EN BANC
this municipality a tax of ONE CENTAVO (P0.01) on each gallon
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES,
INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL
MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal
Bonifacio R Matol and Assistant Solicitor General Conrado T.
Limcaoco & Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance
of Leyte in its Civil Case No. 3294, which was certified to Us by
the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to
municipalities under the Local Autonomy Act (Republic Act No.
2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte
for that court to declare Section 2 of Republic Act No.
2264.1 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as
well as to declare Ordinances Nos. 23 and 27, series of 1962, of
the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts,
the material portions of which state that, first, both Ordinances
Nos. 23 and 27 embrace or cover the same subject matter and
the production tax rates imposed therein are practically the
same, and second, that on January 17, 1963, the acting Municipal
Treasurer of Tanauan, Leyte, as per his letter addressed to the
Manager of the Pepsi-Cola Bottling Plant in said municipality,
sought to enforce compliance by the latter of the provisions of
said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was
approved on September 25, 1962, levies and collects "from soft
drinks producers and manufacturers a tai of one-sixteenth (1/16)
of a centavo for every bottle of soft drink corked." 2 For the
purpose of computing the taxes due, the person, firm, company
or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of
bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was
approved on October 28, 1962, levies and collects "on soft drinks
produced or manufactured within the territorial jurisdiction of
(128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of
computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number of
gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is
denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the
constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the
plaintiff to pay the taxes due under the oft the said Ordinances;
and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company
appealed to the Court of Appeals, which, in turn, elevated the
case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an
undue delegation of power, confiscatory and
oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute
double taxation and impose percentage or
specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust
and unfair?
1. The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the
people. 6 It is a power that is purely legislative and which the
central legislative body cannot delegate either to the executive
or judicial department of the government without infringing
upon the theory of separation of powers. The exception,
however, lies in the case of municipal corporations, to which,
said theory does not apply. Legislative powers may be delegated
to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By
necessary implication, the legislative power to create political
corporations for purposes of local self-government carries with
it the power to confer on such local governmental agencies the
power to tax. 9 Under the New Constitution, local governments
are granted the autonomous authority to create their own
sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to
create its sources of revenue and to levy taxes, subject to such
limitations as may be provided by law." Withal, it cannot be said
that Section 2 of Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and vest in local
governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary
to plaintiff-appellant's pretense, would not suffice to invalidate
the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that
which is exercised by itself. When it is said that the taxing power
may be delegated to municipalities and the like, it is meant that
there may be delegated such measure of power to impose and
collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for
reasons of public policy the State has not deemed wise to tax for
more general purposes. 10 This is not to say though that the
constitutional injunction against deprivation of property without
due process of law may be passed over under the guise of the
taxing power, except when the taking of the property is in the
lawful exercise of the taxing power, as when (1) the tax is for a
public purpose; (2) the rule on uniformity of taxation is observed;
(3) either the person or property taxed is within the jurisdiction
of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes notice and opportunity for
hearing are provided. 11 Due process is usually violated where
the tax imposed is for a private as distinguished from a public
purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are
used in assessing and collecting taxes. But, a tax does not violate
the due process clause, as applied to a particular taxpayer,
although the purpose of the tax will result in an injury rather than
a benefit to such taxpayer. Due process does not require that the
property subject to the tax or the amount of tax to be raised
should be determined by judicial inquiry, and a notice and
hearing as to the amount of the tax and the manner in which it
shall be apportioned are generally not necessary to due process
of law. 12
There is no validity to the assertion that the delegated authority
can be declared unconstitutional on the theory of double
taxation. It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which
local taxation may not be exercised. 13 The reason is that the
State has exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of
the United States and some states of the Union.14 Double
taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity 15 or by
the same jurisdiction for the same purpose, 16 but not in a case
where one tax is imposed by the State and the other by the city
or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover
the same subject matter and impose practically the same tax
rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As
earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks producers
or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the
bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle
and still pay the same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The difference between the two
ordinances clearly lies in the tax rate of the soft drinks produced:
in Ordinance No. 23, it was 1/16 of a centavo for every bottle
corked; in Ordinance No. 27, it is one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The intention
of the Municipal Council of Tanauan in enacting Ordinance No.
27 is thus clear: it was intended as a plain substitute for the prior
Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief
admitted that defendants-appellees are only seeking to enforce
Ordinance No. 27, series of 1962. Even the stipulation of facts
confirms the fact that the Acting Municipal Treasurer of Tanauan,
Leyte sought t6 compel compliance by the plaintiff-appellant of
the provisions of said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No. 27,
series of 1962 is being enforced by defendants-appellees. Even
the Provincial Fiscal, counsel for defendants-appellees admits in
his brief "that Section 7 of Ordinance No. 27, series of 1962
clearly repeals Ordinance No. 23 as the provisions of the latter
are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining
Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those
which are mentioned therein." As long as the text levied under
the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within the
ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition
against municipalities and municipal districts to impose "any
percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except gasoline,
under the provisions of the National Internal Revenue Code." For
purposes of this particular limitation, a municipal ordinance
which prescribes a set ratio between the amount of the tax and
the volume of sale of the taxpayer imposes a sales tax and is null
and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity" on all
soft drinks produced or manufactured under Ordinance No. 27
does not partake of the nature of a percentage tax on sales, or
other taxes in any form based thereon. The tax is levied on the
produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered
solely for purposes of determining the tax rate on the products,
but there is not set ratio between the volume of sales and the
amount of the tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes
are those imposed on specified articles, such as distilled spirits,
wines, fermented liquors, products of tobacco other than cigars
and cigarettes, matches firecrackers, manufactured oils and
other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic
films, playing cards, saccharine, opium and other habit-forming
drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.)
of volume capacity on all softdrinks, produced or manufactured,
or an equivalent of 1-½ centavos per case, 23 cannot be
considered unjust and unfair. 24 an increase in the tax alone
would not support the claim that the tax is oppressive, unjust
and confiscatory. Municipal corporations are allowed much
discretion in determining the reates of imposable taxes. 25 This
is in line with the constutional policy of according the widest
possible autonomy to local governments in matters of local
taxation, an aspect that is given expression in the Local Tax Code
(PD No. 231, July 1, 1973). 26 Unless the amount is so excessive
as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if the
purpose of the law to further strengthen local autonomy were to
be realized. 28
Finally, the municipal license tax of P1,000.00 per corking
machine with five but not more than ten crowners or P2,000.00
with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks
and/or mineral waters under Ordinance No. 54, series of 1964,
as amended by Ordinance No. 41, series of 1968, of defendant
Municipality, 29 appears not to affect the resolution of the
validity of Ordinance No. 27. Municipalities are empowered to
impose, not only municipal license taxes upon persons engaged
in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act
No. 2264, otherwise known as the Local Autonomy Act, as
amended, is hereby upheld and Municipal Ordinance No. 27 of
the Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby declared of
valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra,
Muñoz Palma, Aquino and Concepcion, Jr., JJ., concur.
Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed
with a scholarly and comprehensive character. Insofar as it shows
adherence to tried and tested concepts of the law of municipal
taxation, I am only in agreement. If I limit myself to concurrence
in the result, it is primarily because with the article on Local
Autonomy found in the present Constitution, I feel a sense of
reluctance in restating doctrines that arose from a different basic
premise as to the scope of such power in accordance with the
1935 Charter. Nonetheless it is well-nigh unavoidable that I do
so as I am unable to share fully what for me are the nuances and
implications that could arise from the approach taken by my
brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has
been set forth in City of Baguio v. De Leon.1
1. The present Constitution is quite explicit as to the power of
taxation vested in local and municipal corporations. It is therein
specifically provided: "Each local government unit shall have the
power to create its own sources of revenue and to levy taxes
subject to such limitations as may be provided by law. 2 That was
not the case under the 1935 Charter. The only limitation then on
the authority, plenary in character of the national government,
was that while the President of the Philippines was vested with
the power of control over all executive departments, bureaus, or
offices, he could only . It exercise general supervision over all
local governments as may be provided by law ... 3As far as
legislative power over local government was concerned, no
restriction whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the extent of the
taxing power was solely for the legislative body to decide. It is
true that in 1939, there was a statute that enlarged the scope of
the municipal taxing power. 4 Thereafter, in 1959 such
competence was further expanded in the Local Autonomy
Act. 5 Nevertheless, as late as December of 1964, five years after
its enactment of the Local Autonomy Act, this Court, through
Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan, 6 reaffirmed the traditional concept in these words: "The
rule is well-settled that municipal corporations, unlike sovereign
states, after clothed with no power of taxation; that its charter or
a statute must clearly show an intent to confer that power or the
municipal corporation cannot assume and exercise it, and that
any such power granted must be construed strictly, any doubt
or ambiguity arising from the terms of the grant to be resolved
against the municipality."7
Taxation, according to Justice Parades in the earlier case of Tan
v. Municipality of Pagbilao,8 "is an attribute of sovereignty which
municipal corporations do not enjoy." 9 That case left no doubt
either as to weakness of a claim "based merely by inferences,
implications and deductions, [as they have no place in the
interpretation of the power to tax of a municipal
corporation." 10 As the conclusion reached by the Court finds
support in such grant of the municipal taxing power, I concur in
the result. 2. As to any possible infirmity based on an alleged
double taxation, I would prefer to rely on the doctrine
announced by this Court in City of Baguio v. De Leon. 11 Thus:
"As to why double taxation is not violative of due process, Justice
Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th
Amendment [the due process clause) no more forbids double
taxation than it does doubling the amount of a tax, short of
(confiscation or proceedings unconstitutional on other grouse
With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more
than just a persuasive effect. To some, it delivered the coup
justice to the bogey of double taxation as a constitutional bar to
the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost, as noted by an eminent
critic, still stalks the juridical stage. 'In a 1947 decision, however,
we quoted with approval this excerpt from a leading American
decision: 'Where, as here, Congress has clearly expressed its
intention, the statute must be sustained even though double
taxation results. 12
So I would view the issues in this suit and accordingly concur in
the result.
Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed
with a scholarly and comprehensive character. Insofar as it shows
adherence to tried and tested concepts of the law of municipal
taxation, I am only in agreement. If I limit myself to concurrence
in the result, it is primarily because with the article on Local
Autonomy found in the present Constitution, I feel a sense of
reluctance in restating doctrines that arose from a different basic
premise as to the scope of such power in accordance with the
1935 Charter. Nonetheless it is well-nigh unavoidable that I do
so as I am unable to share fully what for me are the nuances and
implications that could arise from the approach taken by my
brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has
been set forth in City of Baguio v. De Leon.1
1. The present Constitution is quite explicit as to the power of
taxation vested in local and municipal corporations. It is therein
specifically provided: "Each local government unit shall have the
power to create its own sources of revenue and to levy taxes
subject to such limitations as may be provided by law. 2 That was
not the case under the 1935 Charter. The only limitation then on
the authority, plenary in character of the national government,
was that while the President of the Philippines was vested with
the power of control over all executive departments, bureaus, or
offices, he could only . It exercise general supervision over all
local governments as may be provided by law ... 3As far as
legislative power over local government was concerned, no
restriction whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the extent of the
taxing power was solely for the legislative body to decide. It is
true that in 1939, there was a statute that enlarged the scope of
the municipal taxing power. 4 Thereafter, in 1959 such
competence was further expanded in the Local Autonomy
Act. 5 Nevertheless, as late as December of 1964, five years after
its enactment of the Local Autonomy Act, this Court, through
Justice Dizon, in Golden Ribbon Lumber Co. v. City of
Butuan, 6 reaffirmed the traditional concept in these words: "The
rule is well-settled that municipal corporations, unlike sovereign
states, after clothed with no power of taxation; that its charter or
a statute must clearly show an intent to confer that power or the
municipal corporation cannot assume and exercise it, and that
any such power granted must be construed strictly, any doubt
or ambiguity arising from the terms of the grant to be resolved
against the municipality."7
Taxation, according to Justice Parades in the earlier case of Tan
v. Municipality of Pagbilao,8 "is an attribute of sovereignty which
municipal corporations do not enjoy." 9 That case left no doubt
either as to weakness of a claim "based merely by inferences,
implications and deductions, [as they have no place in the
interpretation of the power to tax of a municipal
corporation." 10 As the conclusion reached by the Court finds
support in such grant of the municipal taxing power, I concur in
the result. 2. As to any possible infirmity based on an alleged
double taxation, I would prefer to rely on the doctrine
announced by this Court in City of Baguio v. De Leon. 11 Thus:
"As to why double taxation is not violative of due process, Justice
Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th
Amendment [the due process clause) no more forbids double
taxation than it does doubling the amount of a tax, short of
(confiscation or proceedings unconstitutional on other grouse
With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more
than just a persuasive effect. To some, it delivered the coup
justice to the bogey of double taxation as a constitutional bar to
the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost, as noted by an eminent
critic, still stalks the juridical stage. 'In a 1947 decision, however,
we quoted with approval this excerpt from a leading American
decision: 'Where, as here, Congress has clearly expressed its
intention, the statute must be sustained even though double
taxation results. 12
So I would view the issues in this suit and accordingly concur in
the result.
Footnotes
1 "Sec. 2. Taxation. — Any provision of law to the contrary
notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal
license taxes or fees upon persons engaged in any occupation
or business, or exercising private in chartered cities,
municipalities and municipal districts by requiring them to
secure licenses at rates fixed by the municipal board or city
council of the city, the municipal council of the municipality, or
the municipal district council of the municipal district to collect
fees and charges for service rendered by the city, municipality or
municipal district; to regulate and impose reasonable for
services rendered in connection with any business, profession
occupation being conducted within the city, municipality or
municipal district and otherwise to levy for public purposes, just
and uniform taxes, licenses or fees: Provided, That municipalities
and municipal districts shall, in no case, impose any percentage
tax on sales or other taxes in any form based thereon nor impose 4 Section 2.
taxes on articles subject to specific tax, except gasoline, under
the provisions of the National Internal Revenue Code: Provided, 5 Section 3.
however, That no city, municipality or municipal district may levy
or impose any of the following: 6 Cooley, The Law of Taxation, Vol. 1, Fourth
Edition, 149-150.
(a) Residence tax;
7 Pepsi-Cola Bottling Co. of the Phil., Inc. vs.
(b) Documentary stamp tax; City of Butuan, L-22814, August 28, 1968, 24
SCRA 793-96.
(c) Taxes on the business of any newspaper
engaged in the printing and publication of 8 Rubi v. Prov. Brd. of Mindoro, 39 Phil. 702
any newspaper, magazine, review or bulletin (1919).
appearing at regular interval and having fixed
prices for subscription and sale, and which is 9 Cooley, ante at 190.
not published primarily for the purpose of
publishing advertisements;
10 Idem at 198-200.

(d) Taxes on persons operating waterworks,

11 Malcolm, Philippine Constitutional Law,
irrigation and other public utilities except
513-14.
electric light, heat and power;

12 Cooley ante at 334.

(e) Taxes on forest products and forest
concessions;
13 See footnote 1.

(f) Taxes on estates, inheritance, gifts, legacies

14 Pepsi-Cola Bottling Co. of the Phil. Inc. vs.
and other acquisitions mortis causa
City of Butuan, 1, 2S 1 4, August 28, 1968, 24
SCRA 793-96. See Sec. 22, Art. VI, 1935
(g) Taxes on income of any kind whatsoever;

Constitution and Sec. 17 (1), Art. VIII, 1973

(h) Taxes or fees for the registration of motor
Constitution.
vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof;
15 Commissioner of Internal Revenue v.
Lednicky L- 18169, July 31, 1964, 11 SCRA 609.
(i) Customs duties registration, wharfage on
wharves owned by the national government,
16 SMB, Inc. v. City of Cebu, L-20312, February
tonnage and all other kinds of customs fees,
26, 1972, 43 SCRA 280.
charges and dues;

17 Punzalan v. Mun. Bd of City of Manila, 50

(j) Taxes of any kind on banks, insurance
O.G. 2485; manufacturers Life Ins. Co. v. Meer,
companies, and persons paying franchise tax:
89 Phil. 351 (1951).

(k) Taxes on premiums paid by owners of

18 McQuillin. Municipal Corporations, 3rd. Ed.,
property who obtain insurance directly with
Vol. 6, at 206.-210.
foreign insurance companies; and

19 Villanueva v. City of Iloilo, L-26521,

(i) Taxes, fees or levies, of any kind, which in
December 28, 1968, 26 SCRA 585-86; Nin Bay
effect impose a burden on exports of
Mining Co. v. Mun. of Roxas, Palawan, L-
Philippine finished, manufactured or
20125, July 20, 1965, 14 SCRA 663-64.
processed products and products of
Philippine cottage industries.
20 Arabay, Inc. v. CFI of Zamboanga del Norte,
et al., L-27684, September 10, 1975.
2 Section 2.

21 SMB, Inc. v. City of Cebu, ante, Footnote 16.

3 Section 3.
22 Shell Co. of P.I. Ltd. v. Vaño, 94 Phil. 394-95
(1954); Sections 123-148, NIRC; RA No. 953,
Narcotic Drugs Law, June 20, 1953.
23 Brief, defendants-appellees, at 14. A
regular bottle of Pepsi-Cola soft drinks
contains 8 oz., or 192 oz. per case of 24
bottles; a family-size contains 26 oz., or 312
oz. per case of 12 bottles.
24 See Pepsi-Cola Bottling Co. of the Phil., Inc.
v. City of Butuan, ante, Footnote 14, where the
tax rate is P.10 per case of 24 bottles; City of
Bacolod v. Gruet, L-18290, January 31, 1963, 7
SCRA 168-69, where the tax is P.03 on every
case of bottled Coca-Coal.
25 Northern Philippines Tobacco Corp. v.
Mun. of Agoo, La Union, L-26447, January 30,
1971, 31 SCRA 308.
26 William Lines, Inc. v. City of Ozamis, L-
350048, April 23, 1974, 56 SCRA 593, Second
Division, per Fernando, J.
27 Victorias Milling Co. v. Mun. of Victorias, L-
21183, September 27, 1968, 25 SCRa 205.
28 Procter & Gamble Trading Co. v. Mun. of
Medina, Misamis Oriental, L-29125, January
31, 1973, 43 SCRA 133-34.
29 Subject of plaintiff-appellant's Motion for
Admission and consideration of Essential
Newly Dissevered Evidence, dated April 30,
1969.
FERNANDO, J.
1 L-24756, October 31, 1968, 25 SCRA 938.
2 Article XI, Section 5 of the present
Constitution.
3 Article VII, Section 10 of the 1935
Constitution.
4 Commonwealth Act 472 entitled: "An Act
Revising the General Authority of Municipal
Councils and Municipal District Councils to
Levy Taxes, Subject to Certain Limitations."
5 Republic Act No. 2264.
6 L-18534, December 24,1964,12 SCRA 611.
7 Ibid, 619. Cf. Cuunjieng v. Potspone, 42 Phil.
818 (1922); De Linan v. Municipal Council of
Daet, 44 Phil. 792 (1923); Arquiza Luta v.
Municipality of Zamboanga, 50 Phil. 748
(1927; Hercules Lumber Co. v. Zamboanga, 55
Phil. 653 (1931); Yeo Loby v. Zamboanga, 55
Phil. 656 (1931); People v. Carreon, 65 Phil. 588
(1939); Yap Tak Wing v. Municipal Board, 68
Phil. 511 (1939); Eastern Theatrical Co. v.
Alfonso 83 Phil. 852 (1949); De la Rosa v. City
of Baguio, 91 Phil. 720 (I!)52); Medina v. City
of Baguio, 91 Phil. 854 (1952); Standard-
Vacuum Oil Co. v. Antigua, 96 Phil. 909 (1955);
Municipal Government of Pagsanjan v. Reyes,
98 Phil. 654 (1956), We Wa Yu v. City of Lipa,
Phil. 975 (1956); Municipality of Cotabato v.
Santos, 105 Phil. 963 (1959).
8 L-14264, April 30, 1963, 7 SCRA 887.
9 Ibid, 892.
10 Ibid.
11 L-24756, October 31, 1968, 25 SCRA 938.
12 Ibid, 943-944.
June 18, 1987
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. 2An
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.
SPECIAL FIRST DIVISION endeavor to provide free medical care to
paupers.[1]
For resolution are a motion for reconsideration and
PHILIPPINE HEALTH CARE G.R. No. 167330 supplemental motion for reconsideration dated July 10, 2008
PROVIDERS, INC., and July 14, 2008, respectively, filed by petitioner Philippine
Petitioner, Present: Health Care Providers, Inc.[2]

PUNO, C.J., Chairperson, We recall the facts of this case, as follows:

CORONA,
- v e r s u s - CHICO-NAZARIO,* Petitioner is a domestic corporation whose
LEONARDO-DE CASTRO and primary purpose is [t]o establish, maintain,
BERSAMIN, JJ.** conduct and operate a prepaid group practice
health care delivery system or a health
COMMISSIONER OF maintenance organization to take care of the
INTERNAL REVENUE,
sick and disabled persons enrolled in the
Respondent. Promulgated:
health care plan and to provide for the
S
administrative, legal, and financial
e
responsibilities of the organization.
p
Individuals enrolled in its health care
t
programs pay an annual membership fee and
e
are entitled to various preventive, diagnostic
m
and curative medical services provided by its
b
duly licensed physicians, specialists and other
e
professional technical staff participating in the
r
group practice health delivery system at a
1
hospital or clinic owned, operated or
8
accredited by it.
,
2
xxx xxx xxx
0
0
On January 27, 2000, respondent
9
Commissioner of Internal Revenue [CIR] sent
petitioner a formal demand letter and the
x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
corresponding assessment notices demanding
-x
the payment of deficiency taxes, including
RESOLUTION surcharges and interest, for the taxable years
CORONA, J.: 1996 and 1997 in the total amount
of P224,702,641.18. xxxx

ARTICLE II The deficiency [documentary stamp

Declaration of Principles and State Policies tax (DST)] assessment was imposed on
petitioners health care agreement with the
Section 15. The State shall protect members of its health care program pursuant
and promote the right to health of the people to Section 185 of the 1997 Tax Code xxxx
and instill health consciousness among them.
xxx xxx xxx
ARTICLE XIII
Social Justice and Human Rights Petitioner protested the assessment
in a letter dated February 23, 2000. As
Section 11. The State shall adopt an respondent did not act on the protest,
integrated and comprehensive approach to petitioner filed a petition for review in the
health development which shall endeavor to Court of Tax Appeals (CTA) seeking the
make essential goods, health and other social cancellation of the deficiency VAT and DST
services available to all the people at assessments.
affordable cost. There shall be priority for the
needs of the underprivileged sick, elderly, On April 5, 2002, the CTA rendered a
disabled, women, and children. The State shall decision, the dispositive portion of which read:
 WHEREFORE, in
view of the foregoing, the
instant Petition for Review
is PARTIALLY
GRANTED. Petitioner is
hereby ORDERED to PAY
the deficiency VAT
amounting
to P22,054,831.75 inclusive
of 25% surcharge plus 20%
interest from January 20,
1997 until fully paid for the
1996 VAT deficiency
and P31,094,163.87
inclusive of 25% surcharge
plus 20% interest from
January 20, 1998 until fully
paid for the 1997 VAT
deficiency. Accordingly,
VAT Ruling No. [231]-88 is
declared void and without
force and effect. The 1996
and 1997 deficiency DST
assessment against
petitioner is hereby
CANCELLED AND SET
ASIDE. Respondent is
ORDERED to DESIST from
collecting the said DST
deficiency tax.
SO ORDERED.
Respondent appealed the CTA
decision to the [Court of Appeals (CA)] insofar
as it cancelled the DST assessment. He
claimed that petitioners health care
agreement was a contract of insurance
subject to DST under Section 185 of the 1997
Tax Code.
On August 16, 2004, the CA
rendered its decision. It held that petitioners
health care agreement was in the nature of a
non-life insurance contract subject to DST.
WHEREFORE, the
petition for review is
GRANTED. The Decision of
the Court of Tax Appeals,
insofar as it cancelled and
set aside the 1996 and 1997
deficiency documentary
stamp tax assessment and
ordered petitioner to desist
from collecting the same is
REVERSED and SET ASIDE.
Respondent is
ordered to pay the
amounts of P55,746,352.19
and P68,450,258.73 as
deficiency Documentary
Stamp Tax for 1996 and
1997, respectively, plus
25% surcharge for late
payment and 20% interest
per annum from January
27, 2000, pursuant to
Sections 248 and 249 of the
Tax Code, until the same
shall have been fully paid.
SO ORDERED.
Petitioner moved for
reconsideration but the CA denied it. Hence,
petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the
petition and affirmed the CAs decision. We held that petitioners
health care agreement during the pertinent period was in the
nature of non-life insurance which is a contract of indemnity,
citing Blue Cross Healthcare, Inc. v. Olivares[3] and Philamcare
Health Systems, Inc. v. CA.[4] We also ruled that petitioners
contention that it is a health maintenance organization (HMO)
and not an insurance company is irrelevant because contracts
between companies like petitioner and the beneficiaries under
their plans are treated as insurance contracts. Moreover, DST is
not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the
transaction of the business.
Unable to accept our verdict, petitioner filed the present motion
for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National
Internal Revenue of 1997 is imposed
only on a company engaged in the
business of fidelity bonds and other
insurance policies. Petitioner, as an
HMO, is a service provider, not an
insurance company.
(b) The Court, in dismissing the appeal in CIR
v. Philippine National Bank, affirmed
in effect the CAs disposition that
health care services are not in the
nature of an insurance business.
(c) Section 185 should be strictly construed.
 (d) Legislative intent to exclude health care
agreements from items subject to
DST is clear, especially in the light of
the amendments made in the DST
law in 2002.
(e) Assuming arguendo that petitioners
agreements are contracts of
indemnity, they are not those
contemplated under Section 185.
(f) Assuming arguendo that petitioners
agreements are akin to health
insurance, health insurance is not
covered by Section 185.
(g) The agreements do not fall under the
phrase other branch of insurance
mentioned in Section 185.
(h) The June 12, 2008 decision should only
apply prospectively.
(i) Petitioner availed of the tax amnesty
benefits under RA[5] 9480 for the
taxable year 2005 and all prior
years. Therefore, the questioned
assessments on the DST are now
rendered moot and academic.[6]
Oral arguments were held in Baguio City on April 22,
2009. The parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for
the first time that it availed of a tax amnesty under RA
9480[7] (also known as the Tax Amnesty Act of 2007) by fully
paying the amount of P5,127,149.08 representing 5% of its net
worth as of the year ending December 31, 2005.[8]
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated
with the Securities and Exchange Commission on June 30,
1987.[9] It is engaged in the dispensation of the following
medical services to individuals who enter into health care
agreements with it:
Preventive medical services such as
periodic monitoring of health problems,
family planning counseling, consultation and
advices on diet, exercise and other healthy
habits, and immunization;
Diagnostic medical services such as
routine physical examinations, x-rays,
urinalysis, fecalysis, complete blood count,
and the like and
Curative medical services which
pertain to the performing of other remedial
and therapeutic processes in the event of an
injury or sickness on the part of the enrolled
member.[10]
Individuals enrolled in its health care program pay an
annual membership fee. Membership is on a year-to-year
basis. The medical services are dispensed to enrolled members
in a hospital or clinic owned, operated or accredited by
petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care
practitioners regarding payment schemes, financing and other
procedures for the delivery of health services. Except in cases of
emergency, the professional services are to be provided only by
petitioner's physicians, i.e. those directly employed by it[11] or
whose services are contracted by it.[12] Petitioner also provides
hospital services such as room and board accommodation,
laboratory services, operating rooms, x-ray facilities and general
nursing care.[13] If and when a member avails of the benefits
under the agreement, petitioner pays the participating
physicians and other health care providers for the services
rendered, at pre-agreed rates.[14]
To avail of petitioners health care programs, the
individual members are required to sign and execute a standard
health care agreement embodying the terms and conditions for
the provision of the health care services. The same agreement
contains the various health care services that can be engaged by
the enrolled member, i.e., preventive, diagnostic and curative
medical services. Except for the curative aspect of the medical
service offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any time.
HEALTH
MAINTE
NANCE
ORGANI
ZATION
S ARE
NOT
ENGAGE
D IN
THE
INSURA
NCE
BUSINE
SS
We said in our June 12, 2008 decision that it is irrelevant
that petitioner is an HMO and not an insurer because its
agreements are treated as insurance contracts and the DST is
not a tax on the business but an excise on the privilege,
opportunity or facility used in the transaction of the business.[15]
Petitioner, however, submits that it is of critical
importance to characterize the business it is engaged in, that is,
to determine whether it is an HMO or an insurance company, as
this distinction is indispensable in turn to the issue of whether or
not it is liable for DST on its health care agreements.[16]
A second hard look at the relevant law and
jurisprudence convinces the Court that the arguments of
petitioner are meritorious.
Section 185 of the National Internal Revenue Code of
1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity
bonds and other insurance policies. On all
policies of insurance or bonds or
obligations of the nature of indemnity for
loss, damage, or liability made or renewed
by any person, association or company or
corporation transacting the business
of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of
insurance (except life, marine, inland, and
fire insurance), and all bonds, undertakings,
or recognizances, conditioned for the
performance of the duties of any office or
position, for the doing or not doing of
anything therein specified, and on all
obligations guaranteeing the validity or
legality of any bond or other obligations
issued by any province, city, municipality, or
other public body or organization, and on all
obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile credits,
which may be made or renewed by any such
person, company or corporation, there shall
be collected a documentary stamp tax of fifty
centavos (P0.50) on each four pesos (P4.00),
or fractional part thereof, of the premium
charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no
word, clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void and
insignificant. To this end, a construction which renders every
word operative is preferred over that which makes some words
idle and nugatory.[17] This principle is expressed in the maxim Ut
magis valeat quam pereat, that is, we choose the interpretation
which gives effect to the whole of the statute its every word.[18]
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely: (1)
the document must be a policy of insurance or an obligation
in the nature of indemnity and (2) the maker should be
transacting the business of accident, fidelity, employers
liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine,
inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or
The National Health Insurance Act of 1995), an HMO is an entity
that provides, offers or arranges for coverage of designated
health services needed by plan members for a fixed prepaid
premium.[19] The payments do not vary with the extent,
frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in
the business of insurance during the pertinent taxable years? We
rule that it was not.
Section 2 (2) of PD[20] 1460 (otherwise known as the
Insurance Code) enumerates what constitutes doing an
insurance business or transacting an insurance business:
a) making or proposing to make, as
insurer, any insurance contract;
b) making or proposing to make, as
surety, any contract of suretyship as
a vocation and not as merely
incidental to any other legitimate
business or activity of the surety;
c) doing any kind of business,
including a reinsurance business,
specifically recognized as
constituting the doing of an
insurance business within the
meaning of this Code;
d) doing or proposing to do any
business in substance equivalent to
any of the foregoing in a manner
designed to evade the provisions of
this Code.
In the application of the provisions
of this Code, the fact that no profit is derived
from the making of insurance contracts,
agreements or transactions or that no
separate or direct consideration is received
therefore, shall not be deemed conclusive to
show that the making thereof does not
constitute the doing or transacting of an
insurance business.
Various courts in the United States, whose
jurisprudence has a persuasive effect on our decisions,[21] have
determined that HMOs are not in the insurance business. One
test that they have applied is whether the assumption of risk and
indemnification of loss (which are elements of an insurance
business) are the principal object and purpose of the
organization or whether they are merely incidental to its
business. If these are the principal objectives, the business is that
of insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance.
Applying the principal object and purpose test,[22] there
is significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group
with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health
Association[23] wherein the Court of Appeals of the District of
Columbia Circuit held that Group Health Association should not
be considered as engaged in insurance activities since it was
created primarily for the distribution of health care services
rather than the assumption of insurance risk.
xxx Although Group Healths activities may be
considered in one aspect as creating security
against loss from illness or accident more truly
they constitute the quantity purchase of well-
rounded, continuous medical service by its
members. xxx The functions of such an
organization are not identical with those of
insurance or indemnity companies. The
latter are concerned primarily, if not
exclusively, with risk and the consequences of
its descent, not with service, or its extension in
kind, quantity or distribution; with the unusual
occurrence, not the daily routine of living.
Hazard is predominant. On the other hand,
the cooperative is concerned principally
with getting service rendered to its
members and doing so at lower prices
made possible by quantity purchasing and
economies in operation. Its primary
purpose is to reduce the cost rather than
the risk of medical care; to broaden the
service to the individual in kind and
quantity; to enlarge the number receiving
it; to regularize it as an everyday incident
of living, like purchasing food and clothing
or oil and gas, rather than merely
protecting against the financial loss caused
by extraordinary and unusual occurrences,
such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of
colds, ordinary aches and pains, minor ills and
all the temporary bodily discomforts as well as
the more serious and unusual illness. To
summarize, the distinctive features of the
cooperative are the rendering of service, its
extension, the bringing of physician and
patient together, the preventive features,
the regularization of service as well as
payment, the substantial reduction in cost
by quantity purchasing in short, getting
the medical job done and paid for; not,
except incidentally to these features, the
indemnification for cost after the services
is rendered. Except the last, these are not
distinctive or generally characteristic of the
insurance arrangement. There is, therefore,
a substantial difference between contracting
in this way for the rendering of service, even
on the contingency that it be needed, and
contracting merely to stand its cost when or
after it is rendered.
That an incidental element of risk
distribution or assumption may be present
should not outweigh all other factors. If
attention is focused only on that feature, the
line between insurance or indemnity and
other types of legal arrangement and
economic function becomes faint, if not
extinct. This is especially true when the
contract is for the sale of goods or services on
contingency. But obviously it was not the
purpose of the insurance statutes to regulate
all arrangements for assumption or
distribution of risk. That view would cause
them to engulf practically all contracts,
particularly conditional sales and contingent
service agreements. The fallacy is in looking
only at the risk element, to the exclusion of
all others present or their subordination to
it. The question turns, not on whether risk
is involved or assumed, but on whether
that or something else to which it is related
in the particular plan is its principal object
purpose.[24] (Emphasis supplied)
In California Physicians Service v. Garrison,[25] the
California court felt that, after scrutinizing the plan of operation
as a whole of the corporation, it was service rather than
indemnity which stood as its principal purpose.
There is another and more
compelling reason for holding that the service
is not engaged in the insurance
business. Absence or presence of
assumption of risk or peril is not the sole
test to be applied in determining its status.
The question, more broadly, is whether,
looking at the plan of operation as a whole,
service rather than indemnity is its
principal object and purpose. Certainly the
objects and purposes of the corporation
organized and maintained by the California
physicians have a wide scope in the field of
social service. Probably there is no more
impelling need than that of adequate
medical care on a voluntary, low-cost basis
for persons of small income. The medical
profession unitedly is endeavoring to meet
that need. Unquestionably this is service of
a high order and not
indemnity.[26] (Emphasis supplied)
American courts have pointed out that the main
difference between an HMO and an insurance company is that
HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while
insurance companies simply undertake to indemnify the insured
for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue
Cross and Blue Shield of New Jersey[27] is clear on this point:
The basic distinction between
medical service corporations and ordinary
health and accident insurers is that the former
undertake to provide prepaid medical
services through participating
physicians, thus relieving subscribers of any
further financial burden, while the latter only
undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule
of rates contained in the policy.
xxx xxx xxx
The primary purpose of a medical
service corporation, however, is an
undertaking to provide physicians who will
render services to subscribers on a prepaid
basis. Hence, if there are no physicians
participating in the medical service
corporations plan, not only will the
subscribers be deprived of the protection
which they might reasonably have
expected would be provided, but the
corporation will, in effect, be doing
business solely as a health and accident
indemnity insurer without having qualified
as such and rendering itself subject to the
more stringent financial requirements of the
General Insurance Laws.
A participating provider of health
care services is one who agrees in writing to
render health care services to or for persons
covered by a contract issued by health service
corporation in return for which the health
service corporation agrees to make
payment directly to the participating
provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be
insufficient to override the primary purpose of the business to
provide medical services as needed, with payment made directly
to the provider of these services.[29] In short, even if petitioner
assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it
nevertheless cannot be considered as being engaged in the
insurance business.
By the same token, any indemnification resulting from
the payment for services rendered in case of emergency by non-
participating health providers would still be incidental to
petitioners purpose of providing and arranging for health care
services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is
required to set up a system and the facilities for the delivery of
such medical services. This indubitably shows that
indemnification is not its sole object.
In fact, a substantial portion of petitioners services
covers preventive and diagnostic medical services intended to
keep members from developing medical conditions or
diseases.[30] As an HMO, it is its obligation to maintain the good
health of its members. Accordingly, its health care programs
are designed to prevent or to minimize the possibility of any
assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss or
damage arising from a medical condition but, on the contrary,
to provide the health and medical services needed to prevent
such loss or damage.[31]
Overall, petitioner appears to provide insurance-type
benefits to its members (with respect to its curative medical
services), but these are incidental to the principal activity of
providing them medical care. The insurance-like aspect of
petitioners business is miniscule compared to its noninsurance
activities. Therefore, since it substantially provides health care
services rather than insurance services, it cannot be considered
as being in the insurance business.
It is important to emphasize that, in adopting the
principal purpose test used in the above-quoted U.S. cases, we
are not saying that petitioners operations are identical in every
respect to those of the HMOs or health providers which were
parties to those cases. What we are stating is that, for the
purpose of determining what doing an insurance business
means, we have to scrutinize the operations of the business as a
whole and not its mere components. This is of course only
prudent and appropriate, taking into account the burdensome
and strict laws, rules and regulations applicable to insurers and
other entities engaged in the insurance business. Moreover, we
are also not unmindful that there are other American authorities
who have found particular HMOs to be actually engaged in
insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not
part of the insurance industry. This is evident from the fact that
it is not supervised by the Insurance Commission but by the
Department of Health.[33] In fact, in a letter dated September 3,
2000, the Insurance Commissioner confirmed that petitioner is
not engaged in the insurance business. This determination of the
commissioner must be accorded great weight. It is well-settled
that the interpretation of an administrative agency which is
tasked to implement a statute is accorded great respect and
ordinarily controls the interpretation of laws by the courts. The
reason behind this rule was explained in Nestle Philippines, Inc.
v. Court of Appeals:[34]
The rationale for this rule relates not
only to the emergence of the multifarious
needs of a modern or modernizing society
and the establishment of diverse
administrative agencies for addressing and
satisfying those needs; it also relates to the
accumulation of experience and growth of
specialized capabilities by the administrative
agency charged with implementing a
 particular statute. In Asturias Sugar Central,
Inc. vs. Commissioner of Customs,[35] the
Court stressed that executive officials are
presumed to have familiarized themselves
with all the considerations pertinent to the
meaning and purpose of the law, and to have
formed an independent, conscientious and
competent expert opinion thereon. The courts
give much weight to the government agency
officials charged with the implementation of
the law, their competence, expertness,
experience and informed judgment, and the
fact that they frequently are the drafters of the
law they interpret.[36]
A they are significantly and substantially more
HEALTH
CARE
AGREE
MENT IS
NOT AN
INSURA
NCE
CONTR
ACT
CONTE
MPLATE
D
UNDER
SECTIO
N 185
OF THE
NIRC OF
1997
Section 185 states that DST is imposed on all policies
of insurance or obligations of the nature of indemnity for loss,
damage, or liability. In our decision dated June 12, 2008, we
ruled that petitioners health care agreements are contracts of
indemnity and are therefore insurance contracts:
It is incorrect to say that the health
care agreement is not based on loss or
damage because, under the said agreement,
petitioner assumes the liability and
indemnifies its member for hospital, medical
and related expenses (such as professional
fees of physicians). The term "loss or damage"
is broad enough to cover the monetary
expense or liability a member will incur in case
of illness or injury.
Under the health care agreement,
the rendition of hospital, medical and
professional services to the member in case of
sickness, injury or emergency or his availment
of so-called "out-patient services" (including
physical examination, x-ray and laboratory
tests, medical consultations, vaccine
administration and family planning
counseling) is the contingent event which
gives rise to liability on the part of the
member. In case of exposure of the member
to liability, he would be entitled to
indemnification by petitioner.
Furthermore, the fact that petitioner
must relieve its member from liability by
paying for expenses arising from the
stipulated contingencies belies its claim that
its services are prepaid. The expenses to be
incurred by each member cannot be
predicted beforehand, if they can be
predicted at all. Petitioner assumes the risk of
paying for the costs of the services even if
than what the member has "prepaid."
Petitioner does not bear the costs alone but
distributes or spreads them out among a large
group of persons bearing a similar risk, that is,
among all the other members of the health
care program. This is insurance.[37]
We reconsider. We shall quote once again the
pertinent portion of Section 185:
Section 185. Stamp tax on fidelity
bonds and other insurance policies. On all
policies of insurance or bonds or
obligations of the nature of indemnity for
loss, damage, or liability made or renewed
by any person, association or company or
corporation transacting the business of
accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by
the principle that tax statutes are strictly construed against the
taxing authority.[38] This is because taxation is a destructive
power which interferes with the personal and property rights of
the people and takes from them a portion of their property for
the support of the government.[39] Hence, tax laws may not be
extended by implication beyond the clear import of their
language, nor their operation enlarged so as to embrace matters
not specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the
Court pronounced that a health care agreement is in the nature
of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax
provision. Instead, they dealt with the liability of a health service
provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally
interpreted in favor of the member and strictly against the HMO.
For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract
of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss
by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a
general scheme to distribute actual
losses among a large group of persons
bearing a similar risk and
5. In consideration of the insurers
promise, the insured pays a premium.[41]
Do the agreements between petitioner and its
members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our
insurance laws has pointed out that, even if a contract contains
all the elements of an insurance contract, if its primary purpose
is the rendering of service, it is not a contract of insurance:
It does not necessarily follow
however, that a contract containing all the
four elements mentioned above would be an
insurance contract. The primary purpose of
the parties in making the contract may
negate the existence of an insurance
contract. For example, a law firm which enters
into contracts with clients whereby in
consideration of periodical payments, it
promises to represent such clients in all suits
for or against them, is not engaged in the
insurance business. Its contracts are simply for
the purpose of rendering personal services.
On the other hand, a contract by which a
corporation, in consideration of a stipulated
amount, agrees at its own expense to defend
a physician against all suits for damages for
malpractice is one of insurance, and the
corporation will be deemed as engaged in the
business of insurance. Unlike the lawyers
retainer contract, the essential purpose of
such a contract is not to render personal
services, but to indemnify against loss and
damage resulting from the defense of actions
for malpractice.[42](Emphasis supplied)
Second. Not all the necessary elements of a contract of
insurance are present in petitioners agreements. To begin with,
there is no loss, damage or liability on the part of the member
that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined
consideration in exchange for the hospital, medical and
professional services rendered by the petitioners physician or
affiliated physician to him. In case of availment by a member of
the benefits under the agreement, petitioner does not reimburse
or indemnify the member as the latter does not pay any third
party. Instead, it is the petitioner who pays the participating
physicians and other health care providers for the services
rendered at pre-agreed rates. The member does not make any
such payment.
In other words, there is nothing in petitioner's
agreements that gives rise to a monetary liability on the part of
the member to any third party-provider of medical services
which might in turn necessitate indemnification from petitioner.
The terms indemnify or indemnity presuppose that a liability or
claim has already been incurred. There is no indemnity precisely
because the member merely avails of medical services to be paid
or already paid in advance at a pre-agreed price under the
agreements.
Third. According to the agreement, a member can take
advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on
his or her part.
Fourth. In case of emergency, petitioner is obliged to
reimburse the member who receives care from a non-
participating physician or hospital. However, this is only a very
minor part of the list of services available. The assumption of the
expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness
or injury.
In Michigan Podiatric Medical Association v. National
Foot Care Program, Inc.,[43] although the health care contracts
called for the defendant to partially reimburse a subscriber for
treatment received from a non-designated doctor, this did not
make defendant an insurer. Citing Jordan, the Court determined
that the primary activity of the defendant (was) the provision of
podiatric services to subscribers in consideration of prepayment
for such services.[44] Since indemnity of the insured was not the
focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not partake
of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance
contract, it is not necessarily true that risk alone is sufficient to
establish it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance
contracts.
Indeed, petitioner, as an HMO, undertakes a business
risk when it offers to provide health services: the risk that it might
fail to earn a reasonable return on its investment. But it is not the
risk of the type peculiar only to insurance companies. Insurance
risk, also known as actuarial risk, is the risk that the cost of
insurance claims might be higher than the premiums paid. The
amount of premium is calculated on the basis of assumptions
made relative to the insured.[45]
However, assuming that petitioners commitment to
provide medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the prepaid
fees, it still will not qualify as an insurance contract because
petitioners objective is to provide medical services at reduced
cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with
its members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
THERE
WAS NO
LEGISLA
TIVE
INTENT
TO
IMPOSE
DST ON
HEALTH
CARE
AGREE
MENTS
OF
HMOS
Furthermore, militating in convincing fashion against the
imposition of DST on petitioners health care agreements under
Section 185 of the NIRC of 1997 is the provisions legislative
history. The text of Section 185 came into U.S. law as early as
1904 when HMOs and health care agreements were not even in
existence in this jurisdiction. It was imposed under Section 116,
Article XI of Act No. 1189 (otherwise known as the Internal
Revenue Law of 1904)[46] enacted on July 2, 1904 and became
effective on August 1, 1904. Except for the rate of tax, Section
185 of the NIRC of 1997 is a verbatim reproduction of the
pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied,
collected, and paid for and in respect to the
several bonds, debentures, or certificates of
stock and indebtedness, and other
documents, instruments, matters, and things
mentioned and described in this section, or
for or in respect to the vellum, parchment, or
paper upon which such instrument, matters,
or things or any of them shall be written or
printed by any person or persons who shall
make, sign, or issue the same, on and after
January first, nineteen hundred and five, the
several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or
bond or obligation of the nature of
indemnity for loss, damage, or liability
made or renewed by any person,
association, company, or corporation
transacting the business of accident,
fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic
sprinkle, or other branch of insurance
(except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal
Revenue Law of 1914) was enacted revising and consolidating
the laws relating to internal revenue. The aforecited pertinent
portion of Section 116, Article XI of Act No. 1189 was completely
reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was
thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339
was again reproduced as Section 1604 (l), Article IV of Act No.
2657 (Administrative Code). Upon its amendment on March 10,
1917, the pertinent DST provision became Section 1449 (l) of Act
No. 2711, otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of
Commonwealth Act No. 466 (the NIRC of 1939), which codified
all the internal revenue laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the DST rate was
increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same
DST rate was reproduced in PD 1158 (NIRC of 1977) as Section
234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD 1994,
Section 234 of the NIRC of 1977 was renumbered as Section 198.
And under Section 23 of EO[47] 273 dated July 25, 1987, it was
again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was
amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of
1977 by RA 8424 (or the NIRC of 1997), the subject legal
provision was retained as the present Section 185. In
2004, amendments to the DST provisions were introduced by RA
9243[48] but Section 185 was untouched.
 On the other hand, the concept of an HMO was
introduced in the Philippines with the formation of Bancom
Health Care Corporation in 1974. The same pioneer HMO was
later reorganized and renamed Integrated Health Care Services,
Inc. (or Intercare). However, there are those who claim that
Health Maintenance, Inc. is the HMO industry pioneer, having
set foot in the Philippines as early as 1965 and having been
formally incorporated in 1991. Afterwards, HMOs proliferated
quickly and currently, there are 36 registered HMOs with a total
enrollment of more than 2 million.[49]
We can clearly see from these two histories (of the DST
on the one hand and HMOs on the other) that when the law
imposing the DST was first passed, HMOs were yet unknown in
the Philippines. However, when the various amendments to the
DST law were enacted, they were already in existence in the
Philippines and the term had in fact already been defined by RA
7875. If it had been the intent of the legislature to impose DST
on health care agreements, it could have done so in clear and
categorical terms. It had many opportunities to do so. But it did
not. The fact that the NIRC contained no specific provision on
the DST liability of health care agreements of HMOs at a time
they were already known as such, belies any legislative intent to
impose it on them. As a matter of fact, petitioner was
assessed its DST liability only on January 27, 2000, after
more than a decade in the business as an HMO.[50]
Considering that Section 185 did not change since
1904 (except for the rate of tax), it would be safe to say that
health care agreements were never, at any time, recognized as
insurance contracts or deemed engaged in the business of
insurance within the context of the provision.
THE
POWER
TO TAX
IS NOT
THE
POWER
TO
DESTRO
Y amended, arising from the failure to pay any and all internal
As a general rule, the power to tax is an incident of sovereignty
and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who is to pay it.[51] So potent indeed is the power
that it was once opined that the power to tax involves the power
to destroy.[52]
Petitioner claims that the assessed DST to date which amounts
to P376 million[53] is way beyond its net worth of P259
million.[54] Respondent never disputed these assertions. Given
the realities on the ground, imposing the DST on petitioner
would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the
government ought to encourage private
enterprise.[55] Petitioner, just like any concern organized for a
lawful economic activity, has a right to maintain a legitimate
business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]
The power of taxation is sometimes
called also the power to destroy. Therefore it
should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer.
It must be exercised fairly, equally and
uniformly, lest the tax collector kill the hen
that lays the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to
be taxed out of existence. Incurring losses because of a tax
imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of
the nations thrust towards a better economy which will
ultimately benefit the majority of our people.[59]
PETITIO
NERS
TAX
LIABILIT
Y
WAS
EXTING
UISHED
UNDER
THE
PROVISI
ONS OF
RA 9840
Petitioner asserts that, regardless of the arguments, the
DST assessment for taxable years 1996 and 1997 became moot
and academic[60] when it availed of the tax amnesty under RA
9480 on December 10, 2007. It paid P5,127,149.08 representing
5% of its net worth as of the year ended December 31, 2005 and
complied with all requirements of the tax amnesty. Under
Section 6(a) of RA 9480, it is entitled to immunity from payment
of taxes as well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the 1997 NIRC, as
revenue taxes for taxable year 2005 and prior years.[61]
Far from disagreeing with petitioner, respondent
manifested in its memorandum:
Section 6 of [RA 9840] provides that
availment of tax amnesty entitles a taxpayer
to immunity from payment of the tax
involved, including the civil, criminal, or
administrative penalties provided under the
1997 [NIRC], for tax liabilities arising in 2005
and the preceding years.
In view of petitioners availment of
the benefits of [RA 9840], and without
conceding the merits of this case as discussed
 above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of
petitioner. This admission, however, is not
meant to preclude a revocation of the
amnesty granted in case it is found to have
been granted under circumstances
amounting to tax fraud under Section 10 of
said amnesty law.[62] (Emphasis supplied)
Furthermore, we held in a recent case that DST is one
of the taxes covered by the tax amnesty program under RA
9480.[63] There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and 1997
was totally extinguished by its availment of the tax amnesty
under RA 9480.
IS THE
COURT
BOUND
BY A members of the Court and certified by the Chief Justice.
MINUTE
RESOLU
TION IN
ANOTH
ER
CASE?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling of the
CA[64] in CIR v. Philippine National Bank[65] that a health care
agreement of Philamcare Health Systems is not an insurance
contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001
minute resolution of this Court dismissing the appeal
in Philippine National Bank (G.R. No. 148680).[66] Petitioner
argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is
not an insurance contract.
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed the
CA ruling being questioned. As a result, our ruling in that case
has already become final.[67] When a minute resolution denies or
dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together
with its findings of fact and legal conclusions, are deemed
sustained.[68] But what is its effect on other cases?
With respect to the same subject matter and the same
issues concerning the same parties, it constitutes res
judicata.[69] However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. Baier-
Nickel,[70] the Court noted that a previous case, CIR v. Baier-
Nickel[71] involving the same parties and the same issues, was
previously disposed of by the Court thru a minute resolution
dated February 17, 2003 sustaining the ruling of the CA.
Nonetheless, the Court ruled that the previous case ha(d) no
bearing on the latter case because the two cases involved
different subject matters as they were concerned with the
taxable income of different taxable years.[72]
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII
of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly
applies only to decisions, not to minute resolutions. A minute
resolution is signed only by the clerk of court by authority of the
justices, unlike a decision. It does not require the certification of
the Chief Justice. Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports. Finally, the proviso
of Section 4(3) of Article VIII speaks of a decision.[73] Indeed, as a
rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the
Accordingly, since petitioner was not a party in G.R. No.
148680 and since petitioners liability for DST on its health care
agreement was not the subject matter of G.R. No. 148680,
petitioner cannot successfully invoke the minute resolution in
that case (which is not even binding precedent) in its favor.
Nonetheless, in view of the reasons already discussed, this does
not detract in any way from the fact that petitioners health care
agreements are not subject to DST.
A FINAL
NOTE
Taking into account that health care agreements are
clearly not within the ambit of Section 185 of the NIRC and there
was never any legislative intent to impose the same on HMOs
like petitioner, the same should not be arbitrarily and unjustly
included in its coverage.
It is a matter of common knowledge that there is a
great social need for adequate medical services at a cost which
the average wage earner can afford. HMOs arrange, organize
and manage health care treatment in the furtherance of the goal
of providing a more efficient and inexpensive health care system
made possible by quantity purchasing of services and
economies of scale. They offer advantages over the pay-for-
service system (wherein individuals are charged a fee each time
they receive medical services), including the ability to control
costs. They protect their members from exposure to the high
cost of hospitalization and other medical expenses brought
about by a fluctuating economy.Accordingly, they play an
important role in society as partners of the State in achieving its
constitutional mandate of providing its citizens with affordable
health services.
The rate of DST under Section 185 is equivalent to
12.5% of the premium charged.[74] Its imposition will elevate the
cost of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing
health services beyond the reach of the ordinary wage earner or
driving the industry to the ground. At the end of the day, neither
side wins, considering the indispensability of the services offered
by HMOs.

WHEREFORE, the motion for reconsideration

is GRANTED. The August 16, 2004 decision of the Court of
Appeals in CA-G.R. SP No. 70479 is REVERSED and SET
ASIDE. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED and SET ASIDE. Respondent is
ordered to desist from collecting the said tax.
No costs. SO ORDERED.
SECOND DIVISION
CTA Case No. 7085
COMMISSIONER OF G.R. No. 183505
INTERNAL On May 15, 2002, the BIR sent First Asia a PAN for VAT
REVENUE, deficiency on
Petitioner, Present: cinema ticket sales for taxable year 1999 in the total amount
of P35,823,680.93.[13] First Asia protested the PAN in a letter dated July
CARPIO, J., Chairperson, 9, 2002.[14]
- versus - BRION,
DEL CASTILLO, Subsequently, the BIR issued a Formal Letter of Demand for
ABAD, and the alleged VAT deficiency which was protested by First Asia in a letter
SM PRIME HOLDINGS, INC. PEREZ, JJ. dated December 12, 2002.[15]
and FIRST ASIA REALTY
DEVELOPMENT Promulgated: On September 6, 2004, the BIR rendered a Decision denying
CORPORATION, the protest and ordering First Asia to pay the amount of P35,823,680.93
Respondents. February 26, 2010 for VAT deficiency for taxable year 1999.[16]
x-----------------------------------------------
--------------------x Accordingly, on October 20, 2004, First Asia filed a Petition for
Review before the CTA, docketed as CTA Case No. 7085.[17]
DECISION
CTA Case No. 7111
DEL CASTILLO, J.:

On April 16, 2004, the BIR sent a PAN to First Asia for VAT
When the intent of the law is not apparent as worded, or
deficiency on cinema ticket sales for taxable year 2000 in the amount
when the application of the law would lead to absurdity or injustice,
of P35,840,895.78. First Asia protested the PAN through a letter
legislative history is all important. In such cases, courts may take judicial
dated April 22, 2004.[18]
notice of the origin and history of the law,[1] the deliberations during the
enactment,[2] as well as prior laws on the same subject matter[3] to
Thereafter, the BIR issued a Formal Letter of Demand for
ascertain the true intent or spirit of the law.
alleged VAT deficiency.[19] First Asia protested the same in a letter
dated July 9, 2004.[20]
This Petition for Review on Certiorari under Rule 45 of the
Rules of Court, in relation to Republic Act (RA) No. 9282,[4] seeks to set
On October 5, 2004, the BIR denied the protest and ordered
aside the April 30, 2008 Decision[5] and the June 24, 2008 Resolution[6] of
First Asia to pay the VAT deficiency in the amount of P35,840,895.78 for
the Court of Tax Appeals (CTA).
taxable year 2000.[21]
Factual Antecedents

This prompted First Asia to file a Petition for Review before

Respondents SM Prime Holdings, Inc. (SM Prime) and First
the CTA on December 16, 2004. The case was docketed as CTA Case
Asia Realty Development Corporation (First Asia) are domestic
No. 7111.[22]
corporations duly organized and existing under the laws of the Republic
of the Philippines. Both are engaged in the business of operating
CTA Case No. 7272
cinema houses, among others.[7]

Re: Assessment Notice No. 008-02

CTA Case No. 7079

A PAN for VAT deficiency on cinema ticket sales for the

On September 26, 2003, the Bureau of Internal Revenue (BIR)
taxable year 2002 in the total amount of P32,802,912.21 was issued
sent SM Prime a Preliminary Assessment Notice (PAN) for value added
against First Asia by the BIR. In response, First Asia filed a protest-letter
tax (VAT) deficiency on cinema ticket sales in the amount
dated November 11, 2004. The BIR then sent a Formal Letter of
of P119,276,047.40 for taxable year 2000.[8] In response, SM Prime filed
Demand, which was protested by First Asia on December 14, 2004.[23]
a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal
Re: Assessment Notice No. 003-03
Letter of Demand for the alleged VAT deficiency, which the latter
protested in a letter dated January 14, 2004.[10]
A PAN for VAT deficiency on cinema ticket sales in the total
amount of P28,196,376.46 for the taxable year 2003 was issued by the
On September 6, 2004, the BIR denied the protest filed by SM
BIR against First Asia. In a letter dated September 23, 2004, First Asia
Prime and ordered it to pay the VAT deficiency for taxable year 2000 in
protested the PAN. A Formal Letter of Demand was thereafter issued
the amount of P124,035,874.12.[11]
by the BIR to First Asia, which the latter protested through a letter
dated November 11, 2004. [24]
On October 15, 2004, SM Prime filed a Petition for Review
before the CTA docketed as CTA Case No. 7079.[12]
 On May 11, 2005, the BIR rendered a Decision denying the 000057, VT-00-000122, 003-03 and 008-02
protests. It ordered First Asia to pay the amounts of P33,610,202.91 are ORDERED cancelled and set aside.
and P28,590,826.50 for VAT deficiency for taxable years 2002 and 2003,
respectively.[25] SO ORDERED.[32]

Thus, on June 22, 2005, First Asia filed a Petition for Review Aggrieved, the CIR moved for reconsideration which was
before the CTA, docketed as CTA Case No. 7272.[26] denied by the First Division in its Resolution dated December 14,
2006.[33]
Consolidated Petitions
Ruling of the CTA En Banc
The Commissioner of Internal Revenue (CIR) filed his Answers
to the Petitions filed by SM Prime and First Asia.[27] Thus, the CIR appealed to the CTA En Banc.[34] The case was
docketed as CTA EB No. 244.[35] The CTA En Banc however
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA denied[36] the Petition for Review and dismissed[37] as well petitioners
Case Nos. 7085, 7111 and 7272 with CTA Case No. 7079 on the grounds Motion for Reconsideration.
that the issues raised therein are identical and that SM Prime is a The CTA En Banc held that Section 108 of the NIRC actually
majority shareholder of First Asia. The motion was granted.[28] sets forth an exhaustive enumeration of what services are intended to
be subject to VAT. And since the showing or exhibition of motion
Upon submission of the parties respective memoranda, the pictures, films or movies by cinema operators or proprietors is not
consolidated cases were submitted for decision on the sole issue of among the enumerated activities contemplated in the phrase sale or
whether gross receipts derived from admission tickets by exchange of services, then gross receipts derived by cinema/ theater
cinema/theater operators or proprietors are subject to VAT.[29] operators or proprietors from admission tickets in showing motion
pictures, film or movie are not subject to VAT. It reiterated that the
Ruling of the CTA First Division exhibition or showing of motion pictures, films, or movies is instead
subject to amusement tax under the LGC of 1991. As regards the validity
On September 22, 2006, the First Division of the CTA of RMC No. 28-2001, the CTA En Banc agreed with its First Division that
rendered a Decision granting the Petition for Review. Resorting to the the same cannot be given force and effect for failure to comply with
language used and the legislative history of the law, it ruled that the RMC No. 20-86.
activity of showing cinematographic films is not a service covered by
VAT under the National Internal Revenue Code (NIRC) of 1997, as Issue
amended, but an activity subject to amusement tax under RA 7160,
otherwise known as the Local Government Code (LGC) of 1991. Citing Hence, the present recourse, where petitioner alleges that the
House Joint Resolution No. 13, entitled Joint Resolution Expressing the CTA En Banc seriously erred:
True Intent of Congress with Respect to the Prevailing Tax Regime in
the Theater and Local Film Industry Consistent with the States Policy to (1) In not finding/holding that
Have a Viable, Sustainable and Competitive Theater and Film Industry the gross receipts derived by
as One of its Partners in National Development,[30] the CTA First Division operators/proprietors of cinema houses
held that the House of Representatives resolved that there should only from admission tickets [are] subject to
be one business tax applicable to theaters and movie houses, which is the 10% VAT because:
the 30% amusement tax imposed by cities and provinces under the LGC
of 1991. Further, it held that consistent with the States policy to have a (a) THE EXHIBITION OF
viable, sustainable and competitive theater and film industry, the MOVIES BY CINEMA
national government should be precluded from imposing its own OPERATORS/PROPRIET
business tax in addition to that already imposed and collected by local ORS TO THE PAYING
government units. The CTA First Division likewise found that Revenue PUBLIC IS A SALE OF
Memorandum Circular (RMC) No. 28-2001, which imposes VAT on SERVICE;
gross receipts from admission to cinema houses, cannot be given force
and effect because it failed to comply with the procedural due process (b) UNLESS EXEMPTED
for tax issuances under RMC No. 20-86.[31] Thus, it disposed of the case BY LAW, ALL SALES OF
as follows: SERVICES ARE
EXPRESSLY SUBJECT TO
IN VIEW OF ALL THE FOREGOING, this VAT UNDER SECTION
Court hereby GRANTS the Petitions for 108 OF THE NIRC OF
Review. Respondents Decisions denying 1997;
petitioners protests against deficiency value-added
taxes are hereby REVERSED. Accordingly, (c) SECTION 108 OF THE
Assessment Notices Nos. VT-00-000098, VT-99- NIRC OF 1997 IS A CLEAR
PROVISION OF LAW
AND THE APPLICATION
 OF RULES OF Petitioners Arguments
STATUTORY
CONSTRUCTION AND Petitioner argues that the enumeration of services subject to
EXTRINSIC AIDS IS VAT in Section 108 of the NIRC is not exhaustive because it covers all
UNWARRANTED; sales of services unless exempted by law. He claims that the CTA erred
in applying the rules on statutory construction and in using extrinsic aids
(d) GRANTING WITHOUT in interpreting Section 108 because the provision is clear and
CONCEDING THAT unambiguous. Thus, he maintains that the exhibition of movies by
RULES OF cinema operators or proprietors to the paying public, being a sale of
CONSTRUCTION ARE service, is subject to VAT.
APPLICABLE HEREIN,
STILL THE HONORABLE Respondents Arguments
COURT ERRONEOUSLY
APPLIED THE SAME AND Respondents, on the other hand, argue that a plain reading
PROMULGATED of Section 108 of the NIRC of 1997 shows that the gross receipts of
DANGEROUS proprietors or operators of cinemas/theaters derived from public
PRECEDENTS; admission are not among the services subject to VAT.Respondents
insist that gross receipts from cinema/theater admission tickets were
(e) THERE IS NO never intended to be subject to any tax imposed by the national
VALID, EXISTING government. According to them, the absence of gross receipts from
PROVISION OF LAW cinema/theater admission tickets from the list of services which are
EXEMPTING subject to the national amusement tax under Section 125 of the NIRC
RESPONDENTS of 1997 reinforces this legislative intent. Respondents also highlight the
SERVICES FROM THE fact that RMC No. 28-2001 on which the deficiency assessments were
VAT IMPOSED UNDER based is an unpublished administrative ruling.
SECTION 108 OF THE
NIRC OF 1997; Our Ruling

(f) QUESTIONS ON THE The petition is bereft of merit.

WISDOM OF THE LAW
ARE NOT PROPER
ISSUES TO BE TRIED BY The
THE HONORABLE enumerat
COURT; and ion of
services
(g) RESPONDENTS subject to
WERE TAXED BASED ON VAT
THE PROVISION OF under
SECTION 108 OF THE Section
NIRC. 108 of the
NIRC is
(2) In ruling that the not
enumeration in Section 108 of the NIRC exhaustiv
of 1997 is exhaustive in coverage; e

(3) In misconstruing the NIRC of

Section 108 of the NIRC of the 1997 reads:
1997 to conclude that the showing of
motion pictures is merely subject to the
SEC. 108. Value-added Tax on Sale of Services and
amusement tax imposed by the Local
Use or Lease of Properties.
Government Code; and

(A) Rate and Base of Tax. There shall be levied,

(4) In invalidating Revenue Memorandum Circular
assessed and collected, a value-added tax
(RMC) No. 28-2001.[38]
equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services,
Simply put, the issue in this case is whether the gross receipts
including the use or lease of properties.
derived by operators or proprietors of cinema/theater houses from
The phrase sale or exchange of services means
admission tickets are subject to VAT.
the performance of all kinds of services in the
Philippines for others for a fee, remuneration or
 consideration, including those performed or
rendered by construction and service contractors;
stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether
personal or real; warehousing services; lessors or
distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators
or keepers of hotels, motels, rest houses, pension
houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers; dealers
in securities; lending investors; transportation
contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes
for hire and other domestic common carriers by
land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television
broadcasting and all other franchise grantees
except those under Section 119 of this Code;
services of banks, non-bank financial
intermediaries and finance companies; and non-
life insurance companies (except their crop
insurances), including surety, fidelity, indemnity
and bonding companies; and similar
services regardless of whether or not the
performance thereof calls for the exercise or use of
the physical or mental faculties. The phrase sale or
exchange of services shall likewise include:
(1) The lease or the use of or the right or privilege
to use any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark,
trade brand or other like property or right;
xxxx
(7) The lease of motion picture films, films,
tapes and discs; and
(8) The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the
enumeration of the sale or exchange of services subject to VAT is not
exhaustive. The words, including, similar services, and shall likewise
include, indicate that the enumeration is by way of example only.[39]
Among those included in the enumeration is the lease of
motion picture films, films, tapes and discs. This, however, is not the
same as the showing or exhibition of motion pictures or films. As
pointed out by the CTA En Banc:
Exhibition in Blacks Law Dictionary is defined as To
show or display. x x x To produce anything in public
so that it may be taken into possession (6th ed., p.
573). While the word lease is defined as a contract
by which one owning such property grants to
another the right to possess, use and enjoy it on
specified period of time in exchange for periodic
payment of a stipulated price, referred to as rent
(Blacks Law Dictionary, 6th ed., p. 889). x x x[40]
Since the activity of showing motion pictures, films or movies
by cinema/ theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine whether
such activity falls under the phrase similar services.The intent of the
legislature must therefore be ascertained.
The
legislatur
e never
intended
operators
or
proprieto
rs of
cinema/t
heater
houses to
be
covered
by VAT
Under the NIRC of 1939,[41] the national government
imposed amusement tax on proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses, boxing exhibitions,
and other places of amusement, including cockpits, race tracks, and
cabaret.[42] In the case of theaters or cinematographs, the taxes were
first deducted, withheld, and paid by the proprietors, lessees, or
operators of such theaters or cinematographs before the gross receipts
were divided between the proprietors, lessees, or operators of the
theaters or cinematographs and the distributors of the
cinematographic films. Section 11[43] of the Local Tax Code,[44] however,
amended this provision by transferring the power to impose
amusement tax[45] on admission from theaters, cinematographs,
concert halls, circuses and other places of amusements exclusively to
the local government. Thus, when the NIRC of 1977[46] was enacted, the
national government imposed amusement tax only on proprietors,
lessees or operators of cabarets, day and night clubs, Jai-Alai and race
tracks.[47]
On January 1, 1988, the VAT Law[48] was promulgated. It
amended certain provisions of the NIRC of 1977 by imposing a multi-
stage VAT to replace the tax on original and subsequent sales tax and
percentage tax on certain services. It imposed VAT on sales of services
under Section 102 thereof, 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% percent of gross receipts derived
by any person engaged in the sale of services. The
 phrase sale of services means the performance of on gross receipts arising from admission to places
all kinds of services for others for a fee, of amusement has been transferred to the local
remuneration or consideration, including those governments to the exclusion of the national
performed or rendered by construction and service government.
contractors; stock, real estate, commercial, customs
and immigration brokers; lessors of personal xxxx
property; lessors or distributors of Since the promulgation of the Local Tax
cinematographic films; persons engaged in Code which took effect on June 28, 1973 none of
milling, processing, manufacturing or repacking the amendatory laws which amended the National
goods for others; and similar services regardless of Internal Revenue Code, including the value added
whether or not the performance thereof calls for tax law under Executive Order No. 273, has
the exercise or use of the physical or mental amended the provisions of Section 11 of the Local
faculties: Provided That the following services Tax Code. Accordingly, the sole jurisdiction for
performed in the Philippines by VAT-registered collection of amusement tax on admission receipts
persons shall be subject to 0%: in places of amusement rests exclusively on the
local government, to the exclusion of the national
(1) Processing manufacturing or government. Since the Bureau of Internal Revenue
repacking goods for other persons doing business is an agency of the national government, then it
outside the Philippines which goods are follows that it has no legal mandate to levy
subsequently exported, x x x amusement tax on admission receipts in the said
places of amusement.
xxxx
Considering the foregoing legal
Gross receipts means the total amount background, the provisions under Section 123 of
of money or its equivalent representing the the National Internal Revenue Code as
contract price, compensation or service fee, renumbered by Executive Order No. 273 (Sec. 228,
including the amount charged for materials old NIRC) pertaining to amusement taxes on
supplied with the services and deposits or advance places of amusement shall be implemented in
payments actually or constructively received accordance with BIR RULING, dated December 4,
during the taxable quarter for the service 1973 and BIR RULING NO. 231-86
performed or to be performed for another person, dated November 5, 1986 to wit:
excluding value-added tax.
x x x Accordingly, only the gross
(b) Determination of the tax. (1) Tax receipts of the amusement places derived from
billed as a separate item in the invoice. If the tax is sources other than from admission tickets shall
billed as a separate item in the invoice, the tax shall be subject to x x x amusement tax prescribed
be based on the gross receipts, excluding the tax. under Section 228 of the Tax Code, as
amended (now Section 123, NIRC, as amended by
(2) Tax not billed separately or is billed E.O. 273). The tax on gross receipts derived from
erroneously in the invoice. If the tax is not billed admission tickets shall be levied and collected
separately or is billed erroneously in the invoice, the by the city government pursuant to Section 23
of Presidential Decree No. 231, as amended x x
tax shall be determined by multiplying the gross
x or by the provincial government, pursuant to
receipts (including the amount intended to cover
Section 11 of P.D. 231, otherwise known as the
the tax or the tax billed erroneously) by
Local Tax Code. (Emphasis supplied)
1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as
On October 10, 1991, the LGC of 1991 was passed into
amended, however, were exempted from the coverage of VAT.[49]
law. The local government retained the power to impose amusement
tax on proprietors, lessees, or operators of theaters, cinemas, concert
On February 19, 1988, then Commissioner Bienvenido A. Tan,
halls, circuses, boxing stadia, and other places of amusement at a rate
Jr. issued RMC 8-88, which clarified that the power to impose
of not more than thirty percent (30%) of the gross receipts from
amusement tax on gross receipts derived from admission tickets was
admission fees under Section 140 thereof.[50] In the case of theaters or
exclusive with the local government units and that only the gross
cinemas, the tax shall first be deducted and withheld by their
receipts of amusement places derived from sources other than from
proprietors, lessees, or operators and paid to the local government
admission tickets were subject to amusement tax under the NIRC of
before the gross receipts are divided between said proprietors, lessees,
1977, as amended. Pertinent portions of RMC 8-88 read:
or operators and the distributors of the cinematographic
films. However, the provision in the Local Tax Code expressly excluding
Under the Local Tax Code (P.D. 231, as
the national government from collecting tax from the proprietors,
amended), the jurisdiction to levy amusement tax
lessees, or operators of theaters, cinematographs, concert halls, circuses
and other places of amusements was no longer included.
In 1994, RA 7716 restructured the VAT system by widening
its tax base and enhancing its administration. Three years later, RA 7716
was amended by RA 8241. Shortly thereafter, the NIRC of 1997[51] was
signed into law. Several amendments[52]were made to expand the
coverage of VAT. However, none pertain to cinema/theater operators
or proprietors. At present, only lessors or distributors of
cinematographic films are subject to VAT. While persons subject to
amusement tax[53] under the NIRC of 1997 are exempt from the
coverage of VAT.[54]
Based on the foregoing, the following facts can be
established:
(1) Historically, the activity of showing
motion pictures, films or movies by
cinema/theater operators or proprietors
has always been considered as a form of
entertainment subject to amusement tax.
(2) Prior to the Local Tax Code, all forms
of amusement tax were imposed by the
national government.
(3) When the Local Tax Code was
enacted, amusement tax on admission
tickets from theaters, cinematographs,
concert halls, circuses and other places of
amusements were transferred to the local
government.
(4) Under the NIRC of 1977, the national
government imposed amusement tax only
on proprietors, lessees or operators of
cabarets, day and night clubs, Jai-Alai and
race tracks.
(5) The VAT law was enacted to replace
the tax on original and subsequent sales tax
and percentage tax on certain services.
(6) When the VAT law was implemented,
it exempted persons subject to amusement
tax under the NIRC from the coverage of
VAT.
(7) When the Local Tax Code was
repealed by the LGC of 1991, the local
government continued to impose
amusement tax on admission tickets from
theaters, cinematographs, concert halls,
circuses and other places of amusements.
(8) Amendments to the VAT law have
been consistent in exempting persons
subject to amusement tax under the NIRC
from the coverage of VAT.
(9) Only lessors or distributors of
cinematographic films are included in the
coverage of VAT.
These reveal the legislative intent not to impose VAT on
persons already covered by the amusement tax. This holds true even in
the case of cinema/theater operators taxed under the LGC of 1991
precisely because the VAT law was intended to replace the percentage
tax on certain services. The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The
Local Tax Code, in transferring the power to tax gross receipts derived
by cinema/theater operators or proprietor from admission tickets to the
local government, did not intend to treat cinema/theater houses as a
separate class. No distinction must, therefore, be made between the
places of amusement taxed by the national government and those
taxed by the local government.
To hold otherwise would impose an unreasonable burden on
cinema/theater houses operators or proprietors, who would be paying
an additional 10%[55] VAT on top of the 30% amusement tax imposed
by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition
would result in injustice, as persons taxed under the NIRC of 1997 would
be in a better position than those taxed under the LGC of 1991. We
need not belabor that a literal application of a law must be rejected if it
will operate unjustly or lead to absurd results.[56] Thus, we are convinced
that the legislature never intended to include cinema/theater operators
or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax
Appeals,[57] to wit:
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.
The
repeal of
the Local
Tax Code
by the
LGC of
1991 is
not a
legal basis
for the
impositio
n of VAT
Petitioner, in issuing the assessment notices for deficiency
VAT against respondents, ratiocinated that:
 Basically, it was acknowledged that a
cinema/theater operator was then subject to
amusement tax under Section 260 of
Commonwealth Act No. 466, otherwise known as
the National Internal Revenue Code of 1939,
computed on the amount paid for admission. With
the enactment of the Local Tax Code under
Presidential Decree (PD) No. 231, dated June 28,
1973, the power of imposing taxes on gross
receipts from admission of persons to
cinema/theater and other places of amusement
had, thereafter, been transferred to the provincial
government, to the exclusion of the national or
municipal government (Sections 11 & 13, Local Tax
Code). However, the said provision containing the
exclusive power of the provincial government to
impose amusement tax, had also been repealed
and/or deleted by Republic Act (RA) No. 7160,
otherwise known as the Local Government Code of
1991, enacted into law on October 10,
1991. Accordingly, the enactment of RA No.
7160, thus, eliminating the statutory
prohibition on the national government to
impose business tax on gross receipts from
admission of persons to places of amusement,
led the way to the valid imposition of the VAT
pursuant to Section 102 (now Section 108) of
the old Tax Code, as amended by the Expanded
VAT Law (RA No. 7716) and which was
implemented beginning January 1,
1996.[58] (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a
legal basis for the imposition of VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission
tickets. The removal of the prohibition under the Local Tax Code did not
grant nor restore to the national government the power to impose
amusement tax on cinema/theater operators or proprietors. Neither
did it expand the coverage of VAT. Since the imposition of a tax is a
burden on the taxpayer, it cannot be presumed nor can it be extended
by implication. A law will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously.[59] As it is, the power to
impose amusement tax on cinema/theater operators or proprietors
remains with the local government.
on the gross receipts from admission to cinema houses must be struck
down. We cannot overemphasize that RMCs must not override,
supplant, or modify the law, but must remain consistent and in harmony
with, the law they seek to apply and implement.[60]
In view of the foregoing, there is no need to discuss whether
RMC No. 28-2001 complied with the procedural due process for tax
issuances as prescribed under RMC No. 20-86.
Rule on
tax
exemptio
n does
not apply
Moreover, contrary to the view of petitioner, respondents
need not prove their entitlement to an exemption from the coverage of
VAT. The rule that tax exemptions should be construed strictly against
the taxpayer presupposes that the taxpayer is clearly subject to the tax
being levied against him.[61] The reason is obvious: it is both illogical and
impractical to determine who are exempted without first determining
who are covered by the provision.[62] Thus, unless a statute imposes a
tax clearly, expressly and unambiguously, what applies is the equally
well-settled rule that the imposition of a tax cannot be presumed.[63] In
fact, in case of doubt, tax laws must be construed strictly against the
government and in favor of the taxpayer.[64]
WHEREFORE, the Petition is hereby DENIED. The assailed
April 30, 2008 Decision of the Court of Tax Appeals En Banc holding that
gross receipts derived by respondents from admission tickets in
showing motion pictures, films or movies are not subject to value-
added tax under Section 108 of the National Internal Revenue Code of
1997, as amended, and its June 24, 2008 Resolution denying the motion
for reconsideration are AFFIRMED.
SO ORDERED.

Revenue
Memoran
dum
Circular
No. 28-
2001 is
invalid

Considering that there is no provision of law imposing VAT

on the gross receipts of cinema/theater operators or proprietors
derived from admission tickets, RMC No. 28-2001 which imposes VAT
EN BANC
G.R. No. 168584 October 15, 2007
REPUBLIC OF THE PHILIPPINES, represented by THE
HONORABLE SECRETARY OF FINANCE, THE HONORABLE
COMMISSIONER OF BUREAU OF INTERNAL REVENUE, THE
HONORABLE COMMISSIONER OF CUSTOMS, and THE
COLLECTOR OF CUSTOMS OF THE PORT OF
SUBIC, petitioners,
vs.
HON. RAMON S. CAGUIOA, Presiding Judge, Branch 74,
RTC, Third Judicial Region, Olongapo City, INDIGO
DISTRIBUTION CORP., herein represented by ARIEL G.
CONSOLACION, W STAR TRADING AND WAREHOUSING
CORP., herein represented by HIERYN R. ECLARINAL,
FREEDOM BRANDS PHILS., CORP., herein represented by
ANA LISA RAMAT, BRANDED WAREHOUSE, INC., herein
represented by MARY AILEEN S. GOZUN, ALTASIA INC.,
herein represented by ALAN HARROW, TAINAN TRADE
(TAIWAN), INC., herein represented by ELENA RANULLO,
SUBIC PARK N’ SHOP, herein represented by NORMA
MANGALINO DIZON, TRADING GATEWAYS
INTERNATIONAL PHILS., herein represented by MA.
CHARINA FE C. RODOLFO, DUTY FREE SUPERSTORE (DFS),
herein represented by RAJESH R. SADHWANI, CHJIMES
TRADING INC., herein represented by ANGELO MARK M.
PICARDAL, PREMIER FREEPORT, INC., herein represented by
ROMMEL P. GABALDON, FUTURE TRADE SUBIC FREEPORT,
INC., herein represented by WILLIE S. VERIDIANO, GRAND
COMTRADE INTERNATIONAL CORP., herein represented by
JULIUS MOLINDA, and FIRST PLATINUM INTERNATIONAL,
INC., herein represented by ISIDRO M. MUÑOZ,respondents.
DECISION
CARPIO MORALES, J.:
Petitioners seek via petition for certiorari and prohibition to
annul (1) the May 4, 2005 Order1 issued by public respondent
Judge Ramon S. Caguioa of the Regional Trial Court (RTC),
Branch 74, Olongapo City, granting private respondents’
application for the issuance of a writ of preliminary injunction
and (2) the Writ of Preliminary Injunction2that was issued
pursuant to such Order, which stayed the implementation of
Republic Act (R.A.) No. 9334, AN ACT INCREASING THE EXCISE
TAX RATES IMPOSED ON ALCOHOL AND TOBACCO PRODUCTS,
AMENDING FOR THE PURPOSE SECTIONS 131, 141, 142, 143,
144, 145 AND 288 OF THE NATIONAL INTERNAL REVENUE
CODE OF 1997, AS AMENDED.
Petitioners likewise seek to enjoin, restrain and inhibit public
respondent from enforcing the impugned issuances and from
further proceeding with the trial of Civil Case No. 102-0-05.
The relevant facts are as follows:
In 1992, Congress enacted Republic Act (R.A) No. 72273 or the
Bases Conversion and Development Act of 1992 which, among
other things, created the Subic Special Economic and Freeport
Zone (SBF4) and the Subic Bay Metropolitan Authority (SBMA).
R.A. No. 7227 envisioned the SBF to be developed into a "self-
sustaining, industrial, commercial, financial and investment
center to generate employment opportunities in and around the
zone and to attract and promote productive foreign
investments."5 In line with this vision, Section 12 of the law
provided:
(b) The Subic Special Economic Zone shall be
operated and managed as a separate customs
territory ensuring free flow or movement of goods
and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide
incentives such as tax and duty-free importations of
raw materials, capital and equipment. However,
exportation or removal of goods from the territory
of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the
Philippines;
(c) The provisions of existing laws, rules and
regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed within
the Subic Special Economic Zone. In lieu of paying
taxes, three percent (3%) of the gross income earned
by all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the
National Government, one percent (1%) each to the
local government units affected by the declaration of
the zone in proportion to their population area, and
other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross
income earned by all businesses and enterprises within
the Subic Special Economic Zone to be utilized for the
development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other
municipalities contiguous to be base areas.
In case of conflict between national and local laws with
respect to tax exemption privileges in the Subic Special
Economic Zone, the same shall be resolved in favor of
the latter;
(d) No exchange control policy shall be applied and
free markets for foreign exchange, gold, securities and
future shall be allowed and maintained in the Subic
Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall
supervise and regulate the operations of banks and
other financial institutions within the Subic Special
Economic Zone;
 (f) Banking and finance shall be liberalized with the
establishment of foreign currency depository units of
local commercial banks and offshore banking units of
foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic
Zone whose continuing investment shall not be less
than Two hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under twenty-
one (21) years of age, shall be granted permanent
resident status within the Subic Special Economic Zone.
They shall have freedom of ingress and egress to and
from the Subic Special Economic Zone without any
need of special authorization from the Bureau of
Immigration and Deportation. The Subic Bay
Metropolitan Authority referred to in Section 13 of this
Act may also issue working visas renewal every two (2)
years to foreign executives and other aliens possessing
highly-technical skills which no Filipino within the Subic
Special Economic Zone possesses, as certified by the
Department of Labor and Employment. The names of
aliens granted permanent residence status and
working visas by the Subic Bay Metropolitan Authority
shall be reported to the Bureau of Immigration and
Deportation within thirty (30) days after issuance
thereof;
x x x x. (Emphasis supplied)
Pursuant to the law, private respondents Indigo Distribution
Corporation, W Star Trading and Warehousing Corporation,
Freedom Brands Philippines Corporation, Branded Warehouse,
Inc., Altasia, Inc., Tainan Trade (Taiwan) Inc., Subic Park ‘N Shop,
Incorporated, Trading Gateways International Philipines, Inc.,
Duty Free Superstore (DFS) Inc., Chijmes Trading, Inc., Premier
Freeport, Inc., Future Trade Subic Freeport, Inc., Grand Comtrade
Int’l., Corp., and First Platinum International, Inc., which are all
domestic corporations doing business at the SBF, applied for
and were granted Certificates of Registration and Tax
Exemption6 by the SBMA.
These certificates allowed them to engage in the business either
of trading, retailing or wholesaling, import and export,
warehousing, distribution and/or transshipment of general
merchandise, including alcohol and tobacco products, and
uniformly granted them tax exemptions for such importations as
contained in the following provision of their respective
Certificates:
ARTICLE IV. The Company shall be entitled to tax
and duty-free importation of raw materials, capital
equipment, and household and personal items for
use solely within the Subic Bay Freeport
Zonepursuant to Sections 12(b) and 12(c) of the Act
and Sections 43, 45, 46 and 49 of the Implementing
Rules. All importations by the Company are exempt
from inspection by the Societe Generale de
Surveillance if such importations are delivered
immediately to and for use solely within the Subic Bay
Freeport Zone. (Emphasis supplied)
Congress subsequently passed R.A. No. 9334, however, effective
on January 1, 2005,7 Section 6 of which provides:
Sec. 6. Section 131 of the National Internal Revenue
Code of 1977, as amended, is hereby amended to read
as follows:
Sec. 131. Payment of Excise Taxes on Imported Articles.
–
(A) Persons Liable. – Excise taxes on imported articles
shall be paid by the owner or importer to the Customs
Officers, conformably with the regulations of the
Department of Finance and before the release of such
articles from the customshouse or by the person who
is found in possession of articles which are exempt
from excise taxes other than those legally entitled to
exemption.
In the case of tax-free articles brought or imported into
the Philippines by persons, entities or agencies exempt
from tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entities, the purchasers or recipients shall be
considered the importers thereof, and shall be liable for
the duty and internal revenue tax due on such
importation.
The provision of any special or general law to the
contrary notwithstanding, the importation of cigars
and cigarettes, distilled spirits, fermented liquors
and wines into the Philippines, even if destined for
tax and duty free shops, shall be subject to all
applicable taxes, duties, charges, including excise
taxes due thereon. This shall apply to cigars and
cigarettes, distilled spirits, fermented liquors and
wines brought directly into the duly chartered or
legislated freeports of the Subic Economic Freeport
Zone, created under Republic Act No. 7227; x x x and
such other freeports as may hereafter be established or
created by law: Provided, further, That importations of
cigars and cigarettes, distilled spirits, fermented liquors
and wines made directly by a government-owned and
operated duty-free shop, like the Duty Free Philippines
(DFP), shall be exempted from all applicable duties
only: x x x Provided, finally, That the removal and
transfer of tax and duty-free goods, products,
machinery, equipment and other similar articles other
than cigars and cigarettes, distilled spirits, fermented
liquors and wines, from one Freeport to another
Freeport, shall not be deemed an introduction into the
Philippine customs territory. x x x. (Emphasis and
underscoring supplied)
On the basis of Section 6 of R.A. No. 9334, SBMA issued on
January 10, 2005 a Memorandum8 declaring that effective
January 1, 2005, all importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines into the SBF, including those
intended to be transshipped to other free ports in the
Philippines, shall be treated as ordinary importations subject to
all applicable taxes, duties and charges, including excise taxes.
Meanwhile, on February 3, 2005, former Bureau of Internal
Revenue (BIR) Commissioner Guillermo L. Parayno, Jr. requested
then Customs Commissioner George M. Jereos to immediately
collect the excise tax due on imported alcohol and tobacco
products brought to the Duty Free Philippines (DFP) and
Freeport zones.9
Accordingly, the Collector of Customs of the port of Subic
directed the SBMA Administrator to require payment of all
appropriate duties and taxes on all importations of cigars and
cigarettes, distilled spirits, fermented liquors and wines; and for
all transactions involving the said items to be covered from then
on by a consumption entry and no longer by a warehousing
entry.10
On February 7, 2005, SBMA issued a Memorandum11 directing
the departments concerned to require locators/importers in the
SBF to pay the corresponding duties and taxes on their
importations of cigars, cigarettes, liquors and wines before said
items are cleared and released from the freeport. However,
certain SBF locators which were "exclusively engaged in the
transshipment of cigarette products for foreign destinations"
were allowed by the SBMA to process their import documents
subject to their submission of an Undertaking with the Bureau
of Customs.12
On February 15, 2005, private respondents wrote the offices of
respondent Collector of Customs and the SBMA Administrator
requesting for a reconsideration of the directives on the
imposition of duties and taxes, particularly excise taxes, on their
shipments of cigars, cigarettes, wines and liquors.13 Despite
these letters, however, they were not allowed to file any
warehousing entry for their shipments.
Thus, private respondent enterprises, through their
representatives, brought before the RTC of Olongapo City a
special civil action for declaratory relief14 to have certain
provisions of R.A. No. 9334 declared as unconstitutional, which
case was docketed as Civil Case No. 102-0-05.
In the main, private respondents submitted that (1) R.A. No. 9334
should not be interpreted as altering, modifying or amending
the provisions of R.A. No. 7227 because repeals by implication
are not favored; (2) a general law like R.A. No. 9334 cannot
amend R.A. No. 7727, which is a special law; and (3) the assailed
law violates the one bill-one subject rule embodied in Section
26(1), Article VI15 of the Constitution as well as the constitutional
proscription against the impairment of the obligation of
contracts.16
Alleging that great and irreparable loss and injury would befall
them as a consequence of the imposition of taxes on alcohol and
tobacco products brought into the SBF, private respondents
prayed for the issuance of a writ of preliminary injunction and/or
Temporary Restraining Order (TRO) and preliminary mandatory
injunction to enjoin the directives of herein petitioners.
Petitioners duly opposed the private respondents’ prayer for the
issuance of a writ of preliminary injunction and/or TRO, arguing
that (1) tax exemptions are not presumed and even when
granted, are strictly construed against the grantee; (2) an
increase in business expense is not the injury contemplated by
law, it being a case of damnum absque injuria; and (3) the
drawback mechanism established in the law clearly negates the
possibility of the feared injury.17
Petitioners moreover pointed out that courts are enjoined from
issuing a writ of injunction and/or TRO on the grounds of an
alleged nullity of a law, ordinance or administrative regulation or
circular or in a manner that would effectively dispose of the main
case. Taxes, they stressed, are the lifeblood of the government
and their prompt and certain availability is an imperious need.
They maintained that greater injury would be inflicted on the
public should the writ be granted.
On May 4, 2005, the court a quo granted private respondents’
application for the issuance of a writ of preliminary injunction,
after it found that the essential requisites for the issuance of a
preliminary injunction were present.
As investors duly licensed to operate inside the SBF, the trial
court declared that private respondents were entitled to enjoy
the benefits of tax incentives under R.A. No. 7227, particularly
the exemption from local and national taxes under Section 12(c);
the aforecited provision of R.A. No. 7227, coupled with private
respondents’ Certificates of Registration and Tax Exemption
from the SBMA, vested in them a clear and unmistakable right
or right in esse that would be violated should R.A. No. 9334 be
implemented; and the invasion of such right is substantial and
material as private respondents would be compelled to pay
more than what they should by way of taxes to the national
government.
The trial court thereafter ruled that the prima facie presumption
of validity of R.A. No. 9334 had been overcome by private
respondents, it holding that as a partial amendment of the
National Internal Revenue Code (NIRC) of 1997,18 as amended,
R.A. No. 9334 is a general law that could not prevail over a
special statute like R.A. No. 7227 notwithstanding the fact that
the assailed law is of later effectivity.
The trial court went on to hold that the repealing provision of
Section 10 of R.A. No. 9334 does not expressly mention the
repeal of R. A. No. 7227, hence, its repeal can only be an implied
repeal, which is not favored; and since R.A. No. 9334 imposes
new tax burdens, whatever doubts arising therefrom should be
resolved against the taxing authority and in favor of the
taxpayer.
The trial court furthermore held that R.A. No. 9334 violates the
terms and conditions of private respondents’ subsisting
contracts with SBMA, which are embodied in their Certificates of
Registration and Exemptions in contravention of the
constitutional guarantee against the impairment of contractual
obligations; that greater damage would be inflicted on private
respondents if the writ of injunction is not issued as compared
to the injury that the government and the general public would
suffer from its issuance; and that the damage that private
respondents are bound to suffer once the assailed statute is
implemented – including the loss of confidence of their foreign
principals, loss of business opportunity and unrealized income,
and the danger of closing down their businesses due to
uncertainty of continued viability – cannot be measured
accurately by any standard.
With regard to the rule that injunction is improper to restrain the
collection of taxes under Section 21819 of the NIRC, the trial
court held that what is sought to be enjoined is not per se the
collection of taxes, but the implementation of a statute that has
been found preliminarily to be unconstitutional.
Additionally, the trial court pointed out that private respondents’
taxes have not yet been assessed, as they have not filed
consumption entries on all their imported tobacco and alcohol
products, hence, their duty to pay the corresponding excise
taxes and the concomitant right of the government to collect the
same have not yet materialized.
On May 11, 2005, the trial court issued a Writ of Preliminary
Injunction directing petitioners and the SBMA Administrator as
well as all persons assisting or acting for and in their behalf "1)
to allow the operations of [private respondents] in accordance
with R.A. No. 7227; 2) to allow [them] to file warehousing entries
instead of consumption entries as regards their importation of
tobacco and alcohol products; and 3) to cease and desist from
implementing the pertinent provisions of R.A. No. 9334 by not
compelling [private respondents] to immediately pay duties and
taxes on said alcohol and tobacco products as a condition to
their removal from the port area for transfer to the warehouses
of [private respondents]."20
The injunction bond was approved at One Million pesos
(P1,000,000).21
Without moving for reconsideration, petitioners have come
directly to this Court to question the May 4, 2005 Order and the
Writ of Preliminary Injunction which, they submit, were issued by
public respondent with grave abuse of discretion amounting to
lack or excess of jurisdiction.
In particular, petitioners contend that public respondent
peremptorily and unjustly issued the injunctive writ despite the
absence of the legal requisites for its issuance, resulting in heavy
government revenue losses.22 They emphatically argue that
since the tax exemption previously enjoyed by private
respondents has clearly been withdrawn by R.A. No. 9334,
private respondents do not have any right in esse nor can they
invoke legal injury to stymie the enforcement of R.A. No. 9334.
Furthermore, petitioners maintain that in issuing the injunctive
writ, public respondent showed manifest bias and prejudice and
prejudged the merits of the case in utter disregard of the caveat
issued by this Court in Searth Commodities Corporation, et al. v.
Court of Appeals23 and Vera v. Arca.24
Regarding the P1 million injunction bond fixed by public
respondent, petitioners argue that the same is grossly
disproportionate to the damages that have been and continue
to be sustained by the Republic.
In their Reply25 to private respondents’ Comment, petitioners
additionally plead public respondent’s bias and partiality in
allowing the motions for intervention of a number of
corporations26 without notice to them and in disregard of their
present pending petition for certiorari and prohibition before
this Court. The injunction bond filed by private respondent
Indigo Distribution Corporation, they stress, is not even
sufficient to cover all the original private respondents, much less,
intervenor-corporations.
The petition is partly meritorious.
At the outset, it bears emphasis that only questions relating to
the propriety of the issuance of the May 4, 2005 Order and the
Writ of Preliminary Injunction are properly within the scope of
the present petition and shall be so addressed in order to
determine if public respondent committed grave abuse of
discretion. The arguments raised by private respondents which
pertain to the constitutionality of R.A. No. 9334 subject matter
of the case pending litigation before the trial court have no
bearing in resolving the present petition.
Section 3 of Rule 58 of the Revised Rules of Court provides:
SEC. 3. Grounds for issuance of preliminary injunction.
– A preliminary injunction may be granted when it is
established.
(a) That the applicant is entitled to the relief demanded,
and the whole or part of such relief consists in
restraining the commission or continuance of the act or
acts complained of, or in requiring the performance of
an act or acts, either for a limited period or perpetually;
(b) That the commission, continuance or non-
performance of the act or acts complained of during
the litigation would probably work injustice to the
applicant; or
(c) That a party, court, agency or a person is doing,
threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in
violation of the rights of the applicant respecting the
 subject of the action or proceeding, and tending to those legally entitled those legally entitled
render the judgment ineffectual. to exemption. to exemption.

For a writ of preliminary injunction to issue, the plaintiff must be In the case of tax-free In the case of tax-
able to establish that (1) there is a clear and unmistakable right articles brought or free articles brought
to be protected, (2) the invasion of the right sought to be imported into the or imported into the
protected is material and substantial, and (3) there is an urgent Philippines by Philippines by
and paramount necessity for the writ to prevent serious persons, entities or persons, entities or
damage.27 agencies exempt agencies exempt
from tax which are from tax which are
Conversely, failure to establish either the existence of a clear and subsequently sold, subsequently sold,
positive right which should be judicially protected through the transferred or transferred or
writ of injunction, or of the acts or attempts to commit any act exchanged in the exchanged in the
which endangers or tends to endanger the existence of said Philippines to non- Philippines to non-
right, or of the urgent need to prevent serious damage, is a exempt persons or exempt persons or
sufficient ground for denying the preliminary injunction.28 entities, the entities, the
purchasers or purchasers or
It is beyond cavil that R.A. No. 7227 granted private respondents recipients shall be recipients shall be
exemption from local and national taxes, including excise taxes, considered the considered the
on their importations of general merchandise, for which reason importers thereof, importers thereof,
they enjoyed tax-exempt status until the effectivity of R.A. No. and shall be liable for and shall be liable
9334. the duty and internal for the duty and
revenue tax due on internal revenue tax
By subsequently enacting R.A. No. 9334, however, Congress such importation. due on such
expressed its intention to withdraw private respondents’ tax importation.
exemption privilege on their importations of cigars, cigarettes, The provision of any
distilled spirits, fermented liquors and wines. Juxtaposed to show special or general law The provision of
this intention are the respective provisions of Section 131 of the to the contrary any special or
NIRC before and after its amendment by R.A. No. 9334: notwithstanding, the general law to the
importation of cigars contrary
and cigarettes, notwithstanding,
x x x x. the importation of
distilled spirits,
cigars and
fermented liquors
Sec. 131 of NIRC Sec. 131, as amended cigarettes, distilled
and wines into the
before R.A. No. 9334 by R.A. No. 9334 spirits, fermented
Philippines, even if
liquors and wines
Sec. 131. Payment of Sec. 131. Payment of destined for tax and into the
Excise Taxes on Excise Taxes on duty free shops, shall Philippines, even if
Imported Articles. – Imported Articles. – be subject to all destined for tax
applicable taxes, and duty free
(A) Persons Liable. – (A) Persons Liable. – duties, charges, shops, shall be
Excise taxes on Excise taxes on including excise taxes subject to all
imported articles shall imported articles due thereon. applicable taxes,
be paid by the owner shall be paid by the Provided, duties, charges,
or importer to the owner or importer to however, That this including excise
Customs Officers, the Customs shall not apply to taxes due
conformably with the Officers, cigars and thereon. This
regulations of the conformably with cigarettes, shall apply to
Department of the regulations of fermented spirits cigars and
and wines brought cigarettes, distilled
Finance and before the Department of
directly into the spirits, fermented
the release of such Finance and before
duly chartered or liquors and wines
articles from the the release of such
legislated freeports brought directly
customs house or by articles from the
of the Subic into the duly
the person who is customs house or by chartered or
Economic Freeport
found in possession the person who is legislated freeports
Zone, created under
of articles which are found in possession Republic Act No. of the Subic
exempt from excise of articles which are 7227; the Cagayan Economic Freeport
taxes other than exempt from excise Special Economic Zone, created
taxes other than Zone and Freeport, under Republic Act
created under No. 7227; the statutes: Provided, introduction into the
Republic Act No. Cagayan Special finally, That the Philippine customs
7922; and the Economic Zone and removal and transfer territory.
Zamboanga City Freeport, created of tax and duty-free
Special Economic under Republic Act goods, products, x x x x.
Zone, created under No. 7922; and the machinery,
Republic Act No. Zamboanga City equipment and other
7903, and are not Special Economic similar articles, from
transshipped to any Zone, created under one freeport to
other port in the Republic Act No. another freeport,
Philippines: Provided, 7903, and such other shall not be deemed
further, That freeports as may an introduction into
importations of cigars hereafter be the Philippine
and cigarettes, established or customs territory.
distilled spirits, created by
fermented liquors law: Provided,
x x x x.
and wines made further, That
directly by a importations of
cigars and (Emphasis and underscoring supplied)
government-owned
and operated duty- cigarettes, distilled
free shop, like the spirits, fermented To note, the old Section 131 of the NIRC expressly provided that
Duty Free Philippines liquors and wines all taxes, duties, charges, including excise taxes shall not apply to
(DFP), shall be made directly by a importations of cigars, cigarettes, fermented spirits and wines
exempted from all government-owned brought directly into the duly chartered or legislated freeports
applicable duties, and operated duty- of the SBF.
charges, including free shop, like the
excise tax due Duty Free On the other hand, Section 131, as amended by R.A. No. 9334,
thereon; Provided still Philippines (DFP), now provides that such taxes, duties and charges, including
further, That such shall be exempted excise taxes, shall apply to importation of cigars and cigarettes,
articles directly from all applicable distilled spirits, fermented liquors and wines into the SBF.
imported by a duties
government-owned only: Provided still Without necessarily passing upon the validity of the withdrawal
and operated duty- further, That such of the tax exemption privileges of private respondents, it
free shop, like the articles directly behooves this Court to state certain basic principles and
Duty-Free Philippines, imported by a observations that should throw light on the propriety of the
shall be labeled "tax government-owned issuance of the writ of preliminary injunction in this case.
and duty-free" and and operated duty-
"not for resale": free shop, like the First. Every presumption must be indulged in favor of the
Provided, still further, Duty-Free constitutionality of a statute.29 The burden of proving the
That if such articles Philippines, shall be unconstitutionality of a law rests on the party assailing the
brought into the duly labeled "tax and law.30 In passing upon the validity of an act of a co-equal and
chartered or duty-free" and "not coordinate branch of the government, courts must ever be
legislated freeports for resale": Provided, mindful of the time-honored principle that a statute is presumed
under Republic Acts finally, That the to be valid.
Nos. 7227, 7922 and removal and transfer
7903 are of tax and duty-free
Second. There is no vested right in a tax exemption, more so
subsequently goods, products,
when the latest expression of legislative intent renders its
introduced into the machinery,
continuance doubtful. Being a mere statutory privilege,31 a tax
Philippine customs equipment and
exemption may be modified or withdrawn at will by the granting
territory, then such other similar articles
authority.32
articles shall, upon other than cigars
such introduction, be and cigarettes,
To state otherwise is to limit the taxing power of the State, which
deemed imported distilled spirits,
is unlimited, plenary, comprehensive and supreme. The power to
into the Philippines fermented liquors
impose taxes is one so unlimited in force and so searching in
and shall be subject and wines, from one
extent, it is subject only to restrictions which rest on the
to all imposts and Freeport to another
discretion of the authority exercising it.33
excise taxes provided Freeport, shall not
herein and other be deemed an
Third. As a general rule, tax exemptions are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing
authority.34 The burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by the exemption
so claimed.35 In case of doubt, non-exemption is favored.36
Fourth. A tax exemption cannot be grounded upon the
continued existence of a statute which precludes its change or
repeal.37 Flowing from the basic precept of constitutional law
that no law is irrepealable, Congress, in the legitimate exercise
of its lawmaking powers, can enact a law withdrawing a tax
exemption just as efficaciously as it may grant the same under
Section 28(4) of Article VI38 of the Constitution. There is no
gainsaying therefore that Congress can amend Section 131 of
the NIRC in a manner it sees fit, as it did when it passed R.A. No.
9334.
Fifth. The rights granted under the Certificates of Registration
and Tax Exemption of private respondents are not absolute and
unconditional as to constitute rights in esse – those clearly
founded on or granted by law or is enforceable as a matter of
law.39
These certificates granting private respondents a "permit to
operate" their respective businesses are in the nature of licenses,
which the bulk of jurisprudence considers as neither a property
nor a property right.40 The licensee takes his license subject to
such conditions as the grantor sees fit to impose, including its
revocation at pleasure.41 A license can thus be revoked at any
time since it does not confer an absolute right.42
While the tax exemption contained in the Certificates of
Registration of private respondents may have been part of the
inducement for carrying on their businesses in the SBF, this
exemption, nevertheless, is far from being contractual in nature
in the sense that the non-impairment clause of the Constitution
can rightly be invoked.43
Sixth. Whatever right may have been acquired on the basis of
the Certificates of Registration and Tax Exemption must yield to
the State’s valid exercise of police power.44 It is well to remember
that taxes may be made the implement of the police power.45
It is not difficult to recognize that public welfare and necessity
underlie the enactment of R.A. No. 9334. As petitioners point
out, the now assailed provision was passed to curb the
pernicious practice of some unscrupulous business enterprises
inside the SBF of using their tax exemption privileges for
smuggling purposes. Smuggling in whatever form is bad
enough; it is worse when the same is allegedly perpetrated,
condoned or facilitated by enterprises hiding behind the cloak
of their tax exemption privileges.
Seventh. As a rule, courts should avoid issuing a writ of
preliminary injunction which would in effect dispose of the main
case without trial.46 This rule is intended to preclude a
prejudgment of the main case and a reversal of the rule on the
burden of proof since by issuing the injunctive writ, the court
would assume the proposition that petitioners are inceptively
duty bound to prove.47
Eighth. A court may issue a writ of preliminary injunction only
when the petitioner assailing a statute has made out a case of
unconstitutionality or invalidity strong enough, in the mind of
the judge, to overcome the presumption of validity, in
addition to a showing of a clear legal right to the remedy
sought.48
Thus, it is not enough that petitioners make out a case of
unconstitutionality or invalidity to overcome the prima
faciepresumption of validity of a statute; they must also be able
to show a clear legal right that ought to be protected by the
court. The issuance of the writ is therefore not proper when the
complainant’s right is doubtful or disputed.49
Ninth. The feared injurious effects of the imposition of duties,
charges and taxes on imported cigars, cigarettes, distilled spirits,
fermented liquors and wines on private respondents’ businesses
cannot possibly outweigh the dire consequences that the non-
collection of taxes, not to mention the unabated smuggling
inside the SBF, would wreak on the government. Whatever
damage would befall private respondents must perforce take a
back seat to the pressing need to curb smuggling and raise
revenues for governmental functions.
All told, while the grant or denial of an injunction generally rests
on the sound discretion of the lower court, this Court may and
should intervene in a clear case of abuse.50
One such case of grave abuse obtained in this case when public
respondent issued his Order of May 4, 2005 and the Writ of
Preliminary Injunction on May 11, 200551 despite the absence of
a clear and unquestioned legal right of private respondents.
In holding that the presumption of constitutionality and validity
of R.A. No. 9334 was overcome by private respondents for the
reasons public respondent cited in his May 4, 2005 Order, he
disregarded the fact that as a condition sine qua non to the
issuance of a writ of preliminary injunction, private respondents
needed also to show a clear legal right that ought to be
protected. That requirement is not satisfied in this case.
To stress, the possibility of irreparable damage without proof of
an actual existing right would not justify an injunctive relief.52
Besides, private respondents are not altogether lacking an
appropriate relief under the law. As petitioners point out in their
Petition53 before this Court, private respondents may avail
themselves of a tax refund or tax credit should R.A. No. 9334 be
finally declared invalid.
Indeed, Sections 20454 and 22955 of the NIRC provide for the
recovery of erroneously or illegally collected taxes which would
be the nature of the excise taxes paid by private respondents
should Section 6 of R.A. No. 9334 be declared unconstitutional
or invalid.
It may not be amiss to add that private respondents can also opt
not to import, or to import less of, those items which no longer
enjoy tax exemption under R.A. No. 9334 to avoid the payment
of taxes thereon.
The Court finds that public respondent had also ventured into
the delicate area which courts are cautioned from taking when
deciding applications for the issuance of the writ of preliminary
injunction. Having ruled preliminarily against the prima
facie validity of R.A. No. 9334, he assumed in effect the
proposition that private respondents in their petition for
declaratory relief were duty bound to prove, thereby shifting to
petitioners the burden of proving that R.A. No. 9334 is not
unconstitutional or invalid.
In the same vein, the Court finds public respondent to have
overstepped his discretion when he arbitrarily fixed the
injunction bond of the SBF enterprises at only P1million.
The alleged sparseness of the testimony of Indigo Corporation’s
representative56 on the injury to be suffered by private
respondents may be excused because evidence for a preliminary
injunction need not be conclusive or complete. Nonetheless,
considering the number of private respondent enterprises and
the volume of their businesses, the injunction bond is
undoubtedly not sufficient to answer for the damages that the
government was bound to suffer as a consequence of the
suspension of the implementation of the assailed provisions of
R.A. No. 9334.
Rule 58, Section 4(b) provides that a bond is executed in favor
of the party enjoined to answer for all damages which it may
sustain by reason of the injunction. The purpose of the injunction
bond is to protect the defendant against loss or damage by
reason of the injunction in case the court finally decides that the
plaintiff was not entitled to it, and the bond is usually
conditioned accordingly.57
Recalling this Court’s pronouncements in Olalia v. Hizon58 that:
x x x [T]here is no power the exercise of which is more
delicate, which requires greater caution, deliberation
and sound discretion, or more dangerous in a doubtful
case, than the issuance of an injunction. It is the strong
arm of equity that should never be extended unless to
cases of great injury, where courts of law cannot afford
an adequate or commensurate remedy in damages.
Every court should remember that an injunction is a
limitation upon the freedom of action of the defendant
and should not be granted lightly or precipitately. It
should be granted only when the court is fully satisfied
that the law permits it and the emergency demands it,
it cannot be overemphasized that any injunction that restrains
the collection of taxes, which is the inevitable result of the
suspension of the implementation of the assailed Section 6 of
R.A. No. 9334, is a limitation upon the right of the government
to its lifeline and wherewithal.
The power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.59 That the enforcement of
tax laws and the collection of taxes are of paramount importance
for the sustenance of government has been repeatedly
observed. Taxes being the lifeblood of the government that
should be collected without unnecessary hindrance,60 every
precaution must be taken not to unduly suppress it.
Whether this Court must issue the writ of prohibition, suffice it
to stress that being possessed of the power to act on the petition
for declaratory relief, public respondent can proceed to
determine the merits of the main case. To halt the proceedings
at this point may be acting too prematurely and would not be in
keeping with the policy that courts must decide controversies on
the merits.
Moreover, lacking the requisite proof of public respondent’s
alleged partiality, this Court has no ground to prohibit him from
proceeding with the case for declaratory relief. For these
reasons, prohibition does not lie.
WHEREFORE, the Petition is PARTLY GRANTED. The writ of
certiorari to nullify and set aside the Order of May 4, 2005 as well
as the Writ of Preliminary Injunction issued by respondent Judge
Caguioa on May 11, 2005 is GRANTED. The assailed Order and
Writ of Preliminary Injunction are hereby declared NULL AND
VOID and accordingly SET ASIDE. The writ of prohibition
prayed for is, however, DENIED.
SO ORDERED.
[G.R. No. 119252. August 18, 1997]
COMMISIONER OF INTERNAL REVENUE and COMMISIONER
OF CUSTOMS, petitioners, vs. HON. APOLINARIO B.
SANTOS, in his capacity as Presiding Judge of the
Regional Trial Court, Branch 67, Pasig City;
ANTONIO M. MARCO; JEWELRY BY MARCO & CO.,
INC., and GUILD OF PHILIPPINE JEWELLERS,
INC., respondents.
DECISION
HERMOSISIMA, JR., J.:
Of grave concern to this Court is the judicial
pronouncement of the court a quo that certain provisions of the
Tariff & Customs Code and the National Internal Revenue Code
are unconstitutional. This provokes the issue: Can the Regional
Trial Courts declare a law inoperative and without force and
effect or otherwise unconstitutional? If it can, under what
circumstances?
In this petition, the Commissioner of Internal Revenue and
the Commissioner of Customs jointly seek the reversal of the
Decision,[1] dated February 16, 1995, of herein public
respondent, Hon. Apolinario B. Santos, Presiding Judge of
Branch 67 of the Regional Trial Court of Pasig City.
The following facts, concisely related in the petition[2] of
the Office of the Solicitor General, appear to be undisputed:
"1. Private respondent Guild of Philippine Jewelers, Inc., is an
association of Filipino jewelers engaged in the manufacture of
jewelers (sic) and allied undertakings. Among its members are
Hans Brumann, Inc., Miladay Jewels Inc., Mercelles, Inc., Solid
Gold International Traders inc., Diagem Trading Corporation,
and Private respondent Jewelry by Marco & Co., Inc. Private
respondent Antonio M. Marco is the President of the Guild.
2. On August 5, 1988, Felicidad L. Viray, then Regional Director,
Region No. 4-A of the Bureau of Internal Revenue, acting for and
in behalf of the Commissioner of Internal Revenue, issued
Regional Mission Order No. 109-88 to BIR officers, led by Eliseo
Corcega, to conduct surveillance, monitoring, and inventory of
all imported articles of Hans Brumann, Inc., and place the same
under preventive embargo. The duration of the mission was
from August 8 to August 20, 1988 (Exhibit 1; Exhibit A).
3. On August 17, 1988, persuant to the aforementioned Mission
Order, the BIR officers proceeded to the establishment of Hans
Brumann, Inc., served the Mission Order, and informed the
establishment that they were going to make an inventory of the
articles involved to see if the proper taxes thereon have been
paid. They then made an inventory of the articles displayed in
the cabinets with the assistance of an employee of the
establishment. They listed down the articles, which list was
signed by the assistant employee. They also requested the
presentation of proof of necessary payments for excise tax and
value-added tax on said articles (pp, 10-15, TSN April 12,1993,
Exhibits 2, 2-A, 3, 3-a).
4. The BIR officers requested the establishment not to sell the
articles until it can be proven that the necessary taxes thereon
have been paid. Accordingly, Mr. Hans Brumann, the owner of
the establishment, signed a receipt for Goods, Articles, and
Things Seized under Authority of the National Internal Revenue
Code (dated August 17, 1988), acknowledging that the articles
inventoried have been seized and left in his possession, and
promising not to dispose of the same without authority of the
Commissioner of Internal Revenue pending investigation.[3]
5. Subsequently, BIR officer Eliseo Corcega submitted to his
superiors a report of the inventory conducted and a
computation of the value-added tax and ad valorem tax on the
articles for evaluation and disposition.[4]
6. Mr. Hans Brumann, the owner of the establishment, never filed
a protest with the BIR on the preventive embargo of the
articles.[5]
7. On October 17, 1988, Letter of Authority No. 0020596 was
issued by Deputy Commissioner Eufracio D. Santos to BIR
officers to examine the books of accounts and other accounting
records of Hans Brumann, Inc., for stocktaking investigation for
excise tax purposes for the period January 1, 1988 to present
(Exhibit C). In a latter dated October 27, 1988, in connection with
the physical count of the inventory (stocks on hand) pursuant to
said Letter of Authority, Hans Brumann, Inc. was requested to
prepare and make available to the BIR the documents indicated
therein (Exhibit 'D').
8. Hans Brumann, inc., did not produce the documents
requested by the BIR.[6]
9. Similar Letters of Authority were issued to BIR officers to
examine the books of accounts ans other accounting records of
Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International
Traders, Inc., (Exhibit E, G and N) and Diagem Trading
Corporation[7] for stocktaking/investigation for excise tax
pirpose for the period January 1, 1988 to present.
10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there
is no account of what actually transpired in the implementation
of the Letters of Authority.
11. In the case of Solid Gold International Traders Corporation,
the BIR officers made an inventory of the articles in the
establishment.[8] The same is true with respect to Diagem
Traders Corporation.[9]
12. On November 29, 1988, private respondents Antonio M.
Marco and Jewelry By Marco & Co., Inc. filed with the Regional
Trial Court, National Capital Judicial Region, Pasig City, Meto
Manila, a petition for declaratory relief with writ of preliminary
injunction and/or temporary restraining order against herein
petitioners and Revenue Regional Director Felicidad L. Viray
(docketed as Civil Case No. 56736) praying that Sections 126,
127(a) and (b) and 150 (a) of the National Internal Revenue Code
and Hdg. No 71.01, 71.02, 71.03 and 71.04, Chapter 71 of the
Tariff and Customs Code of the Philippines be declared
unconstitutional and void, and that the Commissioner of Internal
Revenue and Customs be prevented or enjoined from issuing
mission orders and other orders of similar nature. x x x
13. On February 9, 1989, herein petitioners filed their answer to
the petition. x x x
14. On October 16, 1989, private respondents filed a Motion with
Leave to Amend Petition by including as petitioner the Guild of
Philippine Jewelers, Inc., which motion was granted. x x x
15. The case, which was originally assigned to Branch 154, was
later reassigned to Branch 67.
16. On February 16, 1995, public respondent rendered a
decision, the dispositive portion of which reads:
'In view of the foregoing reflections, judgment is hereby
rendered, as follows:
1. Declaring Section 104 of the Tariff and the Custom Code of
the Philippines, Hdg, 71.01, 71.02, 71.03, and 71.04, Chapter 71
as amended by Executive Order No. 470, imposing three to ten
(3% to 10%) percent tariff and customs duty on natural and
cultured pearls and precious or semi-precious stones, and
Section 150 par. (a)the National Internal Revenue Code of 1977,
as amended, renumbered and rearranged by Executive Order
273, imposing twenty (20%) percent excise tax on jewelry, pearls
and other precious stones, as INOPERATIVE and WITHOUT
FORCE and EFFECT insofar as petitioners are concerned.
2. Enforcement of the same is hereby enjoined.
No cost.
SO ORDERED.
Section 150 (a) of Executive Order No. 273 reads:
SEC. 150. Non-essential goods. There shall be levied, assessed
and collected a tax equivalent to 20% based on the wholesale
price or the value of importation used by the Bureau of Customs
in determining tariff and customs duties; net of the excise tax
and value-added tax, of the following goods:
(a) All goods commonly or commercially known as jewelry,
whether real or imitation, pearls, precious and semi-precious
stones and imitations thereof; goods made of, or ornamented,
mounted and fitted with, precious metals or imitations thereof
or ivory (not including surgical and dental instruments, silver-
plated wares, frames or mountings for spectacles or eyeglasses,
and dental gold or gold alloys and other precious metals used
in filling, mounting or fitting of the teeth); opera glasses and
lorgnettes. The term precious metals shall include platinum,
gold, silver, and other metals of similar or greater value. The
term imitation thereof shall include platings and alloys of such
metals.
Section 150 (a) of Executive Order No. 273, which took
effect on January 1, 1988, amended the then Section 163 (a) of
the Tax Code of 1986 which provided that:
SEC. 163. Percentage tax on sales of non-essential articles. There
shall be levied, assessed and collected, once only on every
original sale, barter, exchange or similar transaction for nominal
or valuable consideration intended to transfer ownership of, or
title to, the article herein below enumerated a tax equivalent to
50% of the gross value in money of the articles so sold, bartered.
Exchanged or transferred, such tax to be paid by the
manufacturer or producer:
(a) All articles commonly or commercially known as jewelry,
whether real or imitation, pearls, precious and semi-precious
stones, and imitations thereof, articles made of, or ornamented,
mounted or fitted with, precious metals or imitations thereof or
ivory (not including surgical and dental instruments, silver-
plated wares, frames or mounting for spectacles or eyeglasses,
and dental gold or gold alloys and other precious metal used in
filling, mounting or fitting of the teeth); opera glasses, and
lorgnettes. The term precious metals shall include platinum,
gold, silver, and other metals of similar or greater value. The
term imitations thereof shall include platings and alloys of such
metals;
Section 163(a) of the 1986 Tax Code was formerly Section
194(a) of the 1977 Tax Code and Section 184(a) of the Tax code,
as amended by Presidential Decree No. 69, which took effect on
January 1, 1974.
It will be noted that, while under the present law, jewelry is
subject to a 20% excise tax in addition to a 10% value-added tax
under the old law, it was subjected to 50% percentage tax. It was
even subjected to a 70% percentage tax under then Section
184(a) of the Tax Code, as amended by P.D. 69.
Section 104, Hdg, Nos. 17.01, 17.02, 17.03 and 17.04,
Chapter 71 of the Tariff and Customs Code, as amended by
Executive Order No. 470, dated July 20, 1991, imposes import
duty on natural or cultured pearls and precious or semi-precious
stones at the rate of 3% to 10% to be applied in stages from
1991 to 1994 and 30% in 1995.
Prior to the issuance of E.O. 470, the rate of import duty in
1988 was 10% to 50% when the petition was filed in the court a
quo.
In support of their petition before the lower court, the
private respondents submitted a position paper purporting to
be an exhaustive study of the tax rates on jewelry prevailing in
other Asian countries, in comparison to tax rates levied on the
same in the Philippines.[10]
 The following issues were thus raised therein:
"1. Whether or not the Honorable Court has jurisdiction over the
subject matter of the petition.
2. Whether the petition states a cuase of action or whether the
petition alleges a justiciable controversy between the parties.
3. Whether Section 150, par. (a) of the NIRC and Section 104,
Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs
Code are unconstitutional.
4. Whether the issuance of the Mission Order and Letters of
Authority is valid and legal.
In the assailed decision, the public respondent held indeed
that the Regional Trial Court has jurisdiction to take cognizance
of the petition since jurisdiction over the nature of the suit is
conferred by law and it is detemine[d] through the allegations in
the petition, and that the Court of Tax Appeals ha no jurisdiction
to declare a statute unconstitutional much less issue writs
of certiorari and prohibition in order to correct acts of
respondents allegedly committed with grave abuse of discretion
amounting to lack of jurisdiction.
As to the second issue, the public respondent, made the
holding that there exist a justiciable controversy between the
parties, agreeing with the statements made in the position paper
presented by the private respondents, and considering these
statements to be factual evidence, to wit:
Evidence for the petitioners indeed reveals that government
taxation policy treats jewelry, pearls, and other precious stones
and metals as non-essential luxury items and therefore, taxed
heavily; that the atmospheric cost of taxation is killing the local
manufacturing jewelry industry because they cannot compete
with the neighboring and other countries where importation and
manufacturing of jewelry is not taxed heavily, if not at all; that
while government incentives and subsidies exist, local
manufacturers cannot avail of the same because officially many
of them are unregistered and are unable to produce the required
official documents because they operate underground, outside
the tariff and tax structure; that local jewelry manufacturing is
under threat of extinction, otherwise discouraged, while
domestic trading has become more attractive; and as a
consequence, neighboring countries, such as Hongkong,
Singapore, Malaysia, Thailand, and other foreign competitors
supplying the Philippine market either through local channels or
through the black market for smuggled goods are the ones who
are getting business and making money, while members of the
petitioner Guild of Philippine Jewelers, Inc. are constantly
subjected to bureaucratic harassment instead of being given by
the government the necessary support in order to survive and
generate revenue for the government, and most of all fight
competitively not only in the domestic market but in the arena
of world market where the real contest is.
Considering the allegations of fact in the petition which were
duly proven during the trial, the Court holds that the petition
states a cause of action and there exist a justiciable controversy
between the parties which would require determination of
constitutionality of laws imposing excise tax and customs duty
on jewelry.[11] (emphasis ours)
The public respondent, in addressing the third issue, ruled
that the laws in question are confiscatory and oppressive. Again,
virtually adopting verbatim the reasons presented by the private
respondents in their position paper, the lower court stated:
The court finds that indeed government taxation policy trats(sic)
hewelry(sic) as non-essential luxury item and therefore, taxed
heavily. Aside from the ten (10%) percent value added tax (VAT),
local jewelry manufacturers contend with the (manufacturing)
excise tax of twenty (20%) percent (to be applied in stages)
customs duties on imported raw materials, the highest in the
Asia-Pacific region. In contrast, imported gemstones and other
precious metals are duty free in Hongkong, Thailand, Malaysia
and Singapore.
The court elaborates further on the experience of other countries
in their treatment of the jewelry sector.
MALAYSIA
Duties and taxes on imported gemstones and gold and the sales
tax on jewelry were abolished in Malaysia in 1984. They were
removed to encouraged the development of Malaysias jewelry
manufacturing industry and to increase exports of jewelry.
THAILAND
Gems and jewelry are Thailands ninth most important export
earner. In the past, the industry was overlooked by successive
administrations much to the dismay of those involved in
developing trade. Prohibitive import duties and sales tax on
precious gemstones restricted the growth (sic) of the industry,
resulting in most of the business being unofficial. It was indeed
difficult for a government or businessman to promote an
industry which did not officially exist.
Despite these circumstances, Thailands Gem business kept
growing up in (sic) businessmen began to realize its potential. In
1978, the government quietly removed the severe duties on
precious stones, but imposed a sales tax of 3.5%. Little was said
or done at that time as the government wanted to see if a free
trade in gemstones and jewelry would increase local
manufacturing and exports or if it would mean more foreign
made jewelry pouring into Thailand. However, as time
progressed, there were indications that local manufacturing was
indeed being encouraged and the economy was earning more
from exports. The government soon removed the 3% sales tax
too. Putting Thailand at par with Hongkong and Singapore. In
these countries, there are no more import duties and sales tax
on gems. (Cited in pages 6 and 7 of Exhibit M. The Center for
Research and Communication in cooperation with the Guild of
Philippine Jewelers, Inc., June 1986).
To illustrate, shown hereunder in the Philippine tariff and tax
structure on jewelry and other percious and semi-precious
stones compared to other neighboring countries, to wit:
Tariff on imported
Jewelry and (MANUFACTURING) Sales Tax 10% (VAT)
Precious stones Excise Tax
Philippines 3% to 10% to be 20% 10% VAT
applied in stages
Malaysia None None None
Thailand None None None
Singapore None None None
Hongkong None None None
In this connection, the present tariff and tax structure increases
manufacturing costs and renders the local jewelry manufacturers
uncompetitive against other countries even before they start
manufacturing and trading. Because of the prohibitive cast(sic)
of taxation, most manufacturers source from black market for
smuggled goods, and that while manufacturers can avail of tax
exemption and/or tax credits from the (manufacturing) excise
tax, they have no documents to present when filing this
exemption because, as pointed out earlier, most of them source
their raw materials from the black market, and since many of
them do not legally exist or operate onofficially(sic), or
underground, again they have no records (receipts) to indicate
where and when they will utilize such tax credits. (Cited in Exhibit
M Buencamino Report).
Given these constraints, the local manufacturer has no recourse
but to the back door for smuggled goods if only to be able to
compete even ineffectively, or cease manufacturing activities
and instead engage in the tradinf (sic) of smuggled finished
jewelry.
Worthy of not is the fact that indeed no evidence was adduced
by respondents to disprove the foregoing allegations of
fact. Under the foregoing factual circumstances, the Court finds
the questioned statutory provisions confiscatory and destructive
of the proprietary right of the petitioners to engage in business
in violation of Section 1, Article III of the Constitution which
states, as follows:
No person shall be deprived of the life, liberty, or property
without due process of law x x x.[12]
Anent the fourth and last issue, the herein public
respondent did not find it necessary to rule thereon, since, in his
opinion, the same has been rendered moot and academic by the
aforementioned pronouncement.[13]
The petitioners now assail the decision rendered by the
public respondent, contending that the latter has no authority
to pass judgment upon the taxation policy of the government. In
addition, the petitioners impugn the decision in question by
asserting that there was no showing that the tax laws on jewelry
are confiscatory and desctructive of private respondents
proprietary rights.
We rule in favor of the petitioners.
It is interesting to note that public respondent, in the
dispositive portion of his decision, perhaps keeping in mind his
limitations under the law as a trial judge, did not go so far as to
declare the laws in question to be unconstitutional. However,
therein he declared the laws to be inoperative and without force
and effect insofar as the private respondents are concerned. But,
respondent judge, in the body of his decision, unequivocally but
wrongly declared the said provisions of law to be violative of
Section 1, Article III of the Constitution. In fact, in their
Supplemental Comment on the Petition for Review,[14] the
private respondents insist that Judge Santos, in his capacity as
judge of the Regional Trial Court, acted within his authority in
passing upon the issues, to wit:
A perusal of the appealed decision would undoubtedly disclose
that public respondent did not pass judgment on the soundness
or wisdom of the governments tax policy on jewelry. True, public
respondent, in his questioned decision, observed, inter alia, that
indeed government tax policy treats jewelry as non-essential
item, and therefore, taxed heavily; that the present tariff and tax
structure increase manufacturing cost and renders the local
jewelry manufacturers uncompetitive against other countries
even before they start manufacturing and trading; that many of
the local manufacturers do not legally exist or operate
unofficially or underground; and that the manufacturers have no
recourse but to the back door for smuggled goods if only to be
able to compete even if ineffectively or cease manufacturing
activities.
BUT, public respondent did not, in any manner, interfere with or
encroach upon the prerogative of the legislature to determine
what should be the tax policy on jewelry. On the other hand, the
issue raised before, and passed upon by, the public respondent
was whether or not Section 150, paragraph (a) of the National
Internal Revenue Code (NIRC) and Section 104, Hdg, 71.01,
71.02, 71.03 and 71,04 of the Tariff and Customs Code are
unconstitutional, or differently stated, whether or not the
questioned statutory provisions affect the constitutional right of
private respondents to engage in business.
It is submitted that public respondent confined himself on this
issue which is clearly a judicial question.
We find it incongruous, in the face of the sweeping
pronouncements made by Judge Santos in his decision, that
private respondents can still persist in their argument that the
former did not overreach the restrictions dictated upon him by cannot inquire as to the reasons for its existence. Granting
law. There is no doubt in the Courts mind, despite protestations arguendo that the private respondents may have provided
to the contrary, that respondent judge encroached upon matters convincing arguments why the jewelry industry in the Philippines
properly falling within the province of legislative functions. In should not be taxed as it is, it is to the legislature that they must
citing as basis for his decision unproven comparative data resort to for relief, since with the legislature primarily lies the
pertaining to differences between tax rates of various Asian discretion to determine the nature (kind), object (purpose),
countries, and concluding that the jewelry industry in the extent (rate), coverage (subjects) and situs (place) of
Philippines suffers as a result, the respondent judge took it upon taxation. This Court cannot freely delve into those matters which,
himself to supplant legislative policy regarding jewelry by constitutional fiat, rightly rest on legislative judgment.[22]
taxation. In advocating the abolition of local tax and duty on
As succinctly put in Lim vs. Pacquing:[23] Where a
jewelry simply because other countries have adopted such
controversy may be settled an a platform other than one
policies, the respondent judge overlooked the fact that such
involving constitutional adjudication, the court should exercise
matters are not for him to decide. There are reasons why jewelry,
becoming modesty and avoid the constitutional question. As
a non-essential item, is taxed as it is in this country, and these
judges, we can only interpret and apply the law and, despite our
reasons, deliberate upon by our legislature, are beyond the
doubts about its wisdom, cannot repeal or amend it.[24]
reach of judicial questioning. As held in Macasiano vs. National
Housing Authority:[15] The respondents presented an exhaustive study on the tax
rates on jewelry levied by different Asian countries. This is meant
The policy of our courts is to avoid ruling on constitutional to convince us that compared to other countries, the tax rates
questions and to presume that the acts of the political imposed on said industry in the Philippines is oppressive and
departments are valid in the absence of a clear and unmistakable confiscatory. This Court, however, cannot subscribe to the
showing to the contrary. To doubt is to sustain, this presumption theory that the tax rates of other countries should be used as a
is based on the doctrine of separation of powers which enjoins yardstick in determining what may be the proper subjects of
upon each department a becoming respect for the acts of the taxation in our own country. It should be pointed out that in
other departments. The theory is that as the joint act of Congress imposing the aforementioned taxes and duties, the State, acting
and the President of the Philippines, a law has been carefully through the legislative and executive branches, is exercising its
studied and determined to be in accordance with the sovereign prerogative. It is inherent in the power to tax that the
fundamental law before it was finally enacted. (emphasis ours) State be free to select the subjects of taxation, and it has been
repeatedly held that inequalities which result from singling out
What we see here is a debate on the WISDOM of the laws of one particular class for taxation, or exemption, infringe no
in question. This is a matter on which the RTC is not competent constitutional limitation.[25]
to rule.[16] As Cooley observed: Debatable questions are for the
WHEREFORE, premises considered, the petition is hereby
legislature to decide. The courts do not sit to resolve the merits
GRANTED, and the DECISION in Civil Case No. 56736 is hereby
of conflicting issues.[17] In Angara vs. Electoral
[18] REVERSED and SET ASIDE. No costs.
Commission, Justice Laurel made it clear that the judiciary
does not pass upon question of wisdom, justice or expediency SO ORDERED
of legislation. And fittingly so, for in the exercise of judicial
power, we are allowed only to settle actual controversies
involving rights which are legally demandable and enfoceable,
and may not annul an act of the political departments simply
because we feel it is unwise or impractical.[19] This is not to say
that Regional Trial Courts have no power whatsoever to declare
a law unconstitutional. In J. M. Tuason and Co. v. Court of
Appeals[20] we said that [p]lainly the Constitution contemplates
that the inferior courts should have jurisdiction in cases involving
constitutionality of any treaty or law, for it speaks of appellate
review of final judgments of inferior courts in cases where such
constitutionality happens to be in issue. this authority of lower
courts to decide questions of constitutionality in the first
instance was reaffirmed in Ynos v. Intermediate Court of
Appeals.[21] But this authority does not extend to deciding
questions which pertain to legislative policy.

The trial court is not the proper forum for the ventilation
of the issues raised by the private respondents. The arguments
they presented focus on the wisdom of the provisions of law
which they seek to nullify. Regional Trial Courts can only look
into the validity of a provision, that is, whether or not it has been
passed according to the procedures laid down by law, and thus