D. 711; nor as subsidy,
donation, levy government funded investment, or government share within the contemplation
of P.D. 898, the intention being that said Fund and the disbursements thereof as herein
authorized for the benefit of the coconut farmers shall be owned by them in their private
capacities: Provided, however, That the President may at any time authorize the Commission on
Audit or any other officer of the government to audit the business affairs, administration, and
condition of persons and entities who receive subsidy for coconut-based consumer products x xx.
(Emphasis ours)
Notably, the raising of money by levy on coconut farm production, a form of taxation as already
stated, began in 1971 for the purpose of developing the coconut industry and promoting the interest
of coconut farmers. The use of the fund was expanded in 1973 to include the stabilization of the
domestic market for coconut-based consumer goods and in 1974 to divert part of the funds for
obtaining direct benefit to coconut farmers. After five years or in 1976, however, P.D. 961 declared
the coco-levy funds private property of the farmers. P.D. 1468 reiterated this declaration in 1978. But
neither presidential decree actually turned over possession or control of the funds to the farmers in
their private capacity. The government continued to wield undiminished authority over the
management and disposition of those funds.

In any event, such declaration is void. There is ownership when a thing pertaining to a person is
completely subjected to his will in everything that is not prohibited by law or the concurrence with the
rights of another.63 An owner is free to exercise all attributes of ownership: the right, among others, to
possess, use and enjoy, abuse or consume, and dispose or alienate the thing owned. 64 The owner is
of course free to waive all or some of these rights in favor of others. But in the case of the coconut
farmers, they could not, individually or collectively, waive what have not been and could not be
legally imparted to them.
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III, Section 5 of P.D. 1468
completely ignore the fact that coco-levy funds are public funds raised through taxation. And since
taxes could be exacted only for a public purpose, they cannot be declared private properties of
individuals although such individuals fall within a distinct group of persons. 65
The Court of course grants that there is no hard-and-fast rule for determining what constitutes public
purpose. It is an elastic concept that could be made to fit into modern standards. Public purpose, for
instance, is no longer restricted to traditional government functions like building roads and school
houses or safeguarding public health and safety. Public purpose has been construed as including
the promotion of social justice. Thus, public funds may be used for relocating illegal settlers, building
low-cost housing for them, and financing both urban and agrarian reforms that benefit certain poor
individuals. Still, these uses relieve volatile iniquities in society and, therefore, impact on public order
and welfare as a whole.
But the assailed provisions, which removed the coco-levy funds from the general funds of the
government and declared them private properties of coconut farmers, do not appear to have a color
of social justice for their purpose. The levy on copra that farmers produce appears, in the first place,
to be a business tax judging by its tax base. The concept of farmers-businessmen is incompatible
with the idea that coconut farmers are victims of social injustice and so should be beneficiaries of the
taxes raised from their earnings.
It would altogether be different of course if the laws mentioned set apart a portion of the coco-levy
fund for improving the lives of destitute coconut farm owners or workers for their social amelioration
to establish a proper government purpose. The support for the poor is generally recognized as a
public duty and has long been an accepted exercise of police power in the promotion of the common
good.66 But the declarations do not distinguish between wealthy coconut farmers and the
impoverished ones. And even if they did, the Government cannot just embark on a philanthropic orgy
of inordinate dole-outs for motives political or otherwise. 67Consequently, such declarations are void
since they appropriate public funds for private purpose and, therefore, violate the citizens right to
substantive due process.68
On another point, in stating that the coco-levy fund "shall not be construed or interpreted, under any
law or regulation, as special and/or fiduciary funds, or as part of the general funds of the national
government," P.D.s 961 and 1468 seek to remove such fund from COA scrutiny.
This is also the fault of President Estradas E.O. 312 which deals with P1 billion to be generated out
of the sale of coco-fund acquired assets. Thus
Section 5. Audit of Fund and Submission of Report. The Committee, by a majority vote, shall
engage the services of a reputable auditing firm to conduct periodic audits of the fund. It shall render
a quarterly report on all pertinent transactions and availments of the fund to the Office of the
President within the first three (3) working days of the succeeding quarter. (Emphasis ours)
E.O. 313 has a substantially identical provision governing the management and disposition of the
Coconut Trust Fund capitalized with the substantial SMC shares of stock that the coco-fund
acquired. Thus
Section 13. Accounting. x xx

The Fund shall be audited annually or as often as necessary by an external auditor


designated by the Committee. The Committee may also request the Commission on Audit to
conduct an audit of the Fund. (Emphasis ours)
But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and 1468 as well as those of
E.O.s 312 and 313 that remove such funds and the assets acquired through them from the
jurisdiction of the COA violate Article IX-D, Section 2(1) 69 of the 1987 Constitution. Section 2(1) vests
in the COA the power and authority to examine uses of government money and property. The cited
P.D.s and E.O.s also contravene Section 270 of P.D. 898 (Providing for the Restructuring of the
Commission on Audit), which has the force of a statute.
And there is no legitimate reason why such funds should be shielded from COA review and audit.
The PCA, which implements the coco-levy laws and collects the coco-levy funds, is a governmentowned and controlled corporation subject to COA review and audit.
E.O. 313 suffers from an additional infirmity. Its title, "Rationalizing the Use of the Coconut Levy
Funds by Constituting a Fund for Assistance to Coconut Farmers as an Irrevocable Trust Fund and
Creating a Coconut Trust Fund Committee for the Management thereof" tends to mislead.
Apparently, it intends to create a trust fund out of the coco-levy funds to provide economic
assistance to the coconut farmers and, ultimately, benefit the coconut industry. 71 But on closer look,
E.O. 313 strays from the special purpose for which the law raises coco-levy funds in that it permits
the use of coco-levy funds for improving productivity in other food areas. Thus:
Section 2. Purpose of the Fund. The Fund shall be established for the purpose of financing
programs of assistance for the benefit of the coconut farmers, the coconut industry, and other agrirelated programs intended to maximize food productivity, develop business opportunities in
the
countryside,
provide
livelihood
alternatives,
and
promote
anti-poverty
programs. (Emphasis ours)
x xxx
Section 9. Use and Disposition of the Trust Income. The Coconut Trust Fund Committee, on an
annual basis, shall determine and establish the amount comprising the Trust Income. After such
determination, the Committee shall earmark, allocate and disburse the Trust Income for the following
purposes, namely:
x xxx
(d) Thirty percent (30%) of the Trust Income shall be used to assist and fund agriculturallyrelated programs for the Government, as reasonably determined by the Trust Fund Committee,
implemented for the purpose of: (i) maximizing food productivity in the agriculture areas of the
country, (ii) enhancing the upliftment and well-being of the living conditions of farmers and
agricultural workers, (iii) developing viable industries and business opportunities in the countryside,
(iv) providing alternative means of livelihood to the direct dependents of agriculture businesses and
enterprises, and (v) providing financial assistance and support to coconut farmers in times of
economic hardship due to extremely low prices of copra and other coconut products, natural
calamities, world market dislocation and similar occurrences, including financial support to the
ERAPs SagipNiyugan Program established under Executive Order No. 312 dated November 3,
2000; x xx. (Emphasis ours)
Clearly, E.O. 313 above runs counter to the constitutional provision which directs that all money
collected on any tax levied for a special purpose shall be treated as a special fund and paid out for
such purpose only.72 Assisting other agriculturally-related programs is way off the coco-funds
objective of promoting the general interests of the coconut industry and its farmers.
A final point, the E.O.s also transgress P.D. 1445, 73 Section 84(2),74 the first part by the previously
mentioned sections of E.O. 313 and the second part by Section 4 of E.O. 312 and Sections 6 and 7

of E.O. 313. E.O. 313 vests the power to administer, manage, and supervise the operations and
disbursements of the Trust Fund it established (capitalized with SMC shares bought out of coco-levy
funds) in a Coconut Trust Fund Committee. Thus
Section 6. Creation of the Coconut Trust Fund Committee. A Committee is hereby created to
administer, manage and supervise the operations of the Trust Fund, chaired by the President
with ten (10) members, as follows:
(a) four (4) representatives from the government sector, two of whom shall be the Secretary
of Agriculture and the Secretary of Agrarian Reform who shall act as Vice Chairmen;
(b) four (4) representatives from coconut farmers organizations, one of whom shall come
from a list of nominees from the Philippine Coconut Producers Federation Inc.
("COCOFED");
(c) a representative from the CIIF; and
(d) a representative from a non-government organization (NGO) involved in agricultural and
rural development.
All decisions of the Coconut Trust Fund Committee shall be determined by a majority vote of all the
members.
The Coconut Trust Fund Committee shall perform the functions and duties set forth in Section 7
hereof, with the skill, care, prudence and diligence necessary under the circumstances then
prevailing that a prudent man acting in like capacity would exercise.
The members of the Coconut Trust Fund Committee shall be appointed by the President and shall
hold office at his pleasure.
The Coconut Trust Fund Committee is authorized to hire administrative, technical and/or support
staff as may be required to enable it to effectively perform its functions and responsibilities.
(Emphasis ours)
Section 7. Functions and Responsibilities of the Committee. The Coconut Trust Fund Committee
shall have the following functions and responsibilities:
(a) set the investment policy of the Trust Fund;
(b) establish priorities for assistance giving preference to small coconut farmers and
farmworkers which shall be reviewed periodically and revised as necessary in accordance
with changing conditions;
(c) receive, process and approve project proposals for financing by the Trust Fund;
(d) decide on the use of the Trust Funds income or net earnings including final action
on applications for assistance, grants and/or loans;
(e) avail of professional counsel and services by retaining an investment and financial
manager, if desired;
(f) formulate the rules and regulations governing the allocation, utilization and
disbursement of the Fund; and
(g) perform such other acts and things as may be necessary proper or conducive to attain
the purposes of the Fund. (Emphasis ours)

Section 4 of E.O. 312 does essentially the same thing. It vests the management and disposition of
the assistance fund generated from the sale of coco-levy fund-acquired assets into a Committee of
five members. Thus, Section 4 of E.O. 312 provides
Section 4. Funding. Assets acquired through the coconut levy funds or by entities financed by the
coconut levy funds identified by the President for appropriate disposal or sale, shall be sold or
disposed to generate a maximum fund of ONE BILLION PESOS (P1,000,000,000.00) which shall be
managed by a Committee composed of a Chairman and four (4) members to be appointed by the
President whose term shall be co-terminus with the Program. x xx (Emphasis ours)
In effect, the above transfers the power to allocate, use, and disburse coco-levy funds that P.D. 232
vested in the PCA and transferred the same, without legislative authorization and in violation of P.D.
232, to the Committees mentioned above. An executive order cannot repeal a presidential decree
which has the same standing as a statute enacted by Congress.
UCPB invokes the principle of separability to save the assailed laws from being struck down. The
general rule is that where part of a statute is void as repugnant to the Constitution, while another part
is valid, the valid portion, if susceptible to being separated from the invalid, may stand and be
enforced. When the parts of a statute, however, are so mutually dependent and connected, as
conditions, considerations, or compensations for each other, as to warrant a belief that the
legislature intended them as a whole, the nullity of one part will vitiate the rest. In which case, if
some parts are unconstitutional, all the other provisions which are thus dependent, conditional, or
connected must consequently fall with them.75
But, given that the provisions of E.O.s 312 and 313, which as already stated invalidly transferred
powers over the funds to two committees that President Estrada created, the rest of their provisions
became non-operational. It is evident that President Estrada would not have created the new funding
programs if they were to be managed by some other entity. Indeed, he made himself Chairman of
the Coconut Trust Fund and left to his discretion the appointment of the members of the other
committee.
WHEREFORE, the Court GRANTS the petition in G.R. 147036-37, PARTLY GRANTS the petition in
G.R. 147811, and declares the following VOID:
a) E.O. 312, for being repugnant to Section 84(2) of P.D. 1445, and Article IX-D, Section 2(1)
of the Constitution; and
b) E.O. 313, for being in contravention of Section 84(2) of P.D. 1445, and Article IX-D,
Section 2(1) and Article VI, Section 29(3) of the Constitution.
The Court has previously declared Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961 and
1468 unconstitutional.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SPECIAL FIRST DIVISION
G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE
Declaration of Principles and State Policies

II

Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE
Social Justice and Human Rights

XIII

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.
x xx

x xx

x xx

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
x xx

x xx

x xx

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.
x xx

x xx

x xx

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.4We 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 RA 5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6
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. 8
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.10
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.14
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.15
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.16
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 Utmagisvaleat quam pereat, that
is, we choose the interpretation which gives effect to the whole of the statute its every word. 18
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.
x xx

x xx

x xx

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,35the 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. 37
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 bondsor 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. 39Hence, 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 Crossand 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
Stamp Taxes on Specified Objects

XI

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:
x xx

x xx

x xx

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 EO 47 273 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. 49
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.50
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."52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its
net worth ofP259 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.:57
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." 58

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.59
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 academic 60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paidP5,127,149.08 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. 61
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 CA 64 in CIR v. Philippine National Bank 65 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. BaierNickel,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.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 119286

October 13, 2004

PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,


vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment schedules of corporate income taxes from
annual to quarterly have created problems, especially on the matter of tax refunds. 1 In this case, the
Court is called to resolve the question of whether alleged excess taxes paid by a corporation during
a taxable year should be refunded or credited against its tax liabilities for the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two (2)
parcels of land at Paseo de Roxas in Makati City, seeks a review of the Decision2 of the Court of
Appeals dismissing its petition for review of the resolution 3 of the Court of Tax Appeals (CTA) which,
in turn, denied its claim for refund.
The factual antecedents4 are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring
a gross income of P1,855,000.00, deductions of P1,775,991.00, net income of P79,009.00,
an income tax due thereon in the amount of P27,653.00, prior years excess credit
of P146,026.00, and creditable taxes withheld in 1989 of P54,104.00 or a total tax credit
of P200,130.00 and credit balance of P172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for "the refund of excess
creditable withholding and income taxes for the years 1989 and 1990 in the aggregate
amount of P147,036.15."
On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would expire
on December 30, 1991 and that it was necessary to interrupt the prescriptive period,
petitioner filed with the respondent Court of Tax Appeals a petition for review praying for the
refund of "P54,104.00 representing creditable taxes withheld from income payments of
petitioner for the calendar year ending December 31, 1989."
On February 25, 1992, respondent Commissioner filed an Answer and by way of special
and/or affirmative defenses averred the following: a) the petition states no cause of action for
failure to allege the dates when the taxes sought to be refunded were paid; b) petitioners
claim for refund is still under investigation by respondent Commissioner; c) the taxes claimed
are deemed to have been paid and collected in accordance with law and existing pertinent
rules and regulations; d) petitioner failed to allege that it is entitled to the refund or
deductions claimed; e) petitioners contention that it has available tax credit for the current
and prior year is gratuitous and does not ipso facto warrant the refund; f) petitioner failed to
show that it has complied with the provision of Section 230 in relation to Section 204 of the
Tax Code.
After trial, the respondent Court rendered a decision ordering respondent Commissioner "to
refund in favor of petitioner the amount of P54,104.00, representing excess creditable
withholding taxes paid for January to July1989."
Respondent Commissioner moved for reconsideration of the decision, alleging that
the P54,104.00 ordered to be refunded "has already been included and is part and parcel of
the P172,477.00 which petitioner automatically applied as tax credit for the succeeding
taxable year 1990."
In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July
29, 1993 and dismissed the petition for review, stating that it has "overlooked the fact that the
petitioners 1989 Corporate Income Tax Return (Exh. "A") indicated that the amount
of P54,104.00 subject of petitioners claim for refund has already been included as part and

parcel of the P172,477.00 which the petitioner automatically applied as tax credit for the
succeeding taxable year 1990."
Petitioner filed a Motion for Reconsideration which was denied by respondent Court on
March 10, 1994.5
Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of Appeals. Resolving the
twin issues of whether petitioner is entitled to a refund of P54,104.00 representing creditable taxes
withheld in 1989 and whether petitioner applied such creditable taxes withheld to its 1990 income tax
liability, the appellate court held that petitioner is not entitled to a refund because it had already
elected to apply the total amount of P172,447.00, which includes the P54,104.00 refund claimed,
against its income tax liability for 1990. The appellate court elucidated on the reason for its dismissal
of petitioners claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the year
1989, it filled up the box stating that the total amount of P172,477.00 shall be applied against
its income tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be
applied as tax credit to the succeeding taxable year, but merely marked an "x" to the box
indicating "to be applied as tax credit to the succeeding taxable year." Unlike what petitioner
had done when it filed its income tax return for the year 1988, it specifically stated that out of
the P146,026.00 the entire refundable amount, only P64,623.00 will be made available as
tax credit, while the amount of P81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to
succeeding taxable year," which signified that instead of refund, petitioner will apply the total
amount of P172,447.00, which includes the amount of P54,104.00 sought to be refunded, as
tax credit for its tax liabilities in 1990. Thus, there is really nothing left to be refunded to
petitioner for the year 1989. To grant petitioners claim for refund is tantamount to granting
twice the refund herein sought to be refunded, to the prejudice of the Government.
The Court of Appeals denied petitioners Motion for Reconsideration7 dated November 8, 1994 in
its Resolution8dated February 21, 1995 because the motion merely restated the grounds which have
already been considered and passed upon in its Decision.9
Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the evidence
presented before the lower courts conclusively shows that it did not apply the P54,104.00 to its 1990
income tax liability; that the Decision subject of the instant petition is inconsistent with a final
decision11 of the Sixteenth Division of the appellate court in C.A.-G.R. Sp. No. 32890 involving the
same parties and subject matter; and that the affirmation of the questioned Decision would lead to
absurd results in the manner of claiming refunds or in the application of prior years excess tax
credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May 16, 1996 on behalf of
respondents asserting that the claimed refund of P54,104.00 was, by petitioners election in its
Corporate Annual Income Tax Return for 1989, to be applied against its tax liability for 1990. Not
having submitted its tax return for 1990 to show whether the said amount was indeed applied
against its tax liability for 1990, petitioners election in its tax return stands. The OSG also contends
that petitioners election to apply its overpaid income tax as tax credit against its tax liabilities for the
succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the issue in this
case is not whether the amount of P54,104.00 was included as tax credit to be applied against its
1990 income tax liability but whether the same amount was actually applied as tax credit for 1990.
Petitioner claims that there is no need to show that the amount of P54,104.00 had not been
automatically applied against its 1990 income tax liability because the appellate courts decision in
C.A.-G.R. Sp. No. 32890 clearly held that petitioner charged its 1990 income tax liability against its
tax credit for 1988 and not 1989. Petitioner also disputes the OSGs assertion that the taxpayers
election as to the application of excess taxes is irrevocable averring that there is nothing in the law
that prohibits a taxpayer from changing its mind especially if subsequent events leave the latter no
choice but to change its election.

The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioners 1988 tax return shows a
prior years excess credit of P81,403.00, creditable tax withheld of P92,750.00 and tax due
of P27,127.00. Petitioner indicated that the prior years excess credit of P81,403.00 was to be
refunded, while the remaining amount of P64,623.00 (P92,750.00 - P27,127.00) shall be considered
as tax credit for 1989. However, in its 1989 tax return, petitioner included the P81,403.00 which had
already been segregated for refund in the computation of its excess credit, and specified that the full
amount of P172,479.00* (P81,403.00 + P64,623.00 + P54,104.00** - P27,653.00***) be considered as
its tax credit for 1990. Considering that it had obtained a favorable ruling for the refund of its excess
credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit for 1989 should be the excess
credit to be applied against its 1990 tax liability. In fine, the OSG argues that by its own election,
petitioner can no longer ask for a refund of its creditable taxes withheld in 1989 as the same had
been applied against its 1990 tax due.
In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and required the
parties to simultaneously file their respective memoranda within 30 days from notice. In compliance
with this directive, petitioner submitted its Memorandum16 dated September 18, 1997 in due time,
while the OSG filed itsMemorandum17 dated April 27, 1998 only on April 29, 1998 after several
extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by an
agency such as the CTA which is, by the very nature of its functions, dedicated exclusively to the
study and consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of its authority.18
This interdiction finds particular application in this case since the CTA, after careful consideration of
the merits of the Commissioner of Internal Revenues motion for reconsideration, reconsidered its
earlier decision which ordered the latter to refund the amount of P54,104.00 to petitioner. Its
resolution cannot be successfully assailed based, as it is, on the pertinent laws as applied to the
facts.
Petitioners 1989 tax return indicates an aggregate creditable tax of P172,477.00, representing its
1988 excess credit of P146,026.00 and 1989 creditable tax of P54,104.00 less tax due for 1989,
which it elected to apply as tax credit for the succeeding taxable year. 19 According to petitioner, it
successively utilized this amount when it obtained refunds in CTA Case No. 4439 (C.A.-G.R. Sp. No.
32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and applied its 1990 tax liability, leaving
a balance of P54,104.00, the amount subject of the instant claim for refund. 20 Represented
mathematically, petitioner accounts for its claim in this wise:
P172,477.0
0

Amount indicated in petitioners 1989 tax return to be applied as


tax credit for the succeeding taxable year

- 25,623.00
Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No.
32300)
P146,854.0
0

Balance as of April 16, 1990

- 59,510.00
Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No.
32890)
P87,344.00
Balance as of January 2, 1991

- 33,240.00
Income tax liability for calendar year 1990 applied as of April 15,
1991
P54,104.00
Balance as of April 15, 1991 now subject of the instant claim for
refund21

Other than its own bare allegations, however, petitioner offers no proof to the effect that its creditable
tax ofP172,477.00 was applied as claimed above. Instead, it anchors its assertion of entitlement to
refund on an alleged finding in C.A.-G.R. Sp. No. 32890 22 involving the same parties to the effect that
petitioner charged its 1990 income tax liability to its tax credit for 1988 and not its 1989 tax credit.
Hence, its excess creditable taxes withheld of P54,104.00 for 1989 was left untouched and may be
refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the Court of
Appeals make a categorical determination that petitioners tax liability for 1990 was applied against
its 1988 tax credit. The statement adverted to by petitioner was actually presented in the appellate
courts decision in CA-G.R. Sp No. 32890 as part of petitioners own narration of facts. The pertinent
portion of the decision reads:
It would appear from petitioners submission as follows:
x xx since it has already applied to its prior years excess credit of P81,403.00 (which
petitioner wanted refunded when it filed its 1988 Income Tax Return on April 14, 1989) the
income tax liability for 1988 ofP28,127.00 and the income tax liability for 1989 of P27,653.00,
leaving a balance refundable of P25,623.00 subject of C.T.A. Case No. 4439,
the P92,750.00 (P64,623.00 plus P28,127.00, since this second amount was already applied
to the amount refundable of P81,403.00) should be the refundable amount. But since the
taxpayer again used part of it to satisfy its income tax liability of P33,240.00 for 1990, the
amount refundable was P59,510.00, which is the amount prayed for in the claim for refund
and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims for refund for 1988, 1989,
and 1990, when it filed a claim for refund of P59,510.00 in this case (CTA Case No. 4528).
Hence, the present claim should be resolved together with the previous claims. 23
The confusion as to petitioners entitlement to a refund could altogether have been avoided had it
presented its tax return for 1990. Such return would have shown whether petitioner actually applied
its 1989 tax credit ofP172,477.00, which includes the P54,104.00 creditable taxes withheld for 1989
subject of the instant claim for refund, against its 1990 tax liability as it had elected in its 1989 return,
or at least, whether petitioners tax credit ofP172,477.00 was applied to its approved refunds as it
claims.
The return would also have shown whether there remained an excess credit refundable to petitioner
after deducting its tax liability for 1990. As it is, we only have petitioners allegation that its tax due for
1990 wasP33,240.00 and that this was applied against its remaining tax credits using its own "first
in, first out" method of computation.
It would have been different had petitioner not included the P54,104.00 creditable taxes for 1989 in
the total amount it elected to apply against its 1990 tax liabilities. Then, all that would have been
required of petitioner are: proof that it filed a claim for refund within the two (2)-year prescriptive
period provided under Section 230 of the NIRC; evidence that the income upon which the taxes
were withheld was included in its return; and to establish the fact of withholding by a copy of the
statement (BIR Form No. 1743.1) issued by the payor 24 to the payee showing the amount paid and
the amount of tax withheld therefrom. However, since petitioner opted to apply its aggregate excess
credits as tax credit for 1990, it was incumbent upon it to present its tax return for 1990 to show that
the claimed refund had not been automatically credited and applied to its 1990 tax liabilities.

The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the facts
stated therein are true and correct. 25 Without the tax return, it is error to grant a refund since it would
be virtually impossible to determine whether the proper taxes have been assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner could
very well have attached a copy of its final adjustment return for 1990 when it filed its claim for refund
on November 13, 1991. Annex "B" of its Petition for Review26 dated December 26, 1991 filed with the
CTA, in fact, states that its annual tax return for 1990 was submitted in support of its claim. Yet,
petitioners tax return for 1990 is nowhere to be found in the records of this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioners allegation
that it did not present evidence to prove that its claimed refund had already been automatically
credited against its 1990 tax liability, the CTA would not have reconsidered its earlier Decision. As it
is, the absence of petitioners 1990 tax return was the principal basis of the
CTAs Resolution reconsidering its earlier Decision to grant petitioners claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its petition for review before
the Court of Appeals. The appellate court, being a trier of facts, is authorized to receive it in evidence
and would likely have taken it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its 1990 tax
return, it presented other evidence to prove its claim that it did not apply and could not have applied
the amount in dispute as tax credit. Importantly, petitioner therein attached a copy of its final
adjustment return for 1990 to its motion for reconsideration before the CTA buttressing its claim that
it incurred a net loss and is thus entitled to refund. Considering this fact, the Court held that there is
no reason for the BIR to withhold the tax refund.
In this case, petitioners failure to present sufficient evidence to prove its claim for refund is fatal to
its cause. After all, it is axiomatic that a claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed
strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines (NIRC)
provides:
Sec. 69. Final Adjustment Return.Every corporation liable to tax under Section 24 shall file
a final adjustment return covering the total net income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal
to the total tax due on the entire taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly
income taxes paid, the refundable amount shown on its final adjustment return may
be credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7.Filing of final or adjustment return and final payment of income tax. A final or an
adjustment return on B.I.R. Form No. 1702 covering the total taxable income of the
corporation for the preceding calendar or fiscal year shall be filed on or before the 15th day
of the fourth month following the close of the calendar or fiscal year. The return shall include
all the items of gross income and deductions for the taxable year. The amount of income tax
to be paid shall be the balance of the total income tax shown on the final or adjustment
return after deducting therefrom the total quarterly income taxes paid during the preceding
first three quarters of the same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and shown
in the adjustment or final corporate income tax return shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax liabilities for

the quarters of the succeeding taxable year. The corporation must signify in its annual
corporate adjustment return its intention whether to request for refund of the overpaid
income tax or claim for automatic credit to be applied against its income tax liabilities for the
quarters of the succeeding taxable year by filling up the appropriate box on the corporate tax
return (B.I.R. Form No. 1702). [Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the corporation is entitled to a refund of
the excess estimated quarterly income taxes paid, the refundable amount shown on its final
adjustment return may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding year. The carrying forward of any excess or overpaid income tax
for a given taxable year is limited to the succeeding taxable year only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal
Revenue,29 where the Court declared that "[T]he carrying forward of any excess or overpaid income
tax for a given taxable year then islimited to the succeeding taxable year only," we ruled that since
the case involved a claim for refund of overpaid taxes for 1993, petitioner could only have applied
the 1993 excess tax credits to its 1994 income tax liabilities. To further carry-over to 1995 the 1993
excess tax credits is violative of Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of P146,026.00 in the computation of its total
excess credit for 1989. It indicated this amount, plus the 1989 creditable taxes withheld
of P54,104.00 or a total of P172,477.00, as its total excess credit to be applied as tax credit for 1990.
By its own disclosure, petitioner effectively combined its 1988 and 1989 tax credits and applied its
1990 tax due of P33,240.00 against the total, and not against its creditable taxes for 1989 only as
allowed by Section 69. This is a clear admission that petitioners 1988 tax credit was incorrectly and
illegally applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its excess
taxes applied as tax credit for the succeeding taxable year, such election is not final. Prior
verification and approval by the Commissioner of Internal Revenue is required. The availment of the
remedy of tax credit is not absolute and mandatory. It does not confer an absolute right on the
taxpayer to avail of the tax credit scheme if it so 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.30
Contrary to petitioners assertion however, the taxpayers election, signified by the ticking of boxes in
Item 10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the proper management of
claims for refund or tax credit by leading tax authorities to the direction they should take in
addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act No. 8424 31 emphasizes
that it is imperative to indicate in the tax return or the final adjustment return whether a tax credit or
refund is sought by making the taxpayers choice irrevocable. Section 76 provides:
SEC. 76. Final Adjustment Return.Every corporation liable to tax under Section 27 shall
file a final adjustment return covering the total taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the corporation shall
either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried
over and credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable

for that taxable period and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefore. [Emphasis supplied]
As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its
quarterly tax payments made during the taxable year is not equal to the total tax due for that year:
(a) pay the balance of the tax still due; (b) carry-over the excess credit; or (c) be credited or refunded
the amount paid. If the taxpayer has paid excess quarterly income taxes, it may be entitled to a tax
credit or refund as shown in its final adjustment return which may be carried over and applied
against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding
taxable years. However, once the taxpayer has exercised the option to carry-over and to apply the
excess quarterly income tax against income tax due for the taxable quarters of the succeeding
taxable years, such option is irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed.
Had this provision been in effect when the present claim for refund was filed, petitioners excess
credits for 1988 could have been properly applied to its 1990 tax liabilities. Unfortunately for
petitioner, this is not the case.
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. And since taxes
are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against
exemptions
from
taxation
and
statutes
granting
tax
exemptions
are
thus
construed strictissimijuris against the taxpayer and liberally in favor of the taxing authority. A claim of
refund or exemption from tax payments must be clearly shown and be based on language in the law
too plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. 32
WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of Appeals is
herebyAFFIRMED. No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
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. 6
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," 9being "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. 16
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. 18

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. 21After 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; ... 22
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. 23

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.
Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION

G.R. No. 120880 June 5, 1997


FERDINAND R. MARCOS II, petitioner,
vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and
HERMINIA D. DE GUZMAN, respondents.

TORRES, JR., J.:


In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and
unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition
assails the Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363,
where the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and
estate tax assessment, are already final and (u)nappealable-and-the subsequent
levy of real properties is a tax remedy resorted to by the government, sanctioned by
Section 213 and 218 of the National Internal Revenue Code. This summary tax
remedy is distinct and separate from the other tax remedies (such as Judicial Civil
actions and Criminal actions), and is not affected or precluded by the pendency of
any other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the
petition forcertiorari with prayer for Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED.
More than seven years since the demise of the late Ferdinand E. Marcos, the former President of
the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the
government in estate taxes, are still unresolved, the latter issue being now before this Court for
resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions
the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon
the estate and properties of his father, despite the pendency of the proceedings on probate of the
will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of
Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with
an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993,
seeking to
I. Annul and set aside the Notices of Levy on real property dated February 22, 1993
and May 20, 1993, issued by respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service),
from proceeding with the Auction of the real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November
29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and
the estate of the deceased President Marcos have already become final and unappealable, and may thus
be enforced by the summary remedy of levying upon the properties of the late President, as was done by
the respondent Commissioner of Internal Revenue.
WHEREFORE, premises considered judgment is hereby rendered DISMISSING the
petition forCertiorari with prayer for Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED.
Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision,
assigning the following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE
SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT
AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL
PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED

WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED


ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN
CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL
OTHER COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING
THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD
ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO
INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT
OF WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL,
HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL
MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE
ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS,
RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS
OF THE FOLLOWING GROUNDS IN THE PETITION:
(1) The Notices of Levy on Real Property were issued beyond the
period provided in the Revenue Memorandum Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late
President's ownership or interests in several properties (both
personal and real) make the total value of his estate, and the
consequent estate tax due, incapable of exact pecuniary
determination at this time. Thus, respondents' assessment of the
estate tax and their issuance of the Notices of Levy and Sale are
premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was
never notified, much less served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the NIRC. As such,
petitioner was never given an opportunity to contest the Notices in
violation of his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT
COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT
INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC
NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF
PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S
AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED
DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
On September 29, 1989, former President Ferdinand Marcos died in Honolulu,
Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations
and examinations of the tax liabilities and obligations of the late president, as well as
that of his family, associates and "cronies". Said audit team concluded its
investigation with a Memorandum dated July 26, 1991. The investigation disclosed
that the Marcoses failed to file a written notice of the death of the decedent, an estate
tax returns [sic], as well as several income tax returns covering the years 1982 to
1986, all in violation of the National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the
Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized

under Sections 253 and 254 in relation to Section 252 a & b) of the National
Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of
the Estate Tax Return for the estate of the late president, the Income Tax Returns of
the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of
petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment
no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos
in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment
no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of
P149,551.70 and P184,009,737.40 representing deficiency income tax for the years
1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to
FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the
amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60
Pesos representing his deficiency income taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate and
income tax assessments were all personally and constructively served on August 26,
1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr.
Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes
"D" and "E" of the Petition). Likewise, copies of the deficiency tax assessments
issued against petitioner Ferdinand "Bongbong" Marcos II were also personally and
constructively served upon him (through his caretaker) on September 12, 1991, at
his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan,
M.M. (Annexes "J" and "J-1" of the Petition). Thereafter, Formal Assessment notices
were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office,
House of Representatives, BatasanPambansa, Quezon City. Moreover, a notice to
Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a
conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel but
to no avail.
The deficiency tax assessments were not protested administratively, by Mrs. Marcos
and the other heirs of the late president, within 30 days from service of said
assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on
real property against certain parcels of land owned by the Marcoses to satisfy the
alleged estate tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the
purpose of satisfying the deficiency income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again
issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and
213 of the National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of
herein petitioner) calling the attention of the BIR and requesting that they be duly
notified of any action taken by the BIR affecting the interest of their client Ferdinand
"Bongbong" Marcos II, as well as the interest of the late president copies of the
aforesaid notices were, served on April 7, 1993 and on June 10, 1993, upon Mrs.
Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata,
Bello, Guevarra and Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the
City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of
land took place on July 5, 1993. There being no bidder, the lots were declared
forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant
petition for certiorariand prohibition under Rule 65 of the Rules of Court, with prayer
for temporary restraining order and/or writ of preliminary injunction.
It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance for the sustenance of government. Taxes are the
lifeblood of the government and should be collected without unnecessary hindrance. However, 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. 3
Whether or not the proper avenues of assessment and collection of the said tax obligations were
taken by the respondent Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late
President Marcos effected by the BIR are null and void for disregarding the established procedure
for the enforcement of taxes due upon the estate of the deceased. The case of Domingo
vs. Garlitos 4 is specifically cited to bolster the argument that "the ordinary procedure by which to settle
claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for
the claimant to present a claim before the probate court so that said court may order the administrator to
pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other
means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by
the government for the immediate payment of taxes, and should order the payment of the same only
within the period fixed by the probate court for the payment of all the debts of the decedent. In this
regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate
of Echarri (67 Phil 502), where it was held that:
The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal
Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on
the proposition that the court having control over the administration proceedings has
jurisdiction to entertain the claim presented by the government for taxes due and to
order the administrator to pay the tax should it find that the assessment was proper,
and that the tax was legal, due and collectible. And the rule laid down in that case
must be understood in relation to the case of Collector of Customs
vs. Haygood, supra., as to the procedure to be followed in a given case by the
government to effectuate the collection of the tax. Categorically stated, where during
the pendency of judicial administration over the estate of a deceased person a claim
for taxes is presented by the government, the court has the authority to order
payment by the administrator; but, in the same way that it has authority to order
payment or satisfaction, it also has the negative authority to deny the same. While
there are cases where courts are required to perform certain duties mandatory and
ministerial in character, the function of the court in a case of the present character is
not one of them; and here, the court cannot be an organism endowed with latitude of
judgment in one direction, and converted into a mere mechanical contrivance in
another direction.
On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes
is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not
preclude the assessment and collection, through summary remedies, of estate taxes over the same.

According to the respondent, claims for payment of estate and income taxes due and assessed after
the death of the decedent need not be presented in the form of a claim against the estate. These
can and should be paid immediately. The probate court is not the government agency to decide
whether an estate is liable for payment of estate of income taxes. Well-settled is the rule that the
probate court is a court with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a
probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once
invoked, and made effective, cannot be treated with indifference nor should it be ignored with
impunity by the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to approve
the sale of properties of a deceased person by his prospective heirs before final adjudication; 5 to
determine who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman
claiming to be the legal wife of the decedent; 8the legality of disinheritance of an heir by the testator; 9 and
to pass upon the validity of a waiver of hereditary rights. 10
The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal
Revenue to collect by the summary remedy of levying upon, and sale of real properties of the
decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate
over the supposed will of the deceased.
The nature of the process of estate tax collection has been described as follows:
Strictly speaking, the assessment of an inheritance tax does not directly involve the
administration of a decedent's estate, although it may be viewed as an incident to the
complete settlement of an estate, and, under some statutes, it is made the duty of
the probate court to make the amount of the inheritance tax a part of the final decree
of distribution of the estate. It is not against the property of decedent, nor is it a claim
against the estate as such, but it is against the interest or property right which the
heir, legatee, devisee, etc., has in the property formerly held by decedent. Further,
under some statutes, it has been held that it is not a suit or controversy between the
parties, nor is it an adversary proceeding between the state and the person who
owes the tax on the inheritance. However, under other statutes it has been held that
the hearing and determination of the cash value of the assets and the determination
of the tax are adversary proceedings. The proceeding has been held to be
necessarily a proceeding in rem. 11
In the Philippine experience, the enforcement and collection of estate tax, is executive in character,
as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of
the National Internal Revenue Code attests to this:
Sec. 3.Powers and duties of the Bureau. The powers and duties of the Bureau of
Internal Revenue shall comprehend the assessment and collection of all national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the execution of judgments in all
cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and administer the supervisory and police power
conferred to it by this Code or other laws.
Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes
charged against the estate of the decedent. Such taxes, we said, were exempted from the application of
the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government. Vectigalianervisuntreipublicae taxes are the
sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is


opened, need not be submitted to the committee on claims in the ordinary course of
administration. In the exercise of its control over the administrator, the court may
direct the payment of such taxes upon motion showing that the taxes have been
assessed against the estate.
Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to
allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution
of the estate's properties.
Claims for taxes, whether assessed before or after the death of the deceased, can
be collected from the heirs even after the distribution of the properties of the
decedent. They are exempted from the application of the statute of non-claims. The
heirs shall be liable therefor, in proportion to their share in the inheritance. 13
Thus, the Government has two ways of collecting the taxes in question. One, by going
after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received. Another remedy, pursuant to the lien created by
Section 315 of the Tax Code upon all property and rights to property belong to the
taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the
hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of
Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a
settlement tribunal over the deceased is not a mandatory requirement in the collection of estate
taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and
sale of the properties allegedly owned by the late President, on the ground that it was required to
seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the probate or estate settlement court's approval of the
state's claim for estate taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden
not to authorize the executor or judicial administrator of the decedent's estate to deliver any
distributive share to any party interested in the estate, unless it is shown a Certification by the
Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves
the petitioner's contention that it is the probate court which approves the assessment and collection
of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should
have been pursued through the proper administrative and judicial avenues provided for by law.
Section 229 of the NIRC tells us how:
Sec. 229.Protesting of assessment. When the Commissioner of Internal Revenue
or his duly authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings. Within a period to be prescribed by
implementing regulations, the taxpayer shall be required to respond to said notice. If
the taxpayer fails to respond, the Commissioner shall issue an assessment based on
his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation in such form and manner as may be prescribed by
implementing regulations within (30) days from receipt of the assessment; otherwise,
the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation
adversely affected by the decision on the protest may appeal to the Court of Tax

Appeals within thirty (30) days from receipt of said decision; otherwise, the decision
shall become final, executory and demandable. (As inserted by P.D. 1773)
Apart from failing to file the required estate tax return within the time required for the filing of the
same, petitioner, and the other heirs never questioned the assessments served upon them, allowing
the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the
properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken
by the Government, collection thereof may have been done in violation of the law. Thus, the manner
and method in which the latter is enforced may be questioned separately, and irrespective of the
finality of the former, because the Government does not have the unbridled discretion to enforce
collection without regard to the clear provision of law." 14
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing
Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the
Marcos properties, were issued beyond the allowed period, and are therefore null and void:
. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this
Petition) in satisfaction of said assessments were still issued by respondents well
beyond the period mandated in Revenue Memorandum Circular No. 38-68. These
Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at
least seventeen (17) months had already lapsed from the last service of tax
assessment on 12 September 1991. As no notices of distraint of personal property
were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than
three (3) months nor later than six (6) months from 12 September 1991. In
accordance with the Circular, respondents only had until 12 March 1992 (the last day
of the sixth month) within which to issue these Notices of Levy. The Notices of Levy,
having been issued beyond the period allowed by law, are thus void and of no
effect. 15
We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period
and in accordance with the provisions of the present Tax Code. The deficiency tax assessment,
having already become final, executory, and demandable, the same can now be collected through
the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and collection of tax
deficiency in this instance is Article 223 of the NIRC, which pertinently provides:
Sec. 223.Exceptions as to a period of limitation of assessment and collection of
taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten (10)
years after the discovery of the falsity, fraud, or omission:Provided, That, in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.
xxxxxxxxx
(c) Any internal revenue tax which has been assessed within the period of limitation
above prescribed, may be collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax.
xxxxxxxxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in
case of failure to file a return, the tax may be assessed at any time within ten years after the
omission, and any tax so assessed may be collected by levy upon real property within three years
following the assessment of the tax. Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting the validity of the said assessment,
there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection
against the assessment should have been pursued following the avenue paved in Section 229 of the
NIRC on protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late president's
ownership or interests in several properties (both real and personal) make the total value of his
estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time.
Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale
are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos.
0001-0034 and 0141, which were filed by the government to question the ownership and interests of
the late President in real and personal properties located within and outside the Philippines.
Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of
estate taxes upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at
issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect
the enforcement of tax assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear
evidence of the uncertainty on the part of the Government as to the total value of the estate of the
late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had
already become final and unappealable.
It is not the Department of Justice which is the government agency tasked to determine the amount
of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16 whose determinations
and assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful
where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon
the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error
in the assessment will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has
not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise to the
questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment
bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere
rhetoric cannot supply the basis for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court
of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the
pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his
disregard or even repugnance of the established institutions for governance in the scheme of a wellordered society. The subject tax assessments having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest. In the main, Certiorari may not
be used as a substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in
view of the absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the
respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) both alleging/claiming lack of notice We find, after
considering the facts and circumstances, as well as evidences, that there was
sufficient, constructive and/or actual notice of assessments, levy and sale, sent to
herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda
Marcos.
Even if we are to rule out the notices of assessments personally given to the
caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and
September 12, 1991, as well as the notices of assessment personally given to the
caretaker of petitioner also at his last known address on September 12, 1991 the
subsequent notices given thereafter could no longer be ignored as they were sent at
a time when petitioner was already here in the Philippines, and at a place where said
notices would surely be called to petitioner's attention, and received by responsible
persons of sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs.
Marcos c/o the petitioner, at his office, House of Representatives,
BatasanPambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8,
1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished
the counsel of Mrs. Marcos Dean Antonio Coronel (Annex "B", p. 211, ibid).
Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio
Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices,
petitioner never lifted a finger to protest the assessments, (upon which the Levy and
sale of properties were based), nor appealed the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it
appearing that petitioner continuously ignored said Notices despite several
opportunities given him to file a protest and to thereafter appeal to the Court of Tax
Appeals, the tax assessments subject of this case, upon which the levy and sale
of properties were based, could no longer be contested (directly or indirectly) via this
instant petition for certiorari. 20
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been
issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent,
petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties
should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner
as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late
president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices
of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under
Section 213 of the NIRC, which pertinently states:
xxxxxxxxx
. . . Levy shall be effected by writing upon said certificate a description of the property
upon which levy is made. At the same time, written notice of the levy shall be mailed
to or served upon the Register of Deeds of the province or city where the property is
located and upon the delinquent taxpayer, or if he be absent from the Philippines, to
his agent or the manager of the business in respect to which the liability arose, or if
there be none, to the occupant of the property in question.
xxxxxxxxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale
were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner
himself on April 12, 1993 at his office at the BatasangPambansa. 21 We cannot therefore, countenance
petitioner's insistence that he was denied due process. Where there was an opportunity to raise
objections to government action, and such opportunity was disregarded, for no justifiable reason, the
party claiming oppression then becomes the oppressor of the orderly functions of government. He who
comes to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very
structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court
of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 134062

April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
CORONA, J.:
This is a petition for review on certiorari 1 of a decision2 of the Court of Appeals (CA) dated May 29,
1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of the
Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case
No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed
respondent Bank of the Philippine Islands (BPIs) deficiency percentage and documentary stamp
taxes for the year 1986 in the total amount of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax

P 7, 270,892.88

Add: 25% surcharge

1,817,723.22

20% interest from 1-21-87 to 10-28-88

3,215,825.03

Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE

15,000.00
P12,319,441.13

1986 Deficiency Documentary Stamp Tax


Deficiency percentage tax

P93,723,372.40

Add: 25% surcharge

23,430,843.10

Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE

15,000.00
P117,169,215.50.5

Both notices of assessment contained the following note:


Please be informed that your [percentage and documentary stamp taxes have] been assessed as
shown above. Said assessment has been based on return (filed by you) (as verified) (made by
this Office) (pending investigation) (after investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial
Treasurer of xxx6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed,
even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a
deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can
make an intelligent decision on whether to pay or to protest the assessment. This is all the
more so when the assessment involves astronomical amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the briefest
form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and
as to the percentage tax, it is important that the taxpayer be informed also as to what
particular percentage tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise
forged between your office and the Bankers Association of the Philippines [BAP] on this
issue and of BPIs submission of its computations under this compromise. There is therefore
no basis whatsoever for this assessment, assuming it is on the subject of the BAP
compromise. On the other hand, if it relates to documentary stamp tax on some other issue,
we should like to be informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on how such
assessment may be protested since your letter does not even tell the taxpayer what
particular percentage tax is involved and how your examiner arrived at the deficiency. As
soon as this is explained and clarified in a proper letter of assessment, we shall inform you of
the taxpayers decision on whether to pay or protest the assessment. 7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
although in all respects, your letter failed to qualify as a protest under Revenue Regulations No.
12-85 and therefore not deserving of any rejoinder by this office as no valid issue was raised against
the validity of our assessment still we obliged to explain the basis of the assessments.
xxxxxxxxx
this constitutes the final decision of this office on the matter.8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8,
1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21,
1992.10
On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated November 16,
1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become
final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the
National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA
1125.12 It denied reconsideration in a resolution dated May 27, 1996.13
On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the
CTA14 for a decision on the merits. 15 It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases therefor. It
declared that the proper assessments were those contained in the May 8, 1991 letter which provided
the reasons for the claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the
CTA on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:

1) whether or not the assessments issued to BPI for deficiency percentage and documentary
stamp taxes for 1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270.Protesting of assessment. When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the [CIR] shall issue an
assessment based on his findings.
xxxxxxxxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices 19 were valid
assessments. If they were not, as held by the CA, then the correct assessments were in the May 8,
1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a
reconsideration of the findings which the CIR denied in his December 12, 1991 letter, received by
BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on February
18, 1992 would be well within the 30-day period provided by law.20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which
was designed for the precise purpose of notifying taxpayers of the assessed amounts due and
demanding payment thereof.21 He contends that there was no law or jurisprudence then that required
notices to state the reasons for assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and law upon which the assessments
were based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section
228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due
process requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228.Protesting of Assessment. When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not be required in the following
cases:
xxxxxxxxx
The taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.
xxxxxxxxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of
the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the
computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270
prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23 In CIR v.
Reyes,24 we held that:

In the present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who
had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424,
otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The
old requirement of merely notifying the taxpayer of the CIR's findings was changed in
1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment
would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued.
During those dates, RA 8424 was already in effect. The notice required under the old law was no
longer sufficient under the new law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law
required a written statement to the taxpayer of the law and facts on which the assessments were
based. The Court cannot read into the law what obviously was not intended by Congress. That
would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax
liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed
period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an
affirmation of what the law required under the former Section 270. The amendment introduced by RA
8424 was an innovation and could not be reasonably inferred from the old law.29 Clearly, the
legislature intended to insert a new provision regarding the form and substance of assessments
issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of
the legal and factual basis of the formers decision to charge the latter for deficiency documentary
stamp and gross receipts taxes.31
In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to
inform it in writing of the factual and legal bases of the assessments even if these were not called
for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that "no person
shall be deprived of his property without due process of law." 32 We note, however, what the CTA had
to say:
xxxxxxxxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity
to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI]
ignored) but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh]

out the issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel
honestly tell this Court that they did not know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,]
contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager
of the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which
contain his analysis regarding the findings of the [CIRs] examiner, Mr. San Pedro and that the same
worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].
xxxxxxxxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature
and basis of the assessments, and was given all the opportunity to contest the same but ignored it
despite the notice conspicuously written on the assessments which states that "this ASSESSMENT
becomes final and unappealable if not protested within 30 days after receipt." Counsel resorted to
dilatory tactics and dangerously played with time. Unfortunately, such strategy proved fatal to the
cause of his client.33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on appeal if they are not supported by
substantial evidence or there is a showing of gross error or abuse on the part of the [CTA]. 34
Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days from receipt of the final
decision:35
Sec. 270. Protesting of assessment.

1a\^/phi1.net

xxxxxxxxx
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final
and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of
the said decision; otherwise, the decision shall become final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have protested
the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not
qualify as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a
proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay
or protest the assessment."36 Hence, by its own declaration, BPI did not regard this letter as a
protest against the assessments. As a matter of fact, BPI never deemed this a protest since it did not
even consider the October 28, 1988 notices as valid or proper assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA
correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from disputing
the correctness of the assessments or invoking any defense that would reopen the question of its
liability on the merits.37 Not only that. There arose a presumption of correctness when BPI failed to
protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has
the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties,

an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior
officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed
to have failed to appeal the CIRs final decision regarding the disputed assessments within the 30day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final
decision on the matter." BPI therefore had 30 days from the time it received the decision on June
27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal
in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must now suffer the
repercussions of its omission. We have already declared that:
the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the
basis of his statement indubitably showing that the Commissioner's communicated action is
his final decision on the contested assessment, the aggrieved taxpayer would then be able to
take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer
would be able to determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer
to continually delay the finality of the assessment and, consequently, the collection of the
amount demanded as taxes by repeated requests for recomputation and
reconsideration. On the part of the [CIR], this would encourage his office to conduct a careful and
thorough study of every questioned assessment and render a correct and definite decision thereon
in the first instance. This would also deter the [CIR] from unfairly making the taxpayer grope in the
dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater
import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in
administrative action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the
subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a
considerable amount of money. Be that as it may, we cannot legally presume the existence of
something which was never there. The state will be deprived of the taxes validly due it and the public
will suffer if taxpayers will not be held liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the
very existence of the state whose social contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being
of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals
in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
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.9
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 fees 11 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."12
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.13Respondent alleged that petitioner's exemption from local taxes has been
repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit

hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order 15 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."16
On appeal, the Court of Appeals reversed the trial court's Order 17 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. 19
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."20
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 one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
x

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.24
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' ( McCulloch
v. Maryland,supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it."27
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." 29
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 charges 34 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.41
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.43
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.'"47
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.52
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 property 54 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 xx
(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
xx;
(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 "58
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. 215 60 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 "nonprofit" 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. 2029 63 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 xx."
(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 "businesslike" 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 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." (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 expressiouniusestexclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a nonstock 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 expressiouniusestexclusioalterius. 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
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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, defendants-appellants.
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 UbaldoCarbonell 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 64-67, 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, thePhilippine 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:
xxxxxxxxx
(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.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
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 video-tape
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

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
they are not inconsistent with or foreign to the general subject and title. 2

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.
xxxxxxxxx
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 theaterowners 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 BatasangPambansa 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. 15
... 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, 639-641). 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". 16
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 over-regulated 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. 17
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. 18
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.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
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 byproducts 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.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 193007

July 19, 2011

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


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

ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief1 assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as
regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the
approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424
(the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on
the other hand, claims that she served as Assistant Secretary of the Department of Trade and
Industry and consultant of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria MacapagalArroyo 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.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents Cesar
V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days from notice. 2 Later, the Court issued
another resolution treating the petition as one for prohibition. 3
On August 23, 2010 the Office of the Solicitor General filed the governments comment. 4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should seek
the meaning and intent of the law from the words used in the statute; and that the imposition of VAT
on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars. 5
The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs)
between the government and tollway operators. At any rate, the non-impairment clause cannot limit
the 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 reply6 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
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition;
and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms "franchise grantees" and "sale of services"
under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and
not a tax on services; b) will impair the tollway operators right to a reasonable return of
investment under their TOAs; and c) is not administratively feasible and cannot be
implemented.
The 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, quasijudicial, 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 tollwayseveryday, 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.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed,
and collected, according to Section 108, on the gross receipts derived from the sale or exchange of
services as well as from the use or lease of properties. The third paragraph of Section 108 defines
"sale or exchange of services" as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the Philippines; sales of electricity by generation
companies, transmission, and distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services is not
exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the term
"services" an all-encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the 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."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes
such services from the term "sale of services" under Section 108 of the Code. But, again, nothing in
Section 108 supports this contention. The reverse is true. In specifically including by way of example
electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies rendering public service for a fee to the imposition
of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for
its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course
of congressional deliberations of the would-be law. As the Court said in South African Airways v.

Commissioner of Internal Revenue, 20 "statements made by individual members of Congress in the


consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law." The congressional will is ultimately determined by the
language of the law that the lawmakers voted on. Consequently, the meaning and intention of the
law must first be sought "in the words of the statute itself, read and considered in their natural,
ordinary, commonly accepted and most obvious significations, according to good and approved
usage and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "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:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State.
The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a
"port" constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and
Buildings are properties of public dominion and thus owned by the State or the Republic of the
Philippines.
x xxThe 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 tax30and 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. Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extent that specific constitutional or statutory limitations are
impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it, 35 the facts pertaining to the matter are
not sufficiently established for the Court to pass judgment on. Besides, any concern about how the
VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of
implementing tax laws primarily and exclusively rests. The Court cannot preempt the 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 VATinclusive 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.
1avvphi1

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.

Republic of the Philippines


SUPREME COURT
THIRD DIVISION
G.R. No. 159647 April 15, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioners,
vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.
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 Review1 under Rule 45 of the Rules of Court, seeking to set aside the
August 29, 2002 Decision2 and the August 11, 2003 Resolution3 of the Court of Appeals (CA) in CAGR SP No. 67439. The assailed Decision reads as follows:
"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No
costs."4
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 Decision5 dismissing respondents Petition for lack
of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:
x xx, 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 xx.
x xxxxxxxx
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
3420 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 Atax 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 creditcanbe 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 VATregistered 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 zero-rated 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 PambansaBlg. (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 atax 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
finding32 that the carry-over of tax creditsunder 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 statement39 or financial report upon which theincome 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."42

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.44
A "percentage reduction from the list price x xx 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. 48
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
statement50 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. 52This
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.53
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
accounts54 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 sold56 -- is deducted
from gross sales to come up with the gross income, profit or margin57 derived from business.58 In
another provision therein, sales discountsthat 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. Ubilex non
distinguit, necnosdistingueredebemus. 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 theincome 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 294 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. 67
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.70
Availment of Tax
Credit Voluntary

Third,
the
word may in
the
text
of
the
statute71 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 sales74 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 75accordingly. 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 verbalegis in statutory construction is
thus applicable x xx. 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."76
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.77
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 asjust 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.79
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.83
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 thetax credit limitation under RR 294 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 xx services available to all the people at
affordable cost"87 and of giving "priority for the needs of the x xx elderly." 88 Sections 2.i and 4 of RR 294, 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, hindiba?
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 baganon 'yan?
MS. ADVENTO. Kaya langpo sir, and mga discounts ponila affecting government and public
institutions, so, puwedenaponatinghindiisamayungmga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwedena.Yung about the private hospitals.Yung isiningitnatin?
MS. ADVENTO. Singitnapobayung 15% on credit. (inaudible/did not use the microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa banaisamanatin?
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 nalangnatinparawalang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahatng establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sakuwanlang yon, as private hospitals lang.

REP. AQUINO. Anobayung establishments na covered?


SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments.Alisinnanatin '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. Ganonba 'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahilkung 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 nalangsa Letter A".89
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 xx
[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." 93
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 Code94 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. 166494

June 29, 2007

CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos Superdrug,"
ELSIE M. CANO, doing business under the name and style "Advance Drug," Dr. SIMPLICIO L.
YAP, JR., doing business under the name and style "City Pharmacy," MELVIN S. DELA
SERNA, doing business under the name and style "Boticadela Serna," and LEYTE SERVWELL CORP., doing business under the name and style "Leyte Serv-Well
Drugstore," petitioners,
vs.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF
HEALTH (DOH), DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and LOCAL GOVERNMENT (DILG), respondents.
DECISION
AZCUNA, J.:
This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality
of Section 4(a) of Republic Act (R.A.) No. 9257, 2 otherwise known as the "Expanded Senior Citizens
Act of 2003."
Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Public respondents, on the other hand, include the Department of Social Welfare and Development
(DSWD), the Department of Health (DOH), the Department of Finance (DOF), the Department of
Justice (DOJ), and the Department of Interior and Local Government (DILG) which have been
specifically tasked to monitor the drugstores compliance with the law; promulgate the implementing
rules and regulations for the effective implementation of the law; and prosecute and revoke the
licenses of erring drugstore establishments.
The antecedents are as follows:
On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, 3 was signed into law by President
Gloria Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act states:
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers, and
purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens,
including funeral and burial services for the death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of
the discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue Code, as
amended.4
On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of
R.A. No. 9257, Rule VI, Article 8 of which states:
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted
under Rule V, Section 4 Discounts for Establishments;5 Section 9, Medical and Dental Services in
Private Facilities[,]6 and Sections 107 and 118 Air, Sea and Land Transportation as tax deduction
based on the net cost of the goods sold or services rendered. Provided, That the cost of the discount

shall be allowed as deduction from gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax deduction net of value added tax
if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as amended;
Provided, finally, that the implementation of the tax deduction shall be subject to the Revenue
Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department
of Finance (DOF).9
On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF,
through Director IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction
(under the Expanded Senior Citizens Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent
(20%) discount from all establishments relative to the utilization of transportation services, hotels and
similar lodging establishment, restaurants and recreation centers and purchase of medicines
anywhere in the country, the costs of which may be claimed by the private establishments concerned
as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayers tax liability due to the
government of the amount of discounts such establishment has granted to a senior citizen. The
establishment recovers the full amount of discount given to a senior citizen and hence, the
government shoulders 100% of the discounts granted.
It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover
this tax payment from his/her income tax due. The tax credit scheme under R.A. No. 7432 is,
therefore, inapplicable since no tax payments have previously occurred.
1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment
concerned may claim the discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross
income, based on the net cost of goods sold or services rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross income, in
computing for its tax liability, the amount of discounts granted to senior citizens. Effectively, the
government loses in terms of foregone revenues an amount equivalent to the marginal tax rate the
said establishment is liable to pay the government. This will be an amount equivalent to 32% of the
twenty percent (20%) discounts so granted. The establishment shoulders the remaining portion of
the granted discounts.
It may be necessary to note that while the burden on [the] government is slightly diminished in terms
of its percentage share on the discounts granted to senior citizens, the number of potential
establishments that may claim tax deductions, have however, been broadened. Aside from the
establishments that may claim tax credits under the old law, more establishments were added under
the new law such as: establishments providing medical and dental services, diagnostic and
laboratory services, including professional fees of attending doctors in all private hospitals and
medical facilities, operators of domestic air and sea transport services, public railways and skyways
and bus transport services.
A simple illustration might help amplify the points discussed above, as follows:
Tax Deduction Tax Credit
Gross Sales x xxxxxxxxxxx

Less : Cost of goods sold x xxxx xxxxx


Net Sales x xxxxxxxxxxx
Less: Operating Expenses:
Tax Deduction on Discounts x xxx -Other deductions: x xxx xxxx
Net Taxable Income x xxxxxxxxx
Tax Due x xxxxx
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax deduction on discounts was subtracted
from Net Sales together with other deductions which are considered as operating expenses before
the Tax Due was computed based on the Net Taxable Income. On the other hand, under a tax
credit scheme, the amount of discounts which is the tax credit item, was deducted directly from the
tax due amount.10
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines
to Implement the Relevant Provisions of Republic Act 9257, otherwise known as the "Expanded
Senior Citizens Act of 2003"11was issued by the DOH, providing the grant of twenty percent (20%)
discount in the purchase of unbranded generic medicines from all establishments dispensing
medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177 12 amending A.O. No. 171.
Under A.O. No. 177, the twenty percent discount shall not be limited to the purchase of unbranded
generic medicines only, but shall extend to both prescription and non-prescription medicines whether
branded or generic. Thus, it stated that "[t]he grant of twenty percent (20%) discount shall be
provided in the purchase of medicines from all establishments dispensing medicines for the
exclusive use of the senior citizens."
Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on
the following grounds:13
1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that
private property shall not be taken for public use without just compensation;
2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states
that "no person shall be deprived of life, liberty or property without due process of law, nor shall any
person be denied of the equal protection of the laws;" and
3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11 that
makes "essential goods, health and other social services available to all people at affordable cost." 14
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result in
a loss of profit

and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and
2) the law failed to provide a scheme whereby drugstores will be justly compensated for the
discount.
Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%)
discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse
petitioners for the discount privilege accorded to senior citizens. This is because the discount is
treated as a deduction, a tax-deductible expense that is subtracted from the gross income and
results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law 15 to reduce
the income prior to the application of the tax rate to compute the amount of tax which is due. 16 Being
a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers
a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of
the gross sales of the private establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit. 17 This constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner by
the expropriator. The measure is not the takers gain but the owners loss. The word just is used to
intensify the meaning of the word compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full and ample. 18
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not
meet the definition of just compensation.19
Having said that, this raises the question of whether the State, in promoting the health and welfare of
a special group of citizens, can impose upon private establishments the burden of partly subsidizing
a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges to them for their improvement and well-being as
the State considers them an integral part of our society.20
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself.
Thus, the Act provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its elderly members while the State may
design programs of social security for them. In addition to this, Section 10 in the Declaration of
Principles and State Policies provides: "The State shall provide social justice in all phases of national
development." Further, Article XIII, Section 11, provides: "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." Consonant with
these constitutional principles the following are the declared policies of this Act:

...
(f) To recognize the important role of the private sector in the improvement of the welfare of
senior citizens and to actively seek their partnership.21
To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar
lodging establishments, restaurants and recreation centers; and purchases of medicines for the
exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the
discount as a tax deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and
provide enough room for an efficient and flexible response to conditions and circumstances, thus
assuring the greatest benefits. 22 Accordingly, it has been described as "the most essential, insistent
and the least limitable of powers, extending as it does to all the great public needs." 23 It is "[t]he
power vested in the legislature by the constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same."24
For this reason, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due process,
must yield to general welfare.25
Police power as an attribute to promote the common good would be diluted considerably if on the
mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is
invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of
the provision in question, there is no basis for its nullification in view of the presumption of validity
which every law has in its favor.26
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is
unduly oppressive to their business, because petitioners have not taken time to calculate correctly
and come up with a financial report, so that they have not been able to show properly whether or not
the tax deduction scheme really works greatly to their disadvantage. 27
In treating the discount as a tax deduction, petitioners insist that they will incur losses because,
referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners would
give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of
a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance
drug Norvasc as an example. According to the latter, it acquires Norvasc from the distributors
at P37.57 per tablet, and retails it atP39.60 (or at a margin of 5%). If it grants a 20% discount to
senior citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which
translates to a loss from capital of P5.89 per tablet. Even if the government will allow a tax
deduction, only P2.53 per tablet will be refunded and not the full amount of the discount which
is P7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores. 28
Petitioners computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income,29 the amount of income derived from all sources
before deducting allowable expenses, which will result in net income. Here, petitioners tried to show
a loss on a per transaction basis, which should not be the case. An income statement, showing an

accounting of petitioners sales, expenses, and net profit (or loss) for a given period could have
accurately reflected the effect of the discount on their income. Absent any financial statement,
petitioners cannot substantiate their claim that they will be operating at a loss should they give the
discount. In addition, the computation was erroneously based on the assumption that their
customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income,
not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of
their medicines given the cutthroat nature of the players in the industry. It is a business decision on
the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as
alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right,
petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise
their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing
component of the business. While the Constitution protects property rights, petitioners must accept
the realities of business and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides
the precept for the protection of property, various laws and jurisprudence, particularly on agrarian
reform and the regulation of contracts and public utilities, continuously serve as a reminder that the
right to property can be relinquished upon the command of the State for the promotion of public
good.30
Undeniably, the success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of
R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act. 31
WHEREFORE, the petition is DISMISSED for lack of merit.
No costs.
SO ORDERED.