Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 76778 June 6, 1990

FRANCISCO I. CHAVEZ, petitioner,

vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her capacity as Acting Municipal
Treasurer of the Municipality of Las Pias, respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES,
INC., petitioner-intervenor.

Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression (Bonifacio) for
petitioner.

Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.

MEDIALDEA, J.:

The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986, which We quote
in full, as follows (78 O.G. 5861):

EXECUTIVE ORDER No. 73

PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL
PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE, AS
AMENDED

WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;

WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;

WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment their financial resources to
meet the rising cost of rendering effective services to the people;

NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:

SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection.
 SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to
implement this Executive Order.

SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.

SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or modified accordingly.

SEC. 5. This Executive Order shall take effect immediately.

On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of Executive Order
No. 73 until June 30, 1987.

The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He alleges the following:
that Executive Order No. 73 accelerated the application of the general revision of assessments to January 1, 1987
thereby mandating an excessive increase in real property taxes by 100% to 400% on improvements, and up to
100% on land; that any increase in the value of real property brought about by the revision of real property values
and assessments would necessarily lead to a proportionate increase in real property taxes; that sheer oppression is
the result of increasing real property taxes at a period of time when harsh economic conditions prevail; and that
the increase in the market values of real property as reflected in the schedule of values was brought about only by
inflation and economic recession.

The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national association of
owners-lessors, joins Chavez in his petition to declare unconstitutional Executive Order No. 73, but additionally
alleges the following: that Presidential Decree No. 464 is unconstitutional insofar as it imposes an additional one
percent (1%) tax on all property owners to raise funds for education, as real property tax is admittedly a local tax
for local governments; that the General Revision of Assessments does not meet the requirements of due process
as regards publication, notice of hearing, opportunity to be heard and insofar as it authorizes "replacement cost"
of buildings (improvements) which is not provided in Presidential Decree No. 464, but only in an administrative
regulation of the Department of Finance; and that the Joint Local Assessment/Treasury Regulations No. 2-86 2 is
even more oppressive and unconstitutional as it imposes successive increase of 150% over the 1986 tax.

The Office of the Solicitor General argues against the petition.

The petition is not impressed with merit.

Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73 insofar as the
revision of the assessments and the effectivity thereof are concerned. It should be emphasized that Executive
Order No. 73 merely directs, in Section 1 thereof, that:

SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection. (emphasis supplied)

The general revision of assessments completed in 1984 is based on Section 21 of Presidential Decree No. 464
which provides, as follows:

SEC. 21. General Revision of Assessments. Beginning with the assessor shall make a calendar
year 1978, the provincial or city general revision of real property assessments in the province or
city to take effect January 1, 1979, and once every five years thereafter: Provided; however, That
if property values in a province or city, or in any municipality, have greatly changed since the last
 general revision, the provincial or city assesor may, with the approval of the Secretary of Finance
or upon bis direction, undertake a general revision of assessments in the province or city, or in
any municipality before the fifth year from the effectivity of the last general revision.

Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73 has no legal basis
as the general revision of assessments is a continuing process mandated by Section 21 of Presidential Decree No.
464. If at all, it is Presidential Decree No. 464 which should be challenged as constitutionally infirm. However,
Chavez failed to raise any objection against said decree. It was ROAP which questioned the constitutionality
thereof. Furthermore, Presidential Decree No. 464 furnishes the procedure by which a tax assessment may be
questioned:

SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the action of
the provincial or city assessor in the assessment of his property may, within sixty days from the
date of receipt by him of the written notice of assessment as provided in this Code, appeal to the
Board of Assessment Appeals of the province or city, by filing with it a petition under oath using
the form prescribed for the purpose, together with copies of the tax declarations and such
affidavit or documents submitted in support of the appeal.

xxx xxx xxx

SEC. 34. Action by the Local Board of assessment Appeals. The Local Board of Assessment
Appeals shall decide the appeal within one hundred and twenty days from the date of receipt of
such appeal. The decision rendered must be based on substantial evidence presented at the
hearing or at least contained in the record and disclosed to the parties or such relevant evidence
as a reasonable mind might accept as adequate to support the conclusion.

In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take depositions, and issue subpoena and
subpoena duces tecum. The proceedings of the Board shall be conducted solely for the purpose
of ascertaining the truth without-necessarily adhering to technical rules applicable in judicial
proceedings.

The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor
with a copy each of the decision of the Board. In case the provincial or city assessor concurs in
the revision or the assessment, it shall be his duty to notify the property owner of such fact using
the form prescribed for the purpose. The owner or administrator of the property or the assessor
who is not satisfied with the decision of the Board of Assessment Appeals, may, within thirty
days after receipt of the decision of the local Board, appeal to the Central Board of Assessment
Appeals by filing his appeal under oath with the Secretary of the proper provincial or city Board
of Assessment Appeals using the prescribed form stating therein the grounds and the reasons for
the appeal, and attaching thereto any evidence pertinent to the case. A copy of the appeal
should be also furnished the Central Board of Assessment Appeals, through its Chairman, by the
appellant.

Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment
Appeals concerned shall forward the same and all papers related thereto, to the Central Board of
Assessment Appeals through the Chairman thereof.

xxx xxx xxx

 SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall have
jurisdiction over appealed assessment cases decided by the Local Board of Assessment Appeals.
The said Board shall decide cases brought on appeal within twelve (12) months from the date of
receipt, which decision shall become final and executory after the lapse of fifteen (15) days from
the date of receipt of a copy of the decision by the appellant.

In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and subpoenas duces tecum.

The Central Board of assessment Appeals shall adopt and promulgate rules of procedure relative
to the conduct of its business.

Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any owner who
doubts the assessment of his property, may appeal to the Local Board of Assessment Appeals. In case the, owner
or administrator of the property or the assessor is not satisfied with the decision of the Local Board of Assessment
Appeals, he may, within thirty days from the receipt of the decision, appeal to the Central Board of Assessment
Appeals. The decision of the Central Board of Assessment Appeals shall become final and executory after the lapse
of fifteen days from the date of receipt of the decision.

Chavez argues further that the unreasonable increase in real property taxes brought about by Executive Order No.
73 amounts to a confiscation of property repugnant to the constitutional guarantee of due process, invoking the
cases of Ermita-Malate Hotel, et al. v. Mayor of Manila (G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v.
Ancheta, et al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654).

The reliance on these two cases is certainly misplaced because the due process requirement called for therein
applies to the "power to tax." Executive Order No. 73 does not impose new taxes nor increase taxes.

Indeed, the government recognized the financial burden to the taxpayers that will result from an increase in real
property taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985, deferring the implementation of
the increase in real property taxes resulting from the revised real property assessments, from January 1, 1985 to
January 1, 1988. Section 5 thereof is quoted herein as follows:

SEC. 5. The increase in real property taxes resulting from the revised real property assessments
as provided for under Section 21 of Presidential Decree No. 464, as amended by Presidential
Decree No. 1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order
to enable the Ministry of Finance and the Ministry of Local Government to establish the new
systems of tax collection and assessment provided herein and in order to alleviate the condition
of the people, including real property owners, as a result of temporary economic
difficulties. (emphasis supplied)

The issuance of Executive Order No. 73 which changed the date of implementation of the increase in real property
taxes from January 1, 1988 to January 1, 1987 and therefore repealed Executive Order No. 1019, also finds ample
justification in its "whereas' clauses, as follows:

WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment their financial resources to
meet the rising cost of rendering effective services to the people; (emphasis supplied)
 xxx xxx xxx

The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to be resolved in
the present petition. As stated at the outset, the issue here is limited to the constitutionality of Executive Order
No. 73. Intervention is not an independent proceeding, but an ancillary and supplemental one which, in the nature
of things, unless otherwise provided for by legislation (or Rules of Court), must be in subordination to the main
proceeding, and it may be laid down as a general rule that an intervention is limited to the field of litigation open
to the original parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).

We agree with the observation of the Office of the Solicitor General that without Executive Order No. 73, the basis
for collection of real property taxes win still be the 1978 revision of property values. Certainly, to continue
collecting real property taxes based on valuations arrived at several years ago, in disregard of the increases in the
value of real properties that have occurred since then, is not in consonance with a sound tax system. Fiscal
adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenues must be
adequate to meet government expenditures and their variations.

ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes
and Regalado, JJ., concur.

Padilla, J., took no part.

Grio-Aquino, J., is on leave.

G.R. No. L-25043 April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-
guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary
succession the following properties:
 (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas,
formed a partnership called Roxas y Compania.

AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for
generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its
part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion
them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences
were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares
to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey
and subdivision expenses.

It turned out however that the Government did not have funds to cover the purchase price, and so a special
arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of
P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the
arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly
amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71.
Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for
more than one year pursuant to Section 34 of the Tax Code.

RESIDENTIAL HOUSE

During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which
they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else
leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the
sum of P8,000.00 a year.

ASSESSMENTS

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate
dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax
for dealers of securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate
dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of
P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income
therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the
corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas
y Cia., on the fact that said partnership made profits from the purchase and sale of securities.
In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the
years 1953 and 1955, as follows:

1953 1955
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00
Jose Roxas 6,323.00 5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net
profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of
deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the
Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers
on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence,
100% of the profits derived therefrom was taxed.

The following deductions were disallowed:

ROXAS Y CIA.:

1953
Tickets for Banquet in honor of P
S. Osmea 40.00

Gifts of San Miguel beer 28.00

Contributions to

Philippine Air Force Chapel

100.00

Manila Police Trust Fund 150.00

Philippines Herald's fund for Manila's

neediest families
100.00

1955
Contributions to Contribution to
Our Lady of Fatima Chapel, FEU 50.00

ANTONIO ROXAS:

1953
Contributions to

Pasay City Firemen Christmas Fund 25.00

Pasay City Police Dept. X'mas fund

50.00

1955
Contributions to

Baguio City Police Christmas fund

25.00
 Pasay City Firemen Christmas fund 25.00

Pasay City Police Christmas fund

50.00

EDUARDO ROXAS:

1953
Contributions to

Hijas de Jesus' Retiro de Manresa 450.00

Philippines Herald's fund for Manila's

neediest families
100.00

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

JOSE ROXAS:

1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal
in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31,
1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de
Manresa. The Tax Court's judgment reads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas,
Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal
Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes
for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of
the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should
pay only P150.00, as real estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue
did not appeal.

The issues:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?

(2) Are the deductions for business expenses and contributions deductible?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because
it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the
Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point,
he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el
futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a
juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be
favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there
were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years,
it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization
period.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for
generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of
our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed
compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among
the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack
of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly
to the farmers in the same way and under the same terms as would have been the case had the Government done
it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's
gratitude.

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". And, in order to maintain the general public's trust and
confidence in the Government this power must be used justly and not treacherously. It does not conform with Our
sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later
on to penalize him for duly answering the urgent call.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section
34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is
capital gain, taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio
Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as
representation expenses. Representation expenses are deductible from gross income as expenditures incurred in
carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are
reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the
evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court
of Tax Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio
City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and
Our Lady of Fatima chapel at Far Eastern University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not
deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the
families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible
when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand,
the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila
Police, a government entity, intended to be used exclusively for its public functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground
that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It
should be noted however that the contributions were not made to the Philippines Herald but to a group of civic
spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the
members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest
families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far
Eastern University on the ground that the said university gives dividends to its stockholders. Located within the
premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any
religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income
of said university injures to the benefit of its stockholders. The disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it
earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the
partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals
of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law, which
states: 1wph1.t

. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging,
leasing or renting property on his own account as principal and holding himself out as a full or part-time
dealer in real estate or as an owner of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) .

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is
sustained.1wph1.t

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For
1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively,
computed as follows: *

ANTONIO ROXAS

Net income per return P315,476.59

Add: 1/3 share, profits in Roxas y Cia. P 153,249.15

Less amount declared 146,135.46

Amount understated P 7,113.69

Contributions disallowed 115.00

P 7,228.69
Less 1/3 share of contributions amounting to
P21,126.06 disallowed from partnership but
allowed to partners 7,042.02 186.67

Net income per review P315,663.26

Less: Exemptions 4,200.00

Net taxable income P311,463.26

Tax due 154,169.00

Tax paid 154,060.00

Deficiency P 109.00
==========

EDUARDO ROXAS

P
Net income per return
304,166.92

Add: 1/3 share, profits in Roxas y Cia P 153,249.15

Less profits declared 146,052.58

Amount understated P 7,196.57

Less 1/3 share in contributions amounting to

P21,126.06 disallowed from partnership but
allowed to partners 7,042.02 155.55

Net income per review P304,322.47

Less: Exemptions 4,800.00

Net taxable income P299,592.47

Tax Due P147,250.00

Tax paid 147,159.00

Deficiency P91.00
===========

JOSE ROXAS

Net income per return P222,681.76

Add: 1/3 share, profits in Roxas y Cia. P153,429.15

 Less amount reported 146,135.46

Amount understated 7,113.69

Less 1/3 share of contributions disallowed from

partnership but allowed as deductions to
partners 7,042.02 71.67

Net income per review P222,753.43

Less: Exemption 1,800.00

Net income subject to tax P220,953.43

Tax due P102,763.00

Tax paid 102,714.00

Deficiency P 49.00
===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as
real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the
respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the
year 1955. No costs. So ordered.

Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Zaldivar, J., took no part.
Concepcion, C.J., is on leave.

Footnotes

*
See BIR Records, p. 387.

G.R. No. L-75697

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 they are not inconsistent with or foreign to the general subject
and title. 2 An act having a single general subject, indicated in the title, may contain any number of provisions, no
matter how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and
may be considered in furtherance of such subject by providing for the method and means of carrying out the
general object." 3 The rule also is that the constitutional requirement as to the title of a bill should not be so
narrowly construed as to cripple or impede the power of legislation. 4 It should be given practical rather than
technical construction. 5

Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a rider is without
merit. That section reads, inter alia:

Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision of law to
the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as
the case may be, for every sale, lease or disposition of a videogram containing a reproduction of any
motion picture or audiovisual program. Fifty percent (50%) of the proceeds of the tax collected shall
accrue to the province, and the other fifty percent (50%) shall acrrue to the municipality where the tax is
collected; PROVIDED, That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality
and the Metropolitan Manila Commission.
 xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the accomplishment of, the
general object of the DECREE, which is the regulation of the video industry through the Videogram Regulatory
Board as expressed in its title. The tax provision is not inconsistent with, nor foreign to that general subject and
title. As a tool for regulation 6 it is simply one of the regulatory and control mechanisms scattered throughout the
DECREE. The express purpose of the DECREE to include taxation of the video industry in order to regulate and
rationalize the heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those
preambles explain the motives of the lawmaker in presenting the measure. The title of the DECREE, which is the
creation of the Videogram Regulatory Board, is comprehensive enough to include the purposes expressed in its
Preamble and reasonably covers all its provisions. It is unnecessary to express all those objectives in the title or
that the latter be an index to the body of the DECREE. 7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive, confiscatory, and in
restraint of trade. However, it is beyond serious question that a tax does not cease to be valid merely because it
regulates, discourages, or even definitely deters the activities taxed. 8 The power to impose taxes is one so
unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion of the authority which exercises it. 9 In imposing a tax,
the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive
taxation. 10

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the realization
that earnings of videogram establishments of around P600 million per annum have not been subjected to tax,
thereby depriving the Government of an additional source of revenue. It is an end-user tax, imposed on retailers
for every videogram they make available for public viewing. It is similar to the 30% amusement tax imposed or
borne by the movie industry which the theater-owners pay to the government, but which is passed on to the
entire cost of the admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that
is imposed uniformly on all videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the
video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights,
and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the
movie industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose
the tax was to favor one industry over another. 11

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that "inequities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation". 12 Taxation has been made the implement of the state's
police power.13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by the former
President under Amendment No. 6 of the 1973 Constitution providing that "whenever in the judgment of the
President ... , there exists a grave emergency or a threat or imminence thereof, or whenever the interim Batasang
Pambansa or the regular National Assembly fails or is unable to act adequately on any matter for any reason that
in his judgment requires immediate action, he may, in order to meet the exigency, issue the necessary decrees,
orders, or letters of instructions, which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause sufficiently
summarizes the justification in that grave emergencies corroding the moral values of the people and betraying the
national economic recovery program necessitated bold emergency measures to be adopted with dispatch.
Whatever the reasons "in the judgment" of the then President, considering that the issue of the validity of the
exercise of legislative power under the said Amendment still pends resolution in several other cases, we reserve
resolution of the question raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue delegation of legislative power. The
grant in Section 11 of the DECREE of authority to the BOARD to "solicit the direct assistance of other agencies and
units of the government and deputize, for a fixed and limited period, the heads or personnel of such agencies and
units to perform enforcement functions for the Board" is not a delegation of the power to legislate but merely a
conferment of authority or discretion as to its execution, enforcement, and implementation. "The true distinction
is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be,
and conferring authority or discretion as to its execution to be exercised under and in pursuance of the law. The
first cannot be done; to the latter, no valid objection can be made." 14 Besides, in the very language of the decree,
the authority of the BOARD to solicit such assistance is for a "fixed and limited period" with the deputized agencies
concerned being "subject to the direction and control of the BOARD." That the grant of such authority might be
the source of graft and corruption would not stigmatize the DECREE as unconstitutional. Should the eventuality
occur, the aggrieved parties will not be without adequate remedy in law.

5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other categories, one
which "alters the legal rules of evidence, and authorizes conviction upon less or different testimony than the law
required at the time of the commission of the offense." It is petitioner's position that Section 15 of the DECREE in
providing that:

All videogram establishments in the Philippines are hereby given a period of forty-five (45) days after the
effectivity of this Decree within which to register with and secure a permit from the BOARD to engage in
the videogram business and to register with the BOARD all their inventories of videograms, including
videotapes, discs, cassettes or other technical improvements or variations thereof, before they could be
sold, leased, or otherwise disposed of. Thereafter any videogram found in the possession of any person
engaged in the videogram business without the required proof of registration by the BOARD, shall be
prima facie evidence of violation of the Decree, whether the possession of such videogram be for private
showing and/or public exhibition.

raises immediately a prima facie evidence of violation of the DECREE when the required proof of registration of
any videogram cannot be presented and thus partakes of the nature of an ex post facto law.

The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et al. 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.

Teehankee, (C.J.), Yap, Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento
and Cortes, JJ., concur.

Footnotes

1
Section 19[1], Article VIII, 1973 Constitution; Section 26[l] Article VI, 1987 Constitution.
 2
Sumulong vs. COMELEC, No. 48609, October 10, 1941, 73 Phil. 288; Cordero vs. Hon. Jose Cabatuando,
et al., L-14542, Oct. 31, 1962,6 SCRA 418.

3
Public Service Co., Recktenwald, 290 III. 314, 8 ALR 466, 470.

4
Government vs. Hongkong & Shanghai Banking Corporation, No. 44257, November 22, 1938, 66 Phil.
483; Cordero vs. Cabatuando, et al., supra.

5
Sumulong vs. Commission on Elections, supra.

6
United States vs. Sanchez, 340 U.S. 42, 44, 1950, cited in Bernas, Philippines Constitutional Law, p. 594.

7
People vs. Carlos, L-239, June 30, 1947, 78 Phil. 535.

8
U.S. vs. Sanchez, supra.

9
II Cooley, A Treatise on the Constitutional Limitations, p. 986.

10
ibid., p. 987.

11
Magnano Co. vs. Hamilton, 292, U.S. 40.

12
Lutz vs. Araneta, L-7859, December 22, 1955, 98 Phil. 148, citing Carmichael vs. Southern Coal and Coke
Co., 301 U.S. 495, 81 L. Ed. 1245.

13
ibid., citing Great Atl. and Pacific 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.

14
Cincinnati, W & Z.R. Co. vs. Clinton County Comrs (1852) 1 Ohio St. 88.

15
G. R. No. L-40195, May 29, 1987.

16
ibid., citing People vs. Mingoa, supra, See also U.S. vs. Luling No. 11162, August 12, 1916,34 Phil. 725.

17
Solicitor General's Comments, p. 102, Rollo.

18
Morfe vs. Mutuc, L-20387, January 31, 1968, 22 SCRA 424, 450-451.

THIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
CENTRAL LUZON DRUG Promulgated:
CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

T he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax
deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private
establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that
withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke
the law.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the August
29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 67439. The
assailed Decision reads as follows:

WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in

toto. No costs.[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 Decision[5] dismissing respondents Petition for
lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:

x x x, if no tax has been paid to the government, erroneously or illegally, or if no

amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a
claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the government
of the tax sought to be recovered. x x x.
xxxxxxxxx

Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other
words, if there is no tax liability, tax credit is not available.

Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,[6] granted
respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the
CA] in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of
Internal Revenuepromulgated on May 31, 2001, to wit:

However, Sec. 229 clearly does not apply in the instant case because the tax
sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTAs sweeping but unfounded
statement that both tax refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the government. Tax refunds or
credits do not exclusively pertain to illegally collected or erroneously paid taxes
as they may be other circumstances where a refund is warranted. The tax
refund provided under Section 229 deals exclusively with illegally collected or
erroneously paid taxes but there are other possible situations, such as the
refund of excess estimated corporate quarterly income tax paid, or that of
excess input tax paid by a VAT-registered person, or that of excise tax paid on
goods locally produced or manufactured but actually exported. The standards
and mechanics for the grant of a refund or credit under these situations are
different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another
instance of a tax credit and it does not in any way refer to illegally collected or
erroneously paid taxes, x x x.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit
certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA)
7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a
tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just
compensation for the taking of private property for public use.

Hence this Petition.[8]

The Issues

Petitioner raises the following issues for our consideration:

Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount
as a tax credit instead of as a deduction from gross income or gross sales.

Whether the Court of Appeals erred in holding that respondent is entitled to a refund.[9]

These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim
the 20 percent sales discount as a tax credit.

The Courts Ruling

The Petition is not meritorious.

Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss

Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount on their
purchase of medicine from any private establishment in the country. [11] The latter may then claim the cost of the
discount as a tax credit.[12] But can such credit be claimed, even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code, [13] tax credit generally refers to an amount that is
subtracted directly from ones total tax liability.[14] It is an allowance against the tax itself[15] or a deduction from
what is owed[16] by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of
estimated tax, and investment tax credits.[17]

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a
subtraction from income for tax purposes,[18] or an amount that is allowed by law to reduce income prior to [the]
application of the tax rate to compute the amount of tax which is due. [19] An example of a tax deduction is any of
the allowable deductions enumerated in Section 34[20] of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever
applicable -- the income tax that is determined after applying the corresponding tax rates to taxable
income.[21] A tax deduction, on the other, reduces the income that is subject to tax [22] in order to arrive at taxable
income.[23] To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used
only after the tax has been computed; a tax deduction, before.
Tax Liability Required
for Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax
credit can be applied. Without that liability, any tax creditapplication 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 useof such
credit. While the grant is mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will
obviously be no tax liability against which any tax credit can be applied.[24] For the establishment to choose the
immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact
remains that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered
establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability
that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen,
simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted
from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not
move. But it breathes.

Prior Tax Payments Not

Required for Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the
contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed.
The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been
previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for
estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -- again
when paid to a foreign country -- in computing for the donors tax due. The tax credits in both instances allude to
the prior payment of taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject
to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to
either activity. This input tax may either be the VAT on the purchase or importation of goods or services that is
merely due from -- not necessarily paid by -- such VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of goods, materials
and supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said items.[25] Clearly
from this provision, the tax credit refers to an input tax that is either due only or given a value by mere comparison
with the VAT actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase
of primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into
with the government, again, no prior tax payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section
112(A), apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -- again
not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have not
been applied against output taxes.[26] Where a taxpayer
is engaged in zero-rated or effectively 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 creditincentives. To illustrate, the
incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)
391, include tax creditsequivalent to either five percent of the net value earned, or five or ten percent of the net
local content of exports.[30] In order to avail of such credits under the said law and still achieve its objectives, no
prior tax payments are necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of
a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by
private establishments concerned.[31] However, we do not agree with its finding[32] that the carry-over of tax
credits under the said special law to succeeding taxable periods, and even their application against internal
revenue taxes, did not necessitate the existence of a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the existence or
grant, of a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements
is no different from another that presents a net income. Both are entitled to the tax credit provided for under RA
7432, since the law itself accords that unconditional benefit. However, for the losing establishment to immediately
apply such credit, where no tax is due, will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant.[33] In
turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its
availment.[34] To deny such credit, despite the plain mandate of the law and the regulations carrying out that
mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20
percent discount that shall be deducted by the said establishments from their gross income for income tax
purposes and from their gross sales for value-added tax or other percentage tax purposes. [35] In ordinary business
language, the tax creditrepresents the amount of such discount. However, the manner by which the discount shall
be credited against taxes has not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of
anything.[36] To be more precise, it is in business parlance a deduction or lowering of an amount of money;[37] or a
reduction from the full amount or value of something, especially a price. [38] In business there are many kinds of
discount, the most common of which is that affecting the income statement[39] or financial report upon which
the income tax is based.

Business Discounts
Deducted from Gross Sales

A cash discount, for example, is one granted by business establishments to credit customersfor 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 x x allowed by manufacturers to wholesalers and by wholesalers to
retailers[45] is known as a trade discount. No entry for it need be made in the manual or computerized books of
accounts, since the purchase or sale is already valued at the net price actually charged the buyer. [46] The purpose
for the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be
resold are also suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at
net.[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 statement[50] as a line
item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive
at net sales.[51]This type of presentation is resorted to, because the accounts receivable and sales figures that arise
from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and
computerized books of accounts and reflected in the financial statements at the gross amounts of the
invoices.[52] This manner of recording credit sales -- known as the gross method -- is most widely used, because it is
simple, more convenient to apply than the net method, and produces no material errors over time.[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 accounts[54] and reflected in the
financial statements. A separate line item cannot be shown, [55] because the transactions themselves involving
both accounts receivable and sales have already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose
sum -- along with sales returns, allowances and cost of goods sold[56]-- is deducted from gross sales to come up
with the gross income, profit or margin[57] derived from business.[58] In another provision therein, sales
discounts that are granted and indicated in the invoices at the time of sale -- and that do not depend upon the
happening of any future event -- may be excluded from the gross sales within the same quarter they were
given.[59] While determinative only of the VAT, the latter provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After all, these two provisions affirm that sales discounts are
amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright deduction of
the discount from the invoice price of the medicine sold to the senior citizen. [60] It is, therefore, expected that for
each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -
- and the net amount thereof collected -- immediately upon perfection of the sale.[61] Although prompt payment is
made for an arms-length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above
discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant.
To be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the
private establishment granting the discount. Yet, under the revenue regulations promulgated by our tax
authorities, this benefit has been erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount.
However, to a private establishment, the effect is different from a simple reduction in price that results from such
discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier
discourse, this benefit cannot and should not be treated as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an establishment
covered by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the
former is a deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a
discount is not necessarily a sales discount, and a tax credit for a simple discount privilege should not be
automatically treated like a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law
does not distinguish, we ought not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from gross salesfor VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper,
considering that the latter has to be deducted from gross sales in order to compute the gross income in the income
statement and cannot be deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when
claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is
not even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful
purpose. The definition must, therefore, be stricken down.

Laws Not Amended

by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to create a rule out of
harmony with
the statute is a mere nullity;[62] it cannot prevail.

It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a statute by
the executive officers whose duty it is to enforce it x x x.[63] In the scheme of judicial tax administration, the need
for certainty and predictability in the implementation of tax laws is crucial. [64] Our tax authorities fill in the details
that Congress may not have the opportunity or competence to provide. [65]The regulations these authorities issue
are relied upon by taxpayers, who are certain that these will be followed by the courts.[66] Courts, however, will not
uphold these authorities interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning
utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may
not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature.[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 statute[71] implies that the
[72]
availability of the tax credit benefit is neither unrestricted nor mandatory. There is no absolute right conferred
upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; neither does
it impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at
the sole control and discretion of the taxpayer.[73] For the tax authorities to compel respondent to deduct the 20
percent discount from either its gross income or its gross sales[74] is, therefore, not only to make an imposition
without basis in law, but also to blatantly contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent
is given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even
ignore the credit and simply consider the gesture as an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be
applied. If there is none, the credit cannot be used and will just have to be carried over and
revalidated[75] accordingly. If, however, the business continues to operate at a loss and no other taxes are due,
thus compelling it to close shop, the credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts can
be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever
it pleases. Neither does it allow our tax administrators to expand or contract the legislative mandate. The plain
meaning rule or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are
clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted
interpretation.[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 creditcertificate indicating the correct amount of the discounts
given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such
issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just
compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues.[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 the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a
better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from
the latter.

Grant of Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole
and to establish a program beneficial to them.[86] These objectives are consonant with the constitutional policy of
making health x x x services available to all the people at affordable cost [87] and of giving priority for the needs of
the x x x elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory
objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash
outlay is required from the government for the availment or use of such credit. The deliberations on February 5,
1992 of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true
intent of our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income.
We quote from those deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable
income. I think we incorporated there a provision na - on the
responsibility of the private hospitals and drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon
'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less
deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

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

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back
to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments
 - provided that private establishments may claim the cost as a tax
credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[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 x x [T]he rule is that
on a specific matter the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former. [90] In addition, [w]here there are two statutes, the earlier
special and the later general -- the terms of the general broad enough to include the matter provided for in the
special -- the fact that one is special and the other is general creates a presumption that the special is to be
considered as remaining an exception to the general,[91] one as a general law of the land, the other as the law of a
particular case.[92] It is a canon of statutory construction that a later statute, general in its terms and not expressly
repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute. [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 Code[94] be made to restrict RA 7432. No provision of any revenue
regulation can supplant or modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

EN BANC

CARLOS SUPERDRUG CORP., G.R. No. 166494

doing business under the name
and style Carlos Superdrug, Present:
ELSIE M. CANO, doing business
under the name and style Advance PUNO, C.J.,
Drug, Dr. SIMPLICIO L. YAP, JR., QUISUMBING,*
doing business under the name and YNARES-SANTIAGO,
style City Pharmacy, MELVIN S. SANDOVAL-GUTIERREZ,**
DELA SERNA, doing business under CARPIO,
the name and style Botica dela Serna, AUSTRIA-MARTINEZ,
and LEYTE SERV-WELL CORP., CORONA,
doing business under the name and CARPIO MORALES,
style Leyte Serv-Well Drugstore, AZCUNA,
Petitioners, TINGA,
CHICO-NAZARIO,
- versus - GARCIA,
VELASCO, JR., and
DEPARTMENT OF SOCIAL NACHURA, JJ.
WELFARE and DEVELOPMENT
(DSWD), DEPARTMENT OF Promulgated:
HEALTH (DOH), DEPARTMENT
OF FINANCE (DOF), DEPARTMENT June 29, 2007
OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG),
Respondents.
x ---------------------------------------------------------------------------------------- x

DECISION

AZCUNA, J.:
This is a petition[1] 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 10[7] and 11[8] 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 x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
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[11] was 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 justis 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 at P39.60 (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.

ADOLFO S. AZCUNA
 Associate Justice

G.R. No. 175356 December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,

vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE SECRETARY OF THE
DEPARTMENT OF FINANCE, Respondents.

DECISION

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of proof rests upon him.

Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court filed by petitioners Manila Memorial
Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in the business of providing funeral and
burial services, against public respondents Secretaries of the Department of Social Welfare and Development
(DSWD) and the Department of Finance (DOF).

Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432, 3 as amended by RA 9257,4 and
the implementing rules and regulations issued by the DSWD and DOF insofar as these allow business
establishments to claim the 20% discount given to senior citizens as a tax deduction.

Factual Antecedents

On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation
services, hotels and similar lodging establishment[s], restaurants and recreation centers and purchase of medicine
anywhere in the country: Provided, That private establishments may claim the cost as tax credit;

b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and
concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement;

c) exemption from the payment of individual income taxes: Provided, That their annual taxable income does not
exceed the property level as determined by the National Economic and Development Authority (NEDA) for that
year;

d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work;

e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines
to be issued by the Department of Health, the Government Service Insurance System and the Social Security
System;
f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the
Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be, as are
enjoyed by those in actual service.

On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432. Sections 2(i) and 4 of
RR No. 02-94 provide:

Sec. 2. DEFINITIONS. For purposes of these regulations: i. Tax Credit refers to the amount representing the 20%
discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation
services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema
houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which
discount 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. x x x x Sec. 4. RECORDING/BOOKKEEPING
REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. Private establishments, i.e., transport services, hotels and
similar lodging establishments, restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of culture[,] leisure and amusement, giving 20% discounts to qualified
senior citizens are required to keep separate and accurate record[s] of sales made to senior citizens, which shall
include the name, identification number, gross sales/receipts, discounts, dates of transactions and invoice number
for every transaction. The amount of 20% discount shall be deducted from the gross income for income tax
purposes and from gross sales of the business enterprise concerned for purposes of the VAT and other percentage
taxes.

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 5 the Court declared Sections 2(i) and 4 of
RR No. 02-94 as erroneous because these contravene RA 7432,6 thus:

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In
turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.
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." 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." To be more precise, it is in
business parlance "a deduction or lowering of an amount of money;" or "a reduction from the full amount or value
of something, especially a price." In business there are many kinds of discount, the most common of which is that
affecting the income statement or financial report upon which the income tax is based.

xxxx

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper,
considering that the latter has to be deducted from gross sales in order to compute the gross income in the
income statement and cannot be deducted again, even for purposes of computing the income tax. When the law
says that the cost of the discount may be claimed as a tax credit, it means that the amount when claimed
shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit
depends upon the existence of a tax liability, but to limit the benefit to a sales discount which is not even
identical to the discount privilege that is granted by law does not define it at all and serves no useful purpose.
The definition must, therefore, be stricken down.

Laws Not Amended by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out
of harmony with the statute is a mere nullity;" 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." In the scheme of judicial tax administration, the need for certainty and predictability in the
implementation of tax laws is crucial. Our tax authorities fill in the details that "Congress may not have the
opportunity or competence to provide." The regulations these authorities issue are relied upon by taxpayers, who
are certain that these will be followed by the courts. Courts, however, will not uphold these authorities
interpretations when clearly absurd, erroneous or improper. In the present case, the tax authorities have given the
term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their
interpretation has muddled x x x the intent of Congress in granting a mere discount privilege, not a sales discount.
The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it
administers; it cannot engraft additional requirements not contemplated by the legislature.

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." 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. 7

On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:

SECTION 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;

xxxx

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.

To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the pertinent provision
of which provides:

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME.

Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale
of goods and/or services specified thereunder are entitled to deduct the said discount from gross income subject
to the following conditions:

(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall
be eligible for the deductible sales discount.

(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR
SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen.

(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price
can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from
gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes.
(4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is
granted.

(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and
accurate record[s] of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts,
sales discount granted, [date] of [transaction] and invoice number for every sale transaction to senior citizen.

(6) Only the following business establishments which granted sales discount to senior citizens on their sale of
goods and/or services may claim the said discount granted as deduction from gross income, namely:

xxxx

(i) Funeral parlors and similar establishments The beneficiary or any person who shall shoulder the funeral and
burial expenses of the deceased senior citizen shall claim the discount, such as casket, embalmment, cremation
cost and other related services for the senior citizen upon payment and presentation of [his] death certificate.

The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted under Rule V,
Section 4 Discounts for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections
10 and 11 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).

Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that Section 4 of RA
7432, as amended by RA 9257, and the implementing rules and regulations issued by the DSWD and the DOF be
declared unconstitutional insofar as these allow business establishments to claim the 20% discount given to senior
citizens as a tax deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the tax
credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be reinstated.

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND REGULATIONS,
INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY BE CLAIMED
AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL. 9

Petitioners Arguments

Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are only
assailing the constitutionality of the tax deduction scheme prescribed under RA 9257 and the implementing rules
and regulations issued by the DSWD and the DOF.10

Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution, which
provides that: "[p]rivate property shall not be taken for public use without just compensation."11

In support of their position, petitioners cite Central Luzon Drug Corporation, 12 where it was ruled that the 20%
discount privilege constitutes taking of private property for public use which requires the payment of just
compensation,13 and Carlos Superdrug Corporation v. Department of Social Welfare and Development, 14 where it
was acknowledged that the tax deduction scheme does not meet the definition of just compensation. 15

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation 16 that the tax deduction scheme
adopted by the government is justified by police power.17

They assert that "[a]lthough both police power and the power of eminent domain have the general welfare for
their object, there are still traditional distinctions between the two" 18 and that "eminent domain cannot be made
less supreme than police power."19

Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous contemporaneous
construction that prior payment of taxes is required for tax credit. 20

Petitioners also contend that the tax deduction scheme violates Article XV, Section 4 21 and Article XIII, Section
1122of the Constitution because it shifts the States constitutional mandate or duty of improving the welfare of the
elderly to the private sector.23

Under the tax deduction scheme, the private sector shoulders 65% of the discount because only 35% 24 of it is
actually returned by the government.25

Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA 9257 affects the
businesses of petitioners.26

Thus, there exists an actual case or controversy of transcendental importance which deserves judicious disposition
on the merits by the highest court of the land.27

Respondents Arguments

Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme Court as this
disregards the hierarchy of courts.28

They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax deduction
treatment is not a "fair and full equivalent of the loss sustained" by them.29
As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that
petitioners failed to overturn its presumption of constitutionality. 30

More important, respondents maintain that the tax deduction scheme is a legitimate exercise of the States police
power.31

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality of a law is put in issue, judicial review may
be availed of only if the following requisites concur: "(1) the existence of an actual and appropriate case; (2) the
existence of personal and substantial interest on the part of the party raising the [question of constitutionality]; (3)
recourse to judicial review is made at the earliest opportunity; and (4) the [question of constitutionality] is the lis
mota of the case."32

In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in RA 9257 and
the implementing rules and regulations issued by the DSWD and the DOF. Respondents, however, oppose the
Petition on the ground that there is no actual case or controversy. We do not agree with respondents. An actual
case or controversy exists when there is "a conflict of legal rights" or "an assertion of opposite legal claims
susceptible of judicial resolution."33

The Petition must therefore show that "the governmental act being challenged has a direct adverse effect on the
individual challenging it."34

In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on them. Thus, it
cannot be denied that there exists an actual case or controversy.

The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an exercise of police
power of the State, has already been settled in Carlos Superdrug Corporation.

Petitioners posit that the resolution of this case lies in the determination of whether the legally mandated 20%
senior citizen discount is an exercise of police power or eminent domain. If it is police power, no just compensation
is warranted. But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for
peso reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property
without payment of just compensation. At the outset, we note that this question has been settled in Carlos
Superdrug Corporation.35

In that case, we ruled:

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 to reduce the income prior to the application of the tax rate to
compute the amount of tax which is due. 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. 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. A tax deduction
does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just
compensation. 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. 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.

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. 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." 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." 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. 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. 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. 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 at P39.60 (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. Petitioners computation is flawed. For purposes of reimbursement, the law states
that the cost of the discount shall be deducted from gross income, 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 x x x reminder[s] that the right to property can be
relinquished upon the command of the State for the promotion of public good. 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. 36 (Bold in the
original; underline supplied)

We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power
of the State.

No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug
Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug Corporation 37 that the 20% discount is an
exercise of the power of eminent domain, thus, requiring the payment of just compensation. They urge us to re-
examine our ruling in Carlos Superdrug Corporation38 which allegedly reversed the ruling in Central Luzon Drug
Corporation.39

They also point out that Carlos Superdrug Corporation 40 recognized that the tax deduction scheme under the
assailed law does not provide for sufficient just compensation. We agree with petitioners observation that there
are statements in Central Luzon Drug Corporation41 describing the 20% discount as an exercise of the power of
eminent domain, viz.:

[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as
their just compensation for private property taken by the State for public use. The concept of public use is no
longer confined to the traditional notion of use by the public, but held synonymous with public interest, public
benefit, public welfare, and public convenience. The discount privilege to which our senior citizens are entitled is
actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA
7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes
entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of
property taken by the State, such issuance when not done within a reasonable time from the grant of the
discounts cannot be considered as just compensation. In effect, respondent is made to suffer the consequences
of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its revenues. Besides, the taxation power can also be
used as an implement for the exercise of the power of eminent domain. Tax measures are but "enforced
contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the
power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be
invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person
and give them to another who is not entitled thereto." 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 without the discounts yet will surely start to incur losses because of such discounts. The
same effect is expected if its mark-up is less than 20 percent, and if all its sales come from retail purchases by
senior citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales.
Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if
not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves of tax
credits denied those that are losing, because no taxes are due from the latter.42 (Italics in the original; emphasis
supplied)

The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when we stated preliminarily
that

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 to reduce the income prior to the application of the tax rate to
compute the amount of tax which is due. 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. 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. A tax deduction
does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just
compensation. 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.44

This, notwithstanding, we went on to rule in Carlos Superdrug Corporation 45 that the 20% discount and tax
deduction scheme is a valid exercise of the police power of the State. The present case, thus, affords an
opportunity for us to clarify the above-quoted statements in Central Luzon Drug Corporation46 and Carlos
Superdrug Corporation.47

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation 48 is obiter
dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation, 49 we ruled that the BIR
acted ultra vires when it effectively treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No.
2-94, despite the clear wording of the previous law that the same should be treated as a tax credit. We were,
therefore, not confronted in that case with the issue as to whether the 20% discount is an exercise of police power
or eminent domain. Second, although we adverted to Central Luzon Drug Corporation 50 in our ruling in Carlos
Superdrug Corporation,51 this referred only to preliminary matters. A fair reading of Carlos Superdrug
Corporation52 would show that we categorically ruled therein that the 20% discount is a valid exercise of police
power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme
under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private
establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just
compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos Superdrug
Corporation53 and we find no cogent reason to overturn, modify or abandon it. We also note that petitioners
arguments are a mere reiteration of those raised and resolved in Carlos Superdrug Corporation. 54 Thus, we sustain
Carlos Superdrug Corporation.55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug Corporation 56 as
to why the 20% discount is a valid exercise of police power and why it may not, under the specific circumstances of
this case, be considered as an exercise of the power of eminent domain contrary to the obiter in Central Luzon
Drug Corporation.57

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to restrain the use of liberty and property for public
welfare.58

The only limitation is that the restriction imposed should be reasonable, not oppressive. 59
In other words, to be a valid exercise of police power, it must have a lawful subject or objective and a lawful
method of accomplishing the goal.60

Under the police power of the State, "property rights of individuals may be subjected to restraints and burdens in
order to fulfill the objectives of the government."61

The State "may interfere with personal liberty, property, lawful businesses and occupations to promote the
general welfare [as long as] the interference [is] reasonable and not arbitrary." 62

Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private property for
public use.63

The Constitution, however, requires that private property shall not be taken without due process of law and the
payment of just compensation.64

Traditional distinctions exist between police power and eminent domain. In the exercise of police power, a
property right is impaired by regulation,65 or the use of property is merely prohibited, regulated or restricted 66 to
promote public welfare. In such cases, there is no compensable taking, hence, payment of just compensation is not
required. Examples of these regulations are property condemned for being noxious or intended for noxious
purposes (e.g., a building on the verge of collapse to be demolished for public safety, or obscene materials to be
destroyed in the interest of public morals)67 as well as zoning ordinances prohibiting the use of property for
purposes injurious to the health, morals or safety of the community (e.g., dividing a citys territory into residential
and industrial areas).68

It has, thus, been observed that, in the exercise of police power (as distinguished from eminent domain), although
the regulation affects the right of ownership, none of the bundle of rights which constitute ownership is
appropriated for use by or for the benefit of the public.69

On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and
applied to some public purpose which necessitates the payment of just compensation therefor. Normally, the title
to and possession of the property are transferred to the expropriating authority. Examples include the acquisition
of lands for the construction of public highways as well as agricultural lands acquired by the government under the
agrarian reform law for redistribution to qualified farmer beneficiaries. However, it is a settled rule that the
acquisition of title or total destruction of the property is not essential for "taking" under the power of eminent
domain to be present.70

Examples of these include establishment of easements such as where the land owner is perpetually deprived of his
proprietary rights because of the hazards posed by electric transmission lines constructed above his property 71 or
the compelled interconnection of the telephone system between the government and a private company. 72

In these cases, although the private property owner is not divested of ownership or possession, payment of just
compensation is warranted because of the burden placed on the property for the use or benefit of the public.

The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged governmental act is an exercise of police power or
eminent domain. The very nature of police power as elastic and responsive to various social conditions 73 as well as
the evolving meaning and scope of public use74 and just compensation75 in eminent domain evinces that these are
not static concepts. Because of the exigencies of rapidly changing times, Congress may be compelled to adopt or
experiment with different measures to promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain. The judicious approach, therefore, is to
look at the nature and effects of the challenged governmental act and decide, on the basis thereof, whether the
act is the exercise of police power or eminent domain. Thus, we now look at the nature and effects of the 20%
discount to determine if it constitutes an exercise of police power or eminent domain. The 20% discount is
intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more
prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not
be amiss to mention also that the discount serves to honor senior citizens who presumably spent the productive
years of their lives on contributing to the development and progress of the nation. This distinct cultural Filipino
practice of honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount is a
regulation affecting the ability of private establishments to price their products and services relative to a special
class of individuals, senior citizens, for which the Constitution affords preferential concern.76

In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from senior
citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a private
establishment. However, it does not purport to appropriate or burden specific properties, used in the operation or
conduct of the business of private establishments, for the use or benefit of the public, or senior citizens for that
matter, but merely regulates the pricing of goods and services relative to, and the amount of profits or
income/gross sales that such private establishments may derive from, senior citizens. The subject regulation may
be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control
laws which are traditionally regarded as police power measures. 77

These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to
protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the
rate of return on investment of these corporations considering that they have a monopoly over the goods or
services that they provide to the general public. The subject regulation differs therefrom in that (1) the discount
does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the
discount does not apply to all customers of a given establishment but only to the class of senior citizens.
Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as
belonging to the category of price regulatory measures which affect the profitability of establishments subjected
thereto. On its face, therefore, the subject regulation is a police power measure. The obiter in Central Luzon Drug
Corporation,78 however, describes the 20% discount as an exercise of the power of eminent domain and the tax
credit, under the previous law, equivalent to the amount of discount given as the just compensation therefor. The
reason is that (1) the discount would have formed part of the gross sales of the establishment were it not for the
law prescribing the 20% discount, and (2) the permanent reduction in total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit. The flaw in this reasoning is in its premise.
It presupposes that the subject regulation, which impacts the pricing and, hence, the profitability of a private
establishment, automatically amounts to a deprivation of property without due process of law. If this were so,
then all price and rate of return on investment control laws would have to be invalidated because they impact, at
some level, the regulated establishments profits or income/gross sales, yet there is no provision for payment of
just compensation. It would also mean that overnment cannot set price or rate of return on investment limits,
which reduce the profits or income/gross sales of private establishments, if no just compensation is paid even if
the measure is not confiscatory. The obiter is, thus, at odds with the settled octrine that the State can employ
police power measures to regulate the pricing of goods and services, and, hence, the profitability of business
establishments in order to pursue legitimate State objectives for the common good, provided that the regulation
does not go too far as to amount to "taking."79

In City of Manila v. Laguio, Jr.,80 we recognized that x x x a taking also could be found if government regulation of
the use of property went "too far." When regulation reaches a certain magnitude, in most if not in all cases there
must be an exercise of eminent domain and compensation to support the act. While property may be regulated to
a certain extent, if regulation goes too far it will be recognized as a taking. No formula or rule can be devised to
answer the questions of what is too far and when regulation becomes a taking. In Mahon, Justice Holmes
recognized that it was "a question of degree and therefore cannot be disposed of by general propositions." On
many other occasions as well, the U.S. Supreme Court has said that the issue of when regulation constitutes a
taking is a matter of considering the facts in each case. The Court asks whether justice and fairness require that the
economic loss caused by public action must be compensated by the government and thus borne by the public as a
whole, or whether the loss should remain concentrated on those few persons subject to the public action. 81

The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-to-
case basis. Whether that line between permissible regulation under police power and "taking" under eminent
domain has been crossed must, under the specific circumstances of this case, be subject to proof and the one
assailing the constitutionality of the regulation carries the heavy burden of proving that the measure is
unreasonable, oppressive or confiscatory. The time-honored rule is that the burden of proving the
unconstitutionality of a law rests upon the one assailing it and "the burden becomes heavier when police power is
at issue."82

The 20% senior citizen discount has not been shown to be unreasonable, oppressive or confiscatory.

In Alalayan v. National Power Corporation,83 petitioners, who were franchise holders of electric plants, challenged
the validity of a law limiting their allowable net profits to no more than 12% per annum of their investments plus
two-month operating expenses. In rejecting their plea, we ruled that, in an earlier case, it was found that 12% is a
reasonable rate of return and that petitioners failed to prove that the aforesaid rate is confiscatory in view of the
presumption of constitutionality.84

We adopted a similar line of reasoning in Carlos Superdrug Corporation 85 when we ruled that petitioners therein
failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a
financial report, to establish the impact of the 20% discount on the overall profitability of petitioners was
presented in order to show that they would be operating at a loss due to the subject regulation or that the
continued implementation of the law would be unconscionably detrimental to the business operations of
petitioners. In the case at bar, petitioners proceeded with a hypothetical computation of the alleged loss that they
will suffer similar to what the petitioners in Carlos Superdrug Corporation 86 did. Petitioners went directly to this
Court without first establishing the factual bases of their claims. Hence, the present recourse must, likewise, fail.
Because all laws enjoy the presumption of constitutionality, courts will uphold a laws validity if any set of facts
may be conceived to sustain it.87

On its face, we find that there are at least two conceivable bases to sustain the subject regulations validity absent
clear and convincing proof that it is unreasonable, oppressive or confiscatory. Congress may have legitimately
concluded that business establishments have the capacity to absorb a decrease in profits or income/gross sales
due to the 20% discount without substantially affecting the reasonable rate of return on their investments
considering (1) not all customers of a business establishment are senior citizens and (2) the level of its profit
margins on goods and services offered to the general public. Concurrently, Congress may have, likewise,
legitimately concluded that the establishments, which will be required to extend the 20% discount, have the
capacity to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may
sustain because of sales to senior citizens, can be recouped through higher mark-ups or from other products not
subject of discounts. As a result, the discounts resulting from sales to senior citizens will not be confiscatory or
unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation 88 that the 20% senior citizen
discount and tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is
arbitrary, oppressive or confiscatory.

Conclusion

In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will
force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross
sales. The general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder
the subsidy for senior citizens. This, in petitioners view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more
importantly, this goes into the wisdom, efficacy and expediency of the subject law which is not proper for judicial
review. In a way, this law pursues its social equity objective in a non-traditional manner unlike past and existing
direct subsidy programs of the government for the poor and marginalized sectors of our society. Verily, Congress
must be given sufficient leeway in formulating welfare legislations given the enormous challenges that the
government faces relative to, among others, resource adequacy and administrative capability in implementing
social reform measures which aim to protect and uphold the interests of those most vulnerable in our society. In
the process, the individual, who enjoys the rights, benefits and privileges of living in a democratic polity, must bear
his share in supporting measures intended for the common good. This is only fair. In fine, without the requisite
showing of a clear and unequivocal breach of the Constitution, the validity of the assailed law must be sustained.

Refutation of the Dissent

The main points of Justice Carpios Dissent may be summarized as follows: (1) the discussion on eminent domain in
Central Luzon Drug Corporation89 is not obiter dicta ; (2) allowable taking, in police power, is limited to property
that is destroyed or placed outside the commerce of man for public welfare; (3) the amount of mandatory discount
is private property within the ambit of Article III, Section 990 of the Constitution; and (4) the permanent reduction
in a private establishments total revenue, arising from the mandatory discount, is a taking of private property for
public use or benefit, hence, an exercise of the power of eminent domain requiring the payment of just
compensation. I We maintain that the discussion on eminent domain in Central Luzon Drug Corporation 91 is obiter
dicta. As previously discussed, in Central Luzon Drug Corporation, 92 the BIR, pursuant to Sections 2.i and 4 of RR
No. 2-94, treated the senior citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit
despite the clear provision in that law which stated

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:

a) The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation
services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicines
anywhere in the country: Provided, That private establishments may claim the cost as tax credit; (Emphasis
supplied)

Thus, the Court ruled that the subject revenue regulation violated the law, viz:

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.93

As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at this conclusion.
All that was needed was to point out that the revenue regulation contravened the law which it sought to
implement. And, precisely, this was done in Central Luzon Drug Corporation 94 by comparing the wording of the
previous law vis--vis the revenue regulation; employing the rules of statutory construction; and applying the
settled principle that a regulation cannot amend the law it seeks to implement. A close reading of Central Luzon
Drug Corporation95 would show that the Court went on to state that the tax credit "can be deemed" as just
compensation only to explain why the previous law provides for a tax credit instead of a tax deduction. The Court
surmised that the tax credit was a form of just compensation given to the establishments covered by the 20%
discount. However, the reason why the previous law provided for a tax credit and not a tax deduction was not
necessary to resolve the issue as to whether the revenue regulation contravenes the law. Hence, the discussion on
eminent domain is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or reasons that impelled the enactment of
a particular statute or legal provision. However, statements made relative thereto are not always necessary in
resolving the actual controversies presented before it. This was the case in Central Luzon Drug
Corporation96resulting in that unfortunate statement that the tax credit "can be deemed" as just compensation.
This, in turn, led to the erroneous conclusion, by deductive reasoning, that the 20% discount is an exercise of the
power of eminent domain. The Dissent essentially adopts this theory and reasoning which, as will be shown below,
is contrary to settled principles in police power and eminent domain analysis. II The Dissent discusses at length the
doctrine on "taking" in police power which occurs when private property is destroyed or placed outside the
commerce of man. Indeed, there is a whole class of police power measures which justify the destruction of private
property in order to preserve public health, morals, safety or welfare. As earlier mentioned, these would include a
building on the verge of collapse or confiscated obscene materials as well as those mentioned by the Dissent with
regard to property used in violating a criminal statute or one which constitutes a nuisance. In such cases, no
compensation is required. However, it is equally true that there is another class of police power measures which
do not involve the destruction of private property but merely regulate its use. The minimum wage law, zoning
ordinances, price control laws, laws regulating the operation of motels and hotels, laws limiting the working hours
to eight, and the like would fall under this category. The examples cited by the Dissent, likewise, fall under this
category: Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-
IBIG Fund Law. These laws merely regulate or, to use the term of the Dissent, burden the conduct of the affairs of
business establishments. In such cases, payment of just compensation is not required because they fall within the
sphere of permissible police power measures. The senior citizen discount law falls under this latter category. III The
Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales, due to the 20%
discount, is a "taking" of private property for public purpose without payment of just compensation. At the outset,
it must be emphasized that petitioners never presented any evidence to establish that they were forced to suffer
enormous losses or operate at a loss due to the effects of the assailed law. They came directly to this Court and
provided a hypothetical computation of the loss they would allegedly suffer due to the operation of the assailed
law. The central premise of the Dissents argument that the 20% discount results in a permanent reduction in
profits or income/gross sales, or forces a business establishment to operate at a loss is, thus, wholly unsupported
by competent evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary, oppressive or
confiscatory.97

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of a constitutional violation can be made
because of the following reasons. First, the assailed law, by imposing the senior citizen discount, does not take any
of the properties used by a business establishment like, say, the land on which a manufacturing plant is
constructed or the equipment being used to produce goods or services. Second, rather than taking specific
properties of a business establishment, the senior citizen discount law merely regulates the prices of the goods or
services being sold to senior citizens by mandating a 20% discount. Thus, if a product is sold at P10.00 to the
general public, then it shall be sold at P8.00 ( i.e., P10.00 less 20%) to senior citizens. Note that the law does not
impose at what specific price the product shall be sold, only that a 20% discount shall be given to senior citizens
based on the price set by the business establishment. A business establishment is, thus, free to adjust the prices of
the goods or services it provides to the general public. Accordingly, it can increase the price of the above product
to P20.00 but is required to sell it at P16.00 (i.e. , P20.00 less 20%) to senior citizens. Third, because the law
impacts the prices of the goods or services of a particular establishment relative to its sales to senior citizens, its
profits or income/gross sales are affected. The extent of the impact would, however, depend on the profit margin
of the business establishment on a particular good or service. If a product costs P5.00 to produce and is sold
at P10.00, then the profit98 is P5.0099 or a profit margin100 of 50%.101

Under the assailed law, the aforesaid product would have to be sold at P8.00 to senior citizens yet the business
would still earn P3.00102 or a 30%103 profit margin. On the other hand, if the product costs P9.00 to produce and is
required to be sold at P8.00 to senior citizens, then the business would experience a loss of P1.00.104
But note that since not all customers of a business establishment are senior citizens, the business establishment
may continue to earn P1.00 from non-senior citizens which, in turn, can offset any loss arising from sales to senior
citizens.

Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the business
establishment from revising its pricing strategy.

By revising its pricing strategy, a business establishment can recoup any reduction of profits or income/gross sales
which would otherwise arise from the giving of the 20% discount. To illustrate, suppose A has two customers: X, a
senior citizen, and Y, a non-senior citizen. Prior to the law, A sells his products at P10.00 a piece to X and Y resulting
in income/gross sales of P20.00 (P10.00 + P10.00). With the passage of the law, A must now sell his product to X
at P8.00 (i.e., P10.00 less 20%) so that his income/gross sales would be P18.00 (P8.00 + P10.00) or lower by P2.00.
To prevent this from happening, A decides to increase the price of his products to P11.11 per piece. Thus, he sells
his product to X at P8.89 (i.e. , P11.11 less 20%) and to Y at P11.11. As a result, his income/gross sales would still
be P20.00105 (P8.89 + P11.11). The capacity, then, of business establishments to revise their pricing strategy makes
it possible for them not to suffer any reduction in profits or income/gross sales, or, in the alternative, mitigate the
reduction of their profits or income/gross sales even after the passage of the law. In other words, business
establishments have the capacity to adjust their prices so that they may remain profitable even under the
operation of the assailed law.

The Dissent, however, states that The explanation by the majority that private establishments can always
increase their prices to recover the mandatory discount will only encourage private establishments to adjust their
prices upwards to the prejudice of customers who do not enjoy the 20% discount. It was likewise suggested that if
a company increases its prices, despite the application of the 20% discount, the establishment becomes more
profitable than it was before the implementation of R.A. 7432. Such an economic justification is self-defeating, for
more consumers will suffer from the price increase than will benefit from the 20% discount. Even then, such ability
to increase prices cannot legally validate a violation of the eminent domain clause.106

But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction in its profits or
income/gross sales (or suffer some reduction but continue to operate profitably) despite giving the discount, what
would be the basis to strike down the law? If it is possible that the business establishment, by adjusting its prices,
will not be unduly burdened, how can there be a finding that the assailed law is an unconstitutional exercise of
police power or eminent domain? That there may be a burden placed on business establishments or the
consuming public as a result of the operation of the assailed law is not, by itself, a ground to declare it
unconstitutional for this goes into the wisdom and expediency of the law.

The cost of most, if not all, regulatory measures of the government on business establishments is ultimately
passed on to the consumers but that, by itself, does not justify the wholesale nullification of these measures. It is a
basic postulate of our democratic system of government that the Constitution is a social contract whereby the
people have surrendered their sovereign powers to the State for the common good.107

All persons may be burdened by regulatory measures intended for the common good or to serve some important
governmental interest, such as protecting or improving the welfare of a special class of people for which the
Constitution affords preferential concern. Indubitably, the one assailing the law has the heavy burden of proving
that the regulation is unreasonable, oppressive or confiscatory, or has gone "too far" as to amount to a "taking."
Yet, here, the Dissent would have this Court nullify the law without any proof of such nature.

Further, this Court is not the proper forum to debate the economic theories or realities that impelled Congress to
shift from the tax credit to the tax deduction scheme. It is not within our power or competence to judge which
scheme is more or less burdensome to business establishments or the consuming public and, thereafter, to choose
which scheme the State should use or pursue. The shift from the tax credit to tax deduction scheme is a policy
determination by Congress and the Court will respect it for as long as there is no showing, as here, that the subject
regulation has transgressed constitutional limitations. Unavoidably, the lack of evidence constrains the Dissent to
rely on speculative and hypothetical argumentation when it states that the 20% discount is a significant amount
and not a minimal loss (which erroneously assumes that the discount automatically results in a loss when it is
possible that the profit margin is greater than 20% and/or the pricing strategy can be revised to prevent or
mitigate any reduction in profits or income/gross sales as illustrated above), 108 and not all private establishments
make a 20% profit margin (which conversely implies that there are those who make more and, thus, would not be
greatly affected by this regulation).109

In fine, because of the possible scenarios discussed above, we cannot assume that the 20% discount results in a
permanent reduction in profits or income/gross sales, much less that business establishments are forced to
operate at a loss under the assailed law. And, even if we gratuitously assume that the 20% discount results in some
degree of reduction in profits or income/gross sales, we cannot assume that such reduction is arbitrary, oppressive
or confiscatory. To repeat, there is no actual proof to back up this claim, and it could be that the loss suffered by a
business establishment was occasioned through its fault or negligence in not adapting to the effects of the assailed
law. The law uniformly applies to all business establishments covered thereunder. There is, therefore, no unjust
discrimination as the aforesaid business establishments are faced with the same constraints. The necessity of proof
is all the more pertinent in this case because, as similarly observed by Justice Velasco in his Concurring Opinion,
the law has been in operation for over nine years now. However, the grim picture painted by petitioners on the
unconscionable losses to be indiscriminately suffered by business establishments, which should have led to the
closure of numerous business establishments, has not come to pass. Verily, we cannot invalidate the assailed law
based on assumptions and conjectures. Without adequate proof, the presumption of constitutionality must
prevail. IV At this juncture, we note that the Dissent modified its original arguments by including a new paragraph,
to wit:

Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It does not state
that there should be profit before the taking of property is subject to just compensation. The private property
referred to for purposes of taking could be inherited, donated, purchased, mortgaged, or as in this case, part of the
gross sales of private establishments. They are all private property and any taking should be attended by
corresponding payment of just compensation. The 20% discount granted to senior citizens belong to private
establishments, whether these establishments make a profit or suffer a loss. In fact, the 20% discount applies to
non-profit establishments like country, social, or golf clubs which are open to the public and not only for exclusive
membership. The issue of profit or loss to the establishments is immaterial.110

Two things may be said of this argument. First, it contradicts the rest of the arguments of the Dissent. After it
states that the issue of profit or loss is immaterial, the Dissent proceeds to argue that the 20% discount is not a
minimal loss111 and that the 20% discount forces business establishments to operate at a loss.112

Even the obiter in Central Luzon Drug Corporation,113 which the Dissent essentially adopts and relies on, is
premised on the permanent reduction of total revenues and the loss that business establishments will be forced to
suffer in arguing that the 20% discount constitutes a "taking" under the power of eminent domain. Thus, when the
Dissent now argues that the issue of profit or loss is immaterial, it contradicts itself because it later argues, in order
to justify that there is a "taking" under the power of eminent domain in this case, that the 20% discount forces
business establishments to suffer a significant loss or to operate at a loss. Second, this argument suffers from the
same flaw as the Dissent's original arguments. It is an erroneous characterization of the 20% discount. According to
the Dissent, the 20% discount is part of the gross sales and, hence, private property belonging to business
establishments. However, as previously discussed, the 20% discount is not private property actually owned and/or
used by the business establishment. It should be distinguished from properties like lands or buildings actually used
in the operation of a business establishment which, if appropriated for public use, would amount to a "taking"
under the power of eminent domain. Instead, the 20% discount is a regulatory measure which impacts the pricing
and, hence, the profitability of business establishments. At the time the discount is imposed, no particular
property of the business establishment can be said to be "taken." That is, the State does not acquire or take
anything from the business establishment in the way that it takes a piece of private land to build a public road.
While the 20% discount may form part of the potential profits or income/gross sales114 of the business
establishment, as similarly characterized by Justice Bersamin in his Concurring Opinion, potential profits or
income/gross sales are not private property, specifically cash or money, already belonging to the business
establishment. They are a mere expectancy because they are potential fruits of the successful conduct of the
business. Prior to the sale of goods or services, a business establishment may be subject to State regulations, such
as the 20% senior citizen discount, which may impact the level or amount of profits or income/gross sales that can
be generated by such establishment. For this reason, the validity of the discount is to be determined based on its
overall effects on the operations of the business establishment.

Again, as previously discussed, the 20% discount does not automatically result in a 20% reduction in profits, or, to
align it with the term used by the Dissent, the 20% discount does not mean that a 20% reduction in gross sales
necessarily results. Because (1) the profit margin of a product is not necessarily less than 20%, (2) not all customers
of a business establishment are senior citizens, and (3) the establishment may revise its pricing strategy, such
reduction in profits or income/gross sales may be prevented or, in the alternative, mitigated so that the business
establishment continues to operate profitably. Thus, even if we gratuitously assume that some degree of reduction
in profits or income/gross sales occurs because of the 20% discount, it does not follow that the regulation is
unreasonable, oppressive or confiscatory because the business establishment may make the necessary
adjustments to continue to operate profitably. No evidence was presented by petitioners to show otherwise. In
fact, no evidence was presented by petitioners at all. Justice Leonen, in his Concurring and Dissenting Opinion,
characterizes "profits" (or income/gross sales) as an inchoate right. Another way to view it, as stated by Justice
Velasco in his Concurring Opinion, is that the business establishment merely has a right to profits. The Constitution
adverts to it as the right of an enterprise to a reasonable return on investment. 115

Undeniably, this right, like any other right, may be regulated under the police power of the State to achieve
important governmental objectives like protecting the interests and improving the welfare of senior citizens. It
should be noted though that potential profits or income/gross sales are relevant in police power and eminent
domain analyses because they may, in appropriate cases, serve as an indicia when a regulation has gone "too far"
as to amount to a "taking" under the power of eminent domain. When the deprivation or reduction of profits or
income/gross sales is shown to be unreasonable, oppressive or confiscatory, then the challenged governmental
regulation may be nullified for being a "taking" under the power of eminent domain. In such a case, it is not profits
or income/gross sales which are actually taken and appropriated for public use. Rather, when the regulation
causes an establishment to incur losses in an unreasonable, oppressive or confiscatory manner, what is actually
taken is capital and the right of the business establishment to a reasonable return on investment. If the business
losses are not halted because of the continued operation of the regulation, this eventually leads to the destruction
of the business and the total loss of the capital invested therein. But, again, petitioners in this case failed to prove
that the subject regulation is unreasonable, oppressive or confiscatory.

V.

The Dissent further argues that we erroneously used price and rate of return on investment control laws to justify
the senior citizen discount law. According to the Dissent, only profits from industries imbued with public interest
may be regulated because this is a condition of their franchises. Profits of establishments without franchises
cannot be regulated permanently because there is no law regulating their profits. The Dissent concludes that the
permanent reduction of total revenues or gross sales of business establishments without franchises is a taking of
private property under the power of eminent domain. In making this argument, it is unfortunate that the Dissent
quotes only a portion of the ponencia The subject regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment control laws which are traditionally regarded as
police power measures. These laws generally regulate public utilities or industries/enterprises imbued with public
interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed
by controlling the rate of return on investment of these corporations considering that they have a monopoly over
the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1)
the discount does not prevent the establishments from adjusting the level of prices of their goods and services,
and (2) the discount does not apply to all customers of a given establishment but only to the class of senior
citizens. x x x116

The above paragraph, in full, states

The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of
return on investment control laws which are traditionally regarded as police power measures. These laws generally
regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on
investment of these corporations considering that they have a monopoly over the goods or services that they
provide to the general public. The subject regulation differs therefrom in that (1) the discount does not prevent
the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not
apply to all customers of a given establishment but only to the class of senior citizens.

Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as
belonging to the category of price regulatory measures which affects the profitability of establishments subjected
thereto. (Emphasis supplied)

The point of this paragraph is to simply show that the State has, in the past, regulated prices and profits of
business establishments. In other words, this type of regulatory measures is traditionally recognized as police
power measures so that the senior citizen discount may be considered as a police power measure as well. What is
more, the substantial distinctions between price and rate of return on investment control laws vis--vis the senior
citizen discount law provide greater reason to uphold the validity of the senior citizen discount law. As previously
discussed, the ability to adjust prices allows the establishment subject to the senior citizen discount to prevent or
mitigate any reduction of profits or income/gross sales arising from the giving of the discount. In contrast,
establishments subject to price and rate of return on investment control laws cannot adjust prices accordingly.
Certainly, there is no intention to say that price and rate of return on investment control laws are the justification
for the senior citizen discount law. Not at all. The justification for the senior citizen discount law is the plenary
powers of Congress. The legislative power to regulate business establishments is broad and covers a wide array of
areas and subjects. It is well within Congress legislative powers to regulate the profits or income/gross sales of
industries and enterprises, even those without franchises. For what are franchises but mere legislative
enactments? There is nothing in the Constitution that prohibits Congress from regulating the profits or
income/gross sales of industries and enterprises without franchises. On the contrary, the social justice provisions
of the Constitution enjoin the State to regulate the "acquisition, ownership, use, and disposition" of property and
its increments.117

This may cover the regulation of profits or income/gross sales of all businesses, without qualification, to attain the
objective of diffusing wealth in order to protect and enhance the right of all the people to human dignity. 118

Thus, under the social justice policy of the Constitution, business establishments may be compelled to contribute
to uplifting the plight of vulnerable or marginalized groups in our society provided that the regulation is not
arbitrary, oppressive or confiscatory, or is not in breach of some specific constitutional limitation. When the
Dissent, therefore, states that the "profits of private establishments which are non-franchisees cannot be
regulated permanently, and there is no such law regulating their profits permanently," 119 it is assuming what it
ought to prove. First, there are laws which, in effect, permanently regulate profits or income/gross sales of
establishments without franchises, and RA 9257 is one such law. And, second, Congress can regulate such profits
or income/gross sales because, as previously noted, there is nothing in the Constitution to prevent it from doing
so. Here, again, it must be emphasized that petitioners failed to present any proof to show that the effects of the
assailed law on their operations has been unreasonable, oppressive or confiscatory. The permanent regulation of
profits or income/gross sales of business establishments, even those without franchises, is not as uncommon as
the Dissent depicts it to be. For instance, the minimum wage law allows the State to set the minimum wage of
employees in a given region or geographical area. Because of the added labor costs arising from the minimum
wage, a permanent reduction of profits or income/gross sales would result, assuming that the employer does not
increase the prices of his goods or services. To illustrate, suppose it costs a company P5.00 to produce a product
and it sells the same at P10.00 with a 50% profit margin. Later, the State increases the minimum wage. As a result,
the company incurs greater labor costs so that it now costs P7.00 to produce the same product. The profit per
product of the company would be reduced to P3.00 with a profit margin of 30%. The net effect would be the same
as in the earlier example of granting a 20% senior citizen discount. As can be seen, the minimum wage law could,
likewise, lead to a permanent reduction of profits. Does this mean that the minimum wage law should, likewise, be
declared unconstitutional on the mere plea that it results in a permanent reduction of profits? Taking it a step
further, suppose the company decides to increase the price of its product in order to offset the effects of the
increase in labor cost; does this mean that the minimum wage law, following the reasoning of the Dissent, is
unconstitutional because the consuming public is effectively made to subsidize the wage of a group of laborers,
i.e., minimum wage earners? The same reasoning can be adopted relative to the examples cited by the Dissent
which, according to it, are valid police power regulations. Article 157 of the Labor Code, Sections 19 and 18 of the
Social Security Law, and Section 7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a business
establishment. This would, in turn, be integrated as part of the cost of its goods or services. Again, if the
establishment does not increase its prices, the net effect would be a permanent reduction in its profits or
income/gross sales. Following the reasoning of the Dissent that "any form of permanent taking of private property
(including profits or income/gross sales)120 is an exercise of eminent domain that requires the State to pay just
compensation,"121 then these statutory provisions would, likewise, have to be declared unconstitutional. It does
not matter that these benefits are deemed part of the employees legislated wages because the net effect is the
same, that is, it leads to higher labor costs and a permanent reduction in the profits or income/gross sales of the
business establishments.122

The point then is this most, if not all, regulatory measures imposed by the State on business establishments
impact, at some level, the latters prices and/or profits or income/gross sales.123

If the Court were to sustain the Dissents theory, then a wholesale nullification of such measures would inevitably
result. The police power of the State and the social justice provisions of the Constitution would, thus, be rendered
nugatory. There is nothing sacrosanct about profits or income/gross sales. This, we made clear in Carlos Superdrug
Corporation:124

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.

xxxx

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 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 percept
for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation
of contracts and public utilities, continously serve as a reminder for the promotion of public good.

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 form
quashing a legislative act.125

In conclusion, we maintain that the correct rule in determining whether the subject regulatory measure has
amounted to a "taking" under the power of eminent domain is the one laid down in Alalayan v. National Power
Corporation126 and followed in Carlos Superdurg Corporation127 consistent with long standing principles in police
power and eminent domain analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be
clearly shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of this case, such
determination can only be made upon the presentation of competent proof which petitioners failed to do. A law,
which has been in operation for many years and promotes the welfare of a group accorded special concern by the
Constitution, cannot and should not be summarily invalidated on a mere allegation that it reduces the profits or
income/gross sales of business establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

G.R. No. 85714 November 29, 1991

HYDRO RESOURCES CONTRACTORS CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, THE PROVINCIAL GOVERNMENT OF ISABELA, THE MUNICIPALITY OF RAMON, ISABELA
and THE NATIONAL IRRIGATION ADMINISTRATION, respondents.

G.E. Aragones & Associates for petitioner.

PADILLA, J.:p

This is a petition for certiorari, treated as a petition for review on certiorari of the decision ** of the Court of
Appeals, dated 30 October 1987, in CA-G.R. SP Case No. 09196, affirming the Order dated 6 August 1983 of the
Regional Trial Court of Echague, Isabela, Branch 24, in CV No. XXIV-0106 (re-docketed as Civil Case No. 0093,
before the Regional Trial Court, Santiago, Isabela, Branch XXI). ***

Public respondent National Irrigation Administration (or "NIA") and petitioner Hydro Resources Contractors
Corporation (or "Hydro") entered into a contract whereby the latter undertook to construct for the former the
Magat River Multi-Purpose Project situated at Ramon, Isabela. 1

In June 1982, the Provincial Government of Isabela, its provincial treasurer, the Municipality of Ramon, Isabela,
and its assistant treasurer, as plaintiffs, filed a civil case against herein petitioner Hydro, docketed as Civil Case No.
XXIV-0106, with the Regional Trial Court of Echague, Isabela, Branch 24, for collection of taxes over certain real
properties which Hydro allegedly acquired, possessed and used in connection with the construction of the said
Magat River Multi-Purpose Project. 2

After hearing, the Regional Trial Court, Echague, Br. 24, on 6 August 1983, issued an order in favor of the plaintiffs,
finding defendant Hydro (now petitioner) liable to pay realty taxes over the properties it had constructed in
connection with Magat River Multi-Purpose Project, but that the amount thereof was to be determined in further
proceedings of the court a quo, dispositive part of which order reads:

WHEREFORE, in the light of the foregoing considerations, the court finds and so rules that under
the pertinent provisions of Presidential Decree No. 464 as amended, the defendant, Hydro
Resources Contractors Corporation, is liable to the payment of realty taxes over the real
properties it constructed relative to the prosecution of the Magat River Multi-Purpose
Project (MRMP) at Barangay Aguinaldo, Ramon, Isabela.

Accordingly, it is hereby ordered that further proceedings shall be held to determine the amount
of real property taxes to be paid by the defendant corporation to the plaintiffs in accordance with
this Order and to receive evidence on the questions of facts raised by the former.

However, by reason of the fact that pursuant to Administrative Order No. 7, dated February 11,
1983, of the Honorable Supreme Court, implementing the provisions of Section 18 of Batas
Pambansa Blg. 129, cases which arise in the Municipality of Ramon, Isabela, among other
municipalities, now fall within the administrative jurisdiction of the newly-created Regional Trial
Court, Branch XXI, Santiago, Isabela and it appearing that this case is a proper case for transfer to
said Branch XXI since its venue is the Municipality of Ramon, let the record of this case, consisting
of 70 pages, be dropped from the civil docket of this Court and the same be forwarded to the
Regional Trial Court, Branch XXI, Santiago, Isabela for further proceedings . . . (Emphasis
supplied) 3

Civil Case No. XXIV-0106 was thereafter transferred to the Regional Trial Court, Branch XXI, of Santiago, Isabela,
and redocketed as Civil Case No. 0093.

On 4 November 1983, now before the Regional Trial Court of Santiago, Isabela, Br. XXI, Hydro through counsel filed
a motion for leave to file third-party complaint, dated 21 October 1983, against NIA, attaching to the motion the
proposed third-party complaint (for reimbursement from the NIA); and a motion to admit amended answer,
accompanying the same with the proposed amended answer. 4 On the same date (4 November 1983), the
Regional Trial Court, Santiago, Isabela admitted Hydro's third-party complaint; however, as to its motion for leave
to file amended answer, plaintiffs were given ten (10) days to file their opposition and Hydro was also given ten
(10) days from receipt of such opposition to file its reply. 5

On 12 December 1983, before the court a quo could resolve Hydro's motion for leave to file amended answer,
plaintiffs filed their reply to Hydro's amended answer. 6 NIA also filed its answer to Hydro's third-party
complaint. 7

In an order of 7 February 1983, the court a quo then ordered the parties to file their respective memorandum, in
this wise:

After several arguments made by counsels, three issues were submitted, namely:

1. Whether or not the Order of this Court dated 6 August 1983 was abandoned by the filing of
the Amended Answer by the defendant;

2. Whether the Hydro Resources or the NIA is the beneficial user of the land under question
therefore the beneficial user will pay the taxes; and
 3. Whether it is proper for the plaintiff to avoid multiplicity of suit, to amend its complaint and
plead thereto the amount of P338,750.00 which was not included in the original complaint but
was included in the third party complaint against the third party defendant.

This Court directed counsels of the parties to file their memoranda in support of their respective
position simultaneously within thirty (30) days from today, after which the court, with or without
the said memoranda will resolve the issues aforecited. (emphasis supplied) 8

The parties did not filed their memoranda except Hydro which
complied. 9 On 20 May 1985, the court a quo ruled that the order dated 6 August 1983 (issued by the Regional
Trial Court, Echague, Isabela) was final and executory, disposing that:

WHEREFORE, the Court hereby rules the Order of this Court dated August 6, 1983 to be final and
executory. The Orders of the Court dated October 14, 1983 10 and November 4, 1983, being
devoid of legal basis are hereby SET aside and the Third-party Complaint dated October 21, 1983
filed against the National Irrigation Administration is hereby DISMISSED. (Emphasis supplied) 11

On 14 October 1985, the court a quo denied Hydro's motion for reconsideration of the order dated 20 May
1985: 12

WHEREFORE, for lack of merit, defendant and third-party plaintiff's motion for reconsideration is
hereby Denied.

Defendant and third-party plaintiff is granted a period of twenty (20) days from receipt of this
order within which to file whatever pleading it may deem appropriate under the circumstances.

On 15 January 1986, Hydro filed with the Supreme Court a Petition, docketed G.R. No. 72849, 13 which (petition)
was referred by this Court (First Division) to the Court of Appeals for proper action and disposition. In a resolution
dated 21 May 1986 14 said petition was re-docketed in the Court of Appeals as CA-G.R. SP No. 09196.

On 30 October 1987, the Court of Appeals rendered a decision (now assailed) denying (dismissing) the petition,
dispositive portion of which reads:

WHEREFORE, the writ of certiorari prayed for by petitioner is denied; and the court a quo is
hereby ordered to receive evidence only for the purpose of determining the amount of realty
taxes which petitioner was adjuged liable to pay respondents Provincial Government of Isabela
and Municipality of Ramon, Isabela, pursuant to the order dated August 6, 1983 issued by the
Regional Trial Court, Branch XXIV, Echaque, Isabela in Civil Case No. XXIV-0106, where said
respondents were the plaintiffs and petitioner was the defendant, prior to the transfer of the
case to the Regional Trial Court, Branch XIV (sic,) Santiago Isabela, and there re-docketed as Civil
Case No. Br. XIV-0093, the same being the court and case a quo in this petition. Costs against
petitioner. 15

On 2 November 1988, the Court of Appeals denied petitioner's motion for reconsideration of the said decision.
Hence, the present petition for review, raising the following issues:

I. Whether or not the appellate court has acted without or in excess of its jurisdiction or with
grave abuse of discretion in not finding that the order issued by the court a quo on August 6,
1983 is merely interlocutory and/or provisional in character and could not be considered as a
final determination of the merits of Civil Case No. 0093.
 II. Whether or not the appellate court has acted without or in excess of its jurisdiction or with
grave abuse of discretion in not finding that the said order of August 6, 1983 was abandoned or
set aside through the issuance of the order of November 4, 1983 which admitted herein
petitioner's third-party complaint against respondent NIA.

III. Whether or not the appellate court has acted without or in excess of its jurisdiction or with
grave abuse of discretion in not finding that the court a quo, in issuing the order of May 20, 1985
went beyond the issues presented by the parties, which act is legally impermissible, irregular and
invalid. 16

We grant the petition.

Both the petitioner and the respondents agree that the main issue in the case at bar is whether or not the assailed
order of the court a quo, dated 6 August 1983, is interlocutory in nature or a final judgment.

It is to be observed that while the complaint in the case at bar is admittedly one for collection of realty taxes over
certain real properties, 17 filed against the petitioner, the complaint however, does not allege the amount of taxes
which the plaintiffs seek to collect from petitioner. 18 There is thus a need to determine the effect of such failure
of the complaint to state the aforesaid amount vis-a-vis plaintiff's cause of action. Although this issue is not raised
in the present petition, it is basic that the Court can review matters not assigned as an error in the appeal. 19

We hold that the complaint at bar has failed to state the ultimate facts, 20 which failure is violative of Section 3,
Rule 17 of the Rules of Court. 21

As admitted by the respondents, this case is one for collection of realty taxes. Section 82 of the Presidential Decree
No. 464 (Real Property Tax Code) states that "the delinquent real property tax shall constitute a lawful
indebtedness of the taxpayer to the province or city." Under P.D. 464, the process of collecting real property taxes
involve the acts or methods of appraisal and assessment of the real property subject to tax; 22 the imposition of
real property tax 23 and the collection thereof. 24

The amount of taxes sought to be collected is therefore determinable, yet the complaint at bar did not plead the
same. In the order of the court a quo, dated 7 February 1984, one of the issues submitted was whether it s proper
for the plaintiffs to amend their complaint and plead therein the amount of tax sought to be collected. 25 But this
issue was deemed abandoned when the court a quo issued an order dated 20 May 1985, which held that the order
dated 6 August 1983 was final and executory.

As in any case for collection of a sum of money, stating the amount of tax sought to be collected in a complaint for
collection of realty taxes is part of the ultimate facts constituting the plaintiff cause of action, as provided under
Section 3, Rule 6 of the Rules of Court, supra. In the instant case, there is failure to state in the complaint the
ultimate facts because the amount of tax sought to be collected is not pleaded or alleged.

It can be overlooked that the subject matter 26 of the complaint filed before the court a quo is the amount of the
real estate taxes to be collected. Section 82 of P.D. 464 provides that the collection of delinquent real property
taxes may be enforced in any court of competent jurisdiction. In the present case, as the complaint did not plead
the amount of tax intended to be collected, how could the court a quo ascertain, in the first place, in relation to
the amount of the demand, whether it was the proper forum to try the case? 27 The fact that the third party
complaint filed by petitioner-defendant against the National Irrigation Administration pleaded the amount
P338,750.00 as reimbursible to it by the latter, is of no moment now, as the said third-party complaint was also
ordered dismissed in the order of 20 May 1985. 28 Hence, it can be said that the complaint (in chief) was never
amended.
While it may be true that petitioner-defendant did not move to question the failure of the complaint to plead the
amount of tax sought to be collected, the court a quo upon its own motion, may dismiss the complaint for failure
of the plaintiffs to comply with Section 3, Rule 6 of the Rules of Court in relation to Section 3, Rule 17
thereof 29 which provides that the action may be dismissed for failure to comply with the rules. This dismissal the
court a quo did not order.

The complaint being fatally defective, the questioned order, dated 6 August 1983, which derived its life from the
said complaint, is also without effect. But assuming arguendo that the filing of the compliant at bar complied with
the rules thereby making the order of 6 August 1983 valid, the nature of said order is interlocutory. It is not a final
judgment.

The dispositive part of said order states that petitioner-defendant is liable for the payment of real property taxes,
but, it adds, further proceedings shall be held to determine the amount of real property taxes to be paid by
petitioner-defendant. Furthermore, the same order of 6 August 1983 states:

The defendant corporation also invoked the ground of no cause of action in asking for the
dismissal of the complaint. In so doing, it adopted the stand that it was denied due process by
the fact that the notice of assessment was never served up it nor was it furnished copies of any
Tax Declarations Nos. 03-2101 to 03-2113 mentioned in the fifth paragraph of the complaint and
by the fact that it was never served of any notice delinquency in the payment of real property tax
nor was there any demand made upon it for payment thereof. To the Court, these are matters or
questions of facts which necessitate presentation of evidence to prove or disprove them. At this
stage of the proceedings, the Court can not resolve them one way or the other. (Emphasis
supplied.) (Rollo, p. 12)

As held in Dela Cruz vs. Paras, 30 a court order is final in character if it puts an end to the particular matter
resolved or settles definitely the matter therein disposed of, such that no further questions can come before the
court except the execution of the order; that on the other hand, a court order is merely interlocutory in character
if it is provisional and leaves substantial proceeding to be had in connection with its subject.

Clearly, the order of 6 August 1983 is interlocutory. We fail to see how it could or did put an end to the controversy
when the court a quo still had to determine the amount of realty taxes to be collected by plaintiffs from petitioner-
defendant, and to make findings of fact on certain issues, which could still affect the very liability to pay such taxes.

WHEREFORE, petition is GRANTED, the decision of the Court of Appeals, dated 30 October 1987 in CA-G.R. SP. No.
09196 is hereby SET ASIDE, and a new one entered ordering the complaint in Civil Case No. 0093 before the
Regional Trial Court of Santiago, Isabela, Branch XXI, DISMISSED without prejudice. Without pronouncement as to
costs.

SO ORDERED.

Paras and Regalado, JJ., concur.

Separate Opinions
MELENCIO-HERRERA, J., dissenting:

I concur with the legal aspects of the majority opinion particularly with the conclusion that the Complaint is
defective as it failed to state ultimate facts.

However, considering that (1) the case has proceeded to trial and judgment with no objection having been
interposed by petitioner-defendant to the absence of specification regarding the amount of taxes; (2) petitioner-
defendant has been adjudged liable for the payment of realty taxes by the Regional Trial Court of Echague, Isabela,
Branch 24, on 6 August 1983, which judgment has been affirmed by the Court of Appeals in CA-G.R. SP No. 09196;
(3) the dismissal of the case without prejudice would only result in multiplicity of suits and the prolongation of the
controversy, which has been pending since 1982, it is my view that the judgment of the Court of Appeals "ordering
the reception of evidence only for the purpose of determining the amount of realty taxes which petitioner was
adjuged liable to pay respondents" should be affirmed. The practicality of the situation justifies a departure from
the strict mandate of procedural rules.

The Order of the Regional Trial Court of Echague, Isabela, Branch 24, dismissing the Third-Party Complaint should
also be set aside and the said Complaint reinstated. The determination of the liability of the NIA to reimburse
HYDRO for whatever taxes the latter would pay to respondents could then be included in the proceedings to be
conducted by the Regional Trial Court of Santiago, Isabela, as decreed by the Court of Appeals.

The foregoing procedure would settle all issues in one and the same case and obviate the need for another
litigation with its corresponding inherent delays.

# Separate Opinions

MELENCIO-HERRERA, J., dissenting:

I concur with the legal aspects of the majority opinion particularly with the conclusion that the Complaint is
defective as it failed to state ultimate facts.

However, considering that (1) the case has proceeded to trial and judgment with no objection having been
interposed by petitioner-defendant to the absence of specification regarding the amount of taxes; (2) petitioner-
defendant has been adjudged liable for the payment of realty taxes by the Regional Trial Court of Echague, Isabela,
Branch 24, on 6 August 1983, which judgment has been affirmed by the Court of Appeals in CA-G.R. SP No. 09196;
(3) the dismissal of the case without prejudice would only result in multiplicity of suits and the prolongation of the
controversy, which has been pending since 1982, it is my view that the judgment of the Court of Appeals "ordering
the reception of evidence only for the purpose of determining the amount of realty taxes which petitioner was
adjuged liable to pay respondents" should be affirmed. The practicality of the situation justifies a departure from
the strict mandate of procedural rules.

The Order of the Regional Trial Court of Echague, Isabela, Branch 24, dismissing the Third-Party Complaint should
also be set aside and the said Complaint reinstated. The determination of the liability of the NIA to reimburse
HYDRO for whatever taxes the latter would pay to respondents could then be included in the proceedings to be
conducted by the Regional Trial Court of Santiago, Isabela, as decreed by the Court of Appeals.

The foregoing procedure would settle all issues in one and the same case and obviate the need for another
litigation with its corresponding inherent delays.
G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley,
deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr.,
then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as
inheritance tax on the estate of the deceased, and for the collection of interst thereon at the rate of 6 per cent per
annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under protest. The
defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not
included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both
the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and
considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and
the settlement and distribution of his estate were begun in the Court of First Instance of Zamboanga. The will was
admitted to probate. Said will provides, among other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of
for a period of ten (10) years after my death, and that the same be handled and managed by the
executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore,
Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for
the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew
Hanley to be disposed of in the way he thinks most advantageous.

xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew
Hanley, is a son of my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a
trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the
two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave
bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein
was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the
estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at
P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount of
P1,434.24 which, together with the penalties for deliquency in payment consisting of a 1 per cent monthly interest
from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On
March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of First
Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay
to the Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid
said amount under protest, notifying the defendant at the same time that unless the amount was promptly
refunded suit would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to
refund the said amount hausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew
Hanley, from the moment of the death of the former, and that from the time, the latter became the
owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of
said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of
the testator, and not, as it should have been held, upon the value thereof at the expiration of the period
of ten years after which, according to the testator's will, the property could be and was to be delivered to
the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to
said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the
decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27,
representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931,
which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate of
Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance
tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of
the estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the
estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at
bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there
been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed by the
defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their
briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of
the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest,
gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon
transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p.
1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or
under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article
657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In
other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased
ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the
ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil.,
232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil.,
391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17
Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti
Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun
vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to
testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the language of
article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article does
not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and the
transmission thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure
regarding the authentication and probate of a will as a necessary condition to effect transmission of property does
not affect the general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due
execution but once probated and allowed the transmission is effective as of the death of the testator in
accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the
inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time
when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such
inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento
del causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia o del legado,
transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el
articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1,
Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay
the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the
Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two
sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid
by the first, the former must pay the difference.

SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession
of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if
judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said
period, the payment shall be made by the executor or administrator before delivering to each
beneficiary his share.
 If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum
per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days
after the date of notice and demand thereof by the collector, there shall be further added a surcharge of
twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal
Revenue by the Clerk of Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read
"fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the
English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is
here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before
the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not
and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the
death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in
1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the
real properties in question had a reasonable value of only P5,787. This amount added to the value of the personal
property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which,
excluding deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes its being
and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the
tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death, regardless of any
subsequent contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C.
L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup.
Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and
hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him.
Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574,
1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or the
contingency is settled. This rule was formerly followed in New York and has been adopted in Illinois, Minnesota,
Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either to
the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior
system, we find upon examination of cases and authorities that New York has varied and now requires the
immediate appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its
out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App.
Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E.,
958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App.,
970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the
time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the
estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of
its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the
estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar,
the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses and
disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of the
deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28
(Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised
Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the
tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of
the testamentary or intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535;
14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be deducted in
arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees'
commissions to be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p.
1705). Furthermore, though a testamentary trust has been created, it does not appear that the testator intended
that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp.,
893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the
testator expressed the desire that his real estate be handled and managed by his executors until the expiration of
the period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in
State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a
trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the
legatees or devises, does not come properly within the class or reason for exempting administration expenses. . . .
Service rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to
those entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . .
Trusts . . . of the character of that here before the court, are created for the the benefit of those to whom the
property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound
reason is given to support the contention that such expenses should be taken into consideration in fixing the value
of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the
provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act
No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May
27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect
on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the
decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not
to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its
operation. Liability for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs.
Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate
retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings
Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should
be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the
language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.)
Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act
No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance
taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to
give it retroactive effect. No such effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more
favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore,
should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the
reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25
per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and
(2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within
which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state
which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has
been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and
establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a
penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the
means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are
authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S.,
468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs.
Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in
the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid
within another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent
until and unless the entire period has eplased within which the taxpayer is authorized by law to make such
payment without being subjected to the payment of penalties for fasilure to pay his taxes within the prescribed
period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the
decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was
delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of subsection
(b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. The
appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the testator
as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to
create one is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p. 711).
The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words
is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must
indicate in the will his intention so to do by using language sufficient to separate the legal from the equitable
estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose or object of
the trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust
there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3)
a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp.
705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his
properties be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly
exercised sound judgment in appointment a trustee to carry into effect the provisions of the will (see sec. 582,
Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to
sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not
remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The
corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the
laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of
the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for
the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore
accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him
but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any
beneficial interest in the estate. He took such legal estate only as the proper execution of the trust required (65 C.
J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in
the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the
payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would
be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to
their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In
other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against
petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this
result is a sufficient warning against the accpetance of the essential to the very exeistence of government.
(Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558;
Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194;
26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The
obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the
government but upon the necessity of money for the support of the state (Dobbins vs. Erie Country, supra). For
this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him
can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not
enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed.,
226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit evasions on
merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs.
Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil.,
461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong &
Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When
proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute,
without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to
grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code;
Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion
to demonstrate trenchment adherence to this policy of the law. It held that "the fact that on account of riots
directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal
revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does not
authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to
accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to
enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers,
upon whom the duty is developed of collecting the taxes, may derange the operations of government, and
thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and
Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and,
therefore, liable for the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due
should be computed from that date and it is error on the part of the defendant to compute it one month later. The
provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal
Revenuen or this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the
Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par.
2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore in a
communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was
November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and
interest due were not paid on that date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his
brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley
inaccordance with the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465,
or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under
secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of the estate subject to
inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed
at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount by which
the share exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum of ten
thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two
hundred per centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum of
P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised
Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per centum
per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment under
protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be added
the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the
compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate.
This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot
give the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27
the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So
ordered.

Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

G.R. No. L-29059 December 15, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.
CRUZ, J.:

By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the
Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu
Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on
cement produced and sold by it after October 1957. 1

On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private
respondent, the latter moved for a writ of execution to enforce the said judgment . 2

The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales tax
liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balance
owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3

On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the
private respondent was still being questioned and therefore could not be set-off against the refund. 4

In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund should
be charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the
Tax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt from
sales taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of
distraint of personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any
national internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed in
Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax
assessments have already prescribed because the prescriptive period should be counted from the filing of the sales
tax returns, which had not yet been done by the private respondent.

For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a
manufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188 of the
Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co.
v. Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles declared that "before the
effectivity of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code, cement was taxable
as a manufactured product under Section 186, in connection with Section 194(4) of the said Code," thereby
implying that it was not considered a manufactured product afterwards. Also, the alleged sales tax deficiency could
not as yet be enforced against it because the tax assessment was not yet final, the same being still under protest
and still to be definitely resolved on the merits. Besides, the assessment had already prescribed, not having been
made within the reglementary five-year period from the filing of the tax returns. 10

Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement has
always been considered a manufactured product and not a mineral product. This matter was extensively discussed
and categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation, 11 decided on
August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the pertinent cases, declared for a
unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never considered as a
mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least
80% of its components are minerals, for the simple reason that cement is the product of
a manufacturing process and is no longer the mineral product contemplated in the Tax Code (i.e.;
minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax.
 What has apparently encouraged the herein respondents to maintain their present posture is the
case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28
SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give the
impression that Republic Act No. 1299, which amended Section 246, reclassified cement as a
mineral product that was not subject to sales tax. ...

xxx xxx xxx

After a careful study of the foregoing, we conclude that reliance on the decision penned by
Justice Angeles is misplaced. The said decision is no authority for the proposition that after the
enactment of Republic Act No. 1299 in 1955 (defining mineral product as things with at least 80%
mineral content), cement became a 'mineral product," as distinguished from a "manufactured
product," and therefore ceased to be subject to sales tax. It was not necessary for the Court to so
rule. It was enough for the Court to say in effect that even assuming Republic Act No. 1299 had
reclassified cement was a mineral product, the reclassification could not be given retrospective
application (so as to justify the refund of sales taxes paid before Republic Act 1299 was adopted)
because laws operate prospectively only, unless the legislative intent to the contrary is manifest,
which was not so in the case of Republic Act 1266. [The situation would have been different if
the Court instead had ruled in favor of refund, in which case it would have been absolutely
necessary (1) to make an unconditional ruling that Republic Act 1299 re-classified cement as a
mineral product (not subject to sales tax), and (2) to declare the law retroactive, as a basis for
granting refund of sales tax paid before Republic Act 1299.]

In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar as
its pronouncements or any implication therefrom conflict with the instant decision.

The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus:

The nature of cement as a "manufactured product" (rather than a "mineral product") is well-
settled. The issue has repeatedly presented itself as a threshold question for determining the
basis for computing the ad valorem mining tax to be paid by cement Companies. No
pronouncement was made in these cases that as a "manufactured product" cement is subject to
sales tax because this was not at issue.

The decision sought to be reconsidered here referred to the legislative history of Republic Act
No. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. 246
of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L-20563)
that cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 cannot be
construed to mean that, after the law took effect, cement ceased to be so subject to the tax. To
erase any and all misconceptions that may have been spawned by reliance on the case of Cebu
Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968 (28 SCRA 789)
penned by Justice Eugenio Angeles, the Court has expressly overruled it insofar as it may conflict
with the decision of August 10, 1983, now subject of these motions for reconsideration.

On the question of prescription, the private respondent claims that the five-year reglementary period for the
assessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, the
assessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree.
This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad
valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in the
aforestated resolution:
 In order to avail itself of the benefits of the five-year prescription period under Section 331 of the
Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a sales
tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277).
Thus CEPOC should have filed sales tax returns of its gross sales for the subject periods. Both
parties admit that returns were made for the ad valorem mining tax. CEPOC argues that said
returns contain the information necessary for the assessment of the sales tax. The Commissioner
does not consider such returns as compliance with the requirement for the filing of tax returns so
as to start the running of the five-year prescriptive period.

We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that the
filing of an income tax return cannot be considered as substantial compliance with the
requirement of filing sales tax returns, in the same way that an income tax return cannot be
considered as a return for compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of Internal
Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns filed by
CEPOC, the statute of stations in Sec. 331 did not begin to run against the government. The
assessment made by the Commissioner in 1968 on CEPOC's cement sales during the period from
July 1, 1959 to December 31, 1960 is not barred by the five-year prescriptive period. Absent a
return or when the return is false or fraudulent, the applicable period is ten (10) days from the
discovery of the fraud, falsity or omission. The question in this case is: When was CEPOC's
omission to file tha return deemed discovered by the government, so as to start the running of
said period? 13

The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the
urgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could be
postponed by simply questioning their validity, the machinery of the state would grind to a halt and all government
functions would be paralyzed. That is the reason why, save for the exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax. No court shall have authority to
grant an injunction to restrain the collection of any national internal revenue tax, fee or charge
imposed by this Code.

It goes without saying that this injunction is available not only when the assessment is already being questioned in
a court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the
administrative level. There is all the more reason to apply the rule here because it appears that even after crediting
of the refund against the tax deficiency, a balance of more than P 4 million is still due from the private respondent.

To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he
will later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold that the
respondent Court of Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE,
without any pronouncement as to costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Paras and Gancayco, JJ., concur.

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate
Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow
him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the
latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio
San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is
described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the
Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property
was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464
known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the
highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship
bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his
name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January
24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of
Title in favor of the defendant Ho Fernandez over the parcel of land including
the improvements thereon, subject to whatever encumbrances appearing at
the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795)
cancelled.
 (b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as
attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING
PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT
OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING
THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO
TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS
GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID.
(pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property
was sold at public auction without notice to him and that the price paid for the property was shockingly
inadequate, amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon
himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant
of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims
that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977.
Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;

xxx xxx xxx

 (3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting
of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not
be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The
general rule based on grounds of public policy is well-settled that no set-off admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of duty to, and are the positive acts of the government to the making and enforcing
of which, the personal consent of individual taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim
against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue
taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city government
while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the
national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank
long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977
was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew
about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to
withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he
pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions
of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by
law on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of
this issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified ...
.(Petition for Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof
to show that there was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof and
the general rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This
is actually an exception to the rule that administrative proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied
with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain
the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received
the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof.
He claimed further that he was not present on December 5, 1977 the date of the auction sale
because he went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez

notified you that the property in question shall be sold at public auction to the
highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell
the Court whether you received the original of this letter?

A. I just signed it because I was not able to read the same. It was just sent by
mail carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such
notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the
auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289;
Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we
held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to
effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the amounts
for which they had been actually sold. However, while in ordinary sales for reasons of equity a
transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not follow when the law
gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory
that the lesser the price the easier it is for the owner to effect the redemption. And so it was
aptly said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to redeem and
thus recover the loss he claims to have suffered by reason of the price obtained at the auction
sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash.
162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In
Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for
taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be useless to offer the
property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are
grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73
P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which we
would be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty
and difficulty in the collection of taxes which are the life blood of the state. We are convinced
that the present rules are just, and that they bring hardship only to those who have invited it by
their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely
because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas,
real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny
the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the
date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an
act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine
National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another
notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax
delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr.
Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly
asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent
court is affirmed.

SO ORDERED.

Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to plaintiff
Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing of the
complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present appeal. 1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the first
cause of action, for forest charges covering the period from September 10, 1952 to May 24, 1953,
defendants admitted that they have a liability of P587.37, which liability is covered by a bond executed by
defendant General Insurance & Surety Corporation for Mambulao Lumber Company, jointly and severally
in character, on July 29, 1953, in favor of herein plaintiff; (b) under the second cause of action, both
defendants admitted a joint and several liability in favor of plaintiff in the sum of P296.70, also covered by
a bond dated November 27, 1953; and (c) under the third cause of action, both defendants admitted a
joint and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20, 1954.
These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of plaintiff in the
amount already mentioned is admitted, then what is the defense interposed by the defendants? The
defense presented by the defendants is quite unusual in more ways than one. It appears from Exh. 3 that
from July 31, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of
the Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30, 1947
to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for 'reforestation
charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act 115
which provides that there shall be collected, in addition to the regular forest charges provided under
Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code, the amount of
P0.50 on each cubic meter of timber... cut out and removed from any public forest for commercial
purposes. The amount collected shall be expended by the director of forestry, with the approval of the
secretary of agriculture and commerce, for reforestation and afforestation of watersheds, denuded areas
... and other public forest lands, which upon investigation, are found needing reforestation or
afforestation .... The total amount of the reforestation charges paid by Mambulao Lumber Company is
P9,127.50, and it is the contention of the defendant Mambulao Lumber Company that since the Republic
of the Philippines has not made use of those reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the Republic of the Philippines should refund said
 amount, or, if it cannot be refunded, at least it should be compensated with what Mambulao Lumber
Company owed the Republic of the Philippines for reforestation charges. In line with this thought,
defendant Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1,
in paragraph 4 of which said defendant requested "that our account with your bureau be credited with all
the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956, amounting to
around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was answered by the director
of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry quoted an opinion of the
secretary of justice, to the effect that he has no discretion to extend the time for paying the reforestation
charges and also explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant company
to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the payment of the
sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is appellant's contention that said
sum of P9,127.50, not having been used in the reforestation of the area covered by its license, the same is
refundable to it or may be applied in compensation of said sum of P4,802.37 due from it as forest
charges.1wph1.t

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section
two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known as the
National Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first
and second groups and forty centavos for the third and fourth groups cut out and removed from any
public forest for commercial purposes. The amount collected shall be expended by the Director of
Forestry, with the approval of the Secretary of Agriculture and Natural Resources (commerce), for
reforestation and afforestation of watersheds, denuded areas and cogon and open lands within forest
reserves, communal forest, national parks, timber lands, sand dunes, and other public forest lands, which
upon investigation, are found needing reforestation or afforestation, or needing to be under forest cover
for the growing of economic trees for timber, tanning, oils, gums, and other minor forest products or
medicinal plants, or for watersheds protection, or for prevention of erosion and floods and preparation of
necessary plans and estimate of costs and for reconnaisance survey of public forest lands and for such
other expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from
the sale of barks, medical plants and other products derived from plantations as herein provided shall
constitute a fund to be known as Reforestation Fund, to be expended exclusively in carrying out the
purposes provided for under this Act. All provincial or city treasurers and their deputies shall act as agents
of the Director of Forestry for the collection of the revenues or incomes derived from the provisions of
this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses
or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources for
the reforestation or afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that the amount
collected as reforestation charges should be used exclusively for the reforestation of the area covered by the
license of a licensee or concessionaire, and that if not so used, the same should be refunded to him. Observe too,
that the licensee's area may or may not be reforested at all, depending on whether the investigation thereof by
the Director of Forestry shows that said area needs reforestation. The conclusion seems to be that the amount
paid by a licensee as reforestation charges is in the nature of a tax which forms a part of the Reforestation Fund,
payable by him irrespective of whether the area covered by his license is reforested or not. Said fund, as the law
expressly provides, shall be expended in carrying out the purposes provided for thereunder, namely, the
reforestation or afforestation, among others, of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is applicable, such
that the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to appellee in the
sum of P4,802.37 as forest charges. But in the view we take of this case, appellant and appellee are not mutually
creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao
Lumber Company has paid to the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything, crystal clear that the Republic of the Philippines
and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation
refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can
be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in
an action or any indebtedness of the state or municipality to one who is liable to the state or municipality
for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of
a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when
called upon by the Collector, because he has a claim against the governmental body which is not included
in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-
767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against
the defendant-appellant. So ordered.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and De Leon, JJ., concur.

Footnotes

1
Originally appealed to the Court of Appeals, but later certified to us by said court, on the ground that it
involves questions of law only.

2
"ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other."
 [G.R. No. 97787. August 1, 1996]

The Anti-Graft League of the Philippines, Inc., represented by REYNALDO L. BAGATSING, in his capacity as Chief
Prosecutor/Investigator, petitioner, vs. Hon. REYNALDO SAN JUAN, Provincial Governor, Hon. JOSE M.
BARRETO, SR., Provincial Vice-Governor, Hons. ERNESTO ESTRADA, ROMAN REYES, ISIDRO PACIS,
LEONISA VERGEL DE DIOS, REMEDIOS PARALEJAS, TIMOTEO PASCUAL, ALFREDO VILLANUEVA, AMOS
REYES, Members of the Provincial Board of Rizal, Hon. EUTROPIO MIGRIO, Presiding Judge, RTC-Pasig,
Branch CLI (151), Ortigas & Company Ltd., represented by ATTY. FRANCISCO ORTIGAS, JR., Asian
Appraisal Co., Inc., Rizal Provincial Appraisal Committee composed of the Provincial Assessor, Provincial
Auditor and District Engineer, JESS DOE, STEVE DOE, and HECTOR DOE, respondents.

DECISION

ROMERO, J.:

It is fundamental in this jurisdiction that any party may only come to court if he has legal standing and a valid
cause of action. Petitioner Anti-Graft League of the Philippines, a self-confessed non-governmental, non-stock and
non-profit organization, which was constituted to protect the interest of the Republic and its instrumentalities and
political subdivisions and its constituents against abuses of its public officials and employees, claims the instant
petition for certiorari is a taxpayers suit which it filed because the Provincial Board of Rizal (the Board) allegedly
illegally disbursed public funds in transactions involving four parcels of land in Ugong Norte, Pasig. The allegation is
denied by respondents who challenge the propriety of this action, as well as the capacity of petitioner to file the
same. Public respondents, officers of the Province of Rizal (the Province), even intimate that the filing of this
petition is politically-motivated.
On March 20, 1975, then President Ferdinand E. Marcos issued Presidential Decree No. 674, establishing the
Technological Colleges of Rizal. Among other things, it directed the Board to provide funds for the purchase of a
site and the construction of the necessary structures thereon. Acting upon an authority granted by the Office of
the President, the Province was able to negotiate with respondent Ortigas & Co., Ltd. (Ortigas) for the acquisition
of four parcels of land located in Ugong Norte, Pasig.Three deeds of absolute sale were executed on April 22 and
May 9, 1975, whereby Ortigas transferred its ownership over a total of 192,177 square meters of land to the
Province at P110.00 per square meter. The projected construction, however, never materialized because of the
decimation of the Provinces resources brought about by the creation of the Metro Manila Commission (MMC) in
1976.
Twelve years later, with the property lying idle and the Province needing funds to propel its 5-year
Comprehensive Development Program, the then incumbent Board passed Resolution No. 87-205 dated October
15, 1987 authorizing the Governor to sell the same. The said property was eventually sold to Valley View Realty
Development Corporation (Valley View) for P700.00 per square meter or a total of P134,523,900.00, of which 30
million was given as downpayment. On May 10, 1988, after learning about the sale, Ortigas filed before Branch 151
of the Regional Trial Court of Pasig an action for rescission of contract plus damages with preliminary injunction
against the Province. Docketed as Civil No. 55904, the complaint alleged that the Province violated one of the
terms of its contracts with Ortigas by selling the subject lots which were intended to be utilized solely as a site for
the construction of the Rizal Technological Colleges and the Rizal Provincial Hospital.
Meanwhile, the new provincial officials, including herein public respondents assumed office. On April 21, 1988,
the Board adopted Resolution No. 88-65 which provided for the rescission of the deed of sale between the
Province and Valley View on the ground that the sale price was exceedingly low and, thus, prejudicial to the
Province. Because of this, Valley View then filed a complaint docketed as Civil Case No. 55913 against the Province
for specific performance and damages. The case was, however, dismissed after the parties executed on August 12,
1988 a compromise agreement whereby the Province returned the 30-million peso downpayment earlier given by
Valley View.
 Civil Case No. 55904 was also resolved through a compromise agreement executed by and between the
Province and Ortigas on March 20, 1989. Under the said compromise agreement, which was approved by
respondent Judge Eutropio Migrio in his decision dated March 21, 1989, the Province agreed to reconvey the four
parcels of land to Ortigas at a price of P2,250.00 per square meter, or a total of P432,398,250.00, payable within
two years at an annual interest rate of fourteen percent. This amount is higher than the market values separately
determined by respondents Asian Appraisal, Inc. and the Provincial Appraisal Committee, which respectively
pegged the price of the subject properties at P1,800.00 and P2,200.00 per square meter. Ortigas made its final
payment on March 30, 1991.
On April 1, 1991, petitioner filed the instant petition for certiorari with application for preliminary injunction
seeking the nullification of the March 20, 1989 compromise agreement, and, corollarily, the decision of respondent
Judge approving the same.
A reading of the petition immediately raises several questions: (1) Is the present action a taxpayers suit?
Corollarily, does petitioner possess the legal standing to question the transaction entered into by the Provincial
Board of Rizal with private respondent Ortigas? (2) Is the Supreme Court the proper forum for the instant petition?
(3) Assuming arguendo that the prior questions may be answered in the affirmative, is the present action barred
by laches?
Petitioner and respondents agree that to constitute a taxpayers suit, two requisites must be met, namely, that
public funds are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed, and that the petitioner is directly affected by the alleged ultra vires act. [1] The same
pronouncement was made in Kilosbayan, Inc. v. Guingona, Jr.,[2] where the Court also reiterated its liberal stance in
entertaining so-called taxpayers suits, especially when important issues are involved. A closer examination of the
facts of this case would readily demonstrate that petitioners standing should not even be made an issue here,
since standing is a concept in constitutional law and here no constitutional question is actually involved. [3]
In the case at bar, disbursement of public funds was only made in 1975 when the Province bought the lands
from Ortigas at P110.00 per square meter in line with the objectives of P.D. 674. Petitioner never referred to such
purchase as an illegal disbursement of public funds but focused on the alleged fraudulent reconveyance of said
property to Ortigas because the price paid was lower than the prevailing market value of neighboring lots. The first
requirement, therefore, which would make this petition a taxpayers suit is absent. The only remaining justification
for petitioner to be allowed to pursue this action is whether it is, or would be, directly affected by the act
complained of. As we stated in Kilosbayan, Inc. v. Morato,[4]

Standing is a special concern in constitutional law because in some cases suits are brought not by parties who
have been personally injured by the operation of law or by official action taken, but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Hence the question in standing is whether such parties
have alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which
sharpens the presentation of issues upon which the court so largely depends for illumination of difficult
constitutional questions. (Citing Baker v. Carr, 369 U.S. 186, 7 L. Ed. 2d 633 [1962])
Undeniably, as a taxpayer, petitioner would somehow be adversely affected by an illegal use of public money.
When, however, no such unlawful spending has been shown, as in the case at bar, petitioner, even as a taxpayer,
cannot question the transaction validly executed by and between the Province and Ortigas for the simple reason
that it is not privy to said contract. In other words, petitioner has absolutely no cause of action, and consequently
no locus standi, in the instant case.
Petitioner committed further procedural error by filing its petition with this Court. While it is ostensibly
questioning the reconveyance of the subject lots to Ortigas, that is, the acts of the Governor of Rizal and of the
members of the Provincial Board, it is in effect mainly assailing the March 21, 1989 judgment of respondent Judge
Migrio who approved the compromise agreement. The proper remedy which it should have taken was to file a
petition for review of the trial courts decision before the Court of Appeals because petitioner is questioning the
wisdom of the trial courts action which, in turn, calls for a factual determination of the feasibility of an amicable
settlement between the litigants. No legal issue cognizable by this Court was ever raised by petitioner. Even if
there was, such an action would have failed because of petitioners lack of legal standing to file the same.
Assuming arguendo that petitioner did have the personality and was justified in lodging this case before the
Court, did it do so seasonably? We think not. The questioned decision was promulgated on March 21, 1989 and, no
appeal having been made therefrom, became final and executory on April 5, 1989. Petitioner filed the present
action only on April 1, 1991, two years later, contending that the trial courts decision merely adopted the
compromise agreement which provided, inter alia, that the last installment was due only on March 30, 1991. This
specious line of reasoning is easily demolished. Why should petitioner wait until the parties to the transaction have
fulfilled their respective obligations, which is two years from the date of the contract, when it could have
questioned the same much earlier, even at the contracts inception, and in the process, spared everyone from
unnecessary aggravation?
Accordingly, after concluding that, not only does petitioner lack the legal personality to file this so-called
taxpayers suit, but that it filed the same beyond the reglementary period, this Court no longer finds any reason to
delve into the merits, or the lack of it, of the instant petition.
WHEREFORE, premises considered, the instant petition for certiorari is hereby DISMISSED. Costs against
petitioner.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado, Davide, Jr., Melo, Puno, Kapunan, Mendoza, Francisco, Hermosisima, Jr.,
Panganiban, and Torres, Jr., JJ., concur.
Vitug, J., in the results.
Bellosillo, J., is on official leave.

G.R. No. L-57828 June 14, 1993

SEA-LAND SERVICE, INC. petitioner,

vs.
COURT OF APPEALS and PHILIPPINE HOME ASSURANCE CORPORATION, respondents.

Sofronio A. Larcia for petitioner.

De Lara, De Luna & Associates for private respondents.

QUIASON, J.:

This is an appeal by certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of Appeals in
CA-G.R. No. 64514-R, entitled "Philippine Home Assurance Corporation vs. Donmac Corporation (Rollo, pp. 10-36).

On June 7, 1975, private respondent Philippine Home Assurance Corporation, ("Assurance"), filed an action in the
Court of First Instance of Manila (Civil Case No. 98127) as subrogee of the assured-consignee, Republic Flour Mills
(RFM) to recover from the defendants, Donmac Corporation ("Donmac"), E. Razon, Inc., ("E. Razon"), Reyma
Brokerage, Inc. ("Reyma"), and Sea-Land Services, Inc. ("Sea-Land") petitioner, herein, the sum of P66,289.29,
which it paid to RFM, after the defendants had refused to pay the claim for the loss or damage suffered by RFM's
shipment, consisting of three units of Smokehouse Airconditioning System and one unit of Mepaco Smoke
Generator (Record on Appeal, pp. 6-10, Rollo, p. 37).
Donmac was the carrier; Sea-Land, the ship agent of Donmac; E. Razon, the arrastre contractor in the Port of
Manila; and Reyma, the consignee's broker (Record on Appeal, pp. 6-7, Rollo, p. 37). During the pendency of the
case in the trial court, the original claim was reduced to P30,980.04 because some of the items claimed to have
been lost were found by the consignee and their value refunded to the insurer (Brief for the Petitioner, p. 1; Rollo,
p. 104).

After trial, the Court of First Instance rendered a decision, the dispositive portion of which reads:

WHEREFORE, the Court hereby renders judgment as follows:

(a) Ordering the defendants Donmac Corporation and Sea Land Services, Inc., jointly and
severally, to pay the plaintiff the sum of P20,253.36 with interest at the legal rate of 6% per
annum from the date of the filing of the complaint on June 7, 1975 up to the date said amount is
fully paid;

(b) Ordering the dismissal of the counterclaim of defendant Sea Land Services, Inc.

(c) Without pronouncement as to costs:

SO ORDERED (Record on Appeal p. 77; Rollo, p. 37).

Sea-Land appealed from the decision of the Court of First Instance to the Court of Appeals (CA-G.R. No. 64514-R),
which affirmed the said decision but added cost against the appellant (Rollo, pp. 40-64).

Hence, this petition.

The findings of fact of the trial court, adopted by the Court of Appeals, are as follows:

On May 5, 1975 the Sea-Land Services, Inc. received at its LVRR Elizabeth Terminal in New Jersey,
U.S.A. one (1) H to H container, marked SEAU 17605, STC 3 complete units food processing
machinery, with gross weight of 36,000 measuring 2097 cubic feet from the shipper, Julian
Engineering Co., thru its forwarding agent Interport Company of Chicago, Illinois. On the same
date, the Sea-Land Services Inc. issued on board Bill of Lading No. 901-029162 covering the said
shipment (Exhibits B-plaintiff; 21 Sea-Land)and the shipment was finally received by Sea-Land on
May 8, 1974 in apparent good order and condition (id. "1"-B Sea-land). The shipment has an
invoice value of US$71,635.00 CLF Manila and was sold to RFM Corporation (Meat Processing
Division), consignee, Rizal Philippines, which insured the said shipment on May 14, 1974 with
plaintiff Philippine Home Assurance Corporation against all risk including wars and strikes for CAF
US$71,635.00 plus 2; MU Exchange Rate of P6.50 to $1.00 or for P591,346.93 (Exhibit C). The
shipment was loaded at the Port of Oakland, U.S.A. on board the vessel "TRADE" or "SS SEALAND
COMMERCE" and subsequently transhipped at the port of Hongkong by the "SS Fairland", which
was owned by the defendant Donmac Corporation of Wilmington, Delaware, U.S.S. per Lloyds
Register of Ships, 1974-75 edition, page 1153, Identity No. 511160 (tsn., Nov. 15, 1976, p. 3). The
"SS Fairland", which was the agency of Sea-Land Services, Inc. (Exhibit "O") arrived at and docked
alongside Pier 3, Manila, South Harbor, on June 6, 1974 under Customs Registry No. 935 (Exhibit
"4", Sea-Land). On June 5, 1974 Sea-Land (Phils.) notified the consignee RFM Corporation that
the latter's shipment aboard the S.S. "Fairland" would arrive at the port of Manila on June 6,
1974, which notice was received by the consignee on the same date (exhibit "8" Sea-Land). Cargo
Sea Van No. SEAU No. 17605, containing the shipment, was discharged from the varrying vessel
on June 6, 1974, in apparent good order and condition, with its seal intact. Its content, however,
were not turned over to the arrastre operator. The cargo sea van was brought to the container
terminal of Sea-Land at Pier 3. On July 1, 1974 defendant Sea-Land notified the consignee in
writing that if the containerized shipment was not taken within 36 hours from receipt of the
notice, the container with its a consents would be brought to a bonded warehouse designated by
the Bureau of Customs (Exhibit "5" Sea-Land). This notice was received by the consignee on the
same date, July 1, 1974 (Exhibit "5-A" Sea-Land). As the consignee failed to pick up its
containerized shipment from the container terminal, Pier 3, the same was transferred, after a
clean gate pass was issued on July 4, 1974 (Exhibit "1" Razon), to the bonded warehouse of the
Luzon Brokerage Corporation at Otis St., Paco, Manila, (Exhibit "6" Sea-Land) but later
transferred unopened to the LBC bonded warehouse No. 2-A located at Shaw Boulevard, Pasig,
Rizal (Exhibit "4" Sea-Land)

On July 13, 1974, Domingo Javier, the checker of defendant Sea-Land went to the LBC Compound
at Shaw Boulevard, Pasig, and without securing permission from Bureau of Customs and the
consignee, broke the seal of the container in the presence of one in charge of the LBC compound.
With the help of the LBC stevedors, he removed the contents of the container and checked them
on July 13, and 14, 1974. His checking and examinations are contained in five (5) Good Order
Tally sheets No. 8251 (Exhibit "7" Sea-Land), No. 8252 (Exhibit "7-A" Sea-Land), No. 8255 (Exhibit
"7-B" Sea-Land), No. 8256 (Exhibit "7-C" Sea-Land), and No. 8259 (Exhibit "7-D" Sea-Land); and in
one Bad Order Tally Sheet, No. 8258 (Exhibits "2" and "2-A" Sea-Land). He found that all the
contents of the Good Order Tally Sheets were in good condition with the exception of the
radiator of the engine which was dented in some parts (see Tally Sheet No. 8252) and of the
aluminum sheets which were dented in some parts (see Tally Sheet No. 8256). One case (Bad
Order Tally Sheet No. 8258) contained various items in cartons and pieces. One (1) carton of
Browning (Big) was in bad faith and so with two (2) cartons of Browning (Small) as well as one (1)
carton containing 1 gallon Carbit Paint. All the rest were in good order. No representative of the
consignee or of the Bureau of Customs was present during the checking.

The evidence of record does not disclose in what particular place is the LBC Compound where
the itemized pieces of the shipment stored pending their transfer to the plant of the consignee at
Bo. Pulo, Cabuyao, Laguna. On July 24, 1974 the defendant Reyma Brokerage, Inc. brought the
itemized contents of the van or container from the LBC compound to the plant of the consignee
at Cabuyao, Laguna and delivered them to the consignee thereat (Exhs. "K", "K-1" and "K-2").
Noted on the Delivery Receipt No. 15715 (Exhibit "K-1") were three (3) cartons which were
water-damaged and in Delivery Receipt No. 15716 (Exhibit K-2) was noted one (1) plywood case
which was in bad order.

On the same date, July 24, 1974, the Manila Adjusters and Surveyors Co., on request of the
consignee, sent its surveyors, Jesus Victa, to the plant of the consignee at Cabuyao, Laguna to
survey the imported articles delivered thereat. The Certified Adjuster, Inc., upon request of
defendant Sea-Land Services, Inc., also sent its surveyors, and they with the surveyor of the
Manila Adjusters and Surveyors Co., inventoried and checked the shipment. The findings of Victa,
which are contained in the Certificate of Survet dated August 29, 1974 submitted by the Manila
Adjusters and Surveyors Co. (Exhibit "E"), are as follows:

2. pcs. fresh air damper cut on one side approximately 3" long.

1 pc. coil support frame assembly for 1 blower casing BC-17 slightly dented/cut approximately
10" long x 4" wide.

3 pcs. duct sleeve SL-1 not accounted for.

6 pcs. duct sleeve SL-2 not accounted for.

 3 pcs. steam coil, 42" x 50" not accounted for.

18 rolls block butyl rubber tape not accounted for.

The surveyors of the Certified Adjusters, Inc. had the same findings (Exhibit "4" Sea-Land). The
rest of the items were found in good order condition and accepted by the consignee. The
surveyors of the Manila Adjusters and Surveyors Co. gave the opinion that the "damages"
sustained by the two (2) fresh air dampers and one (1) coil support frame assembly apparently
occurred while the shipment was in transit from port of origin to destination. However, the
surveyors could not state where and when the losses (not accounted for items) could have
occurred because they were not present during the stripping of the container of its contents
(Exhibit "E", p. 4). The surveyors of the Certified Adjusters, Inc. did state their opinion on the
cause and place of damage/loss. The Manila Adjusters and Surveyors Co. computed the damages
(dentings) and losses (not accounted for items) to have a claimable value of P66,289.29 (Exh.
"F"). The consignee filed its claim for the said amount with the defendants Sea-Land Services, Inc.
and E. Razon, Inc. but both defendants declined to pay the same, alleging that they are not
responsible for the damages/losses suffered by the cargo (Exhibit "G"). The consignee thereupon
demanded payment from the plaintiff an insurer of the cargo and the latter complied by issuing
on June 5, 1975 a check in favor of the consignee for the amount of P66,289.29 The consignee
signed and delivered to the plaintiff a subrogation receipt dated June 5, 1975 for the amount of
P66,289.29 (Exhibits "M" and "N"). The plaintiff as subrogee demanded payment from
defendants Sea-Land Services, Inc. and E. Razon, Inc., but both refused to pay for, according to
them, they are not responsible for the damages/losses suffered by the cargo (Exhibit "I" and "J").
On August 19, 1975 the consignee returned the check in the amount of P66,289.29 issued to it by
the plaintiff, informing the latter that the unaccounted for items with a value of P35,909.25 were
found and accounted for, and therefore, the said amount should be deducted from the original
claim of P66,289.29, thus making the corrected claim to be in the amount of P30,380.04 (Exhibit
"L"). The plaintiff paid the consignee the said amount of P30,380.04; and the plaintiff likewise
reduced its claim against the defendants from P66,289.29 to P36,380.04 (Partial Stipulation of
Facts) (Decision, CA-G.R. No. 64514-R, pp. 3-7, Rollo, pp. 42-46).

In the Court of Appeals, petitioner invoked the provisions of Section 15 of the Bill of Lading, (Exh. 1-D, Sea-Land) in
support of its claim that there was a constructive delivery of the shipment to the consignee and that it had been
discharged of its responsibility over the shipment before July 13, 1974 when it opened the sealed container van.
The Court of Appeals, however, dismissed this claim of petitioner on the ground that it was raised for the first time
on appeal; therefore, it was considered as having been waived by petitioner (Decision, p. 9; Rollo, p. 48).

In appellate procedure, parties are not allowed to change theories or shift positions in the appellate court. On
appeal, the parties must keep within the issues stated in their pleadings or the theories on which their causes of
action in the trial court were predicated (American Express Co. v. Natividad, 46 Phil. 207; Torribio v. Decasa, 55
Phil. 461).

The complaint filed by Assurance as a subrogee in Civil Case No. 98127 was to collect damages from the
defendants therein, including petitioner, for the short-landing of and damages to the cargo while in the custody of
the defendants (Complaint, par. 6; Record on Appeal, p. 8; Rollo, p. 37). the answer of petitioner claimed that the
"devanning" of the insured cargo in July 13 and 14, 1974 took place after due notice was given to the consignee
and only after the latter failed to claim the cargo.

Paragraph 26 of the Answer of Sea-Land states: "Despite notice to consignee, the latter failed to take delivery of
the container for almost one (1) month. consequently, the subject container was transferred to the Luzon
Brokerage Customs Bonded Warehouse for devanning. The devanning took place on July 13 and 14, 1974. Upon
devanning, only one case was found in bad condition. The box consisted of 149 packages, but only 4 packages were
noted with exceptions" (Record on Appeal, pp. 31-32; Rollo, p. 37).

It is true that petitioner did not specifically cite the provisions of Section 15 of the Bill of Lading (Exh. 1-D, Sea-
Land) as the authority to support its right to "devan" the insured cargo, but under the rules on pleading, a party is
not required to specify the provisions of the law or contract relied upon by the pleader. The rules only require the
allegations of the ultimate facts.

The rules on appellate procedure do not even require the parties to adhere to their position in minute detail but
only to abide by the general position adopted by them in the trial court (Fisk v. Honorio, 14 Ore, 29). Neither do
the rules prevent the parties from putting up additional grounds to support their position (Sons v. Yangco
Steamship Co., 34 Phil. 597).

Assuming arguendo that the issue of the right of petitioner to "devan" was not raised by it in the trial court, the
fact remains that Assurance failed to object when the Bill of Lading (Exhibit 1-D, See Land) was presented in
evidence. As a matter of fact, Assurance admitted the genuineness and due execution of said document in the
partial stipulation of facts submitted to the trial court (Record on Appeal, p. 50; Rollo, p. 37). Likewise, Assurance
did not object to the admissions of the evidence proving the steps taken by petitioner before removing the cargo
from the container van. When issues not raised by the pleadings are tried by express or implied consent of the
parties, they shall be treated in all respects, as if they had been raised in the pleadings (Rule 10, Sec. 5, Revised
Rules of Court; Lizarraga Hermanos v. Yap Tico, 24 Phil. 504; Molina v. Somes, 24 Phil. 49).

This brings us to the issue as to whether petitioner had been relieved of its obligations under the Bill of Lading
when it "devaned" the cargo on July 13, 1974.

Section 15 of the Bill of Lading Exh. 1-D Sea-Land provides:

The carrier or master may appoint a stevedore or any other persons to unload and take delivery
of the goods and such delivery from ship's tackle shall be considered complete and all
responsibility of the carrier shall then terminate.

It is agreed that when possession of the goods is received or taken by the customs or other
authorities or by any operator of any lighter, craft, dock, pier, store, warehouse, refrigerator,
elevator or other facilities whether selected by the carrier or master, shipper or consignee,
whether public or private, such authority or person shall be considered as having received
possession and delivery of the goods solely as agent of and on behalf of the shipper and
consignee, at the risk of the goods and subject to any lien of the carrier thereon. Also if the
consignee does not take possession or delivery of the goods as soon as the goods are at the
disposal of the consignee for removal, the goods shall be at their own risk and expense, delivery
shall be considered complete and the carrier may, subject to carrier's liens, send the goods to
store, warehouse, put them on lighters or other craft, put them in possession of authorities,
dump, permit to lie where landed or otherwise dispose of them, always at the risk and expense of
the goods, and the shipper and consignee shall pay and indemnify the carrier for any loss,
damage, fine, charge or expense whatsoever suffered or incurred in so dealing with or disposing
of the goods, or by reason of the consignee's failure or delay in taking possession and delivery as
provided herein (Rollo, p. 14; Emphasis supplied).

The "SS Fairland", carrying the container van SEAU 17605, STC 3, arrived in the Port of Manila on June 6, 1974. On
the same day, the said container was unloaded and discharged from the carrying vessel. The day before the arrival
of the vessel, petitioner notified RFM, the consignee, that the latter's shipment would be arriving on June 6, 1974.
Petitioner notified RFM in a letter dated July 1, 1974 (Exh. 5) that the shipment in the container van No. 17605
would be transferred to a customs bonded warehouse. In a follow-up letter dated July 12, 1974 (Exh. 6), petitioner
again informed RFM that the said container van had been transferred to the bonded warehouse of the Luzon
Brokerage Corporation and asked RFM to take immediate delivery of the cargo (Decision, p. 9; Rollo, p. 48).

The bonded warehouse of Luzon Brokerage Corporation is located in Pasig, Metro Manila and in the vicinity of the
offices of RFM.

For the third time, petitioner sent a notice to RFM on July 12, 1974 that the cargo had been transferred to the
Luzon Brokerage Corporation (Exh. 6, Sea-Land).

The cargo was unloaded from the container van on July 13, 1974 in the presence of the Luzon Brokerage
Corporation personnel. It was at this time that portions of the shipment were found to be in bad order. It was only
on July 24, 1974 that RFM took delivery of the shipment from the Luzon Brokerage Corporation bonded warehouse
and transferred the same to its plant in Cabuyao, Laguna. A survey conducted at the consignee's plant showed that
the fresh air damper and the coil support frame assembly had been damaged while several pieces of parts of the
food processing machinery were missing. By this time, Sea-Land had been relieved of responsibility over the cargo
under Section 15 of the Bill of Lading.

There is no dispute that the cargo was shipped "H to H container STC 3 complete units food processing
machinery," meaning that the shipper itself loaded the cargo into the van, which was sealed before its delivery to
the carrying vessel.

There was no evidence presented by Assurance as to the actual condition of the cargo when it was loaded into the
container van by Julian Engineering Co., the shipper. Assurance issued the insurance policy without prior
inspection of the cargo on the assumption that the cargo loaded into the container van was complete and in good
order. The insurance policy was issued when the cargo was inside the sealed container van. Assurance was aware
that the carrying vessel had not accepted the cargo as complete and in good order as shown by its qualified receipt
as appearing in the bill of lading (Exh. 1, Sea-Land).

Under the provisions of Section 15 of the Bill of Lading, the carriers can "send the goods to store, warehouse, put
them on lighters or other craft, put them in possession of the authorities, dump, permit to lie where landed or
otherwise dispose of them, always at the risk and expenses of the goods . . ." after the constructive delivery of the
goods. The carriers can "devan" the goods from the container without the prior consent of the consignee or the
Bureau of Customs (Decision, p. 17; Rollo, p. 56).

WHEREFORE, the petition for certiorari is GRANTED and the decision of the Court of Appeals appealed from is
REVERSED. The complaint in Civil Case No. 98127 of the Court of First Instance of Manila is DISMISSED, with costs
against plaintiff therein.

SO ORDERED.

Cruz, Grio-Aquino and Bellosillo, JJ., concur.

G.R. No. 172087 March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUAG, in his official
capacity as COMMISSIONER OF INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of Respondent. Public
and Private Respondents.

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Certiorari and Prohibition 1 with prayer for the issuance of a
Temporary Restraining Order and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine
Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of Republic Act
(R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of 1997, by excluding
petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III of the
Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue
Regulations No. 16-2005 for being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977. Simultaneous to its
creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of
any type of tax, except a franchise tax of five percent (5%) of the gross revenue. 4 Thereafter, on June 2, 1978, P.D.
No. 1399 was issued expanding the scope of PAGCOR's exemption. 5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was issued. Section 13
thereof reads as follows:

Sec. 13. Exemptions. x x x

(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles,
automobiles, boats, ships, barges, aircraft and such other gambling paraphernalia, including accessories or
related facilities, for the sole and exclusive use of the casinos, the proper and efficient management and
administration thereof and such other clubs, recreation or amusement places to be established under and
by virtue of this Franchise shall be exempt from the payment of duties, taxes and other imposts, including
all kinds of fees, levies, or charges of any kind or nature.

Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing
contractual arrangements with the Corporation, for the sole and exclusive use of the casino or to be used
to service the operations and requirements of the casino, shall likewise be totally exempt from the
payment of all customs duties, taxes and other imposts, including all kinds of fees, levies, assessments or
charges of any kind or nature, whether National or Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as
well as fees, charges, or levies of whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way
to the earnings of the Corporation, except a Franchise Tax of five percent (5%)of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established, or collected by any municipal,
provincial or national government authority.
 (b) Others: The exemption herein granted for earnings derived from the operations conducted
under the franchise, specifically from the payment of any tax, income or otherwise, as well as any
form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or operator has any
contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other remuneration
from the Corporation as a result of essential facilities furnished and/or technical services
rendered to the Corporation or operator.

The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance
of this provision shall be free of any tax.

(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the Corporation
should declare a cash dividend income corresponding to the participation of the private sector shall, as an
incentive to the beneficiaries, be subject only to a final flat income rate of ten percent (10%) of the
regular income tax rates. The dividend income shall not in such case be considered as part of the
beneficiaries' taxable income; provided, however, that such dividend income shall be totally exempted
from income or other form of taxes if invested within six (6) months from the date the dividend income is
received in the following:

(a) operation of the casino(s) or investments in any affiliate activity that will ultimately redound
to the benefit of the Corporation; or any other corporation with whom the Corporation has any
existing arrangements in connection with or related to the operations of the casino(s);

(b) Government bonds, securities, treasury notes, or government debentures; or

(c) BOI-registered or export-oriented corporation(s).7

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of
Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997, took effect.
Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs) shall pay
corporate income tax, except petitioner PAGCOR, the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing

special general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and
controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon
their taxable income as are imposed by this Section upon corporations or associations engaged in similar business,
industry, or activity.9

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal Revenue Code of
1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which
amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from the
enumeration of GOCCs that are exempt from payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing

special general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned and
controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes
Office (PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity and
constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5,
which imposes a 10% VAT on importation of goods; and Section 6, which imposes a 10% VAT on sale of
services and use or lease of properties, all contain a uniform proviso authorizing the President, upon the
recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions were
alleged to be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress the
exclusive authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due process,
as well as of Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment
rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the
guarantee of equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337. 12

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically identifying PAGCOR
as one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue Code of
1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.

xxxx

(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how
their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the Tax Code.
This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or
franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE NON-
IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING
BEYOND THE SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED VAT
ON THE SERVICES OF THE PETITIONER AS WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE BASIC
LAW, AS INTERPRETED BY APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON
PETITIONERS LICENSEES OR FRANCHISEES.14

The BIR, in its Comment15 dated December 29, 2006, counters:

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL
PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL
OF THEIR PROVISIONS WHENEVER POSSIBLE.

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with the
arguments of the petitioner. It added that although the State is free to select the subjects of taxation and that the
inequity resulting from singling out a particular class for taxation or exemption is not an infringement of the
constitutional limitation, a tax law must operate with the same force and effect to all persons, firms and
corporations placed in a similar situation. Furthermore, according to the OSG, public respondent BIR exceeded its
statutory authority when it enacted RR No. 16-2005, because the latter's provisions are contrary to the mandates
of P.D. No. 1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment
of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977,
petitioner is no longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs
that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is violative of its right to
equal protection of the laws under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be
denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:

Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights
conferred and responsibilities imposed. Similar subjects, in other words, should not be treated differently, so as to
give undue favor to some and unjustly discriminate against others. The guarantee means that no person or class of
persons shall be denied the same protection of laws which is enjoyed by other persons or other classes in like
circumstances. The "equal protection of the laws is a pledge of the protection of equal laws." It limits
governmental discrimination. The equal protection clause extends to artificial persons but only insofar as their
property is concerned.

xxxx

Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the law may
operate only on some and not all of the people without violating the equal protection clause. The classification
must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class. 18

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted
from payment of corporate income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing

special or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned and
controlled by the Government, except the Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon
their taxable income as are imposed by this Section upon corporations or associations engaged in similar business,
industry, or activity.19

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means
dated October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax
was due to the acquiescence of the Committee on Ways on Means to the request of PAGCOR that it be exempt
from such tax.20 The records of the Bicameral Conference Meeting reveal:

HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.

CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we
included a tax on cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the ---

HON. R. DIAZ. I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will accept.
(laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the
VAT and other sales taxes---

CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)

HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release the money
into the hands of the public, they will not use that to --- for wallpaper. They will spend that eh, Mr. Chairman. So
when they spend that---

CHAIRMAN ENRILE. Theres a VAT.

HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an
approximation?

CHAIRMAN JAVIER. Not anything.

HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the economy
which is unrealistic.

CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives it in the
form of wages and supplies and other services and other goods. They are not being taken from the public and
stored in a vault.

CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.

HON. ROXAS. Precisely, so they will be spending it.21

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate income
tax was not based on a classification showing substantial distinctions which make for real differences, but to
reiterate, the exemption was granted upon the request of PAGCOR that it be exempt from the payment of
corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the
enumeration of GOCCs that are exempt from paying corporate income tax. The records of the Bicameral
Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No. 1950
and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate
income tax, thus:

THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to
show the world who our creditors, that we are increasing official revenues that go to the national budget.
Unfortunately today, Pagcor is unofficial.

Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small taxes
that they are subjected to. Of the 9.7 billion, they claim they remitted to national government seven billion.
Pagkatapos, there are other specific remittances like to the Philippine Sports Commission, etc., as mandated by
various laws, and then about 400 million to the President's Social Fund. But all in all, their net profit today should
be about 12 billion. That's why I am questioning this two billion. Because while essentially they claim that the
money goes to government, and I will accept that just for the sake of argument. It does not pass through the
appropriation process. And I think that at least if we can capture 35 percent or 32 percent through the
budgetary process, first, it is reflected in our official income of government which is applied to the national
budget, and secondly, it goes through what is constitutionally mandated as Congress appropriating and defining
where the money is spent and not through a board of directors that has absolutely no accountability.

REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmea.

SEN. OSMEA. And Negros.

REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends from the
Department of Finance in a difficult position, but may we know your comments on this knowing that as Senator
Osmea just mentioned, he said, "I accept that that a lot of it is going to spending for basic services," you know,
going to most, I think, supposedly a lot or most of it should go to government spending, social services and the like.
What is your comment on this? This is going to affect a lot of services on the government side.

THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.

SEN. OSMEA. It goes from pocket to the other, Monico.

REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre-
judgment on this and I don't blame you. I don't blame you. And I know you have your own research. But will this
not affect a lot, the disbursements on social services and other?

REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for you to
explain to, say, foreign creditors, how do you explain to them that if there is a fiscal gap some of our richest
corporations has [been] spared [from] taxation by the government which is one rich source of revenues. Now, why
do you save, why do you spare certain government corporations on that, like Pagcor? So, would it be easier for you
to make an argument if everything was exposed to taxation?

REP. TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman Teves?

MR. PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will then enter as an official revenue
although when dividends declare it also goes in as other income. (sic)

xxxx
REP. TEVES. Mr. Chairman.

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on
value-added tax. Do you mean to say we are going to amend it from income tax to value-added tax, as far as
Pagcor is concerned?

THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption from income
tax of Pagcor.

xxxx

REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are VATable?
What will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.

REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

xxxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .

REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis?

THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but it
just takes away their exemption from non-payment of income tax.22

Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming exemption
to prove that it is, in fact, covered by the exemption so claimed.24 As a rule, tax exemptions are construed strongly
against the claimant.25 Exemptions must be shown to exist clearly and categorically, and supported by clear legal
provision.26

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering
that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as shown by the discussions in the Bicameral Conference
Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from
exemption from the payment of corporate income tax. It is a basic precept of statutory construction that the
express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim
expressio unius est exclusio alterius.27 Thus, the express mention of the GOCCs exempted from payment of
corporate income tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming
within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim:
exceptio firmat regulam in casibus non exceptis. 28
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the
Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that
PAGCORs exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the
National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial
distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may
operate only on some, and not all, without violating the equal protection clause. The legislative records show that
the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCORs own request to be
exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-
impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the contract even
without the parties expressly saying so. Petitioner states that the private parties/investors transacting with it
considered the tax exemptions, which inure to their benefit, as the main consideration and inducement for their
decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate income
tax by R.A. No. 9337 has the effect of changing the main consideration and inducement for the transactions of
private parties with it; thus, the amendatory provision is violative of the non-impairment clause of the
Constitution.

Petitioners contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law
impairing the obligation of contracts shall be passed. The non-impairment clause is limited in application to laws
that derogate from prior acts or contracts by enlarging, abridging or in any manner changing the intention of the
parties.29 There is impairment if a subsequent law changes the terms of a contract between the parties, imposes
new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the
parties.30

As regards franchises, Section 11, Article XII of the Constitution 31 provides that no franchise or right shall be
granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires.32

In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the nature of a grant,
which is beyond the purview of the non-impairment clause of the Constitution.34 The pertinent portion of the case
states:

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in
the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions,
nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the
term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and
waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions
granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor
provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility
shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal
by Congress as and when the common good so requires.35

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation
or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within
the territorial jurisdiction of the Republic of the Philippines.36 Under Section 11, Article XII of the Constitution,
PAGCORs franchise is subject to amendment, alteration or repeal by Congress such as the amendment under
Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No.
8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may affect any benefits to
PAGCORs transactions with private parties, is not violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid
for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to
VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the payment of corporate income
tax, which was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof,
which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:

Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:

xxxx

(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under
special laws, except Presidential Decree No. 529.37

Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law that
grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section
108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to
read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of
properties: x x x

xxxx

(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%) rate;

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;

x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by
imposing VAT on other services not previously covered, it did not amend the portion of Section 108 (B) (3) that
subjects to zero percent rate services performed by VAT-registered persons to persons or entities whose
exemption under special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively
discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.39 Acesite was the owner
and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotels premises to PAGCOR. It
incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR from
January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount
assessed to PAGCOR. However, PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid
only the amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount
of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In
May 1998, Acesite sought the refund of the amount it paid as VAT on the ground that its transaction with PAGCOR
was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR and Acesite were
both exempt from paying VAT, thus:

xxxx

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of
taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions.

xxxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees,
charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial, or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the
franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or
levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with
whom the Corporation or operator has any contractual relationship in connection with the operations of the
casino(s) authorized to be conducted under this Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services
rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect
taxes, like the VAT.

We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on
whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect
taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR.
Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly
exempt from such taxes because the law exempts from taxes persons or entities contracting with PAGCOR in
casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact,
it goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The
unmistakable conclusion is that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted
exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case, can be
shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting
PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in
which case it is computed as 1/11 of such value, or charged as an additional 10% to the value. Verily, the seller or
lessor has the option to follow either way in charging its clients and customer. In the instant case, Acesite followed
the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, the use of
either method, and in particular, the first method, does not denigrate the fact that PAGCOR is exempt from an
indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the
payment of it as it is exempt in this particular transaction by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of
R.A. 8424), which provides:

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied, assessed and
collected, a value-added tax equivalent to 10% of gross receipts derived by any person engaged in the sale of
services x x x; Provided, that the following services performed in the Philippines by VAT registered persons shall be
subject to 0%.

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the supply of such services to zero (0%) rate (emphasis
supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption
to entities or individuals dealing with PAGCOR in casino operations are best elucidated from the 1987 case
of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World
Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption
of contractee WHO should be implemented to mean that the entity or person exempt is the contractor itself who
constructed the building owned by contractee WHO, and such does not violate the rule that tax exemptions are
personal because the manifest intention of the agreement is to exempt the contractor so that no contractor's tax
may be shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or
individuals dealing with PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be
shifted to PAGCOR.40

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal
Revenue v. Acesite (Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which
section was retained as Section 108 (B) (3) in R.A. No. 8424, 41 it is still applicable to this case, since the provision
relied upon has been retained in R.A. No. 9337.421avvphi1

It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to implement
said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and provisions of
the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is
exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting PAGCOR to 10% VAT under RR
No. 16-2005; hence, the said regulatory provision is hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the
National Internal Revenue Code of 1997, by excluding petitioner Philippine Amusement and Gaming Corporation
from the enumeration of government-owned and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is
null and void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No.
9337.

No costs.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

G.R. No. L-58897 December 3, 1987

LUZON STEVEDORING CORPORATION, petitioner,

vs.
COURT OF APPEALS, HIJOS DE F. ESCANO, INC., and DOMESTIC INSURANCE COMPANY OF THE
PHILIPPINES, respondents.

GANCAYCO, J.:

On May 30, 1968 at past 6:00 in the morning a maritime collision occurred within the vicinity of the entrance to
the North Harbor, Manila between the tanker LSCO "Cavite" owned by Luzon Stevedoring Corporation and MV
"Fernando Escano" a passenger ship owned by Hijos de F. Escano, Inc. as a result of which said passenger ship
sunk. An action in admiralty was filed by Hijos de F. Escano, Inc. and Domestic Insurance Company of the
Philippines against the Luzon Stevedoring Company (LSC) in the Court of First Instance of Cebu. In the course of the
trial, the trial court appointed two commissioners representing the plaintiffs and defendant to determine the value
of the LSCO "CAVITE." Said commissioners found the value thereof to be P180,000.00.
After trial on the merits, a decision was rendered on January 24, 1974 finding that LSCO "Cavite" was solely to
blame for the collision, thus its dispositive portion reads as follows:

WHEREFORE, based on all the foregoing considerations, the Court renders judgment in favor of
the plaintiffs and against the defendant ordering the latter to pay to the plaintiff Domestic
Insurance Company of the Philippines the sum of P514,000.00, and to the plaintiff Hijos de F.
Escano, Inc. the sum of P68,819.00, with interest on both sums at the legal rate, from the date
the complaint was filed and the further sum of P252,346.70, with interest at the legal rate from
August 7, 1972 and the sum of P163,721.91, without interest in trust for, and with direction that
it pay the same to, the claimants concerned.

With costs against the defendant. 1

In the penultimate paragraph of the decision the trial court held:

With respect to the defense that defendant's liability is limited to the value of the LSCO "Cavite"
and freight earned, invoking Art. 837 of the Code of Commerce, the Court believes and so holds
that the defense has not been established. Moreover, the evidence is such that in principle Art.
837 does not apply here. The counterclaim of the defendant is likewise ordered dismissed for
lack of merit. 2

Not satisfied therewith the defendant interposed an appeal therefrom to the Court of Appeals wherein in due
course a decision was rendered on June 30, 1981 affirming the decision of the court a quo in toto with costs
against appellant. The motion for reconsideration filed by the defendant of the decision was denied in a resolution
of the Court of Appeals of November 7, 1981. Hence said defendant filed a petition for certiorari in this Court
based on the following grounds:

THE LOWER COURT ERRED IN FINDING THAT THE LSCO "CAVITE" WAS THE VESSEL AT FAULT IN
THE COLLISION.

II

THE LOWER COURT ERRED IN NOT FINDING THAT THE COLLISION BETWEEN THE M/V
"FERNANDO ESCANO" AND THE LSCO "CAVITE" WAS DUE SOLELY AND EXCLUSIVELY TO THE
FAULT, NEGLIGENCE AND LACK OF SKILL OF THE MASTER OF THE FORMER VESSEL.

III

THE LOWER COURT ERRED IN NOT RULING THAT THE CIVIL LIABILITY OF THE PETITIONER, IF ANY
THERE BE, SHOULD BE LIMITED TO THE VALUE OF THE LSCO "CAVITE" WITH ALL ITS
APPURTENANCES AND FREIGHT- AGE WHEN THE COLLISION TOOK PLACE. 3

In a resolution of February 26, 1982 this Court denied the petition for lack of merit.

A motion for reconsideration of said resolution was filed by petitioner limiting the issue to the legal question of
whether under Art. 837 of the Code of Commerce abandonment of vessel at fault is necessary in order that the
liability of owner of said vessel shall be limited only to the extent of the value thereof, its appurtenances and
freightage earned in the voyage. After respondents submitted their comment to the motion as required, on
September 29, 1982 this Court denied the motion for reconsideration for lack of merit.
With leave of court petitioner filed a second motion for reconsideration of said resolution raising the following
issues:

1. Whether abandonment is required under Article 837 of the Code of Commerce. The decisions
of this Honorable Court cited by the parties in support of their respective positions only imply the
answer to the question, and the implied answers are contradictory.

2. If abandonment is required under Article 837 of the Code of Commerce, when should it be
made? The Code of Commerce is silent on the matter. The decision of this Honorable Court
in Yangco v. Laserna, 13 Phil. 330, left the question open and no other decision, as far as
petitioner can ascertain, has resolved the question.

3. Is the decision of this Honorable Court in Manila Steamship Co., Inc. v. Abdulhama,n 100 Phil.
32, wherein it was held that "(t)he international rule to the effect that the right of abandonment
of vessels, as a legal station of a shipowner's own fault," invoked by private respondents and
apparently a major consideration in the denial of the motion for reconsideration, applicable to
petitioner under the circumstances of the case at bar? 4

The respondents were required to comment thereto and after said comment was submitted petitioners submitted
a reply thereto to which the respondents filed a rejoinder.

On November 28, 1983, the Court gave due course to the petition for review and considered the respondents'
comment thereto as the Answer. The parties were required to file their briefs. Both parties having filed their briefs
the case is now submitted for decision.

Articles 587, 590, and 837 of the Code of Commerce provide as follows:

ART. 587. The ship agent shall also be civilly liable for the indemnities in favor of third persons
which arise from the conduct of the captain in the vigilance over the goods which the vessel
carried; but he may exempt himself therefrom by abandoning the vessel with all her equipment
and the freight he may have earned during the voyage.

xxx xxx xxx

ART. 590. The co-owners of the vessel shall be civilly liable in the proportion of their contribution
to the common fund for the results of the acts of the captain, referred to in Article 587.

Each co-owner may exempt himself from this liability by the abandonment, before a notary, of
that part of the vessel belonging to him.

xxx xxx xxx

ART. 837. The civil liability incurred by the shipowners in the cases prescribed in this section, shall
be understood as limited to the value of the vessel with all her appurtenances and freight earned
during the voyage. 5

In the case of Philippine Shipping Company vs. Garcia, 6 which is an action for damages instituted by the Philippine
Shipping Company for the loss of Steamship "Ntra. Sra. de Lourdes" as a result of the collision with the Steamship
"Navarra" of Garcia, it was found that the "Navarra" was responsible for the collision. The claim of the Philippine
Shipping is that the defendant should pay P18,000.00, the value of the "Navarro" at the time of its loss, in
accordance with the provision of Article 837 of the Code of Commerce, and that it was immaterial that the
"Navarro" had been entirely lost provided the value could be ascertained since the extent of liability of the owner
of the colliding vessel resulting from the collision is to be determined by its value.

This Court speaking through the then Chief Justice Arellano held:

Article 837 of the Code of Commerce provides: "The civil liability contracted by the shipowners in
the cases prescribed in this section shall be understood as limited to the value of the vessel with
all her equipment and all the freight money earned during the voyage "

"This section is a necessary consequence of the right to abandon the vessel given to the
shipowner in article 587 of the code, and it is one of the many superfluities contained in the
code." (Lorenzo Benito, "Lecciones," 352.)

ART. 587. The agent shall also be civilly liable for the indemnities in favor of third persons which
arise from the conduct of the captain in the care of the goods which the vessel carried but he
may exempt himself therefrom by abandoning the vessel with all her equipments and the freight
he may have earned during the trip.

ART. 590. The part owners of a vessel shall be civilly liable, in the proportion of their contribution
to the common fund, for the results of the acts of the captain referred to in Article 587. Each part
owner may exempt himself from this liability by the abandonment, before a notary, of the part of
the vessel belonging to him.

The "Exposicion de motivos" of the Code of Commerce contains the following: "The present code
(1829) does not determine the juridical status of the agent where such agent is not himself the
owner of the vessel. This omission is supplied by the proposed code, which provides in
accordance with the principles of maritime law that by agent it is to be understood the person
intrusted with the provisioning of the vessel, or the one who represents her in the port in which
she happens to be. This person is the only one who represents the vessel that is to say, the only
one who represents the interests of the owner of the vessel. This provision has therefore cleared
the doubt which existed as to the extent of the liability, both of the agent and of the owner of
the vessel. Such liability is limited by the proposed code to the value of the vessel and other
things appertaining thereto."

There is no doubt that if the Navarro had not been entirely lost, the agent, having been held liable
for the negligence of the captain of the vessel could have abandoned her with all her equipment
and the freight money earned during the voyage, thus bringing himself within the provisions of
article 837 in so far as the subsidiary civil liability is concerned This abandonment which would
have amounted to an offer of the value of the vessel, of her equipment, and freight money
earned could not have been refused, and the agent could not have been personally compelled,
under such circumstances, to pay the 18,000 pesos, the estimated value of the vessel at the time
of the collision.

This is the difference which exists between the lawful acts and lawful obligations of the captain
and the liability which he incurs on account of any unlawful act committed by him. In the first
case, the lawful acts and obligations of the captain beneficial to the vessel may be enforced as
against the agent for the reason that such obligations arise from the contract of agency
(provided, however, that the captain does not exceed his authority), while as to any liability
incurred by the captain through his unlawful acts, the ship agent is simply subsidiarily civilly
liable. This liability of the agent is limited to the vessel and it does not extend further. For this
reason the Code of Commerce makes the agent liable to the extent of the value of the vessel, as
the codes of the principal maritime nations provide, with the vessel, and not individually. Such is
also the spirit of our code.

The spirit of our code is accurately set forth in a treatise on maritime law, from which we deem
proper to quote the following as the basis of this decision:

That which distinguishes the maritime from the civil law and even from the mercantile law in
general is the real and hypothecary nature of the former, and the many securities of a real
nature that maritime customs from time immemorial the laws, the codes, and the later
jurisprudence, have provided for the protection of the various and conflicting interests which are
ventured and risked in maritime expeditions, such as the interests of the vessel and of the agent,
those of the owners of the cargo and consignees, those who salvage the ship, those who make
loans upon the cargo, those of the sailors and members of the crew as to their wages, and those
of a constructor as to repairs made to the vessel.

As evidence of this "real" nature of the maritime law we have (1) the limitation of the liability of
the agents to the actual value of the vessel and the freight money, and (2) the right to retain the
cargo and the embargo and detention of the vessel even in cases where the ordinary civil law
would not allow more than a personal action against the debtor or person liable. It will be
observed that these rights are correlative, and naturally so, because if the agent can exempt
himself from liability by abandoning the vessel and freight money, thus avoiding the possibility of
risking his whole fortune in the business, it is also just that his maritime creditor may for any
reason attach the vessel itself to secure his claim without waiting for a settlement of his rights by
a final judgment, even to the prejudice of a third person.

This repeals the civil law to such an extent that, in certain cases, where the mortgaged property
is lost no personal action lies against the owner or agent of the vessel. For instance, where the'
vessel is lost the sailors and members of the crew can not recover their wages; in case of
collision, the liability of the agent is limited as aforesaid, and in case of shipwreck, those who
loan their money on the vessel and cargo lose all their rights and can not claim reimbursement
under the law.

There are two reasons why it is impossible to do away with these privileges, to wit: (1) The risk to
which the thing is exposed, and (2) the "real" nature of the maritime law, exclusively "real,"
according to which the liability of the parties is limited to a thing which is at the mercy of the
waves. If the agent is only liable with the vessel and freight money and both may be lost through
the accidents of navigation it is only just that the maritime creditor have some means of
obviating this precarious nature of his rights by detaining the ship, his only security, before it is
lost.

The liens tacit or legal, which may exist upon the vessel and which a purchaser of the same
would be obliged to respect and recognize are in addition to those existing in favor of the
State by virtue of the privileges which are granted to it by all the laws pilot, tonnage, and port
dues and other similar charges, the wages of the crew earned during the last voyage as provided
in article 646 of the Code of Commerce, salvage dues under article 842, the indemnification due
to the captain of the vessel in case his contract is terminated on account of the voluntary sale of
the ship and the insolvency of the owner as provided in article 608, and all other liabilities arising
from collisions under Articles 837 and 838.' (Madariaga pp. 60, 62, 63, 85.

We accordingly hold that the defendant is liable for the indemnification to which the plaintiff is
entitled by reason of the collision but he is not required to pay such indemnification for the reason
that the obligation thus incurred has been extinguished on account of the loss of the thing bound
 for the payment thereof and in this respect the judgment of the court below is affirmed except in
so far as it requires the plaintiff to pay the costs of this action, which is not exactly proper. No
special order is made as to costs of this appeal. After the expiration of twenty days let judgment
be entered in accordance herewith and ten days thereafter the record be remanded to the Court
of First Instance for execution. So ordered. 7

From the foregoing the rule is that in the case of collision, abandonment of the vessel is necessary in order to limit
the liability of the shipowner or the agent to the value of the vessel, its appurtenances and freightage earned in
the voyage in accordance with Article 837 of the Code of Commerce. The only instance where such abandonment
is dispensed with is when the vessel was entirely lost. In such case, the obligation is thereby extinguished.

In the case of Government of the Philippines vs. Maritime this Court citing Philippine Shipping stated the exception
thereto in that while "the total destruction of the vessel extinguishes a maritime lien, as there is no longer any risk
to which it can attach, but the total destruction of the vessel does not affect the liability of the owner for repairs of
the vessel completed before its loss, 8 interpreting the provision of Article 591 of the Code of Commerce in relation
with the other Articles of the same Code.

In Ohta Development Company vs. Steamship "Pompey" 9 it appears that at the pier sunk and the merchandise was
lost due to the fault of the steamship "Pompey" that was then docked at said pier. This Court ruled that the liability
of the owner of "Pompey" may not be limited to its value under Article 587 of the Code of Commerce as there was
no abandonment of the ship. We also held that Article 837 cannot apply as it refers to collisions which is not the
case here. 10

In the case of Guison vs. Philippine Shipping Company 11 involving the collision at the mouth of the Pasig river
between the motor launches Martha and Manila H in which the latter was found to be at fault, this Court, applying
Article 837 of the Code of Commerce limited the liability of the agent to its value.

In the case of Yangco vs. Laserna 12 which involved the steamers SS "Negros" belonging to Yangco which after two
hours of sailing from Romblon to Manila encountered rough seas as a result of which it capsized such that many of
its passengers died in the mishap, several actions for damages were filed against Yangco, by a verified pleading, he
sought to abandon the vessel to the plaintiffs in the three cases together with all the equipment without prejudice
to the right to appeal. This Court in resolving the issue held as follows:

Brushing aside the incidental issues, the fundamental question here raised is: May the shipowner
or agent, notwithstanding the total loss of the vessel as a result of the negligence of its captain,
be properly held liable in damages for the consequent death of its passengers? We are of the
opinion and so hold that this question is controlled by the provision of article 587 of the Code of
Commerce. Said article reads:

The agent shall also be civilly liable for the indemnities in favor of third persons which arise from
the conduct of the captain in the. care of the goods which the vessel carried; but he may exempt
himself therefrom by abandoning the vessel with all her equipments and the freight he may have
earned during the voyage.

The provision accords a shipowner or agent the right of abandonment; and by necessary
implication, his liability is confined to that which he is entitled as of right to -abandon "the
vessel with all her equipments and the freight it may have earned during the voyage." It is true
that the article apears to deal only with the limited liability of shipowners or agents for damages
arising from the misconduct of the captain in the care of the goods which the vessel carries, but
this is a mere deficiency of language and in no way indicates the true extent of such liability. The
consensus of authorities is to the effect that notwithstanding the language of the afore-quoted
 provision, the benefit of limited liability therein provided for, applies in all cases wherein the
shipowner or agent may properly be held liable for the negligent or illicit acts of the captain. Dr.
Jose Ma. Gonzalez de Echavarri y Vivanco commenting on said article, said:

La letra del Codigo, en el articulo 587, presenta una gravisima cuestion. El derecho de abandono,
si se atiende a lo escrito, solo se refiere a las indemnizaciones a que diere lugar la conducta del
Capitan en la custodia de los efectos que cargo en el buque.

Es ese el espiritu del legislador? No; habra derecho de abandono en las responsabilidades
nacidas de obligaciones contraidas por el Capitan y de otros actos de este? Lo reputamos
evidente y, para fortalecer nuestra opinion, basta copiar el siguiente parrafo de la Exposicion de
motivos:

El proyecto, al aplicar estos principios, se inspira tambien en los intereses del comercio maritimo
que quedaran mas asegurados ofreciendo a todo el que contrata con el naviero o Capitan del
buque, la garantia real del mismo, cualesquiera que sean las facultades o atribuciones de que se
hallen investidos; (Echavarri, Codigo de Comercio, Tomo 4, 2. ed., pags. 483- 484.)

A cursory examination will disclose that the principle of limited liability of a shipowner or agent is
provided for in but three articles of the Code of Commerce Article 587 aforequoted and articles
590 and 837. Article 590 merely reiterates the principle embodied in article 587, where the vessel
is owned by several person Article 837 applies the same principle in cases of collision and it has
been observed that said article is but 'a necessary consequence of the right to abandon the vessel
given to the shipowner in Article 587 to the Code, and it is one of the many superfluities contained
in the Code. (Lorenzo Benito, Lecciones 352, quoted in Philippine Shipping Co. vs. Garcia, 6 Phil.
281, 282.) In effect therefore, only Articles 587 and 590 are the provisions contained in our Code
of Commerce on the matter, and the framers of said code had intended those provisions to
embody the universal principle of limited liability in all cases. ... . 13

In the said case We invoked our ruling in Philippine Shipping and concluded as follows:

In the light of all the foregoing, we therefore hold that if the shipowner or agent may in any way
be held civilly liable at all for injury to or death of passengers arising from the negligence of the
captain in cases of collisions or shipwrecks, his liability is merely coextensive with his interest in
the vessel such that a total loss thereof results in its extinction. In arriving at this conclusion, we
have not been unmindful of the fact that the ill-fated steamship Negros, as a vessel engaged in
interisland trade, is a common carrier (De Villata v. Stanely 32 Phil. 541), and that the
relationship between the petitioner and the passengers who died in the mishap rests on a
contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the
exclusively "real and hypothecary nature" of maritime law operates to limit such liability to the
value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that
the vessel was insured.

Whether the abandonment of the vessel sought by the petitioner in the instant case was in
accordance with law or not, is immaterial The vessel having totally perished any act of
abandonment would be an Idle ceremony. 14

In the case of Abueg vs. San Diego,15 which involves a claim of compensation under the Workmen's Compensation
Act for the deceased members of the crew of the MS "San Diego II" and MS "Bartolome" which were caught by a
typhoon in the vicinity of Mindoro Island and as a consequence of which they were sunk and totally lost, this Court
held as follows:
Counsel for the appellant cite article 7837 of the Code of Commerce which provides that if the
vessel together with all her tackle and freight money earned during the voyage are abandoned,
the agent's liability to third persons for tortious acts of the captain in the care of the goods which
the ship carried is extinguished (Yangco vs. Laserna, 73 Phil. 330) Article 937 of the same Code
which provides that in cases of collision, the shipowners' liability is limited to the value of the
vessel with all her equipment and freight earned during the voyage (Philippine Shipping
Company vs. Garcia, 6 Phil. 281); and Article 643 of the same Code which provides that if the
vessel and freight are totally lost, the agent's liability for wages of the crew is extinguished. From
these premises counsel draw the conclusion that appellant's liability, as owner of the two motor
ships lost or sunk as a result of the typhoon that lashed the island of Mindoro on October 1,
1941, was extinguished.

The real and hypothecary nature of the liability of the shipowner or agent embodied in the
provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing
conditions of the maritime trade and sea voyages during the medieval ages, attended by
innumerable hazards and perils. To offset against these adverse conditions and to encourage
shipbuilding and maritime commerce, it was deemed necessary to confine the liability of the
owner or agent arising from the operation of a ship to the vessel equipment, and freight, or
insurance, if any, so that if the shipowner or agent abandoned the ship, equipment, and freight,
his liability was extinguished

But the provisions of the Code of Commerce invoked by appellant have no room in the application
of the Workmen's Compensation Act which seeks to improve, and aims at the amelioration of, the
condition of laborers and employees. It is not the liability for the damage or loss of the cargo or
injury to, or death of, a passenger by or through the misconduct of the captain or master of the
ship; nor the liability for the loss of the ship as a result of collision; nor the responsibility for
wages of the crew, but a liability created by a statute to compensate employees and laborers in
cases of injury received by or inflicted upon them, while engaged in the performance of their
work or employment, or the heirs and dependents of such laborers and employees in the event
of death caused by their employment. Such compensation has nothing to do with the provisions
of the Code of Commerce regarding maritime commerce. It is an item in the cost of production
which must be included in the budget of any well managed industry.

Appellant's assertion that in the case of Enciso vs. Dy-Liaco (57 Phil. 446), and Murillo vs.
Mendoza (66 Phil. 689), the question of the extinction of the shipowner's liability due to
abandonment of the ship by him was not fully discussed, as in the case of Yangco vs. Laserna,
supra, is not entirely correct. In the last mentioned case, the limitation of the shipowner's liability
to the value of the ship, equipment, freight, and insurance, if any, was the lis mota In the case of
Enciso vs. Dy-Liaco, supra, the application of the Workmen's Compensation Act to a master or
patron who perished as a result of the sinking of the motorboat of which he was the master, was
the controversy submitted to the court for decision. This Court held in that case that .It has been
repeatedly stated that the Workmen's Compensation Act was enacted to abrogate the common
law and our Civil Code upon culpable acts and omissions, and that the employer need not be
guilty of neglect or fault in order that responsibility may attach to him' (pp. 449-450); and that
the shipowner was liable to pay compensation provided for in the Workmen's Compensation Act,
notwithstanding the fact that the motorboat was totally lost. In the case of Murillo vs. Mendoza,
supra, this Court held that 'The rights and responsibilities defined in said Act must be governed
by its own peculiar provisions in complete disregard of other similar provisions of the Civil as well
as the mercantile law. If an accident is compensable under the Workmen's Compensation Act, it
must be compensated even when the workman's right is not recognized by or is in conflict with
other provisions of the Civil Code or of the Code of Commerce. The reason behind this principle is
that the Workmen's Compensation Act was enacted by the Legislature in abrogation of the other
 existing laws.' This quoted part of the decision is in answer to the contention that it was not the
intention of the Legislature to repeal Articles 643 and 837 of the Code of Commerce with the
enactment of the Workmen's Compensation Act. 16

In said case the Court reiterated that the liability of the shipowner or agent under the provision of Articles 587 and
837 of the Code of Commerce is limited to the value of the vessel with all her equivalent and freight earned during
the voyage if the shipowner or agent abandoned the ship with all the equipment and freight. However, it does not
apply to the liability under the Workmen's Compensation Act where even as in said case the vessel was lost the
liability thereunder is still enforceable against the employer or shipowner.

The case of Manila Steamship Company, Inc. vs. Insa Abdulhaman and Lim Hong To 17 is a case of collision of the
ML "Consuelo V" and MS "Bowline Knot" as a result of which the ML "Consuelo V" capsized and was lost where
nine (9) passengers died or were missing and all its cargoes were lost. In the action for damages arising from the
collision, applying Article 837 of the Code of Commerce, this Court held that in such case where the collision was
imputable to both of them, each vessel shall suffer her own damages and both shall be solidarily liable for the
damages occasioned to their cargoes.18 Thus, We held:

In fact, it is a general principle, well established maritime law and custom, that shipowners and
ship agents are civilly liable for the acts of the captain (Code of Commerce, Article 586) and for
the indemnities due the third persons (Article 587); so that injured parties may immediately look
for reimbursement to the owner of the ship, it being universally recognized that the ship master
or captain is primarily the representative of the owner (Standard Oil Co. vs. Lopez Castelo, 42
Phil. 256, 260). This direct liability, moderated and limited by the owner's right of abandonment
of the vessel and earned freight (Article 587) has been declared to exist not only in case of
breached contracts, but also in cases of tortious negligence (Yu Biao Sontua vs. Osorio, 43 Phil.
511; 515):

xxx xxx xxx

It is easy to see that to admit the defense of due diligence of a bonus paterfamilias (in the
selection and vigilance of the officers and crew) as exempting the shipowner from any liability for
their faults, would render nugatory the solidary liability established by Article 827 of the Code of
Commerce for the greater protection of injured parties. Shipowners would be able to escape
liability in practically every case, considering that the qualifications and licensing of ship masters
and officers are determined by the State, and that vigilance is practically impossible to exercise
over officers and crew of vessels at sea. To compel the parties prejudiced to look to the crew for
indemnity and redress would be an illusory remedy for almost always its members. are, from
captains down, mere wage earners.

We, therefore, find no reversible error in the refusal of the Court of Appeals to consider the
defense of the Manila Steamship Co., that it is exempt from liability for the collision with the M L
"Consuelo V " due to the absence of negligence on its part in the selection and supervision of the
officers and crew of the M/S "Bowline Knot. 19

However, insofar as respondent Lim Hong To, owner of M L "Consuelo V" who admittedly employed an unlicensed
master and engineer and who in his application for permission to operate expressly assumed full risk and
responsibility thereby (Exh. 2) this Court held that the liability of Lim Hong To cannot be limited to the value of his
motor launch by abandonment of the vessel as invoked in Article 587 of the Code of Commerce, We said:

The international rule is to the effect that the right of abandonment of vessels, as a legal
limitation of a shipowner's liability, does not apply to cases where the injury or the average is due
 to shipowner's own fault. Farina (Derecho Commercial Maritima Vol. 1, pp. 122-123), on the
authority of judicial precedents from various nations, sets the rule to be as follows:

xxx xxx xxx 20

From the foregoing, it is clear that in case of collision of vessels, in order to avail of the benefits of Article 837 of
the Code of Commerce the shipowner or agent must abandon the vessel. In such case the civil liability shall be
limited to the value of the vessel with all the appurtenances and freight earned during the voyage. However,
where the injury or average is due to the ship-owner's fault as in said case, the shipowner may not avail of his right
to limited liability by abandoning the vessel.

We reiterate what We said in previous decisions that the real and hypothecary nature of the liability of the
shipowner or agent is embodied in the provisions of the Maritime Law, Book III, Code of Commerce. 21 Articles 587,
590 and 837 of the same code are precisely intended to limit the liability of the shipowner or agent to the value of
the vessel, its appurtenances and freightage earned in the voyage, provided that owner or agent abandons the
vessel. Although it is not specifically provided for in Article 837 of the same code that in case of collision there
should be such abandonment to enjoy such limited liability, said article on collision of vessels is a mere
amplification of the provisions of Articles 587 and 590 of same code where abandonment of the vessel is a pre-
condition. Even without said article, the parties may avail of the provisions of Articles 587 and 590 of same code in
case of collision. This is the reason why Article 837 of the same code is considered a superfluity. 22

Hence the rule is that in case of collision there should be abandonment of the vessel by the shipowner or agent in
order to enjoy the limited liability provided for under said Article 837.

The exception to this rule is when the vessel is totally lost in which case there is no vessel to abandon so
abandonment is not required. Because of such total loss the liability of the shipowner or agent for damages is
extinguished. Nevertheless, the shipowner or agent is personally liable for claims under the Workmen's
Compensation Act and for repairs of the vessel before its loss. 23

In case of illegal or tortious acts of the captain the liability of the shipowner and agent is subsidiary. In such
instance the shipowner or agent may avail of the provisions of Article 837 of the Code by abandoning the vessel. 24

However, if the injury or damage is caused by the shipowner's fault as where he engages the services of an
inexperienced and unlicensed captain or engineer, he cannot avail of the provisions of Article 837 of the Code by
abandoning the vessel. 25 He is personally liable for the damages arising thereby.

In the case now before the Court there is no question that the action arose from a collision and the fault is laid at
the doorstep of LSCO "Cavite" of petitioner. Undeniably petitioner has not abandoned the vessel. Hence petitioner
can not invoke the benefit of the provisions of Article 837 of the Code of Commerce to limit its liability to the value
of the vessel, all the appurtenances and freightage earned during the voyage.

In the light of the foregoing conclusion, the issue as to when abandonment should be made need not be resolved.

WHEREFORE, the petition is DENIED with costs against petitioner.

SO ORDERED.

Teehankee, C.J., Narvasa, Cruz and Paras, JJ., concur.

G.R. No. 71122 March 25, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ARNOLDUS CARPENTRY SHOP, INC. and COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Generoso Jacinto for respondents.

CORTES, J.:

Assailed in this petition is the decision of the Court of Tax Appeals in CTA case No. 3357 entitled "ARNOLDUS
CARPENTRY SHOP, INC. v. COMMISSIONER OF INTERNAL REVENUE."

The facts are simple.

Arnoldus Carpentry Shop, Inc. (private respondent herein) is a domestic corporation which has been in existence
since 1960. It has for its secondary purpose the "preparing, processing, buying, selling, exporting, importing,
manufacturing, trading and dealing in cabinet shop products, wood and metal home and office furniture, cabinets,
doors, windows, etc., including their component parts and materials, of any and all nature and description" (Rollo,
pp. 160-161). These furniture, cabinets and other woodwork were sold locally and exported abroad.

For this business venture, private respondent kept samples or models of its woodwork on display from where its
customers may refer to when placing their orders.

Sometime in March 1979, the examiners of the petitioner Commissioner of Internal Revenue conducted an
investigation of the business tax liabilities of private respondent pursuant to Letter of Authority No. 08307 NA
dated November 23, 1978. As per the examination, the total gross sales of private respondent for the year 1977
from both its local and foreign dealings amounted to P5,162,787.59 (Rollo. p. 60). From this amount, private
respondent reported in its quarterly percentage tax returns P2,471,981.62 for its gross local sales. The balance of
P2,690,805.97, which is 52% of the total gross sales, was considered as its gross export sales (CTA Decision, p. 12).

Based on such an examination, BIR examiners Honesto A. Vergel de Dios and Voltaire Trinidad made a report to
the Commissioner classifying private respondent as an "other independent contractor" under Sec. 205 (16) [now
Sec. 169 (q)] of the Tax Code. The relevant portion of the report reads:

Examination of the records show that per purchase orders, which are hereby attached, of the
taxpayer's customers during the period under review, subject corporation should be considered a
contractor and not a manufacturer. The corporation renders service in the course of an
independent occupation representing the will of his employer only as to the result of his work,
and not as to the means by which it is accomplished, (Luzon Stevedoring Co. v. Trinidad, 43 Phil.
803). Hence, in the computation of the percentage tax, the 3% contractor's tax should be
imposed instead of the 7% manufacturer's tax. [Rollo, p. 591 (Emphasis supplied.)

xxx xxx xxx

As a result thereof, the examiners assessed private respondent for deficiency tax in the amount of EIGHTY EIGHT
THOUSAND NINE HUNDRED SEVENTY TWO PESOS AND TWENTY THREE CENTAVOS ( P88,972.23 ). Later, on
January 31, 1981, private respondent received a letter/notice of tax deficiency assessment inclusive of charges and
interest for the year 1977 in the amount of ONE HUNDRED EIGHT THOUSAND SEVEN HUNDRED TWENTY PESOS
AND NINETY TWO CENTAVOS ( P 108,720.92 ). This tax deficiency was a consequence of the 3% tax imposed on
private respondent's gross export sales which, in turn, resulted from the examiners' finding that categorized
private respondent as a contractor (CTA decision, p.2).

Against this assessment, private respondent filed on February 19, 1981 a protest with the petitioner Commissioner
of Internal Revenue. In the protest letter, private respondent's manager maintained that the carpentry shop is a
manufacturer and therefor entitled to tax exemption on its gross export sales under Section 202 (e) of the National
Internal Revenue Code. He explained that it was the 7% tax exemption on export sales which prompted private
respondent to exploit the foreign market which resulted in the increase of its foreign sales to at least 52% of its
total gross sales in 1977 (CTA decision, pp. 1213).

On June 23, 1981, private respondent received the final decision of the petitioner stating:

It is the stand of this Office that you are considered a contractor an not a manufacturer. Records
show that you manufacture woodworks only upon previous order from supposed manufacturers
and only in accordance with the latter's own design, model number, color, etc. [Rollo p. 64]
(Emphasis supplied.)

On July 22, 1981, private respondent appealed to the Court of Tax Appeals alleging that the decision of the
Commissioner was contrary to law and the facts of the case.

On April 22, 1985, respondent Court of Tax Appeals rendered the questioned decision holding that private
respondent was a manufacturer thereby reversing the decision of the petitioner.

Hence, this petition for review wherein petitioner raises the sole issue of. Whether or not the Court of Tax Appeals
erred in holding that private respondent is a manufacturer and not a contractor and therefore not liable for the
amount of P108,720.92, as deficiency contractor's tax, inclusive of surcharge and interest, for the year 1977.

The petition is without merit.

1. Private respondent is a "manufacturer" as defined in the Tax Code and not a "contractor" under Section 205(e)
of the Tax Code as petitioner would have this Court decide.

(a) Section 205 (16) [now Sec. 170 (q)] of the Tax Code defines "independent contractors" as:

... persons (juridical and natural) not enumerated above (but not including individuals subject to
the occupation tax under Section 12 of the Local Tax Code) whose activity consists essentially of
the sale of all kinds of services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. (Emphasis supplied.)

Private respondent's business does not fall under this definition.

Petitioner contends that the fact that private respondent "designs and makes samples or models that are
'displayed' or presented or 'submitted' to prospective buyers who 'might choose' therefrom" signifies that what
private respondent is selling is a kind of service its shop is capable of rendering in terms of woodwork skills and
craftsmanship (Brief for Petitioner, p. 6). He further stresses the point that if there are no orders placed for goods
as represented by the sample or model, the shop does not produce anything; on the other hand, if there are
orders placed, the shop goes into fall production to fill up the quantity ordered (Petitioner's Brief, p. 7).
The facts of the case do not support petitioner's claim. Petitioner is ignoring the fact that private respondent sells
goods which it keeps in stock and not services. As the respondent Tax Court had found:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a
ready stock of its shop products for sale to its foreign and local buyers. As a matter of fact, the
purchase orders from its foreign buyers showed that they ordered by referring to the models
designated by petitioner. Even purchases by local buyers for television cabinets (Exhs. '2 to13',
pp. 1-13, BIR records) were by orders for existing models except only for some adjustments in
sizes and accessories utilized.

With regard to the television cabinets, petitioner presented three witnesses its bookkeeper,
production manager and manager who testified that samples of television cabinets were
designed and made by petitioner, from which models the television companies such as Hitachi
National and others might choose, then specified whatever innovations they desired. If found to
be saleable, some television cabinets were manufactured for display and sold to the general
public. These cabinets were not exported but only sold locally. (t.s.n., pp. 2235, February
18,1982; t.s.n., pp. 7-10, March 25, 1982; t.s.n., pp. 3-6, August 10, 1983.)

xxx xxx xxx

In the case of petitioner's other woodwork products such as barometer cases, knife racks, church
furniture, school furniture, knock down chairs, etc., petitioner's above-mentioned witnesses
testified that these were manufactured without previous orders. Samples were displayed, and if
in stock, were available for immediate sale to local and foreign customers. Such testimony was
not contradicted by respondent (petitioner herein). And in all the purchase orders presented as
exhibits, whether from foreign or local buyers, reference was made to the model number of the
product being ordered or to the sample submitted by petitioner.

Respondent's examiners, in their memorandum to the Commissioner of Internal Revenue, stated

that petitioner manufactured only upon previous orders from customers and "only in accordance
with the latter's own design, model number, color, etc." (Exh. '1', p. 27, BIR records.) Their bare
statement that the model numbers and designs were the customers' own, unaccompanied by
adequate evidence, is difficult to believe. It ignores commonly accepted and recognized business
practices that it is not the customer but the manufacturer who furnishes the samples or models
from which the customers select when placing their orders, The evidence adduced by petitioner to
prove that the model numbers and designs were its own is more convincing [CTA decision, pp. 6-
8.] (Emphasis supplied)

xxx xxx xxx

This Court finds no reason to disagree with the Tax Court's finding of fact. It has been consistently held that while
the decisions of the Court of Tax Appeals are appealable to the Supreme Court, the former's finding of fact are
entitled to the highest respect. The factual findings can only be disturbed on the part of the tax court [Collector of
Intern. al Revenue v. Henderson, L-12954, February 28, 1961, 1 SCRA 649; Aznar v. Court of Tax Appeals, L-20569,
Aug. 23, 1974, 58 SCRA 519; Raymundo v. de Joya, L-27733, Dec. 3, 1980, 101 SCRA 495; Industrial Textiles
Manufacturing Co. of the Phils. , Inc. v. Commissioner of Internal Revenue, L-27718 and L-27768, May 27,1985,136
SCRA 549.]

(b) Neither can Article 1467 of the New Civil Code help petitioner's cause. Article 1467 states:
A contract for the delivery at a certain price of an article Which the vendor in the ordinary course of his business
manufactures or procures for the - general market, whether the same is on hand at the time or not, is a contract of
sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the
general market, it is a contract for a piece of work.

Petitioner alleged that what exists prior to any order is but the sample model only, nothing more, nothing less and
the ordered quantity would never have come into existence but for the particular order as represented by the
sample or model [Brief for Petitioner, pp. 9-101.]

Petitioner wants to impress upon this Court that under Article 1467, the true test of whether or not the contract is
a piece of work (and thus classifying private respondent as a contractor) or a contract of sale (which would classify
private respondent as a manufacturer) is the mere existence of the product at the time of the perfection of the
contract such that if the thing already exists, the contract is of sale, if not, it is work.

This is not the test followed in this jurisdiction. As can be clearly seen from the wordings of Art. 1467, what
determines whether the contract is one of work or of sale is whether the thing has been manufactured specially for
the customer and upon his special order." Thus, if the thing is specially done at the order of another, this is a
contract for a piece of work. If, on the other hand, the thing is manufactured or procured for the general market in
the ordinary course of one's business, it is a b contract of sale.

Jurisprudence has followed this criterion. As held in Commissioner of Internal Revenue v. Engineering Equipment
and Supply Co. (L-27044 and L-27452, June 30, 1975, 64 SCRA 590, 597), "the distinction between a contract of sale
and one for work, labor and materials is tested by the inquiry whether the thing transferred is one not in existence
and which never would have existed but for the order of the party desiring to acquire it, or a thing which would
have existed and has been the subject of sale to some other persons even if the order had not been given."
(Emphasis supplied.) And in a BIR ruling, which as per Sec. 326 (now Sec. 277) of the Tax Court the Commissioner
has the power to make and which, as per settled jurisprudence is entitled to the greatest weight as an
administrative view [National Federation of Sugar Workers (NFSW) v. Ovejera, G.R. No. 59743, May 31, 1982, 114
SCRA 354, 391; Sierra Madre Trust v. Hon. Sec. of Agriculture and Natural Resources, Nos. 32370 and 32767, April
20, 1983,121 SCRA 384; Espanol v. Chairman and Members of the Board of Administrators, Phil. Veterans
Administration, L-44616, June 29, 1985, 137 SCRA 3141, "one who has ready for the sale to the general public
finished furniture is a manufacturer, and the mere fact that he did not have on hand a particular piece or pieces of
furniture ordered does not make him a contractor only" (BIR Ruling No. 33-1, series of 1960). Likewise,

xxx xxx xxx

When the vendor enters into a contract for the delivery of an article which in the ordinary course
of his business he manufactures or procures for the general market at a price certain (Art. 1458)
such contract is one of sale even if at the time of contracting he may not have such article on
hand. Such articles fall within the meaning of "future goods" mentioned in Art. 1462, par. 1. [5
Padilla, Civil Law: Civil Code Annotated 139 (1974)

xxx xxx xxx

These considerations were what precisely moved the respondent Court of Tax Appeals to rule that 'the fact that
[private respondent] kept models of its products... indicate that these products were for sale to the general public
and not for special orders,' citing Celestino Co and Co. v. Collector of Internal Revenue [99 Phil, 841 (1956)]. (CTA
Decision, pp. 8-9.)

Petitioner alleges that the error of the respondent Tax Court was due to the 'heavy albeit misplaced and
indiscriminate reliance on the case of Celestino Co and Co. v. Collector of Internal Revenue [99 Phil. 841, 842
(1956)] which is not a case in point' 1 Brief for Petitioner, pp. 14-15). The Commissioner of Internal Revenue made
capital of the difference between the kinds of business establishments involved a FACTORY in the Celestino Co
case and a CARPENTRY SHOP in this case (Brief for Petitioner, pp. 14-18). Petitioner seems to have missed the
whole point in the former case.

True, the former case did mention the fact of the business concern being a FACTORY, Thus:

xxx xxx xxx

... I cannot believe that petitioner company would take, as in fact it has taken, all the trouble and
expense of registering a special trade name for its sash business and then orders company
stationery carrying the bold print "Oriental Sash Factory (Celestino Co and Company, Prop.) 926
Raon St., Quiapo, Manila, Tel. No. 33076, Manufacturers of all kinds of doors, windows, sashes
furniture, etc. used season dried and kiln-dried lumber, of the best quality workmanship" solely
for the purpose of supplying the need for doors, windows and sash of its special and limited
customers. One will note that petitioner has chosen for its trade name and has offered itself to
the public as a FACTORY, which means it is out to do business in its chosen lines on a big scale. As
a general rule, sash factories receive orders for doors and windows of special design only in
particular cases but the bulk of their sales is derived from ready-made doors and windows of
standard sizes for the average home. [Emphasis supplied.]

xxx xxx xxx

However, these findings were merely attendant facts to show what the Court was really driving at
the habituality of the production of the goods involved for the general public.

In the instant case, it may be that what is involved is a CARPENTRY SHOP. But, in the same vein, there are also
attendant facts herein to show habituality of the production for the general public.

In this wise, it is noteworthy to again cite the findings of fact of the respondent Tax Court:

xxx xxx xxx

Petitioner [private respondent herein] claims, and the records bear petitioner out, that it had a
ready stock of its shop products for sale to its foreign and local buyers. As a matter of fact, the
purchase orders from its foreign buyers showed that they ordered by referring to the models
designed by petitioner. Even purchases by local buyers for television cabinets... were by orders
for existing models. ...

With regard to the television cabinets, petitioner presented three witnesses... who testified that
samples of television cabinets were designed and made by petitioner, from which models the
television companies ... might choose, then specified whatever innovations they desired. If found
to be saleable, some television cabinets were manufactured for display and sold to the general
public.

xxx xxx xxx

In the case of petitioner's other woodwork products... these were manufactured without
previous orders. Samples were displayed, and if in stock, were available for immediate sale to
local and foreign customers. (CTA decision, pp. 6-8.1 [Emphasis supplied.]
(c) The private respondent not being a "contractor" as defined by the Tax Code or of the New Civil Code, is it a
'manufacturer' as countered by the carpentry shop?

Sec. 187 (x) [now Sec. 157 (x)] of the Tax Code defines a manufacturer' as follows:

"Manufacturer" includes every person who by physical or chemical process alters the exterior
texture or form or inner substance of any raw material or manufactured or partially
manufactured product in such manner as to prepare it for a special use or uses to which it could
not have been in its original condition, or who by any such process alters the quality or any such
raw material or manufactured or partially manufactured product so as to reduce it to marketable
shape or prepare it for any of the uses of industry, or who by any such process combines any
such raw material or manufactured or partially manufactured products with other materials or
products of the same or different kinds and in such manner that the finished product of such
process or manufacture can be put to a special use or uses to which such raw material or
manufactured or partially manufactured products in their original condition would not have been
put, and who in addition alters such raw material or manufactured or partially manufactured
products, or combines the same to produce such finished products for the purpose of their sale
or distribution to others and not for his own use or consumption.

It is a basic rule in statutory construction that when the language of the law is clear and unequivocal, the law must
be taken to mean exactly what it says [Banawa et al. v. Mirano et al., L-24750, May 16, 1980, 97 SCRA 517, 533].

The term "manufacturer" had been considered in its ordinary and general usage. The term has been construed
broadly to include such processes as buying and converting duck eggs to salted eggs ('balut") [Ngo Shiek v.
Collector of Internal Revenue, 100 Phil. 60 (1956)1; the processing of unhusked kapok into clean kapok fiber
[Oriental Kapok Industries v. Commissioner of Internal Revenue, L-17837, Jan. 31, 1963, 7 SCRA 132]; or making
charcoal out of firewood Bermejo v. Collector of Internal Revenue, 87 Phil. 96 (1950)].

2. As the Court of Tax Appeals did not err in holding that private respondent is a "manufacturer," then private
respondent is entitled to the tax exemption under See. 202 (d) and (e) mow Sec. 167 (d) and (e)] of the Tax Code
which states:

Sec. 202. Articles not subject to percentage tax on sales. The following shall be exempt from the
percentage taxes imposed in Sections 194, 195, 196, 197, 198, 199, and 201:

xxx xxx xxx

(d) Articles shipped or exported by the manufacturer or producer, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the articles so exported.

(e) Articles sold by "registered export producers" to (1) other" registered export producers" (2)
"registered export traders' or (3) foreign tourists or travelers, which are considered as "export
sales."

The law is clear on this point. It is conceded that as a rule, as argued by petitioner, any claim for tax exemption
from tax statutes is strictly construed against the taxpayer and it is contingent upon private respondent as
taxpayer to establish a clear right to tax exemption [Brief for Petitioners, p. 181. Tax exemptions are strictly
construed against the grantee and generally in favor of the taxing authority [City of Baguio v. Busuego, L-29772,
Sept. 18, 1980, 100 SCRA 1161; they are looked upon with disfavor [Western Minolco Corp. v. Commissioner
Internal Revenue, G.R. No. 61632, Aug. 16,1983,124 1211. They are held strictly against the taxpayer and if
expressly mentioned in the law, must at least be within its purview by clear legislative intent [Commissioner of
Customs v. Phil., Acetylene Co., L-22443, May 29, 1971, 39 SCRA 70, Light and Power Co. v. Commissioner of
Customs, G.R. L-28739 and L-28902, March 29, 1972, 44 SCRA 122].

Conversely therefore, if there is an express mention or if the taxpayer falls within the purview of the exemption by
clear legislative intent, then the rule on strict construction will not apply. In the present case the respondent Tax
Court did not err in classifying private respondent as a "manufacturer". Clearly, the 'latter falls with the term
'manufacturer' mentioned in Art. 202 (d) and (e) of the Tax Code. As the only question raised by petitioner in
relation to this tax exemption claim by private respondent is the classification of the latter as a manufacturer, this
Court affirms the holding of respondent Tax Court that private respondent is entitled to the percentage tax
exemption on its export sales.

There is nothing illegal in taking advantage of tax exemptions. When the private respondent was still exporting less
and producing locally more, the petitioner did not question its classification as a manufacturer. But when in 1977
the private respondent produced locally less and exported more, petitioner did a turnabout and imposed the
contractor's tax. By classifying the private respondent as a contractor, petitioner would likewise take away the tax
exemptions granted under Sec. 202 for manufacturers. Petitioner's action finds no support in the applicable law.

WHEREFORE, the Court hereby DENIES the Petition for lack of merit and AFFIRMS the Court of Tax Appeals
decision in CTA Case No. 3357.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Feliciano and Bidin, concur.