Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-25043 April 26, 1968 (4)
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own
respective behalf and as judicial co-guardians of JOSE ROXAS,
petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioners.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted
to their grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the
municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely,
Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership
called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been
tilling the lands in Nasugbu for generations expressed their desire to
purchase from Roxas y Cia. the parcels which they actually occupied. For
its part, the Government, in consonance with the constitutional mandate to
acquire big landed estates and apportion them among landless tenants-
farmers, persuaded the Roxas brothers to part with their landholdings.
Conferences were held with the farmers in the early part of 1948 and finally
the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus
P300,000.00 for survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the
purchase price, and so a special arrangement was made for the
Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount
of P1,500,000.00 as loan. Collateral for such loan were the lands proposed
to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed
the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation to pay its loan from
the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a
net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was
reported for income tax purposes as gain on the sale of capital asset held
for more than one year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential
house at Wright St., Malate, Manila, which they inherited from their
1
grandparents. After Antonio and Eduardo got married, they resided
somewhere else leaving only Jose in the old house. In fairness to his
brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of
P8,000.00 a year.
ASSESSMENTS
disallowance of deductions from gross income of various business
expenses and contributions claimed by Roxas y Cia. and the Roxas
brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm
lands and sold them to the farmers on installment, the Commissioner
considered the partnership as engaged in the business of real estate,
hence, 100% of the profits derived therefrom was taxed.

On June 17, 1958, the Commissioner of Internal Revenue demanded from The following deductions were disallowed:
Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount
of P150.00 plus P10.00 compromise penalty for late payment, and ROXAS Y CIA.:
P150.00 tax for dealers of securities for 1952 plus P10.00 compromise 1953
penalty for late payment. The assessment for real estate dealer's tax was Tickets for Banquet in honor of
based on the fact that Roxas y Cia. received house rentals from Jose S. Osmeña P 40.00
Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, Gifts of San Miguel beer 28.00
an owner of a real estate who derives a yearly rental income therefrom in Contributions to —
the amount of P3,000.00 or more is considered a real estate dealer and is Philippine Air Force Chapel
liable to pay the corresponding fixed tax. 100.00
Manila Police Trust Fund
The Commissioner of Internal Revenue justified his demand for the fixed 150.00
tax on dealers of securities against Roxas y Cia., on the fact that said Philippines Herald's fund for Manila's neediest families
partnership made profits from the purchase and sale of securities. 100.00
1955
In the same assessment, the Commissioner assessed deficiency income Contributions to Contribution to
taxes against the Roxas Brothers for the years 1953 and 1955, as follows: Our Lady of Fatima Chapel, FEU 50.00

1953 1955 ANTONIO ROXAS:

Antonio Roxas P7,010.00 1953
P5,813.00 Contributions to —
Eduardo Roxas 7,281.00 5,828.00 Pasay City Firemen Christmas Fund
Jose Roxas 6,323.00 5,588.00 25.00
The deficiency income taxes resulted from the inclusion as income of Pasay City Police Dept. X'mas fund
Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 50.00
derived from the sale of the Nasugbu farm lands to the tenants, and the 1955
2
Contributions to — hereby ordered to pay the respondent Commissioner of Internal Revenue
Baguio City Police Christmas fund the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as
25.00 deficiency income taxes for the years 1953 and 1955, plus 5% surcharge
Pasay City Firemen Christmas fund and 1% monthly interest as provided for in Sec. 51(a) of the Revenue
25.00 Code; and modified with respect to the partnership Roxas y Cia. in the
Pasay City Police Christmas fund sense that it should pay only P150.00, as real estate dealer's tax. With
50.00 costs against petitioners.
EDUARDO ROXAS:
1953 Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court.
Contributions to — The Commissioner of Internal Revenue did not appeal.
Hijas de Jesus' Retiro de Manresa
450.00 The issues:
Philippines Herald's fund for Manila's neediest families
100.00 (1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary
1955 gain, hence 100% taxable?
Contributions to Philippines
Herald's fund for Manila's (2) Are the deductions for business expenses and contributions
neediest families 120.00 deductible?
JOSE ROXAS:
1955 (3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate
Contributions to Philippines dealers?
Herald's fund for Manila's
neediest families 120.00 The Commissioner of Internal Revenue contends that Roxas y Cia. could
The Roxas brothers protested the assessment but inasmuch as said be considered a real estate dealer because it engaged in the business of
protest was denied, they instituted an appeal in the Court of Tax Appeals selling real estate. The business activity alluded to was the act of
on January 9, 1961. The Tax Court heard the appeal and rendered subdividing the Nasugbu farm lands and selling them to the farmers-
judgment on July 31, 1965 sustaining the assessment except the demand occupants on installment. To bolster his stand on the point, he cites one of
for the payment of the fixed tax on dealer of securities and the disallowance the purposes of Roxas y Cia. as contained in its articles of partnership,
of the deductions for contributions to the Philippine Air Force Chapel and quoted below:
Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que
WHEREFORE, the decision appealed from is hereby affirmed with respect pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas
to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are
3
condiciones, estime convenientes y vendiendo aquellas que a juicio de
sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the
Commissioner of Internal Revenue cannot be favorably accepted by Us in
this isolated transaction with its peculiar circumstances in spite of the fact
that there were hundreds of vendees. Although they paid for their
respective holdings in installment for a period of ten years, it would
nevertheless not make the vendor Roxas y Cia. a real estate dealer during
the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the
very farmers who tilled them for generations was not only in consonance
with, but more in obedience to the request and pursuant to the policy of
our Government to allocate lands to the landless. It was the bounden duty
of the Government to pay the agreed compensation after it had persuaded
Roxas y Cia. to sell its haciendas, and to subsequently subdivide them
among the farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds. Obligingly,
Roxas y Cia. shouldered the Government's burden, went out of its way and
sold lands directly to the farmers in the same way and under the same
terms as would have been the case had the Government done it itself. For
this magnanimous act, the municipal council of Nasugbu passed a
resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg". And,
in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously. It does
not conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand and later
on to penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale
in question. Hence, pursuant to Section 34 of the Tax Code the lands sold
to the farmers are capital assets, and the gain derived from the sale thereof
is capital gain, taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for
tickets to a banquet given in honor of Sergio Osmena and P28.00 for San
Miguel beer given as gifts to various persons. The deduction were claimed
as representation expenses. Representation expenses are deductible
from gross income as expenditures incurred in carrying on a trade or
business under Section 30(a) of the Tax Code provided the taxpayer
proves that they are reasonable in amount, ordinary and necessary, and
incurred in connection with his business. In the case at bar, the evidence
does not show such link between the expenses and the business of Roxas
y Cia. The findings of the Court of Tax Appeals must therefore be
sustained.
The petitioners also claim deductions for contributions to the Pasay City
Police, Pasay City Firemen, and Baguio City Police Christmas funds,
Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest
families and Our Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay
City Firemen and Baguio City Police are not deductible for the reason that
the Christmas funds were not spent for public purposes but as Christmas
gifts to the families of the members of said entities. Under Section 39(h), a
contribution to a government entity is deductible when used exclusively for
public purposes. For this reason, the disallowance must be sustained. On
4
the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest
families were disallowed on the ground that the Philippines Herald is not a
corporation or an association contemplated in Section 30 (h) of the Tax
Code. It should be noted however that the contributions were not made to
the Philippines Herald but to a group of civic spirited citizens organized by
the Philippines Herald solely for charitable purposes. There is no question
that the members of this group of citizens do not receive profits, for all the
funds they raised were for Manila's neediest families. Such a group of
citizens may be classified as an association organized exclusively for
charitable purposes mentioned in Section 30(h) of the Tax Code.
. . . "Real estate dealer" includes any person engaged in the business of
buying, selling, exchanging, leasing or renting property on his own account
as principal and holding himself out as a full or part-time dealer in real
estate or as an owner of rental property or properties rented or offered to
rent for an aggregate amount of three thousand pesos or more a year: . . .
(Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of
Tax Appeals or, this point is sustained.1äwphï1.ñët
To Summarize, no deficiency income tax is due for 1953 from Antonio
Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay
deficiency income tax in the sum of P109.00, P91.00 and P49.00,
respectively, computed as follows: *

Rightly, the Commissioner of Internal Revenue disallowed the contribution ANTONIO ROXAS
to Our Lady of Fatima chapel at the Far Eastern University on the ground Net income per return P315,476.59
that the said university gives dividends to its stockholders. Located within Add: 1/3 share, profits in Roxas y Cia. P 153,249.15
the premises of the university, the chapel in question has not been shown Less amount declared 146,135.46
to belong to the Catholic Church or any religious organization. On the other Amount understated
hand, the lower court found that it belongs to the Far Eastern University, P 7,113.69
contributions to which are not deductible under Section 30(h) of the Tax Contributions disallowed 115.00
Code for the reason that the net income of said university injures to the
benefit of its stockholders. The disallowance should be sustained. P 7,228.69
Less 1/3 share of contributions amounting to P21,126.06 disallowed from
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's partnership but allowed to partners 7,042.02 186.67
fixed tax upon it, because although it earned a rental income of P8,000.00 Net income per review
per annum in 1952, said rental income came from Jose Roxas, one of the
partners. Section 194 of the Tax Code, in considering as real estate P315,663.26
dealers owners of real estate receiving rentals of at least P3,000.00 a year, Less: Exemptions
does not provide any qualification as to the persons paying the rentals. 4,200.00
The law, which states: 1äwphï1.ñët Net taxable income
P311,463.26
5
Tax due 154,169.00 Less 1/3 share of contributions disallowed from partnership but allowed as
Tax paid 154,060.00 deductions to partners 7,042.02 71.67
Deficiency Net income per review
P 109.00
========== P222,753.43
EDUARDO ROXAS Less: Exemption
Net income per return 1,800.00
P 304,166.92 Net income subject to tax
Add: 1/3 share, profits in Roxas y Cia P 153,249.15 P220,953.43
Less profits declared 146,052.58 Tax due P102,763.00
Amount understated Tax paid 102,714.00
P 7,196.57 Deficiency
Less 1/3 share in contributions amounting to P21,126.06 disallowed from P 49.00
partnership but allowed to partners 7,042.02 155.55 ===========
Net income per review WHEREFORE, the decision appealed from is modified. Roxas y Cia. is
hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax
P304,322.47 for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered
Less: Exemptions to pay the respective sums of P109.00, P91.00 and P49.00 as their
4,800.00 individual deficiency income tax all corresponding for the year 1955. No
Net taxable income costs. So ordered.
P299,592.47
Tax Due P147,250.00 Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando,
Tax paid 147,159.00 JJ., concur.
Deficiency Zaldivar, J., took no part.
P91.00 Concepcion, C.J., is on leave.
===========
JOSE ROXAS Footnotes
Net income per return
P222,681.76 __________________________________________________________
Add: 1/3 share, profits in Roxas y Cia. P153,429.15 ________________________
Less amount reported 146,135.46
Amount understated
7,113.69
6
EN BANC

G.R. No. 193007

RENATO V. DIAZ and
AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

x ---------------------------------------------------------------------------------------- x

DECISION

ABAD, J.:
7

May toll fees collected by tollway operators be subjected to value- added
tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this
petition for declaratory relief[1] assailing the validity of the impending
imposition of value-added tax (VAT) by the Bureau of Internal Revenue
(BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees,
they have an interest as regular users of tollways in stopping the BIR
action. Additionally, Diaz claims that he sponsored the approval of
Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and
Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC)
at the House of Representatives. Timbol, on the other hand, claims that
she served as Assistant Secretary of the Department of Trade and Industry
and consultant of the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of
President Gloria Macapagal-Arroyo to impose VAT on toll fees. The
imposition was deferred, however, in view of the consistent opposition of
Diaz and other sectors to such move. But, upon President Benigno C.
Aquino IIIs assumption of office in 2010, the BIR revived the idea and
would impose the challenged tax on toll fees beginning August 16, 2010
unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC,
intend to include toll fees within the meaning of sale of services that are
subject to VAT; that a toll fee is a users tax, not a sale of services; that to
impose VAT on toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO),
enjoining the implementation of the VAT. The Court required the
government, represented by respondents Cesar V. Purisima, Secretary of
the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days from notice.[2]
Later, the Court issued another resolution treating the petition as one for
prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed the
governments comment.[4] The government avers that the NIRC imposes
VAT on all kinds of services of franchise grantees, including tollway
operations, except where the law provides otherwise; that the Court should
seek the meaning and intent of the law from the words used in the statute;
and that the imposition of VAT on tollway operations has been the subject
as early as 2003 of several BIR rulings and circulars.[5]
The government also argues that petitioners have no right to invoke the
non-impairment of contracts clause since they clearly have no personal
interest in existing toll operating agreements (TOAs) between the
government and tollway operators. At any rate, the non-impairment clause
cannot limit the States sovereign taxing power which is generally read into
contracts.
Finally, the government contends that the non-inclusion of VAT in the
parametric formula for computing toll rates cannot exempt tollway
operators from VAT. In any event, it cannot be claimed that the rights of
tollway operators to a reasonable rate of return will be impaired by the VAT
since this is imposed on top of the toll rate. Further, the imposition of VAT
on toll fees would have very minimal effect on motorists using the tollways.
8
In their reply[6] to the governments comment, petitioners point out that
tollway operators cannot be regarded as franchise grantees under the
NIRC since they do not hold legislative franchises. Further, the BIR intends
to collect the VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal since only the
Congress can modify VAT rates and authorize its disbursement. Finally,
BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which
directs toll companies to record an accumulated input VAT of zero balance
in their books as of August 16, 2010, contravenes Section 111 of the NIRC
which grants entities that first become liable to VAT a transitional input tax
credit of 2% on beginning inventory. For this reason, the VAT on toll fees
cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as
one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file
the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage
by including tollway operators and tollway operations in the terms franchise
grantees and sale of services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts
to a tax on tax and not a tax on services; b) will impair the tollway operators
right to a reasonable return of investment under their TOAs; and c) is not
administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as
one for prohibition rather than one for declaratory relief, the
characterization that petitioners Diaz and Timbol gave their action. The
government has sought reconsideration of the Courts resolution,[7]
however, arguing that petitioners allegations clearly made out a case for
declaratory relief, an action over which the Court has no original
jurisdiction. The government adds, moreover, that the petition does not
meet the requirements of Rule 65 for actions for prohibition since the BIR
did not exercise judicial, quasi-judicial, or ministerial functions when it
sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol
has a plain, speedy, and adequate remedy in the ordinary course of law
against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one
for prohibition if the case has far-reaching implications and raises
questions that need to be resolved for the public good.[8] The Court has
also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative
authority.[9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its
imposition would impact, not only on the more than half a million motorists
who use the tollways everyday, but more so on the governments effort to
raise revenue for funding various projects and for reducing budgetary
deficits.
To dismiss the petition and resolve the issues later, after the challenged
VAT has been imposed, could cause more mischief both to the tax-paying
9
public and the government. A belated declaration of nullity of the BIR
action would make any attempt to refund to the motorists what they paid
an administrative nightmare with no solution. Consequently, it is not only
the right, but the duty of the Court to take cognizance of and resolve the
issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule
65, the Court has ample power to waive such technical requirements when
the legal questions to be resolved are of great importance to the public.
The same may be said of the requirement of locus standi which is a mere
procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended.
VAT is levied, assessed, and collected, according to Section 108, on the
gross receipts derived from the sale or exchange of services as well as
from the use or lease of properties. The third paragraph of Section 108
defines sale or exchange of services as follows:
The phrase sale or exchange of services means the performance of all
kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods
for others; proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and
caterers; dealers in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; common carriers by air and
sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines; sales of
electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone
and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code and non-life
insurance companies (except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and similar services regardless
of whether or not the performance thereof calls for the exercise or use of
the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of services
rendered in the Philippines for a fee, including those specified in the list.
The enumeration of affected services is not exclusive.[11] By qualifying
services with the words all kinds, Congress has given the term services an
all-encompassing meaning. The listing of specific services are intended to
illustrate how pervasive and broad is the VATs reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined
as a form of service rendered for a fee should be deemed included unless
some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree
(P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the
services that tollway operators render. Essentially, tollway operators
construct, maintain, and operate expressways, also called tollways, at the
operators expense. Tollways serve as alternatives to regular public
highways that meander through populated areas and branch out to local
roads. Traffic in the regular public highways is for this reason slow-moving.
In consideration for constructing tollways at their expense, the operators
are allowed to collect government-approved fees from motorists using the
tollways until such operators could fully recover their expenses and earn
reasonable returns from their investments.
10
When a tollway operator takes a toll fee from a motorist, the fee is in effect
for the latters use of the tollway facilities over which the operator enjoys
private proprietary rights[12] that its contract and the law recognize. In this
sense, the tollway operator is no different from the following service
providers under Section 108 who allow others to use their properties or
facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes,
including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; and
7. Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds
of services rendered for a fee regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use
of human knowledge and skills.
And not only do tollway operators come under the broad term all kinds of
services, they also come under the specific class described in Section 108
as all other franchise grantees who are subject to VAT, except those under
Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to
exceptions (the low-income radio and/or television broadcasting
companies with gross annual incomes of less than P10 million and gas
and water utilities) that Section 119[13] spares from the payment of VAT.
The word franchise broadly covers government grants of a special right to
do an act or series of acts of public concern.[14]
Petitioners of course contend that tollway operators cannot be considered
franchise grantees under Section 108 since they do not hold legislative
franchises. But nothing in Section 108 indicates that the franchise grantees
it speaks of are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a distinction
between franchises granted by Congress and franchises granted by some
other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as
agents of the state, constitute as much a legislative franchise as though
the grant had been made by Congress itself.[15] The term franchise has
been broadly construed as referring, not only to authorizations that
Congress directly issues in the form of a special law, but also to those
granted by administrative agencies to which the power to grant franchises
has been delegated by Congress.[16]
Tollway operators are, owing to the nature and object of their business,
franchise grantees. The construction, operation, and maintenance of toll
facilities on public improvements are activities of public consequence that
necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways. Apart from
Congress, tollway franchises may also be granted by the TRB, pursuant
to the exercise of its delegated powers under P.D. 1112.[17] The franchise
in this case is evidenced by a Toll Operation Certificate.[18]
11
Petitioners contend that the public nature of the services rendered by
tollway operators excludes such services from the term sale of services
under Section 108 of the Code. But, again, nothing in Section 108 supports
this contention. The reverse is true. In specifically including by way of
example electric utilities, telephone, telegraph, and broadcasting
companies in its list of VAT-covered businesses, Section 108 opens other
companies rendering public service for a fee to the imposition of VAT.
Businesses of a public nature such as public utilities and the collection of
tolls or charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court statements made by
certain lawmakers in the course of congressional deliberations of the
would-be law. As the Court said in South African Airways v. Commissioner
of Internal Revenue,[20] statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense
of that body and are, consequently, not controlling in the interpretation of
law. The congressional will is ultimately determined by the language of the
law that the lawmakers voted on. Consequently, the meaning and intention
of the law must first be sought in the words of the statute itself, read and
considered in their natural, ordinary, commonly accepted and most
obvious significations, according to good and approved usage and without
resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on
toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this
argument on the following discussion in Manila International Airport
Authority (MIAA) v. Court of Appeals:[22]
No one can dispute that properties of public dominion mentioned in Article
420 of the Civil Code, like roads, canals, rivers, torrents, ports and bridges
constructed by the State, are owned by the State. The term ports includes
seaports and airports. The MIAA Airport Lands and Buildings constitute a
port constructed by the State. Under Article 420 of the Civil Code, the MIAA
Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the
character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they
pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system
is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the
property whether it is for public dominion or not. Article 420 of the Civil
Code defines property of public dominion as one intended for public use.
Even if the government collects toll fees, the road is still intended for public
use if anyone can use the road under the same terms and conditions as
the rest of the public. The charging of fees, the limitation on the kind of
vehicles that can use the road, the speed restrictions and other conditions
for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees
MIAA charges to airlines, constitute the bulk of the income that maintains
the operations of MIAA. The collection of such fees does not change the
character of MIAA as an airport for public use. Such fees are often termed
users tax. This means taxing those among the public who actually use a
public facility instead of taxing all the public including those who never use
the particular public facility. A users tax is more equitable a principle of
taxation mandated in the 1987 Constitution.[23] (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees
to a users tax must also pertain to tollway fees. But the main issue in the
MIAA case was whether or not Paraaque City could sell airport lands and
buildings under MIAA administration at public auction to satisfy unpaid real
12
estate taxes. Since local governments have no power to tax the national
government, the Court held that the City could not proceed with the auction
sale. MIAA forms part of the national government although not integrated
in the department framework.[24] Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man under Article
420(1)[25] of the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are users tax, but to
make the point that airport lands and buildings are properties of public
dominion and that the collection of terminal fees for their use does not
make them private properties. Tollway fees are not taxes. Indeed, they are
not assessed and collected by the BIR and do not go to the general coffers
of the government.
It would of course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and maintenance
of certain roadways. The tax in such a case goes directly to the
government for the replenishment of resources it spends for the roadways.
This is not the case here. What the government seeks to tax here are fees
collected from tollways that are constructed, maintained, and operated by
private tollway operators at their own expense under the build, operate,
and transfer scheme that the government has adopted for
expressways.[26] Except for a fraction given to the government, the toll
fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways,
are not taxes in any sense. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund public
expenditures.[27] Toll fees, on the other hand, are collected by private
tollway operators as reimbursement for the costs and expenses incurred
in the construction, maintenance and operation of the tollways, as well as
to assure them a reasonable margin of income. Although toll fees are
charged for the use of public facilities, therefore, they are not government
exactions that can be properly treated as a tax. Taxes may be imposed
only by the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or entities, as
an attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax
due to the nature of VAT as an indirect tax. In indirect taxation, a distinction
is made between the liability for the tax and burden of the tax. The seller
who is liable for the VAT may shift or pass on the amount of VAT it paid on
goods, properties or services to the buyer. In such a case, what is
transferred is not the sellers liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT,
but the buyer bears its burden since the amount of VAT paid by the former
is added to the selling price. Once shifted, the VAT ceases to be a tax[30]
and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway
user, but on the tollway operator. Under Section 105 of the Code, [31] VAT
is imposed on any person who, in the course of trade or business, sells or
renders services for a fee. In other words, the seller of services, who in this
case is the tollway operator, is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if
toll fees were deemed as a users tax. VAT is assessed against the tollway
operators gross receipts and not necessarily on the toll fees. Although the
tollway operator may shift the VAT burden to the tollway user, it will not
make the latter directly liable for the VAT. The shifted VAT burden simply
becomes part of the toll fees that one has to pay in order to use the
tollways.[32]
13
Three. Petitioner Timbol has no personality to invoke the non-impairment
of contract clause on behalf of private investors in the tollway projects. She
will neither be prejudiced by nor be affected by the alleged diminution in
return of investments that may result from the VAT imposition. She has no
interest at all in the profits to be earned under the TOAs. The interest in
and right to recover investments solely belongs to the private tollway
investors.
Besides, her allegation that the private investors rate of recovery will be
adversely affected by imposing VAT on tollway operations is purely
speculative. Equally presumptuous is her assertion that a stipulation in the
TOAs known as the Material Adverse Grantor Action will be activated if
VAT is thus imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its sovereign
taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for
claiming input VAT make the VAT on tollway operations impractical and
incapable of implementation. They cite the fact that, in order to claim input
VAT, the name, address and tax identification number of the tollway user
must be indicated in the VAT receipt or invoice. The manner by which the
BIR intends to implement the VAT by rounding off the toll rate and putting
any excess collection in an escrow account is also illegal, while the
alternative of giving change to thousands of motorists in order to meet the
exact toll rate would be a logistical nightmare. Thus, according to them,
the VAT on tollway operations is not administratively feasible.[33]
Administrative feasibility is one of the canons of a sound tax system. It
simply means that the tax system should be capable of being effectively
administered and enforced with the least inconvenience to the taxpayer.
Non-observance of the canon, however, will not render a tax imposition
invalid except to the extent that specific constitutional or statutory
limitations are impaired.[34] Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily
invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually implement
the VAT on tollway operations. Any declaration by the Court that the
manner of its implementation is illegal or unconstitutional would be
premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it,[35] the facts
pertaining to the matter are not sufficiently established for the Court to pass
judgment on. Besides, any concern about how the VAT on tollway
operations will be enforced must first be addressed to the BIR on whom
the task of implementing tax laws primarily and exclusively rests. The
Court cannot preempt the BIRs discretion on the matter, absent any clear
violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR
RMC 63-2010 which directs toll companies to record an accumulated input
VAT of zero balance in their books as of August 16, 2010, the date when
the VAT imposition was supposed to take effect. The issuance allegedly
violates Section 111(A)[36] of the Code which grants first time VAT payers
a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the
product of negotiations with tollway operators who have been assessed
VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by
now can no longer be collected. The tollway operators agreed to waive the
2% transitional input VAT, in exchange for cancellation of their past due
VAT liabilities. Notably, the right to claim the 2% transitional input VAT
belongs to the tollway operators who have not questioned the circulars
validity. They are thus the ones who have a right to challenge the circular
in a direct and proper action brought for the purpose.
14
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative
prerogative or expand the VAT laws coverage when she sought to impose
VAT on tollway operations. Section 108(A) of the Code clearly states that
services of all other franchise grantees are subject to VAT, except as may
be provided under Section 119 of the Code. Tollway operators are not
among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt transactions
under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as
petitioners so strongly allege, then it would have been well for the law to
clearly say so. Tax exemptions must be justified by clear statutory grant
and based on language in the law too plain to be mistaken.[37] But as the
law is written, no such exemption obtains for tollway operators. The Court
is thus duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is
within the exclusive prerogative of Congress. The Courts role is to merely
uphold this legislative policy, as reflected first and foremost in the language
of the tax statute. Thus, any unwarranted burden that may be perceived to
result from enforcing such policy must be properly referred to Congress.
The Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994
when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is
only now, however, that the executive has earnestly pursued the VAT
imposition against tollway operators. The executive exercises exclusive
discretion in matters pertaining to the implementation and execution of tax
laws. Consequently, the executive is more properly suited to deal with the
immediate and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and
Commissioner of Internal Revenues motion for reconsideration of its
August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz
and Aurora Ma. F. Timbols petition for lack of merit, and SETS ASIDE the
Courts temporary restraining order dated August 13, 2010.
SO ORDERED.
ROBERTO A. ABAD
Associate Justice
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
15
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;
16
7.WHEREAS, civic-minded citizens and groups have called for remedial
measures to curb these blatant malpractices which have flaunted our
censorship and copyright laws;
8.WHEREAS, in the face of these grave emergencies corroding the moral
values of the people and betraying the national economic recovery
program, bold emergency measures must be adopted with dispatch; ...
(Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the
following grounds:
1.Section 10 thereof, which imposes a tax of 30% on the gross receipts
payable to the local government is a RIDER and the same is not germane
to the subject matter thereof;
2.The tax imposed is harsh, confiscatory, oppressive and/or in unlawful
restraint of trade in violation of the due process clause of the Constitution;
3.There is no factual nor legal basis for the exercise by the President of
the vast powers conferred upon him by Amendment No. 6;
4.There is undue delegation of power and authority;
5.The Decree is an ex-post facto law; and
6.There is over regulation of the video industry as if it were a nuisance,
which it is not.
We shall consider the foregoing objections in seriatim.
1.The Constitutional requirement that "every bill shall embrace only one
subject which shall be expressed in the title thereof" 1 is sufficiently
complied with if the title be comprehensive enough to include the general
purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The
requirement is satisfied if all the parts of the statute are related, and are
germane to the subject matter expressed in the title, or as long as they are
not inconsistent with or foreign to the general subject and title. 2 An act
having a single general subject, indicated in the title, may contain any
number of provisions, no matter how diverse they may be, so long as they
are not inconsistent with or foreign to the general subject, and may be
considered in furtherance of such subject by providing for the method and
means of carrying out the general object." 3 The rule also is that the
constitutional requirement as to the title of a bill should not be so narrowly
construed as to cripple or impede the power of legislation. 4 It should be
given practical rather than technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax
provision of the DECREE is a rider is without merit. That section reads,
inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. —
Notwithstanding any provision of law to the contrary, the province shall
collect a tax of thirty percent (30%) of the purchase price or rental rate, as
the case may be, for every sale, lease or disposition of a videogram
containing a reproduction of any motion picture or audiovisual program.
Fifty percent (50%) of the proceeds of the tax collected shall accrue to the
province, and the other fifty percent (50%) shall acrrue to the municipality
where the tax is collected; PROVIDED, That in Metropolitan Manila, the
tax shall be shared equally by the City/Municipality and the Metropolitan
Manila Commission.
xxx xxx xxx
17
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
18
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
19
facie evidence of the existence of the guilt of the accused and shift the
burden of proof provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of the one
from proof of the others is not unreasonable and arbitrary because of lack
of connection between the two in common experience". 16
Applied to the challenged provision, there is no question that there is a
rational connection between the fact proved, which is non-registration, and
the ultimate fact presumed which is violation of the DECREE, besides the
fact that the prima facie presumption of violation of the DECREE attaches
only after a forty-five-day period counted from its effectivity and is,
therefore, neither retrospective in character.
6.We do not share petitioner's fears that the video industry is being over-
regulated and being eased out of existence as if it were a nuisance. Being
a relatively new industry, the need for its regulation was apparent. While
the underlying objective of the DECREE is to protect the moribund movie
industry, there is no question that public welfare is at bottom of its
enactment, considering "the unfair competition posed by rampant film
piracy; the erosion of the moral fiber of the viewing public brought about
by the availability of unclassified and unreviewed video tapes containing
pornographic films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees
are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about
the "demise" of the video industry. On the contrary, video establishments
are seen to have proliferated in many places notwithstanding the 30% tax
imposed.
In the last analysis, what petitioner basically questions is the necessity,
wisdom and expediency of the DECREE. These considerations, however,
are primarily and exclusively a matter of legislative concern.
Only congressional power or competence, not the wisdom of the action
taken, may be the basis for declaring a statute invalid. This is as it ought
to be. The principle of separation of powers has in the main wisely
allocated the respective authority of each department and confined its
jurisdiction to such a sphere. There would then be intrusion not allowable
under the Constitution if on a matter left to the discretion of a coordinate
branch, the judiciary would substitute its own. If there be adherence to the
rule of law, as there ought to be, the last offender should be courts of
justice, to which rightly litigants submit their controversy precisely to
maintain unimpaired the supremacy of legal norms and prescriptions. The
attack on the validity of the challenged provision likewise insofar as there
may be objections, even if valid and cogent on its wisdom cannot be
sustained. 18
In fine, petitioner has not overcome the presumption of validity which
attaches to a challenged statute. We find no clear violation of the
Constitution which would justify us in pronouncing Presidential Decree No.
1987 as unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
SO ORDERED.
Teehankee, (C.J.), Yap, Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras,
Feliciano, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
20
Republic of the Philippines The disputed registration fees were imposed by the appellee,
SUPREME COURT Commissioner Romeo F. Elevate pursuant to Section 8, Republic Act No.
Manila 4136, otherwise known as the Land Transportation and Traffic Code.

EN BANC The Philippine Airlines (PAL) is a corporation organized and existing under
the laws of the Philippines and engaged in the air transportation business
G.R. No. L- 41383 August 15, 1988 under a legislative franchise, Act No. 42739, as amended by Republic Act
Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment
PHILIPPINE AIRLINES, INC., plaintiff-appellant, of taxes. The pertinent provision of the franchise provides as follows:
vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, Section 13.In consideration of the franchise and rights hereby granted, the
and UBALDO CARBONELL, in his capacity as National Treasurer, grantee shall pay to the National Government during the life of this
defendants-appellants. franchise a tax of two per cent of the gross revenue or gross earning
derived by the grantee from its operations under this franchise. Such tax
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant. shall be due and payable quarterly and shall be in lieu of all taxes of any
kind, nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if, after the
GUTIERREZ, JR., J.: audit of the accounts of the grantee by the Commissioner of Internal
Revenue, a deficiency tax is shown to be due, the deficiency tax shall be
What is the nature of motor vehicle registration fees? Are they taxes or payable within the ten days from the receipt of the assessment. The
regulatory fees? grantee shall pay the tax on its real property in conformity with existing law.

This question has been brought before this Court in the past. The parties On the strength of an opinion of the Secretary of Justice (Op. No. 307,
are, in effect, asking for a re-examination of the latest decision on this series of 1956) PAL has, since 1956, not been paying motor vehicle
issue. registration fees.

This appeal was certified to us as one involving a pure question of law by
the Court of Appeals in a case where the then Court of First Instance of
Rizal dismissed the portion-about complaint for refund of registration fees
paid under protest.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate
issued a regulation requiring all tax exempt entities, among them PAL to
pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the
appellant's motor vehicles unless the amounts imposed under Republic

21
Act 4136 were paid. The appellant thus paid, under protest, the amount of
P19,529.75 as registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May
19,1971, to Commissioner Edu demanding a refund of the amounts paid,
invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it
was held that motor vehicle registration fees are in reality taxes from the
payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the
decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211,
March 30, 1970) to the effect that motor vehicle registration fees are
regulatory exceptional. and not revenue measures and, therefore, do not
come within the exemption granted to PAL? under its franchise. Hence,
PAL filed the complaint against Land Transportation Commissioner
Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of
First Instance of Rizal, Branch 18 where it was docketed as Civil Case No.
Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI
Carbonell in his capacity as National Treasurer, filed a motion to dismiss
alleging that the complaint states no cause of action. In support of the
motion to dismiss, defendants repatriation the ruling in Republic v.
Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor
vehicles are not taxes, but regulatory fees imposed as an incident of the
exercise of the police power of the state. They contended that while Act
4271 exempts PAL from the payment of any tax except two per cent on its
gross revenue or earnings, it does not exempt the plaintiff from paying
regulatory fees, such as motor vehicle registration fees. The resolution of
the motion to dismiss was deferred by the Court until after trial on the
merits.
On April 24, 1973, the trial court rendered a decision dismissing the
appellant's complaint "moved by the later ruling laid down by the Supreme
Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)."
From this judgment, PAL appealed to the Court of Appeals which certified
the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines,
Inc. (supra) cited by PAL and Commissioner Romeo F. Edu respectively,
discuss the main points of contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed
by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587
[1950]). Its heading speaks of "registration fees." The term is repeated four
times in the body thereof. Equally so, mention is made of the "fee for
registration." (Ibid., Subsection G) A subsection starts with a categorical
statement "No fees shall be charged." (lbid., Subsection H) The conclusion
is difficult to resist therefore that the Motor Vehicle Act requires the
payment not of a tax but of a registration fee under the police power. Hence
the incipient, of the section relied upon by defendant-appellee under the
Back Pay Law, It is not held liable for a tax but for a registration fee. It
therefore cannot make use of a backpay certificate to meet such an
obligation.
Any vestige of any doubt as to the correctness of the above conclusion
should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof
as to the imposition of additional tax on privately-owned passenger
automobiles, motorcycles and scooters was amended by Republic Act No.
5470 which is (sic) approved on May 30, 1969.) A special science fund
was thereby created and its title expressly sets forth that a tax on privately-
owned passenger automobiles, motorcycles and scooters was imposed.
The rates thereof were provided for in its Section 3 which clearly specifies
22
the" Philippine tax."(Cooley to be paid as distinguished from the
registration fee under the Motor Vehicle Act. There cannot be any clearer
expression therefore of the legislative will, even on the assumption that the
earlier legislation could by subdivision the point be susceptible of the
interpretation that a tax rather than a fee was levied. What is thus most
apparent is that where the legislative body relies on its authority to tax it
expressly so states, and where it is enacting a regulatory measure, it is
equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the
Court, on the other hand, held:
The charges prescribed by the Revised Motor Vehicle Law for the
registration of motor vehicles are in section 8 of that law called "fees". But
the appellation is no impediment to their being considered taxes if taxes
they really are. For not the name but the object of the charge determines
whether it is a tax or a fee. Geveia speaking, taxes are for revenue,
whereas fees are exceptional. for purposes of regulation and inspection
and are for that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge fixed by
statute for the service to be person,-When by an officer, where the charge
has no relation to the value of the services performed and where the
amount collected eventually finds its way into the treasury of the branch of
the government whose officer or officers collected the chauffeur, is not a
fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that the
expenditures of the Motor Vehicle Office are but a small portion—about 5
per centum—of the total collections from motor vehicle registration fees.
And as proof that the money collected is not intended for the expenditures
of that office, the law itself provides that all such money shall accrue to the
funds for the construction and maintenance of public roads, streets and
bridges. It is thus obvious that the fees are not collected for regulatory
purposes, that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for their
express object is to provide revenue with which the Government is to
discharge one of its principal functions—the construction and maintenance
of public highways for everybody's use. They are veritable taxes, not
merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those
fees as taxes, for it provides that "no other taxes or fees than those
prescribed in this Act shall be imposed," thus implying that the charges
therein imposed—though called fees—are of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as
amended by section 17 of Republic Act 587, which reads:
Sec. 70(b)No other taxes or fees than those prescribed in this Act shall be
imposed for the registration or operation or on the ownership of any motor
vehicle, or for the exercise of the profession of chauffeur, by any municipal
corporation, the provisions of any city charter to the contrary
notwithstanding: Provided, however, That any provincial board, city or
municipal council or board, or other competent authority may exact and
collect such reasonable and equitable toll fees for the use of such bridges
and ferries, within their respective jurisdiction, as may be authorized and
approved by the Secretary of Public Works and Communications, and also
for the use of such public roads, as may be authorized by the President of
the Philippines upon the recommendation of the Secretary of Public Works
and Communications, but in none of these cases, shall any toll fee." be
charged or collected until and unless the approved schedule of tolls shall
have been posted levied, in a conspicuous place at such toll station. (at
pp. 213-214)
Motor vehicle registration fees were matters originally governed by the
Revised Motor Vehicle Law (Act 3992 [19511) as amended by
Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.
23

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known
as the Land Transportation Code, (as amended by Rep. Acts Nos. 5715
and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act
3992 and remained unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73.Disposal of moneys collected.—Twenty per centum of the
money collected under the provisions of this Act shall accrue to the road
and bridge funds of the different provinces and chartered cities in
proportion to the centum shall during the next previous year and the
remaining eighty per centum shall be deposited in the Philippine Treasury
to create a special fund for the construction and maintenance of national
and provincial roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public
Works in the different provinces and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61.Disposal of Mortgage. Collected—Monies collected under the
provisions of this Act shall be deposited in a special trust account in the
National Treasury to constitute the Highway Special Fund, which shall be
apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount
necessary to maintain and equip the Land Transportation Commission but
not to exceed twenty per cent of the total collection during one year, shall
be set aside for the purpose. (As amended by RA 64-67, approved August
6, 1971).
It appears clear from the above provisions that the legislative intent and
purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance
of highways and to a much lesser degree, pay for the operating expenses
of the administering agency. On the other hand, the Philippine Rabbit case
mentions a presumption arising from the use of the term "fees," which
appears to have been favored by the legislature to distinguish fees from
other taxes such as those mentioned in Section 13 of Rep. Act 4136 which
reads:
Sec. 13.Payment of taxes upon registration.—No original registration of
motor vehicles subject to payment of taxes, customs s duties or other
charges shall be accepted unless proof of payment of the taxes due
thereon has been presented to the Commission.
referring to taxes other than those imposed on the registration, operation
or ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as
an instrument of regulation, As stated by a former presiding judge of the
Court of Tax Appeals and writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees
are changes. looked to as a source of revenue as well as a means of
regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of
automobile license fees. Isabela such case, the fees may properly be
regarded as taxes even though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or if revenue is at least one
of the real and substantial purposes, then the exaction is properly called a
tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd
Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98
Phil. 198.) These exactions are sometimes called regulatory taxes. (See
Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal
Revenue Code of 1954, which classify taxes on tobacco and alcohol as
24
regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing
Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power
(Lutz v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax (Umali,
Id.) Such is the case of motor vehicle registration fees. The conclusions
become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the
Calalang case. The same provision appears as Section 591-593). in the
Land Transportation code. It is patent therefrom that the legislators had in
mind a regulatory tax as the law refers to the imposition on the registration,
operation or ownership of a motor vehicle as a "tax or fee." Though
nowhere in Rep. Act 4136 does the law specifically state that the
imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the
registration or operation or on the ownership of any motor vehicle, or for
the exercise of the profession of chauffeur ..." making the intent to impose
a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents,
speak of an "additional" tax," where the law could have referred to an
original tax and not one in addition to the tax already imposed on the
registration, operation, or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional"
tax. Rep. Act 4136 also speaks of other "fees," such as the special permit
fees for certain types of motor vehicles (Sec. 10) and additional fees for
change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are
not mentioned by Sec. 591-593). of the Code as taxes like the motor
vehicle registration fee and chauffers' license fee. Such fees are to go into
the expenditures of the Land Transportation Commission as provided for
in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple
exceptional. intended only for rigidly purposes in the exercise of the State's
police powers. Over the years, however, as vehicular traffic exploded in
number and motor vehicles became absolute necessities without which
modem life as we know it would stand still, Congress found the registration
of vehicles a very convenient way of raising much needed revenues.
Without changing the earlier deputy. of registration payments as "fees,"
their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at
present exacted pursuant to the Land Transportation and Traffic Code are
actually taxes intended for additional revenues. of government even if one
fifth or less of the amount collected is set aside for the operating expenses
of the agency administering the program.
May the respondent administrative agency be required to refund the
amounts stated in the complaint of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear
from the records as to what payments were made in succeeding years. We
have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968,
repealed all earlier tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals,
et al. (G.R. No. 615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957,
petitioner Radio Communications of the Philippines, Inc., was subject to
both the franchise tax and income tax. In 1964, however, petitioner's
franchise was amended by Republic Act No. 41-42). to the effect that its
25
franchise tax of one and one-half percentum (1-1/2%) of all gross receipts
was provided as "in lieu of any and all taxes of any kind, nature, or
description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is hereby
expressly exempted." The issue raised to this Court now is the validity of
the respondent court's decision which ruled that the exemption under
Republic Act No. 41-42). was repealed by Section 24 of Republic Act No.
5448 dated June 27, 1968 which reads:
"(d)The provisions of existing special or general laws to the contrary
notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this section.
All corporations, agencies, or instrumentalities owned or controlled by the
government, including the Government Service Insurance System and the
Social Security System but excluding educational institutions, shall pay
such rate of tax upon their taxable net income as are imposed by this
section upon associations or corporations engaged in a similar business
or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly
that the law intended all corporate taxpayers to pay income tax as provided
by the statute. There can be no doubt as to the power of Congress to
repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935
Constitution and Article XIV, Section 5 of the Constitution as amended in
1973 expressly provide that no franchise shall be granted to any individual,
firm, or corporation except under the condition that it shall be subject to
amendment, alteration, or repeal by the legislature when the public interest
so requires. There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is clear and
unambiguous. There is a listing of entities entitled to tax exemption. The
petitioner is not covered by the provision. Considering the foregoing, the
Court Resolved to DENY the petition for lack of merit. The decision of the
respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979,
were correctly imposed because the tax exemption in the franchise of PAL
was repealed during the period. However, an amended franchise was
given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:
In consideration of the franchise and rights hereby granted, the grantee
shall pay to the Philippine Government during the lifetime of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower taxes.)
(a)The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the Internal
Revenue Code; or
(b)A franchise tax of two per cent (2%) of the gross revenues. derived by
the grantees from all specific. without distinction as to transport or
nontransport corporations; provided that with respect to international
airtransport service, only the gross passengers, mail, and freight revenues.
from its outgoing flights shall be subject to this law.
The tax paid by the grantee under either of the above alternatives shall be
in lieu of all other taxes, duties, royalties, registration, license and other
fees and charges of any kind, nature or description imposed, levied,
established, assessed, or collected by any municipal, city, provincial, or
national authority or government, agency, now or in the future, including
but not limited to the following:
xxx xxx xxx
(5)All taxes, fees and other charges on the registration, license,
acquisition, and transfer of airtransport equipment, motor vehicles, and all
26
other personal or real property of the gravitates (Pres. Decree 1590, 75
OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity
found in the earlier law. PAL is now exempt from the payment of any tax,
fee, or other charge on the registration and licensing of motor vehicles.
Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no
longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for
refund of registration fees paid in 1971 is DENIED. The Land
Transportation Franchising and Regulatory Board (LTFRB) is enjoined
functions-the collecting any tax, fee, or other charge on the registration and
licensing of the petitioner's motor vehicles from April 9, 1979 as provided
in Presidential Decree No. 1590.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
CARPIO, J.:
The Case
This petition for review1 challenges the 26 June 2012 Decision2 and 13
November 2012 Resolution3 of the Court of Tax. Appeals (CTA) En Banc.
Th e CTA En Banc affirmed the 17 December 2010 Decision4 and 7 April
2011 Resolution5 of the CTA First Division, which in turn affirmed the 2
December 2008 Decision6 and 21 May 2009 Order7 of the Regional Trial
Court of Tanauan City, Batangas, Branch 6. The trial court declared void
the assessment imposed by respondent Municipality of Malvar, Batangas
against petitioner Smart Communications, Inc. for its telecommunications
tower for 2001 to July 2003 and directed respondent to assess petitioner
only for the period starting 1 October 2003.
The Facts
Petitioner Smart Communications, Inc. (Smart) is a domestic corporation
engaged in the business of providing telecommunications services to the
general public while respondent Municipality of Malvar, Batangas
(Municipality) is a local government unit created by law.

EN BANC In the course of its business, Smart constructed a telecommunications

tower within the territorial jurisdiction of the Municipality. The construction
G.R. No. 204429 February 18, 2014 of the tower was for the purpose of receiving and transmitting cellular
communications within the covered area.
SMART COMMUNICATIONS, INC., Petitioner,
vs. On 30 July 2003, the Municipality passed Ordinance No. 18, series of
MUNICIPALITY OF MALVAR, BATANGAS, Respondent. 2003, entitled "An Ordinance Regulating the Establishment of Special
Projects."
DECISION

27
On 24 August 2004, Smart received from the Permit and Licensing Division
of the Office of the Mayor of the Municipality an assessment letter with a In a letter dated 28 September 2004, the Municipality denied Smart’s
schedule of payment for the total amount of ₱389,950.00 for Smart’s protest.
telecommunications tower. The letter reads as follows:
On 17 November 2004, Smart filed with Regional Trial Court of Tanauan
This is to formally submit to your good office your schedule of payments in City, Batangas, Branch 6, an "Appeal/Petition" assailing the validity of
the Municipal Treasury of the Local Government Unit of Malvar, province Ordinance No. 18. The case was docketed as SP Civil Case No. 04-11-
of Batangas which corresponds to the tower of your company built in the 1920.
premises of the municipality, to wit:
On 2 December 2008, the trial court rendered a Decision partly granting
TOTAL PROJECT COST: PHP Smart’s Appeal/Petition. The trial court confined its resolution of the case
11,000,000.00 to the validity of the assessment, and did not rule on the legality of
For the Year 2001-2003 Ordinance No. 18. The trial court held that the assessment covering the
50% of 1% of the total project cost Php55,000.00 period from 2001 to July 2003 was void since Ordinance No. 18 was
Add: 45% surcharge 24,750.00 approved only on 30 July 2003. However, the trial court declared valid the
Php79,750.00 assessment starting 1 October 2003, citing Article 4 of the Civil Code of
Multiply by 3 yrs. (2001, 2002, 2003) Php239,250.00 the Philippines,9 in relation to the provisions of Ordinance No. 18 and
For the year 2004 Section 166 of Republic Act No. 7160 or the Local Government Code of
1% of the total project cost Php110,000.00 1991 (LGC).10 The dispositive portion of the trial court’s Decision reads:
37% surcharge 40,700.00
========== WHEREFORE, in light of the foregoing, the Petition is partly GRANTED.
Php150,700.00 The assessment dated August 24, 2004 against petitioner is hereby
TOTAL Php389,950.00 declared null and void insofar as the assessment made from year 2001 to
Hoping that you will give this matter your preferential attention.8 July 2003 and respondent is hereby prohibited from assessing and
collecting, from petitioner, fees during the said period and the Municipal
Due to the alleged arrears in the payment of the assessment, the Government of Malvar, Batangas is directed to assess Smart
Municipality also caused the posting of a closure notice on the Communications, Inc. only for the period starting October 1, 2003.
telecommunications tower.
No costs.
On 9 September 2004, Smart filed a protest, claiming lack of due process
in the issuance of the assessment and closure notice. In the same protest, SO ORDERED.11
Smart challenged the validity of Ordinance No. 18 on which the
assessment was based.
28
The trial court denied the motion for reconsideration in its Order of 21 May
2009.
On 8 July 2009, Smart filed a petition for review with the CTA First Division,
docketed as CTA AC No. 58.
On 17 December 2010, the CTA First Division denied the petition for
review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is hereby DENIED, for lack of merit.
Accordingly, the assailed Decision dated December 2, 2008 and the Order
dated May 21, 2009 of Branch 6 of the Regional Trial Court of Tanauan
City, Batangas in SP. Civil Case No. 04-11-1920 entitled "Smart
Communications, Inc. vs. Municipality of Malvar, Batangas" are
AFFIRMED.
SO ORDERED.12
On 7 April 2011, the CTA First Division issued a Resolution denying the
motion for reconsideration.
Smart filed a petition for review with the CTA En Banc, which affirmed the
CTA First Division’s decision and resolution. The dispositive portion of the
CTA En Banc’s 26 June 2012 decision reads:
WHEREFORE, premises considered, the present Petition for Review is
hereby DISMISSED for lack of merit.1âwphi1
Accordingly, the assailed Decision dated December 17, 2010 and
Resolution dated April 7, 2011 are hereby AFFIRMED.
SO ORDERED.13
The CTA En Banc denied the motion for reconsideration.
Hence, this petition.
The Ruling of the CTA En Banc
The CTA En Banc dismissed the petition on the ground of lack of
jurisdiction. The CTA En Banc declared that it is a court of special
jurisdiction and as such, it can take cognizance only of such matters as
are clearly within its jurisdiction. Citing Section 7(a), paragraph 3, of
Republic Act No. 9282, the CTA En Banc held that the CTA has exclusive
appellate jurisdiction to review on appeal, decisions, orders or resolutions
of the Regional Trial Courts in local tax cases originally resolved by them
in the exercise of their original or appellate jurisdiction. However, the same
provision does not confer on the CTA jurisdiction to resolve cases where
the constitutionality of a law or rule is challenged.
The Issues
The petition raises the following arguments:
1. The [CTA En Banc Decision and Resolution] should be reversed and
set aside for being contrary to law and jurisprudence considering that the
CTA En Banc should have exercised its jurisdiction and declared the
Ordinance as illegal.
2. The [CTA En Banc Decision and Resolution] should be reversed and
set aside for being contrary to law and jurisprudence considering that the
doctrine of exhaustion of administrative remedies does not apply in [this
case].
3. The [CTA En Banc Decision and Resolution] should be reversed and
set aside for being contrary to law and jurisprudence considering that the
29
respondent has no authority to impose the so-called "fees" on the basis of
the void ordinance.14
The Ruling of the Court
The Court denies the petition.
On whether the CTA has jurisdiction over the present case
Smart contends that the CTA erred in dismissing the case for lack of
jurisdiction. Smart maintains that the CTA has jurisdiction over the present
case considering the "unique" factual circumstances involved.
The CTA refuses to take cognizance of this case since it challenges the
constitutionality of Ordinance No. 18, which is outside the province of the
CTA.
Jurisdiction is conferred by law. Republic Act No. 1125, as amended by
Republic Act No. 9282, created the Court of Tax Appeals. Section 7,
paragraph (a), sub-paragraph (3)15 of the law vests the CTA with the
exclusive appellate jurisdiction over "decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally decided or resolved by
them in the exercise of their original or appellate jurisdiction."
The question now is whether the trial court resolved a local tax case in
order to fall within the ambit of the CTA’s appellate jurisdiction This
question, in turn, depends ultimately on whether the fees imposed under
Ordinance No. 18 are in fact taxes.
Smart argues that the "fees" in Ordinance No. 18 are actually taxes since
they are not regulatory, but revenue-raising. Citing Philippine Airlines, Inc.
v. Edu,16 Smart contends that the designation of "fees" in Ordinance No.
18 is not controlling.
The Court finds that the fees imposed under Ordinance No. 18 are not
taxes.
Section 5, Article X of the 1987 Constitution provides that "each local
government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local government."
Consistent with this constitutional mandate, the LGC grants the taxing
powers to each local government unit. Specifically, Section 142 of the LGC
grants municipalities the power to levy taxes, fees, and charges not
otherwise levied by provinces. Section 143 of the LGC provides for the
scale of taxes on business that may be imposed by municipalities17 while
Section 14718 of the same law provides for the fees and charges that may
be imposed by municipalities on business and occupation.
The LGC defines the term "charges" as referring to pecuniary liability, as
rents or fees against persons or property, while the term "fee" means "a
charge fixed by law or ordinance for the regulation or inspection of a
business or activity."19
In this case, the Municipality issued Ordinance No. 18, which is entitled
"An Ordinance Regulating the Establishment of Special Projects," to
regulate the "placing, stringing, attaching, installing, repair and
construction of all gas mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus, and provide for the correction,
condemnation or removal of the same when found to be dangerous,
defective or otherwise hazardous to the welfare of the inhabitant[s]."20 It
was also envisioned to address the foreseen "environmental depredation"
to be brought about by these "special projects" to the Municipality.21
30
Pursuant to these objectives, the Municipality imposed fees on various
structures, which included telecommunications towers.
As clearly stated in its whereas clauses, the primary purpose of Ordinance
No. 18 is to regulate the "placing, stringing, attaching, installing, repair and
construction of all gas mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus" listed therein, which included
Smart’s telecommunications tower. Clearly, the purpose of the assailed
Ordinance is to regulate the enumerated activities particularly related to
the construction and maintenance of various structures. The fees in
Ordinance No. 18 are not impositions on the building or structure itself;
rather, they are impositions on the activity subject of government
regulation, such as the installation and construction of the structures.22
Since the main purpose of Ordinance No. 18 is to regulate certain
construction activities of the identified special projects, which included "cell
sites" or telecommunications towers, the fees imposed in Ordinance No.
18 are primarily regulatory in nature, and not primarily revenue-raising.
While the fees may contribute to the revenues of the Municipality, this
effect is merely incidental. Thus, the fees imposed in Ordinance No. 18 are
not taxes.
In Progressive Development Corporation v. Quezon City,23 the Court
declared that "if the generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if regulation is
the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax."
In Victorias Milling Co., Inc. v. Municipality of Victorias,24 the Court
reiterated that the purpose and effect of the imposition determine whether
it is a tax or a fee, and that the lack of any standards for such imposition
gives the presumption that the same is a tax.
We accordingly say that the designation given by the municipal authorities
does not decide whether the imposition is properly a license tax or a
license fee. The determining factors are the purpose and effect of the
imposition as may be apparent from the provisions of the ordinance. Thus,
"[w]hen no police inspection, supervision, or regulation is provided, nor any
standard set for the applicant to establish, or that he agrees to attain or
maintain, but any and all persons engaged in the business designated,
without qualification or hindrance, may come, and a license on payment of
the stipulated sum will issue, to do business, subject to no prescribed rule
of conduct and under no guardian eye, but according to the unrestrained
judgment or fancy of the applicant and licensee, the presumption is strong
that the power of taxation, and not the police power, is being exercised."
Contrary to Smart’s contention, Ordinance No. 18 expressly provides for
the standards which Smart must satisfy prior to the issuance of the
specified permits, clearly indicating that the fees are regulatory in nature.
These requirements are as follows:
SECTION 5. Requirements and Procedures in Securing Preliminary
Development Permit.
The following documents shall be submitted to the SB Secretary in
triplicate:
a) zoning clearance
b) Vicinity Map
c) Site Plan
d) Evidence of ownership
31
e) Certificate true copy of NTC Provisional Authority in case of Cellsites,
telephone or telegraph line, ERB in case of gasoline station, power plant,
and other concerned national agencies
f) Conversion order from DAR is located within agricultural zone.
g) Radiation Protection Evaluation.
h) Written consent from subdivision association or the residence of the
area concerned if the special projects is located within the residential zone.
i) Barangay Council Resolution endorsing the special projects.
SECTION 6. Requirement for Final Development Permit – Upon the
expiration of 180 days and the proponents of special projects shall apply
for final [development permit] and they are require[d] to submit the
following:
a) evaluation from the committee where the Vice Mayor refers the special
project
b) Certification that all local fees have been paid.
Considering that the fees in Ordinance No. 18 are not in the nature of local
taxes, and Smart is questioning the constitutionality of the ordinance, the
CTA correctly dismissed the petition for lack of jurisdiction. Likewise,
Section 187 of the LGC,25 which outlines the procedure for questioning
the constitutionality of a tax ordinance, is inapplicable, rendering
unnecessary the resolution of the issue on non-exhaustion of
administrative remedies.
On whether the imposition of the fees in Ordinance No. 18 is ultra vire
Smart argues that the Municipality exceeded its power to impose taxes
and fees as provided in Book II, Title One, Chapter 2, Article II of the LGC.
Smart maintains that the mayor’s permit fees in Ordinance No. 18
(equivalent to 1% of the project cost) are not among those expressly
enumerated in the LGC.
As discussed, the fees in Ordinance No.18 are not taxes. Logically, the
imposition does not appear in the enumeration of taxes under Section 143
of the LGC.
Moreover, even if the fees do not appear in Section 143 or any other
provision in the LGC, the Municipality is empowered to impose taxes, fees
and charges, not specifically enumerated in the LGC or taxed under the
Tax Code or other applicable law. Section 186 of the LGC, granting local
government units wide latitude in imposing fees, expressly provides:
Section 186. Power To Levy Other Taxes, Fees or Charges. - Local
government units may exercise the power to levy taxes, fees or charges
on any base or subject not otherwise specifically enumerated herein or
taxed under the provisions of the National Internal Revenue Code, as
amended, or other applicable laws: Provided, That the taxes, fees, or
charges shall not be unjust, excessive, oppressive, confiscatory or
contrary to declared national policy: Provided, further, That the ordinance
levying such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose.
Smart further argues that the Municipality is encroaching on the regulatory
powers of the National Telecommunications Commission (NTC). Smart
cites Section 5(g) of Republic Act No. 7925 which provides that the
National Telecommunications Commission (NTC), in the exercise of its
regulatory powers, shall impose such fees and charges as may be
necessary to cover reasonable costs and expenses for the regulation and
supervision of the operations of telecommunications entities. Thus, Smart
32
alleges that the regulation of telecommunications entities and all aspects
of its operations is specifically lodged by law on the NTC.
To repeat, Ordinance No. 18 aims to regulate the "placing, stringing,
attaching, installing, repair and construction of all gas mains, electric,
telegraph and telephone wires, conduits, meters and other apparatus"
within the Municipality. The fees are not imposed to regulate the
administrative, technical, financial, or marketing operations of
telecommunications entities, such as Smart’s; rather, to regulate the
installation and maintenance of physical structures – Smart’s cell sites or
telecommunications tower. The regulation of the installation and
maintenance of such physical structures is an exercise of the police power
of the Municipality. Clearly, the Municipality does not encroach on NTC’s
regulatory powers.
The Court likewise rejects Smart’s contention that the power to fix the fees
for the issuance of development permits and locational clearances is
exercised by the Housing and Land Use Regulatory Board (HLURB).
Suffice it to state that the HLURB itself recognizes the local government
units’ power to collect fees related to land use and development.
Significantly, the HLURB issued locational guidelines governing
telecommunications infrastructure.1âwphi1 Guideline No. VI relates to the
collection of locational clearance fees either by the HLURB or the
concerned local government unit, to wit:
VI. Fees
The Housing and Land Use Regulatory Board in the performance of its
functions shall collect the locational clearance fee based on the revised
schedule of fees under the special use project as per Resolution No. 622,
series of 1998 or by the concerned LGUs subject to EO 72.26
On whether Ordinance No. 18 is valid and constitutional
Smart contends that Ordinance No. 18 violates Sections 130(b)(3)27 and
186 of the LGC since the fees are unjust, excessive, oppressive and
confiscatory. Aside from this bare allegation, Smart did not present any
evidence substantiating its claims. In Victorias Milling Co., Inc. v.
Municipality of Victorias,28 the Court rejected the argument that the fees
imposed by respondent therein are excessive for lack of evidence
supporting such claim, to wit:
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus
to the discretion of municipal authorities. Courts will go slow in writing off
an ordinance as unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule
which has gained acceptance is that factors relevant to such an inquiry are
the municipal conditions as a whole and the nature of the business made
subject to imposition.
Plaintiff, has however not sufficiently proven that, taking these factors
together, the license taxes are unreasonable. The presumption of validity
subsists. For, plaintiff has limited itself to insisting that the amounts levied
exceed the cost of regulation and the municipality has adequate funds for
the alleged purposes as evidenced by the municipality’s cash surplus for
the fiscal year ending 1956.
On the constitutionality issue, Smart merely pleaded for the declaration of
unconstitutionality of Ordinance No. 18 in the Prayer of the Petition, without
any argument or evidence to support its plea. Nowhere in the body of the
Petition was this issue specifically raised and discussed. Significantly,
Smart failed to cite any constitutional provision allegedly violated by
respondent when it issued Ordinance No. 18.
33
Settled is the rule that every law, in this case an ordinance, is presumed
valid. To strike down a law as unconstitutional, Smart has the burden to
prove a clear and unequivocal breach of the Constitution, which Smart
miserably failed to do. In Lawyers Against Monopoly and Poverty (LAMP)
v. Secretary of Budget and Management,29 the Court held, thus:

To justify the nullification of the law or its implementation, there must be a

clear and unequivocal, not a doubtful, breach of the Constitution. In case
of doubt in the sufficiency of proof establishing unconstitutionality, the
Court must sustain legislation because "to invalidate [a law] based on xx x
baseless supposition is an affront to the wisdom not only of the legislature
that passed it but also of the executive which approved it." This
presumption of constitutionality can be overcome only by the clearest
showing that there was indeed an infraction of the Constitution, and only
when such a conclusion is reached by the required majority may the Court
pronounce, in the discharge of the duty it cannot escape, that the
challenged act must be struck down.

WHEREFORE, the Court DENIES the petition.

SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
34
 nullified the Customs Memorandum Order (CMO) No. 27-2003[4] on the
SECOND DIVISION tariff classification of wheat issued by petitioner Commissioner of Customs.

COMMISSIONER OF CUSTOMS and the DISTRICT COLLECTOR OF The antecedent facts are as follows:
THE PORT OF SUBIC,
Petitioners, On 7 November 2003, petitioner Commissioner of Customs issued CMO
27-2003. Under the Memorandum, for tariff purposes, wheat was classified
- versus - according to the following: (1) importer or consignee; (2) country of origin;
and (3) port of discharge.[5] The regulation provided an exclusive list of
HYPERMIX FEEDS CORPORATION, corporations, ports of discharge, commodity descriptions and countries of
Respondent. origin. Depending on these factors, wheat would be classified either as
G.R. No. 179579 food grade or feed grade. The corresponding tariff for food grade wheat
was 3%, for feed grade, 7%.
Present:
CMO 27-2003 further provided for the proper procedure for protest or
CARPIO, J., Chairperson, Valuation and Classification Review Committee (VCRC) cases. Under this
BRION, procedure, the release of the articles that were the subject of protest
PEREZ, required the importer to post a cash bond to cover the tariff differential.[6]
SERENO, and
REYES, JJ. A month after the issuance of CMO 27-2003, on 19 December 2003,
respondent filed a Petition for Declaratory Relief[7] with the Regional Trial
Promulgated: Court (RTC) of Las Pias City. It anticipated the implementation of the
regulation on its imported and perishable Chinese milling wheat in transit
February 1, 2012 from China.[8] Respondent contended that CMO 27-2003 was issued
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x without following the mandate of the Revised Administrative Code on
public participation, prior notice, and publication or registration with the
DECISION University of the Philippines Law Center.

SERENO, J.:
Before us is a Petition for Review under Rule 45,[1] assailing the
Decision[2] and the Resolution[3] of the Court of Appeals (CA), which
Respondent also alleged that the regulation summarily adjudged it to be a
feed grade supplier without the benefit of prior assessment and
examination; thus, despite having imported food grade wheat, it would be
subjected to the 7% tariff upon the arrival of the shipment, forcing them to
pay 133% more than was proper.
35

Furthermore, respondent claimed that the equal protection clause of the
Constitution was violated when the regulation treated non-flour millers
differently from flour millers for no reason at all.
Lastly, respondent asserted that the retroactive application of the
regulation was confiscatory in nature.
On 19 January 2004, the RTC issued a Temporary Restraining Order
(TRO) effective for twenty (20) days from notice.[9]
Petitioners thereafter filed a Motion to Dismiss.[10] They alleged that: (1)
the RTC did not have jurisdiction over the subject matter of the case,
because respondent was asking for a judicial determination of the
classification of wheat; (2) an action for declaratory relief was improper; (3)
CMO 27-2003 was an internal administrative rule and not legislative in
nature; and (4) the claims of respondent were speculative and premature,
because the Bureau of Customs (BOC) had yet to examine respondents
products. They likewise opposed the application for a writ of preliminary
injunction on the ground that they had not inflicted any injury through the
issuance of the regulation; and that the action would be contrary to the rule
that administrative issuances are assumed valid until declared otherwise.
On 28 February 2005, the parties agreed that the matters raised in the
application for preliminary injunction and the Motion to Dismiss would just
be resolved together in the main case. Thus, on 10 March 2005, the RTC
rendered its Decision[11] without having to resolve the application for
preliminary injunction and the Motion to Dismiss.
The trial court ruled in favor of respondent, to wit:
WHEREFORE, in view of the foregoing, the Petition is GRANTED and the
subject Customs Memorandum Order 27-2003 is declared INVALID and
OF NO FORCE AND EFFECT. Respondents Commissioner of Customs,
the District Collector of Subic or anyone acting in their behalf are to
immediately cease and desist from enforcing the said Customs
Memorandum Order 27-2003.
SO ORDERED.[12]
The RTC held that it had jurisdiction over the subject matter, given that the
issue raised by respondent concerned the quasi-legislative powers of
petitioners. It likewise stated that a petition for declaratory relief was the
proper remedy, and that respondent was the proper party to file it. The
court considered that respondent was a regular importer, and that the latter
would be subjected to the application of the regulation in future
transactions.
With regard to the validity of the regulation, the trial court found that
petitioners had not followed the basic requirements of hearing and
publication in the issuance of CMO 27-2003. It likewise held that
petitioners had substituted the quasi-judicial determination of the
commodity by a quasi-legislative predetermination.[13] The lower court
pointed out that a classification based on importers and ports of discharge
were violative of the due process rights of respondent.
Dissatisfied with the Decision of the lower court, petitioners appealed to
the CA, raising the same allegations in defense of CMO 27-2003.[14] The
appellate court, however, dismissed the appeal. It held that, since the
regulation affected substantial rights of petitioners and other importers,
petitioners should have observed the requirements of notice, hearing and
publication.
Hence, this Petition.
36
Petitioners raise the following issues for the consideration of this Court:
I. THE COURT OF APPEALS DECIDED A QUESTION OF
SUBSTANCE WHICH IS NOT IN ACCORD WITH THE LAW AND
PREVAILING JURISPRUDENCE.
II. THE COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT
THE TRIAL COURT HAS JURISDICTION OVER THE CASE.
The Petition has no merit.
We shall first discuss the propriety of an action for declaratory relief.
Rule 63, Section 1 provides:
Who may file petition. Any person interested under a deed, will, contract
or other written instrument, or whose rights are affected by a statute,
executive order or regulation, ordinance, or any other governmental
regulation may, before breach or violation thereof, bring an action in the
appropriate Regional Trial Court to determine any question of construction
or validity arising, and for a declaration of his rights or duties, thereunder.
The requirements of an action for declaratory relief are as follows: (1) there
must be a justiciable controversy; (2) the controversy must be between
persons whose interests are adverse; (3) the party seeking declaratory
relief must have a legal interest in the controversy; and (4) the issue
involved must be ripe for judicial determination.[15] We find that the
Petition filed by respondent before the lower court meets these
requirements.
First, the subject of the controversy is the constitutionality of CMO 27-2003
issued by petitioner Commissioner of Customs. In Smart Communications
v. NTC,[16] we held:
The determination of whether a specific rule or set of rules issued by an
administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power
of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. This is within
the scope of judicial power, which includes the authority of the courts to
determine in an appropriate action the validity of the acts of the political
departments. Judicial power includes the duty of the courts of justice to
settle actual controversies involving rights which are legally demandable
and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part
of any branch or instrumentality of the Government. (Emphasis supplied)
Meanwhile, in Misamis Oriental Association of Coco Traders, Inc. v.
Department of Finance Secretary,[17] we said:
xxx [A] legislative rule is in the nature of subordinate legislation, designed
to implement a primary legislation by providing the details thereof. xxx
In addition such rule must be published. On the other hand, interpretative
rules are designed to provide guidelines to the law which the administrative
agency is in charge of enforcing.
Accordingly, in considering a legislative rule a court is free to make three
inquiries: (i) whether the rule is within the delegated authority of the
administrative agency; (ii) whether it is reasonable; and (iii) whether it was
issued pursuant to proper procedure. But the court is not free to substitute
its judgment as to the desirability or wisdom of the rule for the legislative
body, by its delegation of administrative judgment, has committed those
questions to administrative judgments and not to judicial judgments. In the
case of an interpretative rule, the inquiry is not into the validity but into the
correctness or propriety of the rule. As a matter of power a court, when
37
confronted with an interpretative rule, is free to (i) give the force of law to
the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)
give some intermediate degree of authoritative weight to the interpretative
rule. (Emphasis supplied)
Second, the controversy is between two parties that have adverse
interests. Petitioners are summarily imposing a tariff rate that respondent
is refusing to pay.
Third, it is clear that respondent has a legal and substantive interest in the
implementation of CMO 27-2003. Respondent has adequately shown that,
as a regular importer of wheat, on 14 August 2003, it has actually made
shipments of wheat from China to Subic. The shipment was set to arrive
in December 2003. Upon its arrival, it would be subjected to the conditions
of CMO 27-2003. The regulation calls for the imposition of different tariff
rates, depending on the factors enumerated therein. Thus, respondent
alleged that it would be made to pay the 7% tariff applied to feed grade
wheat, instead of the 3% tariff on food grade wheat. In addition, respondent
would have to go through the procedure under CMO 27-2003, which would
undoubtedly toll its time and resources. The lower court correctly pointed
out as follows:
xxx As noted above, the fact that petitioner is precisely into the business
of importing wheat, each and every importation will be subjected to
constant disputes which will result into (sic) delays in the delivery, setting
aside of funds as cash bond required in the CMO as well as the resulting
expenses thereof. It is easy to see that business uncertainty will be a
constant occurrence for petitioner. That the sums involved are not minimal
is shown by the discussions during the hearings conducted as well as in
the pleadings filed. It may be that the petitioner can later on get a refund
but such has been foreclosed because the Collector of Customs and the
Commissioner of Customs are bound by their own CMO. Petitioner cannot
get its refund with the said agency. We believe and so find that Petitioner
has presented such a stake in the outcome of this controversy as to vest
it with standing to file this petition.[18] (Emphasis supplied)
Finally, the issue raised by respondent is ripe for judicial determination,
because litigation is inevitable[19] for the simple and uncontroverted
reason that respondent is not included in the enumeration of flour millers
classified as food grade wheat importers. Thus, as the trial court stated, it
would have to file a protest case each time it imports food grade wheat and
be subjected to the 7% tariff.
It is therefore clear that a petition for declaratory relief is the right remedy
given the circumstances of the case.
Considering that the questioned regulation would affect the substantive
rights of respondent as explained above, it therefore follows that
petitioners should have applied the pertinent provisions of Book VII,
Chapter 2 of the Revised Administrative Code, to wit:
Section 3. Filing. (1) Every agency shall file with the University of the
Philippines Law Center three (3) certified copies of every rule adopted by
it. Rules in force on the date of effectivity of this Code which are not filed
within three (3) months from that date shall not thereafter be the bases of
any sanction against any party of persons.
xxx xxx xxx
Section 9. Public Participation. - (1) If not otherwise required by law, an
agency shall, as far as practicable, publish or circulate notices of proposed
rules and afford interested parties the opportunity to submit their views
prior to the adoption of any rule.
38
(2) In the fixing of rates, no rule or final order shall be valid unless the
proposed rates shall have been published in a newspaper of general
circulation at least two (2) weeks before the first hearing thereon.
(3) In case of opposition, the rules on contested cases shall be observed.
When an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance, for it gives no
real consequence more than what the law itself has already prescribed.
When, on the other hand, the administrative rule goes beyond merely
providing for the means that can facilitate or render least cumbersome the
implementation of the law but substantially increases the burden of those
governed, it behooves the agency to accord at least to those directly
affected a chance to be heard, and thereafter to be duly informed, before
that new issuance is given the force and effect of law.[20]
Likewise, in Taada v. Tuvera,[21] we held:
The clear object of the above-quoted provision is to give the general public
adequate notice of the various laws which are to regulate their actions and
conduct as citizens. Without such notice and publication, there would be
no basis for the application of the maxim ignorantia legis non excusat. It
would be the height of injustice to punish or otherwise burden a citizen for
the transgression of a law of which he had no notice whatsoever, not even
a constructive one.
Perhaps at no time since the establishment of the Philippine Republic has
the publication of laws taken so vital significance that at this time when the
people have bestowed upon the President a power heretofore enjoyed
solely by the legislature. While the people are kept abreast by the mass
media of the debates and deliberations in the Batasan Pambansa and for
the diligent ones, ready access to the legislative records no such publicity
accompanies the law-making process of the President. Thus, without
publication, the people have no means of knowing what presidential
decrees have actually been promulgated, much less a definite way of
informing themselves of the specific contents and texts of such decrees.
(Emphasis supplied)
Because petitioners failed to follow the requirements enumerated by the
Revised Administrative Code, the assailed regulation must be struck down.
Going now to the content of CMO 27-3003, we likewise hold that it is
unconstitutional for being violative of the equal protection clause of the
Constitution.
The equal protection clause means that no person or class of persons shall
be deprived of the same protection of laws enjoyed by other persons or
other classes in the same place in like circumstances. Thus, the guarantee
of the equal protection of laws is not violated if there is a reasonable
classification. For a classification to be reasonable, it must be shown that
(1) it rests on substantial distinctions; (2) it is germane to the purpose of
the law; (3) it is not limited to existing conditions only; and (4) it applies
equally to all members of the same class.[22]
Unfortunately, CMO 27-2003 does not meet these requirements. We do
not see how the quality of wheat is affected by who imports it, where it is
discharged, or which country it came from.
Thus, on the one hand, even if other millers excluded from CMO 27-2003
have imported food grade wheat, the product would still be declared as
feed grade wheat, a classification subjecting them to 7% tariff. On the other
hand, even if the importers listed under CMO 27-2003 have imported feed
grade wheat, they would only be made to pay 3% tariff, thus depriving the
state of the taxes due. The regulation, therefore, does not become
disadvantageous to respondent only, but even to the state.
39
It is also not clear how the regulation intends to monitor more closely wheat
importations and thus prevent their misclassification. A careful study of
CMO 27-2003 shows that it not only fails to achieve this end, but results in
the opposite. The application of the regulation forecloses the possibility
that other corporations that are excluded from the list import food grade
wheat; at the same time, it creates an assumption that those who meet the
criteria do not import feed grade wheat. In the first case, importers are
unnecessarily burdened to prove the classification of their wheat imports;
while in the second, the state carries that burden.
Petitioner Commissioner of Customs also went beyond his powers when
the regulation limited the customs officers duties mandated by Section
1403 of the Tariff and Customs Law, as amended. The law provides:
Section 1403. Duties of Customs Officer Tasked to Examine, Classify, and
Appraise Imported Articles. The customs officer tasked to examine,
classify, and appraise imported articles shall determine whether the
packages designated for examination and their contents are in accordance
with the declaration in the entry, invoice and other pertinent documents
and shall make return in such a manner as to indicate whether the articles
have been truly and correctly declared in the entry as regard their quantity,
measurement, weight, and tariff classification and not imported contrary to
law. He shall submit samples to the laboratory for analysis when feasible
to do so and when such analysis is necessary for the proper classification,
appraisal, and/or admission into the Philippines of imported articles.
Likewise, the customs officer shall determine the unit of quantity in which
they are usually bought and sold, and appraise the imported articles in
accordance with Section 201 of this Code.
Failure on the part of the customs officer to comply with his duties shall
subject him to the penalties prescribed under Section 3604 of this Code.
The provision mandates that the customs officer must first assess and
determine the classification of the imported article before tariff may be
imposed. Unfortunately, CMO 23-2007 has already classified the article
even before the customs officer had the chance to examine it. In effect,
petitioner Commissioner of Customs diminished the powers granted by the
Tariff and Customs Code with regard to wheat importation when it no
longer required the customs officers prior examination and assessment of
the proper classification of the wheat.
It is well-settled that rules and regulations, which are the product of a
delegated power to create new and additional legal provisions that have
the effect of law, should be within the scope of the statutory authority
granted by the legislature to the administrative agency. It is required that
the regulation be germane to the objects and purposes of the law; and that
it be not in contradiction to, but in conformity with, the standards prescribed
by law.[23]
In summary, petitioners violated respondents right to due process in the
issuance of CMO 27-2003 when they failed to observe the requirements
under the Revised Administrative Code. Petitioners likewise violated
respondents right to equal protection of laws when they provided for an
unreasonable classification in the application of the regulation. Finally,
petitioner Commissioner of Customs went beyond his powers of delegated
authority when the regulation limited the powers of the customs officer to
examine and assess imported articles.
WHEREFORE, in view of the foregoing, the Petition is DENIED.
SO ORDERED.
LEONEN, J.:
40
LA SUERTE CIGAR & CIGARETTE FACTORY vs. COURT OF
APPEALS,
G.R. No. 125346, November 11, 2014, EN BANC
These cases involve the taxability of stemmed leaf tobacco imported and
locally purchased by cigarette manufacturers for use as raw material in the
manufacture of their cigarettes. Under the National Internal Revenue Code
of 1997 (1997 NIRC), before it was amended on December 19, 2012
through Republic Act No. 10351[1] (Sin Tax Law), stemmed leaf tobacco
is subject to an excise tax of P0.75 for each kilogram thereof.[2] The 1997
NIRC further provides that stemmed leaf tobacco "leaf tobacco which has
had the stem or midrib removed"[3] "may be sold in bulk as raw material
by one manufacturer directly to another without payment of the tax, under
such conditions as may be prescribed in the rules and regulations
prescribed by the Secretary of Finance."[4]
This is a consolidation of six petitions for review of several decisions of the
Court of Appeals, involving three cigarette manufacturers and the
Commissioner of Internal Revenue. G.R. No. 125346 is an appeal[5] from
the Court of Appeals (Sixth Division) that reversed[6] the Court of Tax
Appeals' decision[7] and held petitioner La Suerte Cigar & Cigarette
Factory (La Suerte) liable for deficiency specific tax on its purchase of
imported and locally produced stemmed leaf tobacco and sale of stemmed
leaf tobacco to Associated Anglo-American Tobacco Corporation (AATC)
during the period from January 1, 1986 to June 30, 1989. G.R. Nos.
136328 29 is an appeal[8] by the Commissioner of Internal Revenue
(Commissioner) from the decision[9] of the Court of Appeals that affirmed
the Court of Tax Appeals' rulings[10] that Fortune Tobacco Corporation
(Fortune) was not obliged to pay the excise tax on its importations of
stemmed leaf tobacco for the periods from January 1, 1986 to June 30,
1989 and July 1, 1989 to November 30, 1990. In G.R. No. 148605, Sterling
Tobacco Corporation (Sterling) appeals[11] the decision[12] of the Court
of Appeals that reversed the Court of Tax Appeals' decision[13] and held
it liable to pay deficiency excise taxes on its importation and local
purchases of stemmed leaf tobacco from November 1986 to June 24,
1989. G.R. No. 144942 is an appeal[14] from the Court of Appeals'
decision[15] that affirmed the Court of Tax Appeals' decision[16] and
ordered the refund of specific taxes paid by La Suerte on its importation of
stemmed leaf tobacco in April 1995. In G.R. No. 158197, La Suerte sought
to appeal[17] the decision[18] of the Court of Appeals holding it liable for
deficiency specific tax on its local and imported purchases of stemmed leaf
tobacco and those it sold for the period from June 21, 1989 to November
20, 1990. Finally, in G.R. No. 165499, La Suerte again sought to appeal
by certiorari[19] the decision[20] of the Court of Appeals reversing the
Court of Tax Appeals and holding it liable for deficiency specific tax on its
importation of stemmed leaf tobacco in March 1995.
Factual background
Overview of cigarette manufacturing
The primary component of cigarettes is tobacco, a processed product
derived from the leaves of the plants in the genus Nicotiana.[21] Most
cigarettes contain a mixture or blend of several types of tobacco from a
variety of sources.
The tobacco types grown in the Philippines are: Virginia (or 'flue-
cured'),[22] which accounts for 59.35% of tobacco production, Burley (or
'bright air-cured'),[23] which makes up 22.21%, and the Native (or 'dark
air-cured),[24] which makes up the remaining 18.44%.[25] "[T]he 'native'
type is normally categorized into three: cigar filler type, wrapper type and
chewing type, or . . . 'Batek' tobacco."[26] Virginia and Burley, considered
as the aromatic type, are intended for cigarette manufacturing.
41

Growing and harvesting
"Tobacco seeds undergo a process of germination, which takes about 7 to
10 days, depending on the tobacco varieties. . . . The tobacco seedlings
are then sown in cold frames or hotbeds to prevent attacks from insects,
and then transplanted into the fields"[27] after 45 to 65 days.[28]
Harvesting begins 55 to 60 days after transplanting.[29] A farmer carries
out either priming (leaf by leaf) or stalk harvesting (by the whole plant).[30]
Curing
"After harvest, tobacco is stored for curing, which allows for the slow
oxidation and degradation of carotenoids. This allows for the leaves to take
on properties that are usually attributed to the 'smoothness' of the
smoke."[31]
"Curing methods vary with the type of tobacco grown. The tobacco barn
design varies accordingly."[32] There are two main ways of curing tobacco
in the Philippine setting:
1)
Air-curing (for Burley and Native tobacco) "is carried out by hanging the
tobacco in well-ventilated barns, where the tobacco is allowed to dry over
a period of 4 to 8 weeks. Air-cured tobacco is generally low in sugar
content, which gives the tobacco smoke a light, smooth, semi-sweet flavor.
These tobacco leaves usually have a high nicotine content[;]"[33] and
2)
Flue-curing (for Virginia tobacco) process "starts by the sticking of tobacco
leaves, which are then hung from tier-poles in curing barns. The procedure
will generally take about a week. Flue-cured tobacco generally produces
cigarette tobacco, which usually has a high content of sugar, with medium
to high levels of nicotine."[34]
Once cured, the leaves are sorted into grades based on size, color, and
quality, and packed in standard bales.[35] The bales are then moved to
accredited trading centers where they are purchased by leaf buyers such
as wholesale tobacco dealers and exporters or cigarette manufacturing
companies.[36]
Redrying and aging
After purchase, leaf tobacco is re-dried and then added with moisture to
make the tobacco pliable enough to remove its large stems.[37] The leaves
are stripped or de-stemmed, either by hand or machine, cleaned and
compressed into boxes or porous wooden vats called hogsheads, and
aged.[38] Thereafter, the leaves are either exported or used for the
manufacture of cigarettes, cigars, and other tobacco products.
Primary processing[39]
In the cigarette factory, the tobacco leaves undergo a conditioning process
where "high temperatures and humidity restore moisture to suitable levels
for cutting and blending tobacco and completing the cigarette-making
process."[40]
"[T]obaccos are precisely cut and blended according to . . . formulas, or
recipes, to produce tobaccos for various brands of cigarettes. These brand
recipes include ingredients and flavors that are added to the tobacco to
give each brand its unique characteristics."[41]
Cigarette making and packing[42]
"The blended tobacco often referred to as "filler" or "cut-filler" . . . is
delivered by a pneumatic feed system to cigarette making machines . . .
within the factory."[43] The machine disperses the shredded tobacco over
a continuous roll of cigarette paper and cuts the paper to the desired
42
length. The completed cigarettes are subsequently packed, sealed, and
placed in cartons.
Cigarette manufacturers
La Suerte Cigar & Cigarette Factory (La Suerte),[44] Fortune Tobacco
Corporation (Fortune),[45] and Sterling Tobacco Corporation (Sterling)[46]
are domestic corporations engaged in the production and manufacture of
cigars and cigarettes. These companies import leaf tobacco from foreign
sources and purchase locally produced leaf tobacco to be used in the
manufacture of cigars and cigarettes.[47]
The transactions of these cigarette manufacturers pertinent to these
consolidated cases are the following:
La Suerte's local purchases, importations, and sale of stemmed leaf
tobacco from January 1, 1986 to June 30, 1989 (G.R. No. 125346), and
from June 1989 to November 1990 (G.R. No. 158197), and importations
in March 1995 (G.R. No. 165499) and April 1995 (G.R. No. 144942);
Fortune's importation of tobacco strips from January 1, 1986 to June 30,
1989, and from July 1, 1989 to November 30, 1990 (G.R. Nos. 136328 29);
and
Sterling's importations and local purchases of stemmed leaf tobacco from
November 1986 to June 24, 1989 (G.R. No. 148605).
History of applicable tax provisions
The first tax code came into existence in 1939 with the enactment of
Commonwealth Act No. 466[48] (1939 Code). Section 136 of the 1939
Code imposed specific (excise) taxes on manufactured products of
tobacco, but excluded cigars and cigarettes, which were subject to tax
under a different section.[49] Section 136 provided thus:
SECTION 136. Specific Tax on Products of Tobacco. On manufactured
products of tobacco, except cigars, cigarettes, and tobacco specially
prepared for chewing so as to be unsuitable for consumption in any other
manner, but including all other tobacco twisted by hand or reduced into a
condition to be consumed in any manner other than by the ordinary mode
of drying and curing; and on all tobacco prepared or partially prepared for
sale or consumption, even if prepared without the use of any machine or
instrument and without being pressed or sweetened; and on all fine-cut
shorts and refuse, scraps, clippings, cuttings, and sweepings of tobacco,
there shall be collected on each kilogram, sixty centavos.
On tobacco specially prepared for chewing so as to be unsuitable for use
in any other manner, on each kilogram, forty-eight centavos. (Emphasis
supplied)
Section 132 of the 1939 Code, however, by way of exception, provided
that "stemmed leaf tobacco . . . may be sold in bulk as raw material by one
manufacturer directly to another, under such conditions as may be
prescribed in the regulations of the Department of Finance, without the
prepayment of the tax." Section 132 stated:
SECTION 132. Removal of Tobacco Products Without Pre-payment of
Tax. Products of tobacco entirely unfit for chewing or smoking may be
removed free of tax for agricultural or industrial use, under such conditions
as may be prescribed in the regulations of the Department of Finance; and
stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, refuse, scraps, cuttings, clippings and sweepings of tobacco may
be sold in bulk as raw material by one manufacturer directly to another,
under such conditions as may be prescribed in the regulations of the
Department of Finance, without the pre-payment of the tax.
"Stemmed leaf tobacco," as herein used means leaf tobacco which has
had the stem or midrib removed. The term does not include broken leaf
tobacco. (Emphasis supplied)
43
On September 29, 1954, upon the recommendation of then Acting
Collector of Internal Revenue J. Antonio Araneta, the Department of
Finance promulgated Revenue Regulations No. V-39 (RR No. V-39), or
"The Tobacco Products Regulations," relative to "the enforcement of the
provisions of Title IV of the [1939 Tax Code] in so far as they affect the
manufacture or importation of, and the collection and payment of the
specific tax on, manufactured tobacco or products of tobacco."[50] Section
20(a) of RR No. V-39, which lays the rules for tax exemption on tobacco
products, states:
SECTION 20. Exemption from tax of tobacco products intended for
agricultural or industrial purposes. (a) Sale of stemmed leaf tobacco, etc.,
by one factory to another. Subject to the limitations herein established,
products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use; and stemmed leaf tobacco, fine-
cut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings,
clippings, and sweepings of tobacco may be sold in bulk as raw materials
by one manufacturer directly to another without the prepayment of specific
tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or
partially manufactured tobacco or other refuse of tobacco may be
transferred from one factory to another under an official L-7 invoice on
which shall be entered the exact weight of the tobacco at the time of its
removal, and entry shall be made in the L-7 register in the place provided
on the page of removals. Corresponding debit entry will be made in the L-
7 register book of the factory receiving the tobacco under heading "Refuse,
etc., received from other factory," showing the date of receipt, assessment
and invoice numbers, name and address of the consignor, form in which
received, and the weight of the tobacco. This paragraph should not,
however, be construed to permit the transfer of materials unsuitable for the
manufacture of tobacco products from one factory to another. (Emphasis
supplied)
Sections 10 and 11 of RR No. V-39 enumerate and describe the record
books to be kept and used by manufacturers of tobacco products, viz:
SECTION 10. (a) Register, auxiliary, and stamps requisition books for
manufacturers. The Collector of Internal Revenue shall from time to time
supply provincial revenue agents or the Chief of the Tobacco Tax Section
with the necessary number of manufacturers official register books and
official auxiliary register books as may be required in each locality by
manufacturers of tobacco products. Whenever any manufacturer shall
have qualified himself as such by executing a proper bond, registering his
factory, and paying the privilege tax and shall have complied with all the
requirements of engaging in such business contained in the National
Internal Revenue Code and in these regulations, the internal revenue
agent within whose district the factory is located shall deliver to said
manufacturer the necessary official register books and auxiliary register
books. These books consist of the following:
(b) General nature of official register and auxiliary register books. The L-7
official register book is the record of all raw materials used in the
manufacture of tobacco products of all description in the factory. It is the
primary record of the internal operations of the factory. It shows the raw
materials used in the manufacture and the articles actually manufactured
or produced. The Schedule A register books are the record of the articles
actually manufactured or produced, and transferred from the credit side of
the official register book, L-7. They show the amount of taxes paid and the
name of the person to whom the finished products is consigned or sold
when leaving the factory. The bale book[,] L-7-1/2, is an auxiliary to the L-
7 official register book.
All official register books and other official records herein required of
manufacturers shall be kept in the factory premises, or in the factory
warehouse, in the case of bale books, and open to inspection by any
internal revenue officer at all times of the day or night.
44

....
SECTION 11. Entries to be made in the official register and auxiliary
register books; monthly transcripts. (a) Official bale book (L-7-1/2). All leaf
tobacco received in any factory or factory warehouse shall be debited, and
any removal of tobacco from the factory shall be credited in the official bale
book; except cuttings, clippings, sweepings, and other partially
manufactured tobacco, which shall be credited in the L-7 register book.
The Collector of Internal Revenue may in his discretion waive the
requirements of keeping an official bale book by small factories.
(b) The Official Register Book (L-7). One L-7 books shall suffice for each
manufacturer of tobacco products, regardless of the classes of tobacco
manufactured by him. All loose leaf tobacco received in the factory proper
and all bales of leaf tobacco which are opened in the factory for use in the
manufacture of tobacco products shall be entered in the L-7 official register
book under the heading "Received from Dealers" at the net weights. In the
column headed "Name["] and "Address" shall be shown the words
"Transferred from tobacco factory warehouse". All leaf tobacco received
into a factory must be entered in the official bale book pertaining to the
factory and bales of leaf tobacco shall not be taken up in the L-7 register
book until said bales are transferred for use and credited in the official bale
book. While leaf tobacco must be taken in the official bale book, this is
done for statistical purposes only. As soon as it enters the factory for use
in manufacture it should be taken up in the L-7 register book and credited
in the official bale book.
All removals of waste of tobacco, whether transferred to other factories,
removed for agricultural or industrial purposes, or destroyed on the
premises or elsewhere, shall be entered in the official register book, L-7,
under the heading "Raw Materials Removed", showing all information
required therein. (Emphasis supplied)
Section 2 of RR No. V-39 broadly defined "manufactured products of
tobacco" and "manufacturer of tobacco products" as follows:
Section 2. Definition of terms. When used in there [sic] regulations, the
following terms shall be given the interpretations indicated in their
respective definitions given below, except where the context indicates
otherwise:
(a) "Manufactured products of tobacco" shall include cigars, cigarettes,
smoking tobacco, chewing, snuff, and all other forms of manufactured and
partially manufactured tobacco, as defined in section 194 (M)[51] of the
National Internal Revenue Code.
(b) "Manufacturer of tobacco products" shall include all persons engaged
in the manufacture of any of the forms of tobacco mentioned in the next
preceding paragraph.
In 1967, the Secretary of Finance promulgated Revenue Regulations No.
17-67 (RR No. 17-67), as amended,[52] or the "Tobacco Revenue
Regulations on Leaf, Scrap, Other Partially Manufactured Tobacco and
Other Tobacco Products; Grading, Classification, Inspection, Shipments,
Exportation, Importation and the Manufacturers thereof under the
provisions of Act No. 2613, as amended." Section 2(i) of RR No. 17-67
defined a "manufacturer of tobacco" and included in the definition one who
prepares partially manufactured tobacco. Section 2(m) defined "partially
manufactured tobacco" as including stemmed leaf tobacco. Thus, Sections
2(i) and (m) read:
(i)
"Manufacturer of tobacco" Includes every person whose business it is to
manufacture tobacco o[r] snuff or who employs others to manufacture
tobacco or snuff, whether such manufacture be by cutting, pressing (not
baling), grinding, or rubbing (grating) any raw or leaf tobacco, or otherwise
preparing raw or leaf tobacco, or manufactured or partially manufactured
45
tobacco and snuff, or putting up for consumption scraps, refuse, or stems
of tobacco resulting from any process of handling tobacco stems, scraps,
clippings, or waste by sifting, twisting, screening or by any other process.
....
(m) "Partially manufactured tobacco" Includes:
(1)
"Stemmed leaf" handstripped tobacco, clean, good, partially broken leaf
only, free from mold and dust.
(2)
"Long-filler" handstripped tobacco of good, long pieces of broken leaf
usable as filler for cigars without further preparation, and free from mold,
dust stems and cigar cuttings.
(3)
"Short-filler" handstripped or machine-stripped tobacco, clean, good, short
pieces of broken leaf, which will not pass through a screen of two inches
(2") mesh.
(4)
"Cigar-cuttings" clean cuttings or clippings from cigars, unsized with any
other form of tobacco.
(5)
"Machine-scrap tobacco" machine-threshed, clean, good tobacco, not
included in any of the above terms, usable in the manufacture of tobacco
products.
(6)
"Stems" midribs of leaf tobacco removed from the whole leaf or broken leaf
either by hand or machine.
(7)
"Waste tobacco" denatured tobacco; powder or dust, refuse, unfit for
human consumption; discarded materials in the manufacture of tobacco
products, which may include stems.
Section 3 of RR No. 17-67 classified entities that dealt with tobacco
according to the type of permit that the Bureau of Internal Revenue issued
to each entity. Under this classification, wholesale leaf tobacco dealers
were considered L-3 permittees. Those (referring to wholesale leaf
tobacco dealers) that reprocess partially manufactured tobacco for export,
for themselves, and/or for other L-6 or L-7 permittees were considered L-
6 permittees. Manufacturers of tobacco products such as cigarette
manufacturers were considered L-7 permittees. Section 3 of RR No. 17-
67 reads:
(a)
L-3 Wholesale leaf tobacco dealer.
(b)
L-3F Wholesale leaf tobacco dealer. Issued only in favor of Farmer's
Cooperative Marketing Association (FaCoMas) duly organized in
accordance with law. [This function relative to tobacco trading was
transferred to the Philippine Virginia Tobacco Administration (PVTA) under
Section 15 of Republic Act No. 2265].
(c)
L-3R Wholesale leaf tobacco dealers. Issued only in favor of persons or
entities having fully equipped Redrying Plants.
(d)
L-3-¼ Buyers for wholesale leaf tobacco dealers.
(e)
L-4 Wholesale leaf tobacco dealers. Issued only in favor of persons or
entities having flue-curing barns, who may purchase or receive green
Virginia leaf tobacco from bona fide tobacco planters only, or handle green
leaf of their own production, which tobacco shall be sold or transferred only
to holders of L-3 and L-3R permits after flue-curing the tobacco.
(f)
L-5 Tobacco planters selling to consumers part or the whole of their
tobacco production.
(g)
L-6 Wholesale leaf tobacco dealers who, exclusively for export, except as
otherwise provided for in these regulations, perform the following
functions:
46
(1)
Handstripped and/or thresh whole leaf tobacco for themselves or for other
L-6 or L-7 permittees;
(2)
Re-process partially manufactured tobacco for themselves, or for other L-
6 or L-7 permittees;
(3)
Sell their partially manufactured tobacco to other L-6 permittees.
(h)
L-7 Manufacturers of tobacco products. [L-7 ½ designates an auxiliary
registered book (bale books), for manufacturers of tobacco products.]
(i)
B-14 Wholesale leaf tobacco dealers (Privilege tax receipt)
(j)
B-14 (a) Retail leaf tobacco dealers (Privilege tax receipt)
La Suerte contends that on December 12, 1972, then Internal Revenue
Commissioner Misael P. Vera issued a ruling which declared that:
. . . . The subsequent sale or transfer by the L-6/L-3R permittee for export
or to an L-7-1/2 for use in the manufacture of cigars or cigarettes may also
be allowed without the prepayment of the specific tax.[53]
Almost 40 years from the enactment of the 1939 Tax Code, Presidential
Decree No. 1158-A, otherwise known as the "National Internal Revenue
Code of 1977," was promulgated on June 3, 1977, to consolidate and
integrate the various tax laws which have so far amended or repealed the
provisions found in the 1939 Tax Code. Section 132 was renumbered as
Section 144, and Section 136 as Section 148. Sections 144 and 148, read:
SEC. 144. Removal of tobacco products without prepayment of tax.
Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under such conditions as may
be prescribed in the regulations of the Department of Finance, and
stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cuts chewing
tobacco, re-refuse, scraps, cuttings, clippings, stems or midribs, and
sweepings of tobacco may be sold in bulk as raw material by one
manufacturer directly to another, under such conditions as may be
prescribed in the regulations of the Department of Finance, without the
prepayment of the tax.
"Stemmed leaf tobacco", as herein used means leaf tobacco which has
had the stem or midrib removed. The term does not include broken leaf
tobacco.
....
SEC. 148. Specific tax on products of tobacco. On manufactured products
of tobacco, except cigars, cigarettes, and tobacco specially prepared for
chewing so as to be unsuitable for consumption in any other manner, but
including all other tobacco twisted by hand or reduced into a condition to
be consumed in any manner other than by the ordinary mode of drying and
curing; and on all tobacco prepared or partially prepared for sale or
consumption, even if prepared without the use of any machine or
instrument and without being pressed or sweetened; and on all fine-cut
shorts and refuse, scraps, clippings, cuttings, stems, and sweepings of
tobacco, there shall be collected on each kilogram, seventy-five centavos:
Provided, however, That fine-cut shorts and refuse, scraps, clippings,
cuttings, stems and sweepings of tobacco resulting from the handling, or
stripping of whole leaf tobacco may be transferred, disposed of, or
otherwise sold, without prepayment of the specific tax herein provided for
under such conditions as may be prescribed in the regulations
promulgated by the Secretary of Finance upon recommendation of the
Commissioner if the same are to be exported or to be used in the
manufacture of other tobacco products on which the specific tax will
eventually be paid on the finished product.
On tobacco specially prepared for chewing so as to be unsuitable for use
in any other manner, on each kilogram, sixty centavos.
47
Sections 144 and 148 were subsequently renumbered as Sections 120
and 125 respectively under Presidential Decree No. 1994,[54] which took
effect on January 1, 1986 (1986 Tax Code); then as Sections 137 and 141
under Executive Order No. 273;[55] and finally as Sections 140 and 144
under Republic Act No. 8424 or the "Tax Reform Act of 1997." However,
the provisions remained basically unchanged.
The business transactions of La Suerte, Fortune, and Sterling that the
Commissioner found to be taxable for specific tax took place during the
effectivity of the 1986 Tax Code, as amended by Executive Order No. 273.
The pertinent provisions are Sections 137 and 141, thus:
SEC. 137. Removal of tobacco products without prepayment of tax.
Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under such conditions as may
be prescribed in the regulations of the Ministry of Finance. Stemmed leaf
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps,
cuttings, clippings, stems or midribs, and sweepings of tobacco may be
sold in bulk as raw material by one manufacturer directly to another,
without payment of the tax under such conditions as may be prescribed in
the regulations of the Ministry of Finance.
'Stemmed leaf tobacco,' as herein used, means leaf tobacco which has
had the stem or midrib removed. The term does not include broken leaf
tobacco.
....
SEC. 141. Tobacco Products. There shall be collected a tax of seventy-
five centavos on each kilogram of the following products of tobacco:
(a) tobacco twisted by hand or reduced into a condition to be consumed in
any manner other than the ordinary mode of drying and curing;
(b) tobacco prepared or partially prepared with or without the use of any
machine or instruments or without being pressed or sweetened; and
(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco.
Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco resulting from the handling or stripping of whole leaf
tobacco may be transferred, disposed of, or otherwise sold, without
prepayment of the specific tax herein provided for under such conditions
as may be prescribed in the regulations promulgated by the Ministry of
Finance upon recommendation of the Commissioner, if the same are to be
exported or to be used in the manufacture of other tobacco products on
which the excise tax will eventually be paid on the finished product.
On tobacco specially prepared for chewing so as to be unsuitable for use
in any other manner, on each kilogram, sixty centavos.
Parenthetically, the present provisions explicitly state the following:
Stemmed leaf tobacco, tobacco prepared or partially prepared with or
without the use of any machine or instrument or without being pressed or
sweetened, fine-cut shorts and refuse, scraps, clippings, cuttings, stems,
midribs, and sweepings of tobacco resulting from the handling or stripping
of whole leaf tobacco shall be transferred, disposed of, or otherwise sold,
without any prepayment of the excise tax . . . if the same are to be exported
or to be used in the manufacture of cigars, cigarettes, or other tobacco
products on which the excise tax will eventually be paid on the finished
product, under such conditions as may be prescribed in the rules and
regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.[56]
BIR assessments
G.R. No. 125346
Sometime in June, 1989, a team of examiners from the Bureau of Internal
Revenue, led by Crisanto G. Luna, Revenue Officer III of the Field
48
Operation Division of the Excise Tax Service, conducted an examination
of the books of La Suerte by virtue of a letter of authority issued by then
Commissioner Jose U. Ong.
On January 3, 1990, La Suerte received a letter from then Commissioner
Jose U. Ong demanding the payment of P34,934,827.67 as deficiency
excise tax on La Suerte's entire importation and local purchase of
stemmed leaf tobacco for the period covering January 1, 1986 to June 30,
1989.
On January 12, 1990, La Suerte . . . protest[ed] the excise tax deficiency
assessment . . . stressing that the BIR assessment was based solely on
Section 141(b) of the Tax Code without, however, applying Section 137
thereof, the more specific provision, which expressly allows the sale of
stemmed leaf tobacco as raw material by one manufacturer directly to
another without payment of the excise tax. However, in a letter, dated
August 31, 1990, Commissioner Jose U. Ong denied La Suerte's protest,
insisting that stemmed leaf tobacco is subject to excise tax "unless there
is an express grant of exemption from [the] payment of tax."
In a letter dated October 17, 1990, Commissioner Ong reiterated his
demand for the payment of the alleged deficiency excise taxes due from
La Suerte, to wit:
"Please be informed that in an investigation conducted by this Office, it
was ascertained that you incurred a deficiency specific tax on your
importation and local purchase of stemmed leaf tobacco covering the
period from January 1, 1986 to June 30, 1989 in the total amount of
P34,904,247.00 computed as follows:
STEMMED LEAF TOBACCO
Imported 13,918,465 kls. x
P0.75 P10,438,848.00
Local 32,620,532 kls. x
0.75 24,465,399.00
Total Amount Due (Basic Tax) - - - - - - - - - - - -P34,904,247.00
. . . ." (page 99, Rollo)
On December 6, 1990, La Suerte filed with the Court of Tax Appeals a
Petition for Review seeking for the annulment of the assessments. . .
. . . On July 13, 1995, the Tax Court rendered [its] Decision, the dispositive
portion of which reads[:]
"WHEREFORE, in all the foregoing, the assessment of alleged deficiency
specific tax in the amount of P34,904,247.00 issued by the Respondent is
hereby CANCELLED for lack of merit.
SO ORDERED."[57]
The Commissioner appealed the Court of Tax Appeals' decision before the
Court of Appeals. On December 29, 1995, the Court of Appeals Sixth
Division ruled against La Suerte and found that RR No. V-39 limits the tax
exemption on transfers of stemmed leaf tobacco to transfers between two
L-7 permittees.[58] The Court of Appeals ruled as follows:
IN THE LIGHT OF ALL THE FOREGOING, the Decision appealed from is
hereby REVERSED and SET ASIDE. Respondent is ordered to pay the
petitioner Commissioner of Internal Revenue the amount of
P34,904,247.00 as deficiency specific tax on its importations and local
purchases of stemmed leaf tobacco and its sale of stemmed leaf tobacco
to Associated Anglo-American Tobacco Corporation covering the period
from January 1, 1986 to June 30, 1989, plus 25% surcharge for late
payment and 20% interest per annum from October 17, 1990 until fully
paid pursuant to sections 248 and 249 of the Tax Code.
SO ORDERED.[59]
La Suerte filed a motion for reconsideration, which was denied by the Court
of Appeals in its June 7, 1996 resolution.[60]
49
On August 2, 1996, La Suerte filed the instant petition for review,[61]
praying for the reversal of the Court of Appeals' decision and cancellation
of the assessment by the Commissioner. La Suerte raises the following
grounds in support of its prayer:
THE COURT OF APPEALS ERRED WHEN IT CONSIDERED SECTION
20 (A) OF RR NO. V-39, SINCE THE COMMISSIONER RAISED IT FOR
THE FIRST TIME IN THE COURT OF APPEALS
THE COURT OF APPEALS ERRED WHEN IT HELD THAT SECTION
20(A) OF RR NO. V-39 RESTRICTS THE APPLICATION OF SECTION
137 OF THE TAX CODE, SINCE LANGUAGE IN SEC. 137 IS
UNQUALIFIED, WHILE SEC. 20(A) CONTAINS NO RESTRICTIVE
LANGUAGE
THE COURT OF APPEALS ERRED WHEN IT IGNORED SEC. 43 OF RR
NO. 17-67 AS WELL AS OPINIONS OF BIR OFFICIALS WHICH
CONFIRMED THE EXEMPTION OF STEMMED LEAF TOBACCO FROM
PREPAYMENT OF SPECIFIC TAX
THE COURT OF APPEALS ERRED WHEN IT HELD THAT SEC. 43 OF
RR NO. 17-67 DID NOT REPEAL SECTIONS 35 AND 20(A) OF RR NO.
V-39, SINCE THEIR PROVISIONS ARE REPUGNANT TO EACH OTHER
THE COURT OF APPEALS ERRED WHEN IT HELD THAT RR NO. V-39
IMPOSES SPECIFIC TAXES ON STEMMED LEAF TOBACCO, SINCE IT
MAKES NO MENTION AT ALL OF TAXES ON STEMMED LEAF
TOBACCO
THE COURT OF APPEALS ERRED WHEN IT HELD RR NO. V-39
APPLIED TO L-6 PERMITTEES OR MANUFACTURERS OF STEMMED
LEAF TOBACCO, SINCE L-6 CLASSIFICATION WAS NON-EXISTENT
AT THE TIME
THE COURT OF APPEALS ERRED WHEN IT INTERPRETED SECTION
20(A) OF RR NO. V-39 IN SUCH A WAY AS TO RESULT IN
ADMINISTRATIVE LEGISLATION, SINCE THE INTERPRETATION
SANCTIONED THE RESTRICTION OF AN UNQUALIFIED PROVISION
OF LAW BY A MERE REGULATION
THE COURT OF APPEALS ERRED WHEN IT GAVE NO WEIGHT TO
THE DECEMBER 12, 1972 BIR RULING AND OPINIONS OF OTHER BIR
OFFICIALS WHICH CONFIRMED THE EXEMPTION OF STEMMED
LEAF TOBACCO FROM PREPAYMENT OF SPECIFIC TAX
THE COURT OF APPEALS ERRED WHEN IT HELD [THAT] NON-
APPLICATION OF [THE] DECEMBER 12 RULING DID NOT IMPINGE
ON PRINCIPLE OF NON-RETROACTIVITY OF RULINGS BECAUSE
THE ASSESSMENT DID NOT CITE THE RULING, SINCE CITATION OF
A RULING IN AN ASSESSMENT [IS] NOT NECESSARY FOR
PRINCIPLE TO APPLY
THE COURT OF APPEALS ERRED WHEN IT DISREGARDED THE
ADMINISTRATIVE PRACTICE OF BIR FOR OVER HALF A CENTURY
OF NOT SUBJECTING STEMMED LEAF TOBACCO TO SPECIFIC TAX
THE COURT OF APPEALS ERRED WHEN IT HELD THAT SUBJECTING
STEMMED LEAF TOBACCO TO SPECIFIC TAX IS NOT PROHIBITED
FORM OF DOUBLE TAXATION, SINCE A TAX ON BOTH STEMMED
LEAF TOBACCO AND CIGARETTES INTO WHICH IT IS
MANUFACTURED IS DOUBLE TAXATION
THE COURT OF APPEALS ERRED WHEN IT HELD LA SUERTE LIABLE
FOR SPECIFIC TAX EVEN IF NO EFFORT WAS FIRST MADE TO
COLLECT THE TAX FROM THE MANUFACTURER OF STEMMED LEAF
50
TOBACCO, SINCE TAX CODE ALLOWS THIS ONLY IF SPECIAL
ALLOWANCE IS GRANTED, WHICH IS NOT THE CASE
THE COURT OF APPEALS ERRED WHEN IT FAILED TO CONSIDER
THAT THE REENACTMENT OF THE 1939 CODE AS THE 1977 CODE
AND 1986 TAX CODES ADOPTED THE INTERPRETATION IN THE
DECEMBER 1972 BIR RULING
THE COURT OF APPEALS ERRED WHEN IT APPLIED THE RULES OF
CONSTRUCTION ON EXEMPTION FROM TAXES, SINCE NO TAX
EXEMPTION WAS INVOLVED BUT MERELY AN EXEMPTION FROM
PREPAYMENT OF TAX.[62]
G.R. No. 136328 29
In the letter dated November 24, 1989, the Commissioner demanded from
Fortune the payment of deficiency excise tax in the amount of
P28,938,446.25 for its importation of tobacco strips from January 1, 1986
to June 30, 1989. Fortune requested for reconsideration, which was denied
by the Commissioner on August 31, 1990. Undaunted, Fortune appealed
to the Court of Tax Appeals through a petition for review, which was
docketed as CTA Case No. 4587.[63]
In the decision dated November 23, 1994, the Court of Tax Appeals ruled
in favor of Fortune and set aside the Commissioner's assessment of
P28,938,446.25 as deficiency excise tax.
Meanwhile, on March 20, 1991, Fortune received another letter from the
Bureau of Internal Revenue, demanding payment of P1,989,821.86 as
deficiency specific tax on its importation of stemmed leaf tobacco from July
1, 1989 to November 30, 1990.[64] Fortune filed its protest and requested
the Commissioner to cancel and withdraw the assessment.[65] On April
18, 1991, the Commissioner denied with finality Fortune's request.[66]
Fortune appealed to the Court of Tax Appeals, and the case was docketed
as CTA Case No. 4616.[67]
In the decision dated October 6, 1994, the Court of Tax Appeals ruled in
favor of Fortune and set aside the Commissioner's assessment of
P1,989,821.26 as deficiency excise tax on stemmed leaf tobacco.
The Commissioner filed separate petitions before the Court of Appeals,
challenging the decisions rendered by the Court of Tax Appeals in CTA
Case Nos. 4587 and 4616. These petitions were consolidated on
November 28, 1996.[68]
In the decision dated January 30, 1998, the Court of Appeals Seventeenth
Division dismissed the consolidated petitions filed by the Commissioner
and affirmed the assailed decisions of the Court of Tax Appeals. It also
denied the Commissioner's motion for reconsideration.
Hence, the Commissioner filed the present petition[69] on January 8, 1999.
The Commissioner claims that the Court of Appeals erred (1) "in holding
that stemmed leaf tobacco is not subject to the specific tax imposed under
Section 141 of the Tax Code[;]"[70] (2) "in not holding that under Section
137 of the Tax Code, stemmed leaf tobacco is exempt from specific tax
when sold in bulk as raw material by one manufacturer directly to another
under such conditions as may be prescribed in the regulations of the
Department of Finance[;]"[71] and (3) "in holding that there is double
taxation in the prohibited sense when specific tax is imposed on stemmed
leaf tobacco and again on the finished product of which stemmed leaf
tobacco is a raw material."[72]
G.R. No. 144942
In April 1995, "[La Suerte] imported stemmed leaf tobacco from various
sellers abroad."[73] The Commissioner "assessed specific taxes on the
51
stemmed leaf tobacco in the amount of P175,909.50, which [La Suerte]
paid under protest."[74] "Consequently, [La Suerte] filed a claim for refund
with [the Commissioner], [who] failed to act on the same."[75] Undeterred,
La Suerte appealed to the Court of Tax Appeals, which in its March 9, 1999
decision, ruled in its favor.
The Commissioner appealed to the Court of Appeals Third Division, which
on August 31, 2000, rendered its decision in CA-G.R. SP. No. 51902,
affirming the decision of the Court of Tax Appeals.
The Commissioner then filed the instant petition for review[76] asking this
court to overturn the Court of Appeals' decision. It avers that the Court of
Appeals erred in holding that Section 137 of the Tax Code applied "without
any conditions as to the domicile of the manufacturers and that [the
Commissioner] cannot indirectly restrict its application to local
manufacturers."[77]
The Third Division of this court initially denied[78] the petition due to an
insufficient or defective verification and because "the petition was filed by
revenue lawyers and not by the Solicitor General."[79]
The Commissioner filed a motion for clarification[80] seeking to clarify
whether the Bureau of Internal Revenue legal officers can file petitions for
review pursuant to Section 220 of the Tax Code without the intervention of
the Office of the Solicitor General.
The motion was referred to the En Banc[81] on August 7, 2001, which
issued the resolution on July 4, 2002, holding that "Section 220 of the Tax
Reform Act must not be understood as overturning the long established
procedure before this Court in requiring the Solicitor General to represent
the interest of the Republic. This Court continues to maintain that it is the
Solicitor General who has the primary responsibility to appear for the
government in appellate proceedings."[82] In the same resolution, this
court also declared the following:
The present controversy ruminate upon the singular issue of whether or
not Revenue Regulation 1767 [sic] issued by petitioner, in relation to
Section 137 of the Internal Revenue Code in the imposition of a tax on
stemmed-leaf tobacco, deviated from the tax code. This question basically
inquires then into whether or not the revenue regulation has exceeded, on
constitutional grounds, the allowable limits of legislative delegation.
Aware that the dismissal of the petition could have lasting effect on
government tax revenues, the lifeblood of the state, the Court heeds the
plea of petitioner for a chance to prosecute its case.[83] (Emphasis and
underscoring supplied)
This court resolved to reinstate[84] and give due course[85] to the
Commissioner's petition.
G.R. No. 148605
"On January 12, 1990, [Sterling] received a pre-assessment notice for
alleged deficiency excise tax on its importation and local purchase of
stemmed-leaf tobacco for P5,187,432.00 covering the period from
November 1986 to January 1989."[86] Sterling filed its protest letter[87]
dated January 19, 1990. The Commissioner, through its letters[88] dated
August 31, 1990 and October 17, 1990, denied the protest with finality.
Sterling filed before the Court of Tax Appeals a petition for review[89]
dated January 3, 1991, seeking the cancellation of the deficiency
assessment and praying that the Commissioner be ordered to desist from
collecting the assessed excise tax. On July 13, 1995, the Court of Tax
Appeals rendered its decision ordering the cancellation of the assessment
for deficiency excise tax.
52
The Commissioner then appealed[90] to the Court of Appeals. On March
7, 2001, the latter, through its Ninth Division, rendered a decision reversing
the Court of Tax Appeals' ruling, thus:
WHEREFORE, premises considered, the Decision of the Court of Tax
Appeals in C.T.A. Case No. 4532 is hereby REVERSED and SET ASIDE,
and the respondent is ORDERED to pay to the public petitioner the amount
of P5,187,432.00 as deficiency specific tax on its imported and locally
purchased stemmed leaf tobacco from November 1986 to June 24, 1989,
plus 25% surcharge on 5,187,432.00, and 20% interest per annum on the
total amount due from December 07, 1990 until full payment, pursuant to
Sections 248-49 of the Tax Code.
SO ORDERED.[91]
Sterling filed a motion for reconsideration,[92] which was denied by the
Court of Appeals in its June 19, 2001 resolution.
Hence, on August 13, 2001, Sterling filed the instant petition for review.[93]
Sterling argues that the Court of Appeals erred in holding that (1) then
Section 141 of the Tax Code subjects stemmed leaf tobacco to excise tax;
(2) Section 137 of the Tax Code did not exempt stemmed leaf tobacco
from prepayment of excise tax; (3) Section 20(A) of RR No. V-39 restricts
the application of Section 137 of the Tax Code since its language was
unqualified, while Section 20(A) contained no restrictive language; (4) RR
No. V-39 imposed specific taxes on stemmed leaf tobacco since its
language made no mention of taxes on stemmed leaf tobacco; (5) the
reason behind limiting exemptions only to transfers from one L-7 to another
L-7 is because sale has previously been subjected to specific tax; and (6)
the exemption from specific tax did not apply to imported stemmed leaf
tobacco.[94]
Sterling further argues that the Court of Appeals erred in not holding that
(1) the Commissioner's interpretation of Section 141 of the Tax Code and
Section 20(A) of RR No. V-39 amounts to an amendment of Sections 141
and 137 of the Tax Code by a mere administrative regulation; (2) a
December 12, 1972 Bureau of Internal Revenue ruling and opinions of
other Bureau of Internal Revenue officials confirmed the exemption of
stemmed leaf tobacco from prepayment of specific tax; (3) the
administrative practice of the Bureau of Internal Revenue for over half a
century of not subjecting stemmed leaf tobacco to excise tax proves that
no excise taxes were ever intended to be imposed; (4) imposition of excise
tax on stemmed leaf tobacco would result in the prohibited form of double
taxation; and (5) the re-enactment of the relevant provisions in the 1977
and 1986 Tax Codes adopted the interpretation in the December 1972
Bureau of Internal Revenue ruling.[95] Sterling also contends that the
"Court of Appeals erred in applying the rules of construction on exemption
from taxes, since no tax exemption was involved, but merely an exemption
from prepayment of excise tax."[96]
G.R. No. 158197
On January 10, 1991, the Commissioner sent a pre-assessment notice to
La Suerte demanding payment of P11,757,275.25 as deficiency specific
tax on its local purchases and importations and on the sale of stemmed
leaf tobacco during the period from September 14, 1989 to November 20,
1990.[97] On February 8, 1991, La Suerte received the formal assessment
letter of the Commissioner.[98]
La Suerte filed its protest on March 8, 1991.[99] On May 14, 1991, La
Suerte received the Commissioner's decision "denying the protest with
finality."[100]
"On June 13, 1991, the Court of Tax Appeals promulgated a Decision
finding for . . . La Suerte and disposing [as follows:]"[101]
WHEREFORE, in view of the foregoing, We find the petition for review
meritorious and the same is hereby GRANTED. Respondent's decision
53
dated April 29, 1991 is hereby set aside and the formal assessment for the
deficiency specific tax in the sum of P11,575,275.25 subject of the
respondent's letter, dated January 30, 1991, is deemed cancelled.
No pronouncement as to costs of suit.
SO ORDERED.[102]
The Commissioner filed a motion for reconsideration that was denied by
the Court of Tax Appeals in its April 5, 1995 resolution.[103]
The Commissioner appealed to the Court of Appeals.[104] In its decision
dated July 18, 2002, the Court of Appeals reversed the decision of the
Court of Tax Appeals. It cited Commissioner of Internal Revenue v. La
Campaña Fabrica de Tabacos, Inc.[105] as basis for its ruling. La Suerte
filed a motion for reconsideration, but it was denied by the Court of Appeals
in the resolution[106] dated May 9, 2003.
La Suerte prays for the reversal of the Court of Appeals' decision and
resolution in its petition for review,[107] wherein it raises the following
arguments:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT
SECTION 20(A) OF REV. REGS. NO. V-39 LIMITED THE CLASS OF
MANUFACTURERS WHOSE SALES OF STEMMED LEAF TOBACCO
WERE EXEMPT FROM PRE-PAYMENT OF SPECIFIC TAX.
EVEN IF SEC. 3 OF RR NO. 17-67 HAD BEEN WAS [sic] INTENDED TO
LIMIT MANUFACTURERS EXEMPT FROM PREPAYMENT OF
SPECIFIC TAX, THIS WOULD AMOUNT TO UNLAWFUL DELEGATION
OF LEGISLATIVE POWER.
RR NO. 17-67 WAS NEITHER ISSUED TO AMEND RR NO. V-39 NOR
TO AMEND THE TAX CODE, BUT SOLELY TO IMPLEMENT ACT NO.
2613, AS AMENDED, WHICH WAS ENACTED IN 1916 AND HAD
ABSOLUTELY NOTHING TO DO WITH TAXES.
SECTION 2(H) OF RR NO. 17-67 EXCEEDED THE CONSTITUTIONAL
LIMITS ON THE DELEGATION OF LEGISLATIVE POWER.
SECTION 3(M) OF RR NO. 17-67 AS INTERPRETED BY
COMMISSIONER EXCEEDED ALLOWABLE LIMITS ON DELEGATION
OF LEGISLATIVE POWER.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING
SECTION 20(A) OF RR NO. V-39 TO LA SUERTE'S IMPORTS OF
STEMMED LEAF TOBACCO, FOR THE APPLICABLE PROVISION IS
CHAPTER V OF RR NO. V-39.
THE COMMISSIONER'S PRESENT INTERPRETATION OF SECTIONS
2(M)(1) AND 3(H) OF RR NO. 17-67, WAS NOT THE INTERPRETATION
GIVEN TO THOSE SECTIONS BY ITS FRAMERS, AS SHOWN BY THE
LONG ADMINISTRATIVE PRACTICE AFTER THE ISSUANCE OF RR
NO. 17-67 AND THE BIR RULING DATED DECEMBER 12, 1972, WHICH
CONFIRMED THE TAX-FREE TRANSFER OF STEMMED- LEAF
TOBACCO.[108]
G.R. No. 165499
On various dates in March 1995, the Commissioner of Internal Revenue .
. . collected from La Suerte the aggregate amount of THREE HUNDRED
TWENTY-FIVE THOUSAND FOUR HUNDRED TEN PESOS
(P325,410.00) for specific taxes on La Suerte's bulk purchases of
stemmed-leaf tobacco from foreign tobacco manufacturers. La Suerte paid
the said amount under protest.
....
54
On September 27, 1996 and October 2, 1996, La Suerte instituted with the
Commissioner of Internal Revenue . . . and with Revenue District No. 52,
a claim for refund of specific taxes said to have been erroneously paid on
its importations of stemmed-leaf tobacco for the period of November 1994
up to May 1995, including the amount of Three Hundred Twenty Five
Thousand Four Hundred Ten Pesos (P325,410.00). . . .
Inasmuch as its claim for refund was not acted upon by petitioner and in
order to toll the running of the two-year reglementary period within which
to file a judicial claim for such refund as provided under Section 229 of the
1997 National Internal Revenue Code, as amended, La Suerte filed on
February 8, 1997 a petition for review with the CTA.[109]
On September 23, 1998, the Court of Tax Appeals rendered judgment
granting the petition for review and ordering the Commissioner to refund
the amount of P325,410.00 to La Suerte.[110] The Commissioner filed a
motion for reconsideration, but this was denied by the Court of Tax
Appeals on December 15, 1998.[111]
On appeal, the Court of Appeals Fourth Division reversed[112] the Court
of Tax Appeals' ruling. It also denied[113] La Suerte's motion for
reconsideration. Hence, this petition was filed,[114] reiterating the same
arguments already presented in the other cases.
This court ordered the consolidation of G.R. Nos. 136328 29 and
125346.[115] Thereafter, this court consolidated G.R. Nos. 165499,
144942, and 148605.[116] Finally, this court approved the consolidation of
G.R. Nos. 125346, 136328 29, 144942, 148605, 158197, and
165499.[117]
Issues
Whether stemmed leaf tobacco is subject to excise (specific) tax under
Section 141 of the 1986 Tax Code;
Whether Section 137 of the 1986 Tax Code exempting from the payment
of specific tax the sale of stemmed leaf tobacco by one manufacturer to
another is not subject to any qualification and, therefore, exempts an L-7
manufacturer from paying said tax on its purchase of stemmed leaf
tobacco from other manufacturers who are not classified as L-7 permittees;
Whether stemmed leaf tobacco imported by La Suerte, Fortune, and
Sterling is exempt from specific tax under Section 137 of the 1986 Tax
Code;
Whether Section 20(a) of RR No. V-39, in relation to RR No. 17-67, which
limits the exemption from payment of specific tax on stemmed leaf tobacco
to sales transactions between manufacturers classified as L-7 permittees
is a valid exercise by the Department of Finance of its rule-making power
under Section 338[118] of the 1939 Tax Code;
Whether the possessor or owner of stemmed leaf tobacco may be held
liable for the payment of specific tax if such tobacco product is removed
from the place of production without payment of said tax;
Whether the August 31, 1990 ruling of then Bureau of Internal Revenue
Commissioner Jose U. Ong denying La Suerte's request for exemption
from specific tax on its local purchase and importation of stemmed leaf
tobacco violates the principle on non-retroactivity of administrative ruling
for allegedly contradicting the previous position taken by the Bureau of
Internal Revenue that such a transaction is not subject to specific tax as
expressed in the December 12, 1972 ruling of then Bureau of Internal
Revenue Commissioner Misael P. Vera; and
Whether the imposition of excise tax on stemmed leaf tobacco under
Section 141 of the 1986 Tax Code constitutes double taxation.
Arguments of the cigarette manufacturers
55
The cigarette manufacturers claim that since Section 137 of the 1986 Tax
Code and Section 20(a) of RR No. V-39 do not distinguish "as to the type
of manufacturer that may sell stemmed-leaf tobacco without the
prepayment of specific tax[,] [t]he logical conclusion is that any kind of
tobacco manufacturer is entitled to this treatment."[119] The authority of
the Secretary of Finance to prescribe the "conditions" refers only to
procedural matters and should not curtail or modify the substantive right
granted by the law.[120] The cigarette manufacturers add that the
reference to an L-7 invoice and L-7 register book in the second paragraph
of Section 20(a) cannot limit the application of the tax exemption provision
only to transfers between L-7 permittees because (1) it does not so
provide;[121] and (2) under the terms of RR No. V-39, L-7 referred to
manufacturers of any class of tobacco products, including manufacturers
of stemmed leaf tobacco.[122]
They further argue that, going by the theory of the Commissioner, RR No.
17-67 would have unduly restricted the meaning of "manufacturers" by
limiting it to a few manufacturers such as manufacturers of cigars and
cigarettes.[123] Allegedly, RR No. 17-67 cannot change the original
meaning of L-7 in Section 20(A) of RR No. V-39 without exceeding
constitutional limits of delegated legislative power.[124] La Suerte further
points out that RR No. 17-67 was not even issued for the purpose of
implementing the Tax Code but for the sole purpose of implementing Act
No. 2613; and Section 3 of RR No. 17-67 restricts the new designations
only for administrative purposes.[125]
Moreover, the cigarette manufacturers contend "that Section 132 does not
operate as a tax exemption" because "prepayment means payment of
obligation in advance or before it is due."[126] Consequently, the rules of
construction on tax exemption do not apply.[127] According to them, "the
absence of tax prepayment for the sale of stemmed leaf tobacco impliedly
indicates the underlying policy of the law: that stemmed leaf tobacco shall
not be taxed twice, first, as stemmed leaf tobacco and, second, as a
component of the finished products of which it forms an integral part."[128]
Fortune, for its part, claims that stemmed leaf tobacco is not subject to
excise tax. It argues that stemmed leaf tobacco cannot be considered
prepared or partially prepared tobacco because it does not fall within the
definition of a "processed tobacco" under Section 1-b of Republic Act No.
698, as amended.[129] Furthermore, it adds that Section 141 should be
strictly construed against the taxing power.[130] "There being no explicit
reference to stemmed leaf tobacco in Section 141, it cannot be claimed or
construed to be subject to specific tax."[131]
According to Fortune, "a plain reading of Section 141 readily reveals that
the intention was to impose excise taxes on products of tobacco that are
not to be used as raw materials in the manufacture of other tobacco
products."[132] "Section 2(m)(1) unduly expanded the meaning of
prepared or partially prepared tobacco to include a raw material like
stemmed leaf tobacco; hence, ultra vires and invalid."[133]
As regards the taxability of their importations, Sterling argues that since
locally manufactured stemmed leaf tobaccos are not subject to specific
tax, it follows that imported stemmed leaf tobaccos are also not subject to
specific tax.[134] On the other hand, La Suerte claims that Section 20(A)
of RR No. V-39 does not apply to its imports because the applicable
provision is Section 128(b) of the 1986 Tax Code, which states that
"imported articles shall be subject to the same tax and the same rates and
basis of excise taxes applicable to locally manufactured articles," and
Chapter V of RR No. V-39 (Payment of specific taxes on imported cigars,
cigarettes, smoking and chewing tobacco).[135]
Finally, La Suerte and Sterling[136] argues that the Court of Appeals erred:
(1) in ignoring Section 43 of RR No. 17-67, December 12, 1972 Bureau of
Internal Revenue ruling and other Bureau of Internal Revenue opinions
56
confirming the exemption of stemmed leaf tobacco from prepayment of
specific tax;[137] (2) in disregarding the Bureau of Internal Revenue's
practice for over half a century of not subjecting stemmed leaf tobacco to
specific tax;[138] (3) in failing to consider that the re-enactment of the 1939
Tax Code as the 1977 and 1986 Tax Codes impliedly adopted the
interpretation in the December 12, 1972 ruling; and 4) in holding that non-
application of the December 12, 1972 ruling did not impinge on the
principle of non-retroactivity of rulings.[139] Moreover, it argues that the
Tax Code does not authorize collection of specific tax from buyers without
a prior attempt to collect tax from manufacturers.[140]
Respondent's arguments
Respondent counters that "under Section 141(b), partially prepared or
manufactured tobacco is subject to specific tax."[141] The definition of
"partially manufactured tobacco" in Section 2(m) of RR No. 17-67 includes
stemmed leaf tobacco; hence, stemmed leaf tobacco is subject to specific
tax.[142] "Imported stemmed leaf tobacco is also subject to specific tax
under Section 141(b) in relation to Section 128 of the 1977 Tax
Code."[143] Fortune's reliance on the definition of "processed tobacco" in
Section 1-b of Republic Act No. 698[144] as amended by Republic Act No.
1194 is allegedly misplaced because the definition therein of processed
tobacco merely clarified the type of tobacco product that may not be
imported into the country.[145]
Respondent posits that "there is no double taxation in the prohibited sense
even if specific tax is also imposed on the finished product of which
stemmed leaf tobacco is a raw material."[146] Congress clearly intended
it "considering that stemmed leaf tobacco, as partially prepared or
manufactured tobacco, is subjected to specific tax under Section 141(b),
while cigars and cigarettes, of which stemmed leaf tobacco is a raw
material, are also subjected to specific tax under Section 142."[147] It adds
that there is no constitutional prohibition against double taxation.[148]
"Foreign manufacturers of tobacco products not engaged in trade or
business in the Philippines cannot be classified as L-7, L-6, or L-3R since
they are beyond the pale of Philippine laws and regulations."[149] "Since
the transfer of stemmed leaf tobacco from one factory to another must be
under an official L-7 invoice and entered in the L-7 registers of both
transferor and transferee, it is obvious that the factories contemplated are
those located or operating in the Philippines and operated only by L-7
permittees."[150] The transaction contemplated under Section 137 is sale
and not importation because the law uses the word "sold."[151] The law
uses "importation" or "imported" whenever the transaction involves
bringing in articles from foreign countries.[152]
Respondent argues that "the issuance of RR Nos. V-39 and 17-67 is a
valid exercise by the Department of Finance of its rule-making power"
under Sections 132 and 338 of the 1939 Tax Code.[153] It explains that
"the reason for the exemption from specific tax of the sale of stemmed leaf
tobacco as raw material by one L-7 directly to another L-7 is that the
stemmed leaf tobacco is supposed to have been already subjected to
specific tax when an L-7 purchased the same from an L-6."[154] "Section
20(A) of RR No. V-39 adheres to the standards set forth in Section 245
because it provides the conditions for a tax-free removal of stemmed leaf
tobacco under Section 137 without negating the imposition of specific tax
under Section 141(b)."[155] "To construe Section 137 in the restrictive
manner suggested by La Suerte will practically defeat the revenue-
generating provision of Section 141(b)."[156]
It further argues that the August 31, 1990 ruling of then Bureau of Internal
Revenue Commissioner Jose U. Ong denying La Suerte's request for
exemption from specific tax on its local purchase and importation of
stemmed leaf tobacco does not violate the principle on non-retroactivity of
administrative ruling. It alleges that an erroneous ruling, like the December
57
12, 1972 ruling, does not give rise to a vested right that can be invoked by
La Suerte.[157]
Finally, respondent contends that under Section 127, if domestic products
are removed from the place of production without payment of the excise
taxes due thereon, it is not required that the tax be collected first from the
manufacturer or producer before the possessor thereof shall be liable.[158]
Court's ruling
Nature of excise tax
Excise tax is a tax on the production, sale, or consumption of a specific
commodity in a country. Section 110 of the 1986 Tax Code explicitly
provides that the "excise taxes on domestic products shall be paid by the
manufacturer or producer before [the] removal [of those products] from the
place of production." "It does not matter to what use the article[s] subject
to tax is put; the excise taxes are still due, even though the articles are
removed merely for storage in some other place and are not actually sold
or consumed."[159] The excise tax based on weight, volume capacity or
any other physical unit of measurement is referred to as "specific tax." If
based on selling price or other specified value, it is referred to as "ad
valorem" tax.
Section 141 subjects partially prepared tobacco, such as stemmed leaf
tobacco, to excise tax
Section 141 of the 1986 Tax Code provides:
SEC. 141. Tobacco Products. There shall be collected a tax of seventy-
five centavos on each kilogram of the following products of tobacco:
(a) tobacco twisted by hand or reduced into a condition to be consumed in
any manner other than the ordinary mode of drying and curing;
(b) tobacco prepared or partially prepared with or without the use of any
machine or instruments or without being pressed or sweetened; and
(c) fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco.
Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and
sweepings of tobacco resulting from the handling or stripping of whole leaf
tobacco may be transferred, disposed of, or otherwise sold, without
prepayment of the specific tax herein provided for under such conditions
as may be prescribed in the regulations promulgated by the Ministry of
Finance upon recommendation of the Commissioner, if the same are to be
exported or to be used in the manufacture of other tobacco products on
which the excise tax will eventually be paid on the finished product.
On tobacco specially prepared for chewing so as to be unsuitable for use
in any other manner, on each kilogram, sixty centavos. (Emphasis
supplied)
It is evident that when tobacco is harvested and processed either by hand
or by machine, all its products become subject to specific tax. Section 141
reveals the legislative policy to tax all forms of manufactured tobacco in
contrast to raw tobacco leaves including tobacco refuse or all other
tobacco which has been cut, split, twisted, or pressed and is capable of
being smoked without further industrial processing.
Stemmed leaf tobacco is subject to the specific tax under Section 141(b).
It is a partially prepared tobacco. The removal of the stem or midrib from
the leaf tobacco makes the resulting stemmed leaf tobacco a prepared or
partially prepared tobacco. The following is La Suerte's own illustration of
how the stemmed leaf tobacco comes about: In the process of removing
the stems, the whole leaf tobacco breaks into pieces; after the stems or
midribs are removed, the tobacco is threshed (cut by machine into fine
58
narrow strips) and then undergoes a process of redrying,[160] undoubtedly
showing that stemmed leaf tobacco is a partially prepared tobacco.
Since the Tax Code contained no definition of "partially prepared tobacco,"
then the term should be construed in its general, ordinary, and
comprehensive sense.[161]
RR No. 17-67, as amended, supplements the law by delineating what
products of tobacco are "prepared or manufactured" and "partially
prepared or partially manufactured." Section 2(m) states:
(m) "Partially manufactured tobacco" Includes:
(1)
"Stemmed leaf" handstripped tobacco, clean, good, partially broken leaf
only, free from mold and dust.
(2)
"Long-filler" handstripped tobacco of good, long pieces of broken leaf
usable as filler for cigars without further preparation, and free from mold,
dust stems and cigar cuttings.
(3)
"Short-filler" handstripped or machine-stripped tobacco, clean, good, short
pieces of broken leaf, which will not pass through a screen of two inches
(2") mesh.
(4)
"Cigar-cuttings" clean cuttings or clippings from cigars, unsized with any
other form of tobacco.
(5)
"Machine-scrap tobacco" machine-threshed, clean, good tobacco, not
included in any of the above terms, usable in the manufacture of tobacco
products.
(6)
"Stems" midribs of leaf tobacco removed from the whole leaf or broken leaf
either by hand or machine.
(7)
"Waste tobacco" denatured tobacco; powder or dust, refuse, unfit for
human consumption; discarded materials in the manufacture of tobacco
products, which may include stems.
Insisting on the inapplicability of RR No. 17-67, La Suerte points to the
different definitions given to stemmed leaf tobacco by Section 2(m)(1) of
RR No. 17-67 and Section 137. It argues that while RR No. 17-67 defines
stemmed leaf tobacco as handstripped tobacco of clean, good, partially
broken leaf only, free from mold and dust, Section 137 defines it as leaf
tobacco which has had the stem or midrib removed. The term does not
include broken leaf tobacco. We are not convinced.
Different definitions of the term "stemmed leaf" are unavoidable, especially
considering that Section 2(m)(1) is an implementing regulation of Act No.
2613, which was enacted in 1916 for purposes of improving the quality of
Philippine tobacco products, while Section 137 defines the tobacco
product only for the purpose of exempting it from the specific tax.
Whichever definition is adopted, there is no doubt that stemmed leaf
tobacco is a partially prepared tobacco.
The onus of proving that stemmed leaf tobacco is not subject to the specific
tax lies with the cigarette manufacturers. Taxation is the rule, exemption is
the exception.[162] Accordingly, statutes granting tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority. The cigarette manufacturers must justify their claim by
a clear and categorical provision in the law. Otherwise, they are liable for
the specific tax on stemmed leaf tobacco found in their possession
pursuant to Section 127[163] of the 1986 Tax Code, as amended.
Stemmed leaf tobacco transferred in bulk between cigarette
manufacturers are exempt from excise tax under Section 137 of the 1986
Tax Code in conjunction with RR No. V-39 and RR No. 17-67
59
In the instant case, an exemption on the taxability of stemmed leaf tobacco
is found in Section 137, which provides the following:
SEC. 137. Removal of tobacco products without prepayment of tax.
Products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under such conditions as may
be prescribed in the regulations of the Ministry of Finance. Stemmed leaf
tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps,
cuttings, clippings, stems or midribs, and sweepings of tobacco may be
sold in bulk as raw material by one manufacturer directly to another,
without payment of the tax under such conditions as may be prescribed in
the regulations of the Ministry of Finance.
'Stemmed leaf tobacco,' as herein used, means leaf tobacco which has
had the stem or midrib removed. The term does not include broken leaf
tobacco. (Emphasis and underscoring supplied)
Section 137 authorizes a tax exemption subject to the following: (1) that
the stemmed leaf tobacco is sold in bulk as raw material by one
manufacturer directly to another; and (2) that the sale or transfer has
complied with the conditions prescribed by the Department of Finance.
That the title of Section 137 uses the term "without prepayment" while the
body itself uses "without payment" is of no moment. Both terms simply
mean that stemmed leaf tobacco may be removed from the factory or place
of production without prior payment of the specific tax.
This court has held in Commissioner of Internal Revenue v. La Campaña
Fabrica de Tabacos, Inc.,[164] reiterated in Compania General de
Tabacos de Filipinas v. Court of Appeals[165] and Commissioner of
Internal Revenue v. La Suerte Cigar and Cigarette Factory, Inc.[166] that
the exemption from specific tax of the sale of stemmed leaf tobacco is
qualified by and is subject to "such conditions as may be prescribed in the
regulations of the Department of Finance." These conditions were
provided for in RR Nos. V-39 and 17-67. Thus, Section 137 must be read
and interpreted in accordance with these regulations.
Section 20(a) of RR No. V-39 provides the rules for tax exemption on
tobacco products:
SECTION 20. Exemption from tax of tobacco products intended for
agricultural or industrial purposes. (a) Sale of stemmed leaf tobacco, etc.,
by one factory to another. Subject to the limitations herein established,
products of tobacco entirely unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use; and stemmed leaf tobacco, fine-
cut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings,
clippings, and sweepings of tobacco may be sold in bulk as raw materials
by one manufacturer directly to another without the prepayment of the
specific tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing
tobacco, scraps, cuttings, clippings, and sweeping of leaf tobacco or
partially manufactured tobacco or other refuse of tobacco may be
transferred from one factory to another under an official L-7 invoice on
which shall be entered the exact weight of the tobacco at the time of its
removal, and entry shall be made in the L-7 register in the place provided
on the page of removals. Corresponding debit entry will be made in the L-
7 register book of the factory receiving the tobacco under heading "Refuse,
etc., received from other factory," showing the date of receipt, assessment
and invoice numbers, name and address of the consignor, form in which
received, and the net weight of the tobacco. This paragraph should not,
however, be construed to permit the transfer of materials unsuitable for the
manufacture of tobacco products from one factory to another. (Emphasis
supplied)
The conditions under which stemmed leaf tobacco may be transferred from
one factory to another without prepayment of specific tax are as follows:
(a)
60
The transfer shall be under an official L-7 invoice on which shall be entered
the exact weight of the tobacco at the time of its removal;
(b)
Entry shall be made in the L-7 register in the place provided on the page
for removals; and
(c)
Corresponding debit entry shall be made in the L-7 register book of the
factory receiving the tobacco under the heading, "Refuse, etc., received
from the other factory," showing the date of receipt, assessment and
invoice numbers, name and address of the consignor, form in which
received, and the weight of the tobacco.
Under Section 3(h) of RR No. 17-67, entities that were issued by the
Bureau of Internal Revenue with an L-7 permit refer to "manufacturers of
tobacco products." Hence, the transferor and transferee of the stemmed
leaf tobacco must be an L-7 tobacco manufacturer.
La Campaña explained that the reason behind the tax exemption of
stemmed leaf tobacco transferred between two L-7 manufacturers is that
the same had already been previously taxed when acquired by the L-7
manufacturer from dealers of tobacco, thus:
[T]he exemption from specific tax of the sale of stemmed leaf tobacco as
raw material by one L-7 directly to another L-7 is because such stemmed
leaf tobacco has been subjected to specific tax when an L-7 manufacturer
purchased the same from wholesale leaf tobacco dealers designated
under Section 3, Chapter I, Revenue Regulations No. 17-67 (supra) as L-
3, L-3F, L-3R, L-4, or L-6, the latter being also a stripper of leaf tobacco.
These are the sources of stemmed leaf tobacco to be used as raw
materials by an L-7 manufacturer which does not produce stemmed leaf
tobacco. When an L-7 manufacturer sells the stemmed leaf tobacco
purchased from the foregoing suppliers to another L-7 manufacturer as
raw material, such sale is not subject to specific tax under Section 137
(now Section 140), as implemented by Section 20(a) of Revenue
Regulations No. V-39.[167]
There is no new product when stemmed leaf tobacco is transferred
between two L-7 permit holders. Thus, there can be no excise tax that will
attach. The regulation, therefore, is reasonable and does not create a new
statutory right.
RR Nos. V-39 and 17-67 did not exceed the allowable limits of legislative
delegation
The cigarette manufacturers contend that the authority of the Department
of Finance to prescribe conditions is merely procedural. Its rule-making
power is only for the effective enforcement of the law, which implicitly rules
out substantive modifications. The Secretary of Finance cannot, by mere
regulation, limit the classes of manufacturers that may be entitled to the
tax exemption. Otherwise, Section 137 (Section 132 in the 1939 Tax Code)
would be invalid as an undue delegation of legislative power without the
required standards or parameters.
The power of taxation is inherently legislative and may be imposed or
revoked only by the legislature.[168] Moreover, this plenary power of
taxation cannot be delegated by Congress to any other branch of
government or private persons, unless its delegation is authorized by the
Constitution itself.[169] Hence, the discretion to ascertain the following (a)
basis, amount, or rate of tax; (b) person or property that is subject to tax;
(c) exemptions and exclusions from tax; and (d) manner of collecting the
tax may not be delegated away by Congress.
However, it is well-settled that the power to fill in the details and manner
as to the enforcement and administration of a law may be delegated to
various specialized administrative agencies like the Secretary of Finance
in this case.[170]
61
This court in Maceda v. Macaraig, Jr.[171] explained the rationale behind
the permissible delegation of legislative powers to specialized agencies
like the Secretary of Finance:
The latest in our jurisprudence indicates that delegation of legislative
power has become the rule and its non-delegation the exception. The
reason is the increasing complexity of modern life and many technical
fields of governmental functions as in matters pertaining to tax exemptions.
This is coupled by the growing inability of the legislature to cope directly
with the many problems demanding its attention. The growth of society has
ramified its activities and created peculiar and sophisticated problems that
the legislature cannot be expected reasonably to comprehend.
Specialization even in legislation has become necessary. To many of the
problems attendant upon present day undertakings, the legislature may
not have the competence, let alone the interest and the time, to provide
the required direct and efficacious, not to say specific solutions.[172]
Thus, rules and regulations implementing the law are designed to fill in the
details or to make explicit what is general, which otherwise cannot all be
incorporated in the provision of the law.[173] Such rules and regulations,
when promulgated in pursuance of the procedure or authority conferred
upon the administrative agency by law,[174] "deserve to be given weight
and respect by the courts in view of the rule-making authority given to
those who formulate them and their specific expertise in their respective
fields."[175] To be valid, a revenue regulation must be within the scope of
statutory authority or standard granted by the legislature. Specifically, the
regulation must (1) be germane to the object and purpose of the law;[176]
(2) not contradict, but conform to, the standards the law prescribes;[177]
and (3) be issued for the sole purpose of carrying into effect the general
provisions of our tax laws.[178]
Section 338 authorizes the Secretary of Finance to promulgate all needful
rules and regulations for the effective enforcement of the provisions of the
1939 Tax Code.
The specific authority of the Department of Finance to issue regulations
relating to the taxation of tobacco products is found in Section 4[179]
(Specific provisions to be contained in regulations); Section 125[180]
(Payment of specific tax on imported articles to customs officers prior to
release from the customhouse); Section 132 (Removal of tobacco
products without prepayment of tax); Section 149[181] (Extent of
supervision over establishments producing taxable output); Section
150[182] (Records to be kept by manufacturers; Assessment based
thereon); and Section 152[183] (Labels and form of packages) of the 1939
Tax Code.
RR No. V-39 was promulgated to enforce the provisions of Title IV
(Specific Taxes) of the 1939 Tax Code relating to the manufacture and
importation of, and payment of specific tax on, manufactured tobacco or
products of tobacco. By an explicit provision in Section 132, the lawmakers
defer to the Department of Finance to provide the details upon which the
removal of stemmed leaf tobacco may be exempt from the specific tax in
view of its supposed expertise in the tobacco trade. Section 20(a) of RR
No. V-39 adhered to the standards because it provided the conditions the
proper documentation and recording of raw materials transferred from one
factory to another for a tax-free removal of stemmed leaf tobacco, without
negating the imposition of specific tax under Section 137. The "effective
enforcement of the provisions of [the Tax Code]" in Section 338 provides
a sufficient standard for the Secretary of Finance in determining the
conditions for the tax-free removal of stemmed leaf tobacco. Section 4
further provides a limitation on the contents of revenue regulations to be
issued by the Secretary of Finance.
On the other hand, RR No. 17-67 was promulgated "[i]n accordance with
the provisions of Section 79 (B) of the Administrative Code, as amended
by Act No. 2803."[184] Among the specific administrative powers
conferred upon a department head under the Administrative Code is that
of promulgating rules and regulations, not contrary to law, "necessary to
62
regulate the proper working and harmonious and efficient administration
of each and all of the offices and dependencies of his Department, and for
the strict enforcement and proper execution of the laws relative to matters
under the jurisdiction of said Department."[185] Under the 1939 Tax Code,
the Secretary of Finance is authorized to prescribe regulations affecting
the business of persons dealing in articles subject to specific tax, including
the mode in which the processes of production of tobacco and tobacco
products should be conducted and the records to be kept by
manufacturers. Clearly then, the provisions of RR No. 17-67 classifying
and regulating the business of persons dealing in tobacco and tobacco
products are within the rule-making authority of the Secretary of Finance.
RR No. 17-67 did not create a new classification
The contention of the cigarette manufacturers that RR No. 17-67 unduly
restricted the meaning of manufacturers of tobacco products by limiting it
to a few manufacturers such as manufacturers of cigars and cigarettes is
misleading.
The definitions in RR No. 17-67 of "manufacturer of tobacco" and
"manufacturer of cigars and/or cigarettes" are in conformity with, as in fact
they are verbatim adoptions of, the definitions under Section 194(m) and
(n) of the 1939 Tax Code.
The cigarette companies further argue that RR No. 17-67 unduly restricted
the meaning of L-7 in Section 20(a) of RR No. V-39 because when RR No.
V-39 was issued, there was no distinction at all between L-7, L-3, L-6
permittees, and L-7 referred to manufacturers of any class of tobacco
products including stemmed leaf tobacco.
This argument is similarly misplaced.
A reading of the entire RR No. V-39 shows that the regulation pertains
particularly to activities of manufacturers of smoking and chewing tobacco,
cigars and cigarettes.[186] This was rightly so because the regulation was
issued to enforce the tax law provisions in relation to the manufacture and
importation of tobacco products. Clearly apparent in Section 10(a) is that
when a manufacturer of chewing and smoking tobacco, cigars, or
cigarettes has been qualified to conduct his or her business as such, he or
she is issued by the internal revenue agent the corresponding register
books and auxiliary register books pertaining to his business as well as the
official register book, L-7, to be used as record of the raw materials for his
or her product. It is, therefore, logical to conclude that the L-7 invoice and
L-7 register book under Section 20(a) refers to those invoice and books
used by manufacturers of chewing and smoking tobacco, cigars or
cigarettes.
RR No. 17-67 clarified RR No. V-39 by explicitly designating the
manufacturers of tobacco products as L-7 permittees (Section 2), in
contrast to wholesale leaf tobacco dealers and those that process partially
manufactured tobacco such as stemmed leaf tobacco. RR No. 17-67 did
not create a new and restrictive classification but only expressed in clear
and categorical terms the distinctions between "manufacturers" and
"dealers" of tobacco that were already implicit in RR No. V-39.
Indeed, there is no repugnancy between RR No. 17-67 and RR No. V-39,
on the one hand, and the Tax Code, on the other. It is safer to presume
that the term "manufacturer" used in Section 137 on tax exempt removals
referred to an entity that is engaged in the business of, and was licensed
by the Bureau of Internal Revenue as a, manufacturer of tobacco products.
It does not include an entity engaged in business as a dealer in tobacco
that, incidentally or in furtherance of its business as a dealer, strip or thresh
whole leaf tobacco or reprocess partially manufactured tobacco.[187]
63
Such construction is consistent with the rule that tax exemptions, deemed
to be in derogation of the state's sovereign right of taxation, are strictly
applied and may be granted only under clear and unmistakable terms of
the law and not merely upon a vague implication or inference.[188]
RR No. V-39 must be applied and read together with RR No. 17-67
The cigarette manufacturers' argument is misplaced, stating that RR No.
17-67 could not modify RR No. V-39 because it was promulgated to
enforce Act No. 2613, as amended (entitled "An Act to Improve the
Methods of Production and the Quality of Tobacco in the Philippines and
to Develop the Export Trade Therein"), which allegedly had nothing
whatsoever to do with the Tax Code or with the imposition of taxes.
"The Tobacco Inspection Service, instituted under Act No. 2613, was
made part of the Bureau of Internal Revenue and Bureau of Customs
administration for . . . internal revenue purposes."[189] The Collector of
Internal Revenue was charged to enforce Act No. 2613, otherwise known
as the Tobacco Inspection Law, with a view to promoting the Philippine
tobacco trade and thereby increase the revenues of the government. This
can be inferred from a reading of the following provisions of Act No. 2613:
SEC. 6. The Collector of Internal Revenue shall have the power and it shall
be his duty:
(a)
To establish general and local rules respecting the classification, marking,
and packing of tobacco for domestic sale or factory use and for exportation
so far as may be necessary to secure leaf tobacco of good quality and to
secure its handling under sanitary conditions, and to the end that leaf
tobacco be not mixed, packed, and marked and of the same quality when
it is not of the same class and origin.
(b)
To establish from time to time adequate rules defining the standard and
the type of leaf and manufactured tobacco which shall be exported, as well
also as the manner in which standard tobacco, shall be packed. Before
establishing the rules above specified, the Collector of Internal Revenue
shall give due notice of the proposed rules or amendments to those
interested and shall give them an opportunity to present their objections to
such rules or amendments.
(c)
To require, whenever it shall be deemed expedient the inspection of and
affixture of inspection labels to tobacco removed from the province of its
origin to another province before such removal, or to tobacco for domestic
sale or factory use.[190]
SEC. 7. No leaf tobacco or manufactured tobacco shall be exported until
it shall have been inspected by the Collector of Internal Revenue or his
duly authorized representative and found to be standard for export.
Collector of customs shall not permit the exportation of tobacco from the
Philippines unless the shipment be in conformity with the requirements set
forth in this Act. The prohibition contained in this section shall not apply to
waste and refuse tobacco accumulated in the manufacturing process when
it is invoiced and marked as such waste and refuse.[191] (Emphasis
supplied)
....
SEC. 9. The Collector of Internal Revenue may appoint inspectors of
tobacco for the purpose of making the inspections herein required, and
may also detail any officer or employee of the Bureau to perform such duty.
Said inspectors or employees shall likewise be charged with the duty of
grading leaf tobacco and shall perform such other duties as may be
required of them in the promotion of the Philippine tobacco industry. The
Collector of Internal Revenue shall likewise appoint, with the approval of
the Secretary of Finance, agents in the United States for the purpose of
64
promoting the export trade in tobacco with the United States, whose duty
it shall be to inspect shipments of tobacco upon or after their arrival in that
country when so required, to assist manufacturers of, exporters of, and
dealers in tobacco in disseminating information regarding Philippine
tobacco and, at the request of the parties, to act as arbitrators between the
exporter in the Philippine Islands and the importer in the United States
whenever a dispute arises between them as to the quality, sizes, classes,
or shapes shipped or received. When acting as arbitrator as aforesaid, the
agent shall proceed in accordance with the law governing arbitration and
award in the locality where the dispute arises. All agents, inspectors, and
employees acting under and by virtue of this Act shall be subject to all
penal provisions applicable to internal-revenue officers generally.[192]
(Emphasis supplied)
....
SEC. 12. The inspection fees collected by virtue of the provisions of this
Act shall constitute a special fund to be known a the Tobacco Inspection
Fund, which shall be expended by the Collector of Internal Revenue, with
the approval of the Secretary of Finance, upon allotment by a Board
consisting of the Commissioner of Internal Revenue, the Director of Plant
Industry, the Director of the Bureau of Commerce and Industry, two
manufacturers designated by the Manila Tobacco Association, and two
persons representing the interests of the tobacco producers and growers,
appointed by the President of the Philippine Islands[.]
These funds may be expended for any of the following purposes:
(a) The payment of the expenses incident to the enforcement of this Act
including the salaries of the inspectors and agents.
(b) The payment of expenses incident to the reconditioning and returning
to the Philippine Islands of damaged tobacco and the reimbursement of
the value of the United States internal-revenue stamps lost thereby.
(c) The advertising of Philippine tobacco products in the United States and
in foreign countries.
(d) The establishment of tobacco warehouses in the Philippine Islands and
in the United States at such points as the trade conditions may demand.
(e) The payment of bounties to encourage the production of leaf tobacco
of high quality.
(f) The promotion and defense of the Philippine tobacco interests in the
United States and in foreign countries.
(g) The establishment, operation, and maintenance of tobacco
experimental farms for the purpose of studying and testing the best
methods for the improvement of the leaves: Provided, however, That thirty
per centum of the total annual income of the tobacco inspection fund shall
be expended for the establishment, operation, and maintenance of said
tobacco experimental farms and for the investigation and discovery of
efficacious ways and means for the extermination and control of the pests
and diseases of tobacco: Provided, further, That in the establishment of
experimental farms, preference shall be given to municipalities offering the
necessary suitable land for the establishment of an experimental farm.
(h) The sending of special agents and commissions to study the markets
of the United States and foreign countries with regard to the Philippine
cigars and their propaganda in said markets.
(i) The organization of exhibits of cigars and other Philippine tobacco
products in the United States and in foreign countries.[193]
65

SEC. 13. The Collector Internal Revenue shall be the executive officer
charged with the enforcement of the provisions of this Act and of the
regulations issued in accordance therewith, but it shall be the duty of the
Director of Agriculture, with the approval of the Secretary of Public
Instruction, to execute and enforce the provisions hereof referring to the
cultivation of tobacco. (Emphasis supplied)
The cigarette manufacturers, thus, erroneously concluded that Act No.
2613 does not involve taxation.
Parenthetically, Section 8 of Act No. 2613 pertained to the imposition of
tobacco inspection fees, which are National Internal Revenue taxes, these
being one of the miscellaneous taxes provided for under the Tax Code.
Said Section 8 was in fact repealed by Section 369(b) of the 1939 Tax
Code, and the provision regarding inspection fees are found in Section 302
of the 1939 Tax Code.
Since the two revenue regulations, RR Nos. V-34 and 17-67, are in pari
materia, i.e., they both pertain specifically to the regulation of tobacco
trade, they should be read and applied together.
Statutes are in pari materia when they relate to the same person or thing
or to the same class of persons or things, or object, or cover the same
specific or particular subject matter.
It is axiomatic in statutory construction that a statute must be interpreted,
not only to be consistent with itself, but also to harmonize with other laws
on the same subject matter, as to form a complete, coherent and intelligible
system. The rule is expressed in the maxim, "interpretare et concordare
legibus est optimus interpretandi," or every statute must be so construed
and harmonized with other statutes as to form a uniform system of
jurisprudence.[194] (Citation omitted)
The foregoing rules on statutory construction can be applied by analogy to
administrative issuances such as RR No. V-39 and RR No. 17-67,
especially since both are issued by the same administrative agency.
Importation of stemmed leaf tobacco not included in the exemption under
Section 137
The transaction contemplated in Section 137 does not include importation
of stemmed leaf tobacco for the reason that the law uses the word "sold"
to describe the transaction of transferring the raw materials from one
manufacturer to another.
The Tax Code treats an importer and a manufacturer differently. Section
123 clearly distinguishes between goods manufactured or produced in the
Philippines and things imported. The law uses the proper term
"importation" or "imported" whenever the transaction involves bringing in
articles from foreign countries as provided under Section 125 (cf. Section
124). Whenever the Tax Code refers to importers and manufacturers, they
are separately mentioned as two distinct persons or entities (Sections 156
and 160). Under Chapter II, whenever the law uses the word manufacturer,
it only means local manufacturer or producer of domestic products
(Sections 150, 151, and 152 of the 1939 Tax Code).
Moreover, foreign manufacturers of tobacco products not engaged in trade
or business in the Philippines cannot be designated as L-7 since these are
beyond the pale of Philippine law and regulations. The factories
contemplated are those located or operating only in the Philippines.
Contrary to La Suerte's claim, Chapter V, Section 61 of RR No. V-39[195]
is not applicable to justify the tax exemption of its importation of stemmed
leaf tobacco because from the title of Chapter V, the provision particularly
refers to specific taxes on imported cigars, cigarettes, smoking and
chewing tobacco.
66

No estoppel against government
The cigarette manufacturers contend that for a long time prior to the
transactions herein involved, the Collector of Internal Revenue had never
subjected their purchases and importations of stemmed leaf tobacco to
excise taxes. This prolonged practice allegedly represents the official and
authoritative interpretation of the law by the Bureau of Internal Revenue
which must be respected.
We are not persuaded.
In Philippine Long Distance Telephone Co. v. Collector of Internal
Revenue,[196] this court has held that this principle is not absolute, and
an erroneous implementation by an officer based on a misapprehension
of law may be corrected when the true construction is ascertained. Thus:
The appellant argues that the Collector of Internal Revenue, previous to
the transactions herein involved, had never collected the franchise tax on
items of the same nature as those herein in question and this is strong
evidence that such transactions are not subject to tax on the principle that
a prolonged practice on the part of an executive or administrative officer in
charge of executing a certain statute is an authoritative construction of
great weight. This contention may be granted, but the principle is not
absolute and may be overcome by strong reasons to the contrary. If
through a misapprehension of law an officer has erroneously executed it
for a long time, the error may be corrected when the true construction is
ascertained. Such we deem to be the situation in the present case.
Incidentally, the doctrine of estoppel does not apply here.[197] (Emphasis
supplied)
This court reiterated this rule in Abello v. Commissioner of Internal
Revenue[198] where it rejected petitioners' claim that the prolonged
practice (since 1939 up to 1988) of the Bureau of Internal Revenue in not
subjecting political contributions to donor's tax was an authoritative
interpretation of the statute, entitled to great weight and the highest
respect:
This Court holds that the BIR is not precluded from making a new
interpretation of the law, especially when the old interpretation was flawed.
It is a well-entrenched rule that[:]
. . . erroneous application and enforcement of the law by public officers do
not block subsequent correct application of the statute, and that the
Government is never estopped by mistake or error on the part of its
agents.[199] (Emphasis supplied, citations omitted)
Prolonged practice of the Bureau of Internal Revenue in not collecting the
specific tax on stemmed leaf tobacco cannot validate what is otherwise an
erroneous application and enforcement of the law. The government is
never estopped from collecting legitimate taxes because of the error
committed by its agents.[200]
In La Suerte Cigar and Cigarette Factory v. Court of Tax Appeals,[201] this
court upheld the validity of a revenue memorandum circular issued by the
Commissioner of Internal Revenue to correct an error in a previous circular
that resulted in the non-collection of tobacco inspection fees for a long time
and declared that estoppel cannot work against the government:
. . . the assailed Revenue Memorandum Circular was issued to rectify the
error in General Circular No. V-27 and to interpret the phrase "tobacco for
domestic sale or factory use" with the view of arresting huge losses of
tobacco inspection fees which were not collected and imposed since the
said Circular (No. V-27) took effect. Furthermore, the questioned Revenue
Memorandum Circular was also issued to apprise those concerned of the
construction and interpretation which should be accorded to Act No. 2613,
as amended, and which respondent is duty bound to enforce. It is an
opinion on how the law should be construed and there was no attempt
whatsoever to enlarge or restrict the meaning of the law.
The basis for the issuance of said Memorandum Circular was so stated in
Resolution No. 2-67 of the Tobacco Board, wherein petitioners as
67
members of the Manila Tobacco Association, Inc. were duly represented,
the pertinent portions of which read:
". . . .
WHEREAS, this original recommendation of Mr. Hernandez was perfectly
in accordance with existing law, more particularly Sec. 1 of Republic Act
No. 31 which took effect since September 25, 1946, but perhaps thru
oversight by the former Commissioners and officers of the Tobacco
Inspection Service the propriety and legality of effecting the inspection of
tobacco products for local sales and imported leaf tobacco for factory use
might have overlooked resulting in huge losses of tobacco inspection fees
. . ." (Italics supplied)
....
Tobacco Inspection fees are undoubtedly National Internal Revenue
taxes, they being one of the miscellaneous taxes provided for under the
Tax Code. Section 228 (formerly Section 302) of Chapter VII of the Code
specifically provides for the collection and manner of payment of the said
inspection fees. It is within the power and duty of the Commissioner to
collect the same, even without inspection, should tobacco products be
removed clandestinely or surreptitiously from the establishment of the
wholesaler, manufacturer or redrying plant and from the customs custody
in case of imported leaf tobacco. Errors, omissions or flaws committed by
BIR inspectors and representatives while in the performance of their duties
cannot be set up as estoppel nor estop the Government from collecting a
tax legally due. Tobacco inspection fees are levied and collected for
purposes of regulation and control and also as a source of revenue since
fifty percentum (50%) of said fees shall accrue to the Tobacco Inspection
Fee Fund created by Sec. 12 of Act No. 2613, as amended and the other
fifty percentum, to the Cultural Center of the Philippines. (Sec. 88, Chapter
VII, NIRC)[202] (Emphasis in this paragraph supplied, citation omitted)
Furthermore, the December 12, 1972 ruling of Commissioner Misael P.
Vera runs counter to Section 20(a) of RR No. V-39 in relation to RR No.
17-67, which provides that only transfers of stemmed leaf tobacco between
L-7 permittees are exempt. An implementing regulation cannot be
superseded by a ruling which is a mere interpretation of the law. While
opinions and rulings of officials of the government called upon to execute
or implement administrative laws command much respect and weight,
courts are not bound to accept the same if they override, instead of remain
consistent and in harmony with, the law they seek to apply and
implement.[203]
Double taxation
The contention that the cigarette manufacturers are doubly taxed because
they are paying the specific tax on the raw material and on the finished
product in which the raw material was a part is also devoid of merit.
For double taxation in the objectionable or prohibited sense to exist, "the
same property must be taxed twice, when it should be taxed but
once."[204] "[B]oth taxes must be imposed on the same property or
subject- matter, for the same purpose, by the same . . . taxing authority,
within the same jurisdiction or taxing district, during the same taxing period,
and they must be the same kind or character of tax."[205]
At all events, there is no constitutional prohibition against double taxation
in the Philippines.[206] This court has explained in Pepsi-Cola Bottling
Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte:[207]
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. 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
68
some states of the Union. Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same governmental entity
or by the same jurisdiction for the same purpose, but not in a case where
one tax is imposed by the State and the other by the city or
municipality.[208] (Emphasis supplied, citations omitted)
"It is something not favored, but is permissible, provided some other
constitutional requirement is not thereby violated, such as the requirement
that taxes must be uniform."[209]
Excise taxes are essentially taxes on property[210] because they are
levied on certain specified goods or articles manufactured or produced in
the Philippines for domestic sale or consumption or for any other
disposition, and on goods imported. In this case, there is no double
taxation in the prohibited sense because the specific tax is imposed by
explicit provisions of the Tax Code on two different articles or products: (1)
on the stemmed leaf tobacco; and (2) on cigar or cigarette.[211]
WHEREFORE, this court:
DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory
in G.R. No. 125346 and AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 38107;
GRANTS the petition for review filed by the Commissioner of Internal
Revenue in G.R. Nos. 136328 29 and REVERSES and SETS ASIDE the
challenged decision and resolution of the Court of Appeals in CA-G.R. SP.
Nos. 38219 and 40313. Fortune Tobacco Corporation is ORDERED to pay
the following taxes:
a. P28,938,446.25 as deficiency excise tax for the period covering
January 1, 1986 to June 30, 1989, plus 20% interest per annum from
November 24, 1989 until fully paid; and
b. P1,989,821.26 as deficiency excise tax for the period covering July 1,
1989 to November 30, 1990, plus 20% interest per annum from March 1,
1991 until fully paid.
GRANTS the petition for review filed by the Commissioner of Internal
Revenue in G.R. No. 144942 and REVERSES and SETS ASIDE the
challenged decision of the Court of Appeals in CA-G.R. SP. No. 51902. La
Suerte Cigar & Cigarette Factory's claim for refund of the amount of
P175,909.50 is DENIED.
DENIES the petition for review filed by Sterling Tobacco Corporation in
G.R. No. 148605 and AFFIRMS the questioned decision and resolution of
the Court of Appeals in CA-G.R. SP. No. 38159;
DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory
in G.R. No. 158197 and AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 37124; and
DENIES the petition for review filed by La Suerte Cigar & Cigarette Factory
in G.R. No. 165499 and AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 50241.
Sereno, (Chief Justice), on official leave.
Velasco, Jr., Leonardo-De Castro, Brion, Castillo, Villarama, Jr., Perez,
Mendoza, Reyes, Perlas-Bernabe, and Jardeleza, JJ., concur.
Carpio, (Acting Chief Justice), no part.
Peralta, and Bersamin, JJ., on official leave.
69
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 210551 June 30, 2015
JOSE J. FERRER, JR., Petitioner,
vs.
CITY MAYOR HERBERT BAUTISTA, CITY COUNCIL OF QUEZON
CITY, CITY TREASURER OF QUEZON CITY, and CITY ASSESSOR OF
QUEZON CITY, Respondents.
DECISION
PERALTA, J.:
Before this Court is a petition for certiorari under Rule 65 of the Rules of
Court with prayer for the issuance of a temporary restraining order (TRO)
seeking to declare unconstitutional and illegal Ordinance Nos. SP-2095,
S-2011 and SP-2235, S-2013 on the Socialized Housing Tax and Garbage
Fee, respectively, which are being imposed by the respondents.
The Case
On October 17, 2011,1 respondent Quezon City Council enacted
Ordinance No. SP-2095, S-2011,2 or the Socialized Housing Tax of
Quezon City, Section 3 of which provides:
SECTION 3. IMPOSITION. A special assessment equivalent to one-half
percent (0.5%) on the assessed value of land in excess of One Hundred
Thousand Pesos (Php100,000.00) shall be collected by the City Treasurer
which shall accrue to the Socialized Housing Programs of the Quezon City
Government. The special assessment shall accrue to the General Fund
under a special account to be established for the purpose.
Effective for five (5) years, the Socialized Housing Tax ( SHT ) shall be
utilized by the Quezon City Government for the following projects: (a) land
purchase/land banking; (b) improvement of current/existing socialized
housing facilities; (c) land development; (d) construction of core houses,
sanitary cores, medium-rise buildings and other similar structures; and (e)
financing of public-private partners hip agreement of the Quezon City
Government and National Housing Authority ( NHA ) with the private
sector.3
Under certain conditions, a tax credit shall be enjoyed by taxpayers
regularly paying the special assessment:
SECTION 7. TAX CREDIT. Taxpayers dutifully paying the special
assessment tax as imposed by this ordinance shall enjoy a tax credit. The
tax credit may be availed of only after five (5) years of continue[d] payment.
Further, the taxpayer availing this tax credit must be a taxpayer in good
standing as certified by the City Treasurer and City Assessor.
The tax credit to be granted shall be equivalent to the total amount of the
special assessment paid by the property owner, which shall be given as
follows:
1. 6th year - 20%
2. 7th year - 20%
3. 8th year - 20%
4. 9th year - 20%
70
 On all condominium unit and socialized housing projects/units in Quezon
5. 10th year - 20% City;

Furthermore, only the registered owners may avail of the tax credit and FLOOR AREA
may not be continued by the subsequent property owners even if they are IMPOSABLE FEE
buyers in good faith, heirs or possessor of a right in whatever legal capacity
over the subject property.4 Less than 40 sq. m. PHP 25.00
41 sq. m. – 60 sq. m. PHP 50.00
On the other hand, Ordinance No. SP-2235, S-20135 was enacted on 61 sq. m. – 100 sq. m. PHP 75.00
December 16, 2013 and took effect ten days after when it was approved 101 sq. m. – 150 sq. m. PHP 100.00
by respondent City Mayor.6 The proceeds collected from the garbage fees 151 sq. m. – 200 sq. [m.] or more PHP 200.00
on residential properties shall be deposited solely and exclusively in an On high-rise Condominium Units
earmarked special account under the general fund to be utilized for
garbage collections.7 Section 1 of the Ordinance se t forth the schedule a) High-rise Condominium – The Homeowners Association of high- rise
and manner for the collection of garbage fees: condominiums shall pay the annual garbage fee on the total size of the
entire condominium and socialized Housing Unit and an additional
SECTION 1. The City Government of Quezon City in conformity with and garbage fee shall be collected based on area occupied for every unit
in relation to Republic Act No. 7160, otherwise known as the Local already so ld or being amortized.
Government Code of 1991 HEREBY IMPOSES THE FOLLOWING
SCHEDULE AND MANNER FOR THE ANNUAL COLLECTION OF b) High-rise apartment units – Owners of high-rise apartment units shall
GARBAGE FEES, AS FOLLOWS: On all domestic households in Quezon pay the annual garbage fee on the total lot size of the entire apartment and
City; an additional garbage fee based on the schedule prescribed herein for
every unit occupied.
LAND AREA
IMPOSABLE FEE The collection of the garbage fee shall accrue on the first day of January
and shall be paid simultaneously with the payment of the real property tax,
Less than 200 sq. m. PHP 100.00 but not later than the first quarter installment.8 In case a household owner
201 sq. m. – 500 sq. m. PHP 200.00 refuses to pay, a penalty of 25% of the garbage fee due, plus an interest
501 sq. m. – 1,000 sq. m. PHP 300.00 of 2% per month or a fraction thereof, shall be charged.9
1,001 sq. m. – 1,500 sq. m. PHP 400.00
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00 Petitioner alleges that he is a registered co-owner of a 371-square-meter
residential property in Quezon City which is covered by Transfer Certificate

71
of Title (TCT ) No. 216288, and that, on January 7, 2014, he paid his realty
tax which already included the garbage fee in the sum of
Php100.00.10
The instant petition was filed on January 17, 2014. We issued a TRO on
February 5, 2014, which enjoined the enforcement of Ordinance Nos. SP-
2095 and SP-2235 and required respondents to comment on the petition
without necessarily giving due course thereto.11
Respondents filed their Comment12 with urgent motion to dissolve the
TRO on February 17, 2014. Thereafter, petitioner filed a Reply and a
Memorandum on March 3, 2014 and September 8, 2014, respectively.
Procedural Matters
A. Propriety of a Petition for Certiorari
Respondents are of the view that this petition for certiorari is improper
since they are not tribunals, boards or officers exercising judicial or quasi-
judicial functions. Petitioner, however, counters that in enacting Ordinance
Nos. SP-2095 and SP-2235, the Quezon City Council exercised quasi-
judicial function because the ordinances ruled against the property owners
who must pay the SHT and the garbage fee, exacting from them funds for
basic essential public services that they should not be held liable. Even if
a Rule 65 petition is improper, petitioner still asserts that this Court, in a
number of cases like in Rosario v. Court of Appeals,13 has taken
cognizance of an improper remedy in the interest of justice.
We agree that respondents neither acted in any judicial or quasi-judicial
capacity nor arrogated unto themselves any judicial or quasi-judicial
prerogatives.
A respondent is said to be exercising judicial function where he has the
power to determine what the law is and what the legal rights of the parties
are, and then undertakes to determine these questions and adjudicate
upon the rights of the parties.
Quasi-judicial function, on the other hand, is "a term which applies to the
actions, discretion, etc., of public administrative officers or bodies …
required to investigate facts or ascertain the existence of facts, hold
hearings, and draw conclusions from them as a basis for their official action
and to exercise discretion of a judicial nature."
Before a tribunal, board, or officer may exercise judicial or quasi-judicial
acts, it is necessary that there be a law that gives rise to some specific
rights of person s or property under which adverse claims to such rights
are made, and the controversy en suing therefrom is brought before a
tribunal, board, or officer clothed with power and authority to determine the
law and adjudicate the respective rights of the contending parties.14
For a writ of certiorari to issue, the following requisites must concur: (1) it
must be directed against a tribunal, board, or officer exercising judicial or
quasi-judicial functions; (2) the tribunal, board, or officer must have acted
without or in excess of jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction; and (3) there is no appeal or
any plain, speedy, and adequate remedy in the ordinary course of law. The
enactment by the Quezon City Council of the assailed ordinances was
done in the exercise of its legislative, not judicial or quasi-judicial, function.
Under Republic Act (R.A.) No.7160, or the Local Government Code of
1991 (LGC), local legislative power shall be exercised by the Sangguniang
Panlungsod for the city.15Said law likewise is specific in providing that the
power to impose a tax, fee, or charge , or to generate revenue shall be
exercised by the sanggunian of the local government unit concerned
through an appropriate ordinance.16
72
Also, although the instant petition is styled as a petition for certiorari, it
essentially seeks to declare the unconstitutionality and illegality of the
questioned ordinances. It, thus, partakes of the nature of a petition for
declaratory relief, over which this Court has only appellate, not original,
jurisdiction.17
Despite these, a petition for declaratory relief may be treated as one for
prohibition or mandamus, over which we exercise original jurisdiction, in
cases with far-reaching implications or one which raises transcendental
issues or questions that need to be resolved for the public good.18The
judicial policy is that this Court will entertain direct resort to it when the
redress sought cannot be obtained in the proper courts or when
exceptional and compelling circumstances warrant availment of a remedy
within and calling for the exercise of Our primary jurisdiction.19
Section 2, Rule 65 of the Rules of Court lay down under what
circumstances a petition for prohibition may be filed:
SEC. 2. Petition for prohibition. - When the proceedings of any tribunal,
corporation, board, officer or person, whether exercising judicial, quasi-
judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or excess
of jurisdiction, and there is no appeal or any other plain, speedy, and
adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging the facts
with certainty and praying that judgment be rendered commanding the
respondent to desist from further proceeding in the action or matter
specified therein, or otherwise granting such incidental reliefs as law and
justice may require.
In a petition for prohibition against any tribunal, corporation, board, or
person – whether exercising judicial, quasi-judicial, or ministerial functions
– who has acted without or in excess of jurisdiction or with grave abuse of
discretion, the petitioner prays that judgment be rendered, commanding
the respondents to desist from further proceeding in the action or matter
specified in the petition. In this case, petitioner's primary intention is to
prevent respondents from implementing Ordinance Nos. SP-2095 and SP-
2235. Obviously, the writ being sought is in the nature of a prohibition,
commanding desistance.
We consider that respondents City Mayor, City Treasurer, and City
Assessor are performing ministerial functions. A ministerial function is one
that an officer or tribunal performs in the context of a given set of facts, in
a prescribed manner and without regard for the exercise of his or its own
judgment, upon the propriety or impropriety of the act done.20 Respondent
Mayor, as chief executive of the city government, exercises such powers
and performs such duties and functions as provided for by the LGC and
other laws.21 Particularly, he has the duty to ensure that all taxes and
other revenues of the city are collected, and that city funds are applied to
the payment of expenses and settlement of obligations of the city, in
accordance with law or ordinance.22 On the other hand, under the LGC,
all local taxes, fees, and charges shall be collected by the provincial, city,
municipal, or barangay treasurer, or their duly-authorized deputies, while
the assessor shall take charge, among others, of ensuring that all laws and
policies governing the appraisal and assessment of real properties for
taxation purposes are properly executed.23 Anent the SHT, the
Department of Finance (DOF) Local Finance Circular No. 1-97, dated April
16, 1997, is more specific:
6.3 The Assessor’s office of the Identified LGU shall:
a. immediately undertake an inventory of lands within its jurisdiction which
shall be subject to the levy of the Social Housing Tax (SHT) by the local
sanggunian concerned;
73
b. inform the affected registered owners of the effectivity of the SHT; a list
of the lands and registered owners shall also be posted in 3 conspicuous
places in the city/municipality;
c. furnish the Treasurer’s office and the local sanggunian concerned of the
list of lands affected;
6.4 The Treasurer’s office shall:
a. collect the Social Housing Tax on top of the Real Property Tax, SEF Tax
and other special assessments;
b. report to the DOF, thru the Bureau of Local Government Finance, and
the Mayor’s office the monthly collections on Social Housing Tax (SHT).
An annual report should likewise be submitted to the HUDCC on the total
revenues raised during the year pursuant to Sec. 43, R.A. 7279 and the
manner in which the same was disbursed.
Petitioner has adduced special and important reasons as to why direct
recourse to us should be allowed. Aside from presenting a novel question
of law, this case calls for immediate resolution since the challenged
ordinances adversely affect the property interests of all paying constituents
of Quezon City. As well, this petition serves as a test case for the guidance
of other local government units (LGUs).Indeed, the petition at bar is of
transcendental importance warranting a relaxation of the doctrine of
hierarchy of courts. In Social Justice Society (SJS) Officers, et al. v. Lim
,24the Court cited the case of Senator Jaworski v. Phil. Amusement &
Gaming Corp.,25 where We ratiocinated:
Granting arguendo that the present action cannot be properly treated as a
petition for prohibition, the transcendental importance of the issues
involved in this case warrants that we set aside the technical defects and
take primary jurisdiction over the petition at bar . x x x This is in accordance
with the well entrenched principle that rules of procedure are not inflexible
tools designed to hinder or delay, but to facilitate and promote the
administration of justice. Their strict and rigid application, which would
result in technicalities that tend to frustrate, rather than promote substantial
justice, must always be eschewed.26
B. Locus Standi of Petitioner
Respondents challenge petitioner’s legal standing to file this case on the
ground that, in relation to Section 3 of Ordinance No. SP-2095, petitioner
failed to allege his ownership of a property that has an assessed value of
more than Php100,000.00 and, with respect to Ordinance No. SP-2335,
by what standing or personality he filed the case to nullify the same.
According to respondents, the petition is not a class suit, and that, for not
having specifically alleged that petitioner filed the case as a taxpayer, it
could only be surmised whether he is a party-in-interest who stands to be
directly benefited or injured by the judgment in this case.
It is a general rule that every action must be prosecuted or defended in the
name of the real party-in-interest, who stands to be benefited or injured by
the judgment in the suit, or the party entitled to the avails of the suit.
Jurisprudence defines interest as "material interest, an interest in issue
and to be affected by the decree, as distinguished from mere interest in
the question involved, or a mere incidental interest. By real interest is
meant a present substantial interest, as distinguished from a mere
expectancy or a future, contingent, subordinate, or consequential interest."
"To qualify a person to be a real party-in-interest in whose name an action
must be prosecuted, he must appear to be the present real owner of the
right sought to be enforced."27
"Legal standing" or locus standi calls for more than just a generalized
grievance.28 The concept has been define d as a personal and substantial
74
interest in the case such that the party has sustained or will sustain direct
injury as a result of the government al act that is being challenged.29 The
gist of the question of standing is whether a party alleges such personal
stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the
court depends for illumination of difficult constitutional questions.30
A party challenging the constitutionality of a law, act, or statute must show
"not only that the law is invalid, but also that he has sustained or is in
immediate, or imminent danger of sustaining some direct injury as a result
of its enforcement, and not merely that he suffers thereby in some
indefinite way." It must be shown that he has been, or is about to be, denied
some right or privilege to which he is lawfully entitled, or that he is about
to be subjected to some burdens or penalties by reason of the statute
complained of.31
Tested by the foregoing, petitioner in this case clearly has legal standing
to file the petition. He is a real party-in-interest to assail the constitutionality
and legality of Ordinance Nos. SP-2095 and SP-2235 because
respondents did not dispute that he is a registered co-owner of a
residential property in Quezon City an d that he paid property tax which
already included the SHT and the garbage fee. He has substantial right to
seek a refund of the payments he made and to stop future imposition.
While he is a lone petitioner, his cause of action to declare the validity of
the subject ordinances is substantial and of paramount interest to similarly
situated property owners in Quezon City.
C. Litis Pendentia
Respondents move for the dismissal of this petition on the ground of litis
pendentia. They claim that, as early as February 22, 2012, a case entitled
Alliance of Quezon City Homeowners, Inc., et al., v. Hon. Herbert Bautista,
et al. , docketed as Civil Case No. Q-12- 7-820, has been pending in the
Quezon City Regional Trial Court, Branch 104, which assails the legality
of Ordinance No. SP-2095. Relying on City of Makati, et al. v. Municipality
(now City) of Taguig, et al.,32 respondents assert that there is substantial
identity of parties between the two cases because petitioner herein and
plaintiffs in the civil case filed their respective cases as taxpayers of
Quezon City.
For petitioner, however, respondents’ contention is untenable since he is
not a party in Alliance and does not even have the remotest identity or
association with the plaintiffs in said civil case. Moreover, respondents’
arguments would deprive this Court of its jurisdiction to determine the
constitutionality of laws under Section 5, Article VIII of the 1987
Constitution.33
Litis pendentia is a Latin term which literally means "a pending suit" and is
variously referred to in some decisions as lis pendens and auter action
pendant.34 While it is normally connected with the control which the court
has on a property involved in a suit during the continuance proceedings, it
is more interposed as a ground for the dismissal of a civil action pending
in court.35 In Film Development Council of the Philippines v. SM Prime
Holdings, Inc.,36 We elucidated:
Litis pendentia, as a ground for the dismissal of a civil action, refers to a
situation where two actions are pending between the same parties for the
same cause of action, so that one of them becomes unnecessary and
vexatious. It is based on the policy against multiplicity of suit and
authorizes a court to dismiss a case motu proprio.
xxxx
The requisites in order that an action may be dismissed on the ground of
litis pendentia are: (a) the identity of parties, or at least such as
representing the same interest in both actions; (b) the identity of rights
75
asserted and relief prayed for, the relief being founded on the same facts,
and (c) the identity of the two cases such that judgment in one, regardless
of which party is successful, would amount to res judicata in the other.
The underlying principle of litis pendentia is the theory that a party is not
allowed to vex another more than once regarding the same subject matter
and for the same cause of action. This theory is founded on the public
policy that the same subject matter should not be the subject of
controversy in courts more than once, in order that possible conflicting
judgments may be avoided for the sake of the stability of the rights and
status of persons, and also to avoid the costs and expenses incident to
numerous suits.
Among the several tests resorted to in ascertaining whether two suits
relate to a single or common cause of action are: (1) whether the same
evidence would support and sustain both the first and second causes of
action; and (2) whether the defenses in one case may be used to
substantiate the complaint in the other.
The determination of whether there is an identity of causes of action for
purposes of litis pendentia is inextricably linked with that of res judicata ,
each constituting an element of the other. In either case, both relate to the
sound practice of including, in a single litigation, the disposition of all issues
relating to a cause of action that is before a court.37
There is substantial identity of the parties when there is a community of
interest between a party in the first case and a party in the second case
albeit the latter was not impleaded in the first case.38 Moreover, the fact
that the positions of the parties are reversed, i.e., the plaintiffs in the first
case are the defendants in the second case or vice-versa, does not negate
the identity of parties for purposes of determining whether the case is
dismissible on the ground of litis pendentia .39
In this case, it is notable that respondents failed to attach any pleading
connected with the alleged civil case pending before the Quezon City trial
court.1âwphi1 Granting that there is substantial identity of parties between
said case and this petition, dismissal on the ground of litis pendentia still
cannot be had in view of the absence of the second and third requisites.
There is no way for us to determine whether both cases are based on the
same set of facts that require the presentation of the same evidence. Even
if founded on the same set of facts, the rights asserted and reliefs prayed
for could be different. Moreover, there is no basis to rule that the two cases
are intimately related and/or intertwined with one another such that the
judgment that may be rendered in one, regardless of which party would be
successful, would amount to res judicata in the other.
D. Failure to Exhaust Administrative Remedies
Respondents contend that petitioner failed to exhaust administrative
remedies for his non-compliance with Section 187 of the LGC, which
mandates:
Section 187. Procedure for Approval and Effectivity of Tax Ordinances and
Revenue Measures; Mandatory Public Hearings. – The procedure for
approval of local tax ordinances and revenue measures shall be in
accordance with the provisions of this Code: Provided, That public
hearings shall be conducted for the purpose prior to the enactment thereof:
Provided, further, That any question on the constitutionality or legality of
tax ordinances or revenue measures may be raised on appeal within thirty
(30) days from the effectivity thereof to the Secretary of Justice who shall
render a decision within sixty (60) days from the date of receipt of the
appeal: Provided, however, That such appeal shall not have the effect of
suspending the effectivity of the ordinance and the accrual and payment
of the tax, fee, or charge levied therein: Provided, finally, That within thirty
(30) days after receipt of the decision or the lapse of the sixty-day period
without the Secretary of Justice acting upon the appeal, the aggrieved
76
party may file appropriate proceedings with a court of competent
jurisdiction.
The provision, the constitutionality of which was sustained in Drilon v. Lim
,40 has been construed as mandatory41 considering that –
A municipal tax ordinance empowers a local government unit to impose
taxes. The power to tax is the most effective instrument to raise needed
revenues to finance and support the myriad activities of local government
units for the delivery of basic services essential to the promotion of the
general welfare and enhancement of peace, progress, and prosperity of
the people. Consequently, any delay in implementing tax measures would
be to the detriment of the public. It is for this reason that protests over tax
ordinances are required to be done within certain time frames. x x x.42
The obligatory nature of Section 187 was underscored in Hagonoy Market
Vendor Asso. v. Municipality of Hagonoy:43
x x x [T]he timeframe fixed by law fo r parties to avail of their legal remedies
before competent courts is not a "mere technicality" that can be easily
brushed aside. The periods stated in Section 187 of the Local Government
Code are mandatory. x x x Being its lifeblood, collection of revenues by the
government is of paramount importance. The funds for the operation of its
agencies and provision of basic services to its inhabitants are largely
derived from its revenues and collections. Thus, it is essential that the
validity of revenue measures is not left uncertain for a considerable length
of time. Hence, the law provided a time limit for an aggrieved party to assail
the legality of revenue measures and tax ordinances."44
Despite these cases, the Court, in Ongsuco, et al. v. Hon. Malones,45held
that there was no need for petitioners therein to exhaust administrative
remedies before resorting to the courts, considering that there was only a
pure question of law, the parties did not dispute any factual matter on which
they had to present evidence. Likewise, in Cagayan Electric Power and
Light Co., Inc. v. City of Cagayan de Oro,46 We relaxed the application of
the rules in view of the more substantive matters. For the same reasons,
this petition is an exception to the general rule.
Substantive Issues
Petitioner asserts that the protection of real properties from informal
settlers and the collection of garbage are basic and essential duties and
functions of the Quezon City Government. By imposing the SHT and the
garbage fee, the latter has shown a penchant and pattern to collect taxes
to pay for public services that could be covered by its revenues from taxes
imposed on property, idle land, business, transfer, amusement, etc., as
well as the Internal Revenue Allotment (IRA ) from the National
Government. For petitioner, it is noteworthy that respondents did not raise
the issue that the Quezon City Government is in dire financial state and
desperately needs money to fund housing for informal settlers and to pay
for garbage collection. In fact, it has not denied that its revenue collection
in 2012 is in the sum of ₱13.69 billion.
Moreover, the imposition of the SHT and the garbage fee cannot be
justified by the Quezon City Government as an exercise of its power to
create sources of income under Section 5, Article X of the 1987
Constitution.47 According to petitioner, the constitutional provision is not a
carte blanche for the LGU to tax everything under its territorial and political
jurisdiction as the provision itself admits of guidelines and limitations.
Petitioner further claims that the annual property tax is an ad valorem tax,
a percentage of the assessed value of the property, which is subject to
revision every three (3) years in order to reflect an increase in the market
value of the property. The SHT and the garbage fee are actually increases
in the property tax which are not based on the assessed value of the
77
property or its reassessment every three years; hence, in violation of
Sections 232 and 233 of the LGC.48
For their part, respondents relied on the presumption in favor of the
constitutionality of Ordinance Nos. SP-2095 and SP-2235, invoking
Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,49 People v.
Siton, et al.,50 and Hon. Ermita v. Hon. Aldecoa-Delorino .51 They argue
that the burden of establishing the invalidity of an ordinance rests heavily
upon the party challenging its constitutionality. They insist that the
questioned ordinances are proper exercises of police power similar to
Telecom. & Broadcast Attys. of the Phils., Inc. v. COMELEC52 and Social
Justice Society (SJS), et al. v. Hon. Atienza, Jr.53 and that their enactment
finds basis in the social justice principle enshrined in Section 9,54 Article
II of the 1987 Constitution.
As to the issue of publication, respondents argue that where the law
provides for its own effectivity, publication in the Official Gazette is not
necessary so long as it is not punitive in character, citing Balbuna, et al. v.
Hon. Secretary of Education, et al.55 and Askay v. Cosalan .[56]] Thus,
Ordinance No. SP-2095 took effect after its publication, while Ordinance
No. SP-2235 became effective after its approval on December 26, 2013.
Additionally, the parties articulate the following positions:
On the Socialized Housing Tax
Respondents emphasize that the SHT is pursuant to the social justice
principle found in Sections 1 and 2, Article XIII57 of the 1987 Constitution
and Sections 2 (a)58 and 4359 of R.A. No. 7279, or the "Urban
Development and Housing Act of 1992 ( UDHA ).
Relying on Manila Race Horse Trainers Assn., Inc. v. De La Fuente,60and
Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,61respondents
assert that Ordinance No. SP-2095 applies equally to all real property
owners without discrimination. There is no way that the ordinance could
violate the equal protection clause because real property owners and
informal settlers do not belong to the same class.
Ordinance No. SP-2095 is also not oppressive since the tax rate being
imposed is consistent with the UDHA. While the law authorizes LGUs to
collect SHT on properties with an assessed value of more than
₱50,000.00, the questioned ordinance only covers properties with an
assessed value exceeding ₱100,000.00. As well, the ordinance provides
for a tax credit equivalent to the total amount of the special assessment
paid by the property owner beginning in the sixth (6th) year of the effectivity
of the ordinance.
On the contrary, petitioner claims that the collection of the SHT is
tantamount to a penalty imposed on real property owners due to the failure
of respondent Quezon City Mayor and Council to perform their duty to
secure and protect real property owners from informal settlers, thereby
burdening them with the expenses to provide funds for housing. For
petitioner, the SHT cannot be viewed as a "charity" from real property
owners since it is forced, not voluntary.
Also, petitioner argues that the collection of the SHT is a kind of class
legislation that violates the right of property owners to equal protection of
the laws since it favors informal settlers who occupy property not their own
and pay no taxes over law-abiding real property owners w ho pay income
and realty taxes.
Petitioner further contends that respondents’ characterization of the SHT
as "nothing more than an advance payment on the real property tax" has
no statutory basis. Allegedly, property tax cannot be collected before it is
due because, under the LGC, chartered cities are authorized to impose
78
property tax based on the assessed value and the general revision of
assessment that is made every three (3) years.
As to the rationale of SHT stated in Ordinance No. SP-2095, which, in turn,
was based on Section 43 of the UDHA, petitioner asserts that there is no
specific provision in the 1987 Constitution stating that the ownership and
enjoyment of property bear a social function. And even if there is, it is
seriously doubtful and far-fetched that the principle means that property
owners should provide funds for the housing of informal settlers and for
home site development. Social justice and police power, petitioner
believes, does not mean imposing a tax on one, or that one has to give up
something, for the benefit of another. At best, the principle that property
ownership and enjoyment bear a social function is but a reiteration of the
Civil Law principle that property should not be enjoyed and abused to the
injury of other properties and the community, and that the use of the
property may be restricted by police power, the exercise of which is not
involved in this case.
Finally, petitioner alleges that 6 Bistekvilles will be constructed out of the
SHT collected. Bistek is the monicker of respondent City Mayor. The
Bistekvilles makes it clear, therefore, that politicians will take the credit for
the tax imposed on real property owners.
On the Garbage Fee
Respondents claim that Ordinance No. S-2235, which is an exercise of
police power, collects on the average from every household a garbage fee
in the meager amount of thirty-three (33) centavos per day compared with
the sum of ₱1,659.83 that the Quezon City Government annually spends
for every household for garbage collection and waste management.62
In addition, there is no double taxation because the ordinance involves a
fee. Even assuming that the garbage fee is a tax, the same cannot be a
direct duplicate tax as it is imposed on a different subject matter and is of
a different kind or character. Based on Villanueva, et al. v. City of Iloilo63
and Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,64 there is
no "taxing twice" because the real property tax is imposed on ownership
based on its assessed value, while the garbage fee is required on the
domestic household. The only reference to the property is the
determination of the applicable rate and the facility of collection.
Petitioner argues, however, that Ordinance No. S-2235 cannot be justified
as an exercise of police power. The cases of Calalang v. Williams,65
Patalinghug v. Court of Appeals,66 and Social Justice Society (SJS), et al.
v. Hon. Atienza, Jr.,67 which were cited by respondents, are inapplicable
since the assailed ordinance is a revenue measure and does not regulate
the disposal or other aspect of garbage.
The subject ordinance, for petitioner, is discriminatory as it collects
garbage fee only from domestic households and not from restaurants, food
courts, fast food chains, and other commercial dining places that spew
garbage much more than residential property owners.
Petitioner likewise contends that the imposition of garbage fee is
tantamount to double taxation because garbage collection is a basic and
essential public service that should be paid out from property tax, business
tax, transfer tax, amusement tax, community tax certificate, other taxes,
and the IRA of the Quezon City Government. To bolster the claim, he
states that the revenue collection of the Quezon City Government reached
Php13.69 billion in 2012. A small portion of said amount could be spent for
garbage collection and other essential services.
It is further noted that the Quezon City Government already collects
garbage fee under Section 4768 of R.A. No. 9003, or the Ecological Solid
Waste Management Act of 2000, which authorizes LGUs to impose fees
in amounts sufficient to pay the costs of preparing, adopting, and
79
implementing a solid waste management plan, and that LGUs have access
to the Solid Waste Management (SWM) Fund created under Section 4669
of the same law. Also, according to petitioner, it is evident that Ordinance
No. S2235 is inconsistent with R.A. No. 9003 for whil e the law encourages
segregation, composting, and recycling of waste, the ordinance only
emphasizes the collection and payment of garbage fee; while the law calls
for an active involvement of the barangay in the collection, segregation,
and recycling of garbage, the ordinance skips such mandate. Lastly, in
challenging the ordinance, petitioner avers that the garbage fee was
collected even if the required publication of its approval had not yet
elapsed. He notes that on January 7, 2014, he paid his realty tax which
already included the garbage fee.
The Court's Ruling
Respondents correctly argued that an ordinance, as in every law, is
presumed valid.
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left thus
to the discretion of municipal authorities. Courts will go slow in writing off
an ordinance as unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule
which has gained acceptance is that factors relevant to such an inquiry are
the municipal conditions as a whole and the nature of the business made
subject to imposition.70
For an ordinance to be valid though, it must not only be within the corporate
powers of the LGU to enact and must be passed according to the
procedure prescribed by law, it should also conform to the following
requirements: (1) not contrary to the Constitution or any statute; (2) not
unfair or oppressive; (3) not partial or discriminatory; (4) not prohibit but
may regulate trade; (5) general and consistent with public policy; and (6)
not unreasonable.71 As jurisprudence indicates, the tests are divided into
the formal (i.e., whether the ordinance was enacted within the corporate
powers of the LGU and whether it was passed in accordance with the
procedure prescribed by law), and the substantive ( i.e., involving inherent
merit, like the conformity of the ordinance with the limitations under the
Constitution and the statutes, as well as with the requirements of fairness
and reason, and its consistency with public policy).72
An ordinance must pass muster under the test of constitutionality and the
test of consistency with the prevailing laws.73 If not, it is void.74
Ordinance should uphold the principle of the supremacy of the
Constitution.75 As to conformity with existing statutes,
Batangas CATV, Inc. v. Court of Appeals76 has this to say:
It is a fundamental principle that municipal ordinances are inferior in status
and subordinate to the laws of the state. An ordinance in conflict with a
state law of general character and statewide application is universally held
to be invalid. The principle is frequently expressed in the declaration that
municipal authorities, under a general grant of power, cannot adopt
ordinances which infringe the spirit of a state law or repugnant to the
general policy of the state. In every power to pass ordinances given to a
municipality, there is an implied restriction that the ordinances shall be
consistent with the general law. In the language of Justice Isagani Cruz
(ret.), this Court, in Magtajas vs. Pryce Properties Corp., Inc., ruled that:
The rationale of the requirement that the ordinances should not contravene
a statute is obvious. Municipal governments are only agents of the national
government. Local councils exercise only delegated legislative powers
conferred on them by Congress as the national lawmaking body. The
delegate cannot be superior to the principal or exercise powers higher than
those of the latter. It is a heresy to suggest that the local government units
80
can undo the acts of Congress, from which they have derived their power
in the first place, and negate by mere ordinance the mandate of the statute.
Municipal corporations owe their origin to, and derive their powers and
rights wholly from the legislature. It breathes into them the breath of life,
without which they cannot exist. As it creates, so it may destroy. As it may
destroy, it may abridge and control. Unless there is some constitutional
limitation on the right, the legislature might, by a single act, and if we can
suppose it capable of so great a folly and so great a wrong, sweep from
existence all of the municipal corporations in the State, and the corporation
could not prevent it. We know of no limitation on the right so far as to the
corporation themselves are concerned. They are so to phrase it, the mere
tenants at will of the legislature.
This basic relationship between the national legislature and the local
government units has not been enfeebled by the new provisions in the
Constitution strengthening the policy of local autonomy. Without meaning
to detract from that policy, we here confirm that Congress retains control
of the local government units although in significantly reduced degree now
than under our previous Constitutions. The power to create still includes
the power to destroy. The power to grant still includes the power to withhold
or recall. True, there are certain notable innovations in the Constitution,
like the direct conferment on the local government units of the power to
tax, which cannot now be withdrawn by mere statute. By and large,
however, the national legislature is still the principal of the local
government units, which cannot defy its will or modify or violate it.77
LGUs must be reminded that they merely form part of the whole; that the
policy of ensuring the autonomy of local governments was never intended
by the drafters of the 1987 Constitution to create an imperium in imperio
and install an intra-sovereign political subdivision independent of a single
sovereign state.78
"[M]unicipal corporations are bodies politic and corporate, created not only
as local units of local self-government, but as governmental agencies of
the state. The legislature, by establishing a municipal corporation, does
not divest the State of any of its sovereignty; absolve itself from its right
and duty to administer the public affairs of the entire state; or divest itself
of any power over the inhabitants of the district which it possesses before
the charter was granted."79
LGUs are able to legislate only by virtue of a valid delegation of legislative
power from the national legislature; they are mere agents vested with what
is called the power of subordinate legislation.80 "Congress enacted the
LGC as the implementing law for the delegation to the various LGUs of the
State’s great powers, namely: the police power, the power of eminent
domain, and the power of taxation. The LGC was fashioned to delineate
the specific parameters and limitations to be complied with by each LGU
in the exercise of these delegated powers with the view of making each
LGU a fully functioning subdivision of the State subject to the constitutional
and statutory limitations."81
Specifically, with regard to the power of taxation, it is indubitably the most
effective instrument to raise needed revenues in financing and supporting
myriad activities of the LGUs for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people.82 As this Court opined in National
Power Corp. v. City of Cabanatuan:83
In recent years, the increasing social challenges of the times expanded the
scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the
protection of local industries as well as public welfare and similar
objectives. Taxation assume s even greater significance with the
ratification of the 1987 Constitution. Thenceforth, the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
81
given direct authority to levy taxes, fees and other charges pursuant to
Article X, Section 5 of the 1987 Constitution, viz: "Section 5. Each Local
Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy
of local autonomy. Such taxes, fees and charges shall accrue exclusively
to the local governments."
This paradigm shift results from the realization that genuine development
can be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country’s highly
centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders." The
only way to shatter this culture of dependence is to give the LGUs a wider
role in the delivery of basic services, and confer them sufficient powers to
generate their own sources for the purpose. To achieve this goal, Section
3 of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local
autonomy , set the guidelines and limitations to this grant of taxing powers
x x x84
Fairly recently, We also stated in Pelizloy Realty Corporation v. Province
of Benguet85 that:
The rule governing the taxing power of provinces, cities, municipalities and
barangays is summarized in Icard v. City Council of Baguio :
It is settled that a municipal corporation unlike a sovereign state is clothed
with no inherent power of taxation. The charter or statute must plainly show
an intent to confer that power or the municipality, cannot assume it. And
the power when granted is to be construed in strictissimi juris . Any doubt
or ambiguity arising out of the term used in granting that power must be
resolved against the municipality. Inferences, implications, deductions – all
these – have no place in the interpretation of the taxing power of a
municipal corporation. [Underscoring supplied]
xxxx
Per Section 5, Article X of the 1987 Constitution, "the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other charges." Nevertheless,
such authority is "subject to such guidelines and limitations as the
Congress may provide."
In conformity with Section 3, Article X of the 1987 Constitution, Congress
enacted Republic Act No. 7160, otherwise known as the Local
Government Code of 1991. Book II of the LGC governs local taxation and
fiscal matters.86
Indeed, LGUs have no inherent power to tax except to the extent that such
power might be delegated to them either by the basic law or by the
statute.87 "Under the now prevailing Constitution , where there is neither
a grant nor a prohibition by statute , the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The
basic rationale for the current rule is to safeguard the viability and self-
sufficiency of local government units by directly granting them general and
broad tax powers. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional objective
obviously is to ensure that, while the local government units are being
strengthened and made more autonomous , the legislature must still see
to it that (a) the taxpayer will not be over-burdened or saddled with multiple
and unreasonable impositions; (b) each local government unit will have its
fair share of available resources; (c) the resources of the national
82
government will not be unduly disturbed; and (d) local taxation will be fair,
uniform, and just."88
Subject to the provisions of the LGC and consistent with the basic policy
of local autonomy, every LGU is now empowered and authorized to create
its own sources of revenue and to levy taxes, fees, and charges which
shall accrue exclusively to the local government unit as well as to apply its
resources and assets for productive, developmental, or welfare purposes,
in the exercise or furtherance of their governmental or proprietary powers
and functions.89 The relevant provisions of the LGC which establish the
parameters of the taxing power of the LGUs are as follows:
SECTION 130. Fundamental Principles. – The following fundamental
principles shall govern th e exercise of the taxing and other revenue-raising
powers of local government units:
(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based as far as practicable on the taxpayer’s ability
to pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
(4) not be contrary to law, public policy, national economic policy, or in
restraint of trade;
(c) The collection of local taxes, fees, charges and other impositions shall
in no case be left to any private person;
(d) The revenue collected pursuant to the provisions of this Code shall
inure solely to the benefit of, and be subject to the disposition by, the local
government unit levying the tax, fee, charge or other imposition unless
otherwise specifically provided herein; and,
(e) Each local government unit shall, as far as practicable, evolve a
progressive system of taxation.
SECTION 133. Common Limitations on the Taxing Powers of Local
Government Units. – Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions
mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues
except wharfage on wharves constructed and maintained by the local
government unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form whatsoever upon
such goods or merchandise;
83
(f) Taxes, fees or charges on agricultural and aquatic products when sold
by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of Investments
as pioneer or non-pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided
herein;
(j) Taxes on the gross receipts of transportation contractors and persons
engaged in the transportation of passengers or freight by hire and common
carriers by air, land or water, except as provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for the
issuance of all kinds of licenses or permits for the driving thereof, except
tricycles;
(m) Taxes, fees, or other charges on Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the Philippines"
respectively; and
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units.
SECTION 151. Scope of Taxing Powers. – Except as otherwise provided
in this Code, the city, may levy the taxes, fees, and charges which the
province or municipality may impose: Provided, however, That the taxes,
fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates
allowed for the province or municipality by not more than fifty percent
(50%) except the rates of professional and amusement taxes.
SECTION 186. Power to Levy Other Taxes, Fees or Charges. – Local
government units may exercise the power to levy taxes, fees or charges
on any base or subject not otherwise specifically enumerated herein or
taxed under the provisions of the National Internal Revenue Code, as
amended, or other applicable laws: Provided, That the taxes, fees, or
charges shall not be unjust, excessive, oppressive, confiscatory or
contrary to declared national policy: Provided, further, That the ordinance
levying such taxes, fees or charges shall not be enacted without any prior
public hearing conducted for the purpose.
On the Socialized Housing Tax
Contrary to petitioner’s submission, the 1987 Constitution explicitly
espouses the view that the use of property bears a social function and that
all economic agents shall contribute to the common good.90 The Court
already recognized this in Social Justice Society (SJS), et al. v. Hon.
Atienza, Jr.:91
84
Property has not only an individual function, insofar as it has to provide for
the needs of the owner, but also a social function insofar as it has to
provide for the needs of the other members of society. The principle is this:
Police power proceeds from the principle that every holder of property,
however absolute and unqualified may be his title, holds it under the
implied liability that his use of it shall not be injurious to the equal
enjoyment of others having an equal right to the enjoyment of their
property, no r injurious to the right of the community. Rights of property,
like all other social and conventional rights, are subject to reasonable
limitations in their enjoyment as shall prevent them from being injurious,
and to such reasonable restraints and regulations established by law as
the legislature, under the governing an d controlling power vested in them
by the constitution, may think necessary and expedient.92
Police power, which flows from the recognition that salus populi est
suprema lex (the welfare of the people is the supreme law), is the plenary
power vested in the legislature to make statutes and ordinances to
promote the health, morals, peace, education, good order or safety and
general welfare of the people.93 Property rights of individuals may be
subjected to restraints and burdens in order to fulfill the objectives of the
government in the exercise of police power. 94 In this jurisdiction, it is well-
entrenched that taxation may be made the implement of the state’s police
power.95
Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent to
0.5% on the assessed value of land in excess of Php100,000.00. This
special assessment is the same tax referred to in R.A. No. 7279 or the
UDHA.96 The SHT is one of the sources of funds for urban development
and housing program.97 Section 43 of the law provides:
Sec. 43. Socialized Housing Tax . – Consistent with the constitutional
principle that the ownership and enjoyment of property bear a social
function and to raise funds for the Program, all local government units are
hereby authorized to impose an additional one-half percent (0.5%) tax on
the assessed value of all lands in urban areas in excess of Fifty thousand
pesos (₱50,000.00).
The rationale of the SHT is found in the preambular clauses of the subject
ordinance, to wit:
WHEREAS, the imposition of additional tax is intended to provide the City
Government with sufficient funds to initiate, implement and undertake
Socialized Housing Projects and other related preliminary activities;
WHEREAS, the imposition of 0.5% tax will benefit the Socialized Housing
Programs and Projects of the City Government, specifically the
marginalized sector through the acquisition of properties for human
settlements;
WHEREAS, the removal of the urban blight will definitely increase fair
market value of properties in the city[.]
The above-quoted are consistent with the UDHA, which the LGUs are
charged to implement in their respective localities in coordination with the
Housing and Urban Development Coordinating Council, the national
housing agencies, the Presidential Commission for the Urban Poor, the
private sector, and other non-government organizations.98 It is the
declared policy of the State to undertake a comprehensive and continuing
urban development and housing program that shall, among others, uplift
the conditions of the underprivileged and homeless citizens in urban areas
and in resettlement areas, and provide for the rational use and
development of urban land in order to bring a bout, among others,
reduction in urban dysfunctions, particularly those that adversely affect
public health, safety and ecology, and access to land and housing by the
underprivileged and homeless citizens.99 Urban renewal and resettlement
85
shall include the rehabilitation and development of blighted and slum
areas100 and the resettlement of program beneficiaries in accordance with
the provisions of the UDHA.101 Under the UDHA, socialized housing102
shall be the primary strategy in providing shelter for the underprivileged
and homeless.103 The LGU or the NHA, in cooperation with the private
developers and concerned agencies, shall provide socialized housing or
re settlement areas with basic services and facilities such as potable water,
power and electricity, and an adequate power distribution system,
sewerage facilities, and an efficient and adequate solid waste disposal
system; and access to primary roads and transportation facilities.104 The
provisions for health, education, communications, security, recreation,
relief and welfare shall also be planned and be given priority for
implementation by the LGU and concerned agencies in cooperation with
the private sector and the beneficiaries themselves.105
Moreover, within two years from the effectivity of the UDHA, the LGUs, in
coordination with the NHA, are directed to implement the relocation and
resettlement of persons living in danger areas such as esteros , railroad
tracks, garbage dumps, riverbanks, shorelines, waterways, and other
public places like sidewalks, roads, parks, and playgrounds.106 In
coordination with the NHA, the LG Us shall provide relocation or
resettlement sites with basic services and facilities and access to
employment and livelihood opportunities sufficient to meet the basic needs
of the affected families.107
Clearly, the SHT charged by the Quezon City Government is a tax which
is within its power to impose. Aside from the specific authority vested by
Section 43 of the UDHA, cities are allowed to exercise such other powers
and discharge such other functions and responsibilities as are necessary,
appropriate, or incidental to efficient and effective provision of the basic
services and facilities which include, among others, programs and projects
for low-cost housing and other mass dwellings.108 The collections made
accrue to its socialized housing programs and projects.
The tax is not a pure exercise of taxing power or merely to raise revenue;
it is levied with a regulatory purpose. The levy is primarily in the exercise
of the police power for the general welfare of the entire city. It is greatly
imbued with public interest. Removing slum areas in Quezon City is not
only beneficial to the underprivileged and homeless constituents but
advantageous to the real property owners as well. The situation will
improve the value of the their property investments, fully enjoying the same
in view of an orderly, secure, and safe community, and will enhance the
quality of life of the poor, making them law-abiding constituents and better
consumers of business products.
Though broad and far-reaching, police power is subordinate to
constitutional limitations and is subject to the requirement that its exercise
must be reasonable and for the public good.109 In the words of City of
Manila v. Hon. Laguio, Jr.:110
The police power granted to local government units must always be
exercised with utmost observance of the rights of the people to due
process and equal protection of the law. Such power cannot be exercised
whimsically, arbitrarily or despotically as its exercise is subject to a
qualification, limitation or restriction demanded by the respect and regard
due to the prescription of the fundamental law, particularly those forming
part of the Bill of Rights. Individual rights, it bears emphasis, may be
adversely affected only to the extent that may fairly be required by the
legitimate demands of public interest or public welfare. Due process
requires the intrinsic validity of the law in interfering with the rights of the
person to his life, liberty and property.
xxxx
To successfully invoke the exercise of police power as the rationale for the
enactment of the Ordinance, and to free it from the imputation of
86
constitutional infirmity, not only must it appear that the interests of the
public generally, as distinguished from those of a particular class, require
an interference with private rights, but the means adopted must be
reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals. It must be evident that no other
alternative for the accomplishment of the purpose less intrusive of private
rights can work. A reasonable relation must exist between the purposes of
the police measure and the means employed for its accomplishment, for
even under the guise of protecting the public interest, personal rights and
those pertaining to private property will not be permitted to be arbitrarily
invaded.
Lacking a concurrence of these two requisites, the police measure shall
be struck down as an arbitrary intrusion into private rights – a violation of
the due process clause.111
As with the State, LGUs may be considered as having properly exercised
their police power only if there is a lawful subject and a lawful method or,
to be precise, if the following requisites are met: (1) the interests of the
public generally, as distinguished from those of a particular class, require
its exercise and (2) the mean s employed are reasonably necessary for
the accomplishment of the purpose and not unduly oppressive upon
individuals.112
In this case, petitioner argues that the SHT is a penalty imposed on real
property owners because it burdens them with expenses to provide funds
for the housing of informal settlers, and that it is a class legislation since it
favors the latter who occupy properties which is not their own and pay no
taxes.
We disagree.
Equal protection requires that all persons or things similarly situated should
be treated alike, both as to rights conferred and responsibilities
imposed.113 The guarantee means that no person or class of persons
shall be denied the same protection of laws which is enjoyed by other
persons or other classes in like circumstances.114 Similar subjects should
not be treated differently so as to give undue favor to some and unjustly
discriminate against others.115 The law may, therefore, treat and regulate
one class differently from another class provided there are real and
substantial differences to distinguish one class from another.116
An ordinance based on reasonable classification does not violate the
constitutional guaranty of the equal protection of the law. The requirements
for a valid and reasonable classification are: (1) it must rest on substantial
distinctions; (2) it must be germane to the purpose of the law; (3) it must
not be limited to existing conditions only; and (4) it must apply equally to
all members of the same class.117For the purpose of undertaking a
comprehensive and continuing urban development and housing program,
the disparities between a real property owner and an informal settler as
two distinct classes are too obvious and need not be discussed at length.
The differentiation conforms to the practical dictates of justice and equity
and is not discriminatory within the meaning of the Constitution. Notably,
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 over
another.118 It is inherent in the power to tax that a State is free to select
the subjects of taxation.119 Inequities which result from a singling out of
one particular class for taxation or exemption infringe no constitutional
limitation.120
Further, the reasonableness of Ordinance No. SP-2095 cannot be
disputed. It is not confiscatory or oppressive since the tax being imposed
therein is below what the UDHA actually allows. As pointed out by
respondents, while the law authorizes LGUs to collect SHT on lands with
an assessed value of more than ₱50,000.00, the questioned ordinance
87
only covers lands with an assessed value exceeding ₱100,000.00. Even
better, on certain conditions, the ordinance grants a tax credit equivalent
to the total amount of the special assessment paid beginning in the sixth
(6th) year of its effectivity. Far from being obnoxious, the provisions of the
subject ordinance are fair and just.
On the Garbage Fee
In the United States of America, it has been held that the authority of a
municipality to regulate garbage falls within its police power to protect
public health, safety, and welfare.121 As opined, the purposes and policy
underpinnings of the police power to regulate the collection and disposal
of solid waste are: (1) to preserve and protect the public health and welfare
as well as the environment by minimizing or eliminating a source of
disease and preventing and abating nuisances; and (2) to defray costs and
ensure financial stability of the system for the benefit of the entire
community, with the sum of all charges marshalled and designed to pay
for the expense of a systemic refuse disposal scheme.122
Ordinances regulating waste removal carry a strong presumption of
validity.123 Not surprisingly, the overwhelming majority of U.S. cases
addressing a city's authority to impose mandatory garbage service and
fees have upheld the ordinances against constitutional and statutory
challenges.124
A municipality has an affirmative duty to supervise and control the
collection of garbage within its corporate limits.125 The LGC specifically
assigns the responsibility of regulation and oversight of solid waste to local
governing bodies because the Legislature determined that such bodies
were in the best position to develop efficient waste management
programs.126 To impose on local governments the responsibility to
regulate solid waste but not grant them the authority necessary to fulfill the
same would lead to an absurd result."127 As held in one U.S. case:
x x x When a municipality has general authority to regulate a particular
subject matter, the manner and means of exercising those powers, where
not specifically prescribed by the legislature, are left to the discretion of the
municipal authorities. x x x Leaving the manner of exercising municipal
powers to the discretion of municipal authorities "implies a range of
reasonableness within which a municipality's exercise of discretion will not
be interfered with or upset by the judiciary."128
In this jurisdiction, pursuant to Section 16 of the LGC and in the proper
exercise of its corporate powers under Section 22 of the same, the
Sangguniang Panlungsod of Quezon City, like other local legislative
bodies, is empowered to enact ordinances, approve resolutions, and
appropriate funds for the genera l welfare of the city and its
inhabitants.129Section 16 of the LGC provides:
SECTION 16. General Welfare . – Every local government unit shall
exercise the powers expressly granted, those necessarily implied
therefrom, as well as powers necessary, appropriate, or incidental for its
efficient and effective governance, and those which are essential to the
promotion of the general welfare. Within their respective territorial
jurisdictions, local government units shall ensure and support, among
other things, the preservation and enrichment of culture, promote health
and safety, enhance the right of the people to a balanced ecology,
encourage and support the development of appropriate and self-reliant
scientific and technological capabilities, improve public morals, enhance
economic prosperity and social justice, promote full employment among
their residents, maintain peace and order, and preserve the comfort and
convenience of their inhabitants.
88
The general welfare clause is the delegation in statutory form of the police
power of the State to LGUs.130 The provisions related thereto are liberally
interpreted to give more powers to LGUs in accelerating economic
development and upgrading the quality of life for the people in the
community.131 Wide discretion is vested on the legislative authority to
determine not only what the interests of the public require but also what
measures are necessary for the protection of such interests since the
Sanggunian is in the best position to determine the needs of its
constituents.132
One of the operative principles of decentralization is that, subject to the
provisions of the LGC and national policies, the LGUs shall share with the
national government the responsibility in the management and
maintenance of ecological balance within their territorial jurisdiction.133 In
this regard, cities are allowed to exercise such other powers and discharge
such other functions and responsibilities as are necessary, appropriate, or
incidental to efficient and effective provision of the basic services and
facilities which include, among others, solid waste disposal system or
environmental management system and services or facilities related to
general hygiene and sanitation.134 R.A. No. 9003, or the Ecological Solid
Waste Management Act of 2000,135 affirms this authority as it expresses
that the LGUs shall be primarily responsible for the implementation and
enforcement of its provisions within their respective jurisdictions while
establishing a cooperative effort among the national government, other
local government units, non-government organizations, and the private
sector.136
Necessarily, LGUs are statutorily sanctioned to impose and collect such
reasonable fees and charges for services rendered.137 "Charges" refer to
pecuniary liability, as rents or fees against persons or property, while "Fee"
means a charge fixed by law or ordinance for the regulation or inspection
of a business or activity.138
The fee imposed for garbage collections under Ordinance No. SP-2235 is
a charge fixed for the regulation of an activity. The basis for this could be
discerned from the foreword of said Ordinance, to wit:
WHEREAS, Quezon City being the largest and premiere city in the
Philippines in terms of population and urban geographical areas, apart
from being competent and efficient in the delivery of public service,
apparently requires a big budgetary allocation in order to address the
problems relative and connected to the prompt and efficient delivery of
basic services such as the effective system of waste management, public
information programs on proper garb age and proper waste disposal,
including the imposition of waste regulatory measures;
WHEREAS, to help augment the funds to be spent for the city’s waste
management system, the City Government through the Sangguniang
Panlungsod deems it necessary to impose a schedule of reasonable fees
or charges for the garbage collection services for residential (domestic
household) that it renders to the public.
Certainly, as opposed to petitioner’s opinion, the garbage fee is not a tax.
In Smart Communications, Inc. v. Municipality of Malvar, Batangas ,139the
Court had the occasion to distinguish these two concepts:
In Progressive Development Corporation v. Quezon City, the Court
declared that "if the generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if regulation is
the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax."
In Victorias Milling Co., Inc. v. Municipality of Victorias, the Court reiterated
that the purpose and effect of the imposition determine whether it is a tax
or a fee, and that the lack of any standards for such imposition gives the
presumption that the same is a tax.
89
We accordingly say that the designation given by the municipal authorities
does not decide whether the imposition is properly a license tax or a
license fee.1awp++i1 The determining factors are the purpose and effect
of the imposition as may be apparent from the provisions of the ordinance.
Thus, "[w]hen no police inspection, supervision, or regulation is provided,
nor any standard set for the applicant to establish, or that he agrees to
attain or maintain, but any and all persons engaged in the business
designated, without qualification or hindrance, may come, and a license
on payment of the stipulated sum will issue, to do business, subject to no
prescribed rule of conduct and under no guardian eye, but according to the
unrestrained judgment or fancy of the applicant and licensee, the
presumption is strong that the power of taxation, and not the police power,
is being exercised."
In Georgia, U.S.A., assessments for garbage collection services have
been consistently treated as a fee and not a tax.140
In another U.S. case,141 the garbage fee was considered as a "service
charge" rather than a tax as it was actually a fee for a service given by the
city which had previously been provided at no cost to its citizens.
Hence, not being a tax, the contention that the garbage fee under
Ordinance No. SP-2235 violates the rule on double taxation142 must
necessarily fail.
Nonetheless, although a special charge, tax, or assessment may be
imposed by a municipal corporation, it must be reasonably commensurate
to the cost of providing the garbage service.143 To pass judicial scrutiny,
a regulatory fee must not produce revenue in excess of the cost of the
regulation because such fee will be construed as an illegal tax when the
revenue generated by the regulation exceeds the cost of the
regulation.144
Petitioner argues that the Quezon City Government already collects
garbage fee under Section 47 of R.A. No. 9003, which authorizes LGUs to
impose fees in amounts sufficient to pay the costs of preparing, adopting,
and implementing a solid waste management plan, and that it has access
to the SWM Fund under Section 46 of the same law. Moreover, Ordinance
No. S-2235 is inconsistent with R.A. No. 9003, because the ordinance
emphasizes the collection and payment of garbage fee with no concern for
segregation, composting and recycling of wastes. It also skips the mandate
of the law calling for the active involvement of the barangay in the
collection, segregation, and recycling of garbage.
We now turn to the pertinent provisions of R.A. No. 9003.
Under R.A. No. 9003, it is the declared policy of the State to adopt a
systematic, comprehensive and ecological solid waste management
program which shall, among others, ensure the proper segregation,
collection, transport, storage, treatment and disposal of solid waste
through the formulation and adoption of the best environmental practices
in ecological waste management.145 The law provides that segregation
and collection of solid waste shall be conducted at the barangay level,
specifically for biodegradable, compostable and reusable wastes, while
the collection of non-recyclable materials and special wastes shall be the
responsibility of the municipality or city.146 Mandatory segregation of solid
wastes shall primarily be conducted at the source, to include household,
institutional, industrial, commercial and agricultural sources.147
Segregation at source refers to a solid waste management practice of
separating, at the point of origin, different materials found in soli d waste
in order to promote recycling and re-use of resources and to reduce the
volume of waste for collection and disposal.148 Based on Rule XVII of the
Department of Environment and Natural Resources (DENR)
Administrative Order No. 2001-34, Series of 2001,149 which is the
Implementing Rules and Regulations ( IRR ) of R.A. No. 9003, barangays
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shall be responsible for the collection, segregation, and recycling of
biodegradable, recyclable , compostable and reusable wastes.150
For the purpose, a Materials Recovery Facility (MRF), which shall receive
biodegradable wastes for composting and mixed non-biodegradable
wastes for final segregation, re-use and recycling, is to be established in
every barangay or cluster of barangays.151
According to R.A. 9003, an LGU, through its local solid waste management
board, is mandated by law to prepare a 10-year solid waste management
plan consistent with the National Solid Waste Management
Framework.152 The plan shall be for the re-use, recycling and composting
of wastes generated in its jurisdiction; ensure the efficient management of
solid waste generated within its jurisdiction; and place primary emphasis
on implementation of all feasible re-use, recycling, and composting
programs while identifying the amount of landfill and transformation
capacity that will be needed for solid waste which cannot be re-used,
recycled, or composted.153 One of the components of the so lid waste
management plan is source reduction:
(e) Source reduction – The source reduction component shall include a
program and implementation schedule which shows the methods by which
the LGU will, in combination with the recycling and composting
components, reduce a sufficient amount of solid waste disposed of in
accordance with the diversion requirements of Section 20.
The source reduction component shall describe the following:
(1) strategies in reducing the volume of solid waste generated at source;
(2) measures for implementing such strategies and the resources
necessary to carry out such activities;
(3) other appropriate waste reduction technologies that may also be
considered, provide d that such technologies conform with the standards
set pursuant to this Act;
(4) the types of wastes to be reduced pursuant to Section 15 of this Act;
(5) the methods that the LGU will use to determine the categories of solid
wastes to be diverted from disposal at a disposal facility through re-use ,
recycling and composting; and
(6) new facilities and of expansion of existing facilities which will be needed
to implement re-use, recycling and composting.
The LGU source reduction component shall include the evaluation and
identification of rate structures and fees for the purpose of reducing the
amount of waste generated, and other source reduction strategies,
including but not limited to, program s and economic incentives provided
under Sec. 45 of this Act to reduce the use of non-recyclable materials,
replace disposable materials and products with reusable materials and
products, reduce packaging, and increase the efficiency of the use of
paper, cardboard, glass, metal, and other materials. The waste reduction
activities of the community shall al so take into account, among others,
local capability, economic viability, technical requirements, social
concerns, disposition of residual waste and environmental impact:
Provided , That, projection of future facilities needed and estimated cost
shall be incorporated in the plan. x x x154
The solid waste management pl an shall also include an implementation
schedule for solid waste diversion:
SEC. 20. Establishing Mandatory Solid Waste Diversion. – Each LGU plan
shall include an implementation schedule which shows that within five (5)
years after the effectivity of this Act, the LGU shall divert at least 25% of
91
all solid waste from waste disposal facilities through re-use, recycling, and
composting activities and other resource recovery activities: Provided ,
That the waste diversion goals shall be increased every three (3) years
thereafter: Provided , further, That nothing in this Section prohibits a local
government unit from implementing re-use, recycling, and composting
activities designed to exceed the goal.
The baseline for the twenty-five percent (25%) shall be derived from the
waste characterization result155 that each LGU is mandated to
undertake.156In accordance with Section 46 of R.A. No. 9003, the LGUs
are entitled to avail of the SWM Fund on the basis of their approved solid
waste management plan. Aside from this, they may also impose SWM
Fees under Section 47 of the law, which states:
SEC. 47. Authority to Collect Solid Waste Management Fees – The local
government unit shall impose fees in amounts sufficient to pay the costs
of preparing, adopting, and implementing a solid waste management plan
prepared pursuant to this Act. The fees shall be based on the following
minimum factors:
(a) types of solid waste;
(b) amount/volume of waste; and
(c) distance of the transfer station to the waste management facility.
The fees shall be used to pay the actual costs incurred by the LGU in
collecting the local fees. In determining the amounts of the fees, an LGU
shall include only those costs directly related to the adoption and
implementation of the plan and the setting and collection of the local fees.
Rule XVII of the IRR of R.A. No. 9003 sets forth the details:
Section 1. Power to Collect Solid Waste Management Fees . – The Local
SWM Board/Local SWM Cluster Board shall impose fees on the SWM
services provided for by the LGU and/or any authorized organization or
unit. In determining the amounts of the fees, a Local SWM Board/Local
SWM Cluster Board shall include only those costs directly related to the
adoption and implementation of the SWM Plan and the setting and
collection of the local fees. This power to impose fees may be ceded to the
private sector and civil society groups which have been duly accredited by
the Local SWM Boar d/Local SWM Cluster Board; provided, the SWM fees
shall be covered by a Contract or Memorandum of Agreement between
the respective boa rd and the private sector or civil society group.
The fees shall pay for the costs of preparing, adopting and implementing
a SWM Plan prepared pursuant to the Act. Further, the fees shall also be
used to pay the actual costs incurred in collecting the local fees and for
project sustainability.
Section 2. Basis of SWM Service Fees
Reasonable SWM service fees shall be computed based on but not limited
to the following minimum factors:
a) Types of solid waste to include special waste
b) amount/volume of waste
c) distance of the transfer station to the waste management facility
d) capacity or type of LGU constituency
e) cost of construction
f) cost of management
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g) type of technology
Section 3. Collection of Fees. – Fees may be collected corresponding to
the following levels:
a) Barangay – The Barangay may impose fees for collection and
segregation of biodegradable, compostable and reusable wastes from
households, commerce, other sources of domestic wastes, and for the use
of Barangay MRFs. The computation of the fees shall be established by
the respective SWM boards. The manner of collection of the fees shall be
dependent on the style of administration of respective Barangay Councils.
However, all transactions shall follow the Commission on Audit rules on
collection of fees.
b) Municipality – The municipal and city councils may impose fees on the
barangay MRFs for the collection and transport of non-recyclable and
special wastes and for the disposal of these into the sanitary landfill. The
level and procedure for exacting fees shall be defined by the Local SWM
Board/Local SWM Cluster Board and supported by LGU ordinances;
however, payments shall be consistent with the accounting system of
government.
c) Private Sector/Civil Society Group – On the basis of the stipulations of
contract or Memorandum of Agreement, the private sector or civil society
group shall impose fees for collection, transport and tipping in their SLFs.
Receipts and invoices shall be issued to the paying public or to the
government.
From the afore-quoted provisions, it is clear that the authority of a
municipality or city to impose fees is limited to the collection and transport
of non-recyclable and special wastes and for the disposal of these into the
sanitary landfill. Barangays, on the other hand, have the authority to
impose fees for the collection and segregation of biodegradable,
compostable and reusable wastes from households, commerce, other
sources of domestic wastes, and for the use of barangay MRFs. This is
but consistent with
Section 10 of R.A. No. 9003 directing that segregation and collection of
biodegradable, compostable and reusable wastes shall be conducted at
the barangay level, while the collection of non-recyclable materials and
special wastes shall be the responsibility of the municipality or city.
In this case, the alleged bases of Ordinance No. S-2235 in imposing the
garbage fee is the volume of waste currently generated by each person in
Quezon City, which purportedly stands at 0.66 kilogram per day, and the
increasing trend of waste generation for the past three years.157
Respondents
did not elaborate any further. The figure presented does not reflect the
specific types of wastes generated – whether residential, market,
commercial, industrial, construction/demolition, street waste, agricultural,
agro-industrial, institutional, etc. It is reasonable, therefore, for the Court
to presume that such amount pertains to the totality of wastes, without any
distinction, generated by Quezon City constituents. To reiterate, however,
the authority of a municipality or city to impose fees extends only to those
related to the collection and transport of non-recyclable and special
wastes.
Granting, for the sake of argument, that the 0.66 kilogram of solid waste
per day refers only to non-recyclable and special wastes, still, We cannot
sustain the validity of Ordinance No. S-2235. It violates the equal
protection clause of the Constitution and the provisions of the LGC that an
ordinance must be equitable and based as far as practicable on the
taxpayer’s ability to pay, and not unjust, excessive, oppressive,
confiscatory.158
93
 b) High-rise apartment units – Owners of high-rise apartment units shall
In the subject ordinance, the rates of the imposable fee depend on land or pay the annual garbage fee on the total lot size of the entire apartment and
floor area and whether the payee is an occupant of a lot, condominium, an additional garbage fee based on the schedule prescribed herein for
social housing project or apartment. For easy reference, the relevant every unit occupied.
provision is again quoted below:
For the purpose of garbage collection, there is, in fact, no substantial
On all domestic households in Quezon City; distinction between an occupant of a lot, on one hand, and an occupant of
a unit in a condominium, socialized housing project or apartment, on the
LAND AREA IMPOSABLE FEE other hand. Most likely, garbage output produced by these types of
Less than 200 sq. m. PHP 100.00 occupants is uniform and does not vary to a large degree; thus, a similar
201 sq. m. – 500 sq. m. PHP 200.00 schedule of fee is both just and equitable.159
501 sq. m. – 1,000 sq. m. PHP 300.00
1,001 sq. m. – 1,500 sq. m. PHP 400.00 The rates being charged by the ordinance are unjust and inequitable: a
1,501 sq. m. – 2,000 sq. m. or more PHP 500.00 resident of a 200 sq. m. unit in a condominium or socialized housing project
On all condominium unit and socialized housing projects/units in Quezon has to pay twice the amount than a resident of a lot similar in size; unlike
City; unit occupants, all occupants of a lot with an area of 200 sq. m. and less
have to pay a fixed rate of Php100.00; and the same amount of garbage
FLOOR AREA fee is imposed regardless of whether the resident is from a condominium
IMPOSABLE FEE or from a socialized housing project.

Less than 40 sq. m. PHP 25.00 Indeed, the classifications under Ordinance No. S-2235 are not germane
41 sq. m. – 60 sq. m. PHP 50.00 to its declared purpose of "promoting shared responsibility with the
61 sq. m. – 100 sq. m. PHP 75.00 residents to attack their common mindless attitude in over-consuming the
101 sq. m. – 150 sq. m. PH₱100.00 present resources and in generating waste."160 Instead of simplistically
151 sq. m. – 200 sq. [m.] or more PHP 200.00 categorizing the payee into land or floor occupant of a lot or unit of a
On high-rise Condominium Units condominium, socialized housing project or apartment, respondent City
Council should have considered factors that could truly measure the
a) High-rise Condominium – The Homeowners Association of high rise amount of wastes generated and the appropriate fee for its collection.
condominiums shall pay the annual garbage fee on the total size of the Factors include, among others, household age and size, accessibility to
entire condominium and socialized Housing Unit and an additional waste collection, population density of the barangay or district, capacity to
garbage fee shall be collected based on area occupied for every unit pay, and actual occupancy of the property. R.A. No. 9003 may also be
already so ld or being amortized. looked into for guidance. Under said law, WM service fees may be
computed based on minimum factors such as type s of solid waste to
94
include special waste, amount/volume of waste, distance of the transfer
station to the waste management facility, capacity or type of LGU
constituency, cost of construction, cost of management, and type of
technology. With respect to utility rates set by municipalities, a municipality
has the right to classify consumers under reasonable classifications based
upon factors such as the cost of service, the purpose for which the service
or the product is received, the quantity or the amount received, the different
character of the service furnished, the time of its use or any other matter
which presents a substantial difference as a ground of distinction.161[A]
lack of uniformity in the rate charged is not necessarily unlawful
discrimination. The establishment of classifications and the charging of
different rates for the several classes is not unreasonable and does not
violate the requirements of equality and uniformity. Discrimination to be
unlawful must draw an unfair line or strike an unfair balance between those
in like circumstances having equal rights and privileges. Discrimination
with respect to rates charged does not vitiate unless it is arbitrary and
without a reasonable fact basis or justification.162
On top of an unreasonable classification, the penalty clause of Ordinance
No. SP-2235, which states:
SECTION 3. Penalty Clause – A penalty of 25% of the garbage fee due
plus an interest of 2% per month or a fraction thereof (interest) shall be
charged against a household owner who refuses to pay the garbage fee
herein imposed. lacks the limitation required by Section 168 of the LGC,
which provides:
SECTION 168. Surcharges and Penalties on Unpaid Taxes, Fees, or
Charges. – The sanggunian may impose a surcharge not exceeding
twenty-five (25%) of the amount of taxes, fees or charges not paid on time
and an interest at the rate not exceeding two percent (2%) per month of
the unpaid taxes, fees or charges including surcharges, until such amount
is fully paid but in no case shall the total interest on the unpaid amount or
portion thereof exceed thirty-six (36) months. (Emphasis supplied)
Finally, on the issue of publication of the two challenged ordinances.
Petitioner argues that the garbage fee was collected even if the required
publication of its approval had not yet elapsed. He notes that he paid his
realty tax on January 7, 2014 which already included the garbage fee.
Respondents counter that if the law provides for its own effectivity,
publication in the Official Gazette is not necessary so long as it is not penal
in nature. Allegedly, Ordinance No. SP-2095 took effect after its publication
while Ordinance No. SP-2235 became effective after its approval on
December 26, 2013.
The pertinent provisions of the LGC state:
SECTION 59. Effectivity of Ordinances or Resolutions. – (a) Unless
otherwise stated in the ordinance or the resolution approving the local
development plan and public investment program, the same shall take
effect after ten (10) days from the date a copy thereof is posted in a bulletin
board at the entrance of the provincial capital or city, municipal, or
barangay hall, as the case may be, and in at least two (2) other
conspicuous places in the local government unit concerned.
(b) The secretary to the sanggunian concerned shall cause the posting of
an ordinance or resolution in the bulletin board at the entrance of the
provincial capital and the city, municipal, or barangay hall in at least two
(2) conspicuous places in the local government unit concerned not later
than five (5) days after approval thereof.
The text of the ordinance or resolution shall be disseminated and posted
in Filipino or English and in the language or dialect understood by the
95
majority of the people in the local government unit concerned, and the
secretary to the sanggunian shall record such fact in a book kept for the
purpose, stating the dates of approval and posting.
(c) The gist of all ordinances with penal sanctions shall be published in a
newspaper of general circulation within the province where the local
legislative body concerned belongs. In the absence of any newspaper of
general circulation within the province, posting of such ordinances shall be
made in all municipalities and cities of the province where the sanggunian
of origin is situated.
(d) In the case of highly urbanized and independent component cities, the
main features of the ordinance or resolution duly enacted or adopted shall,
in addition to being posted, be published once in a local newspaper of
general circulation within the city: Provided, That in the absence thereof
the ordinance or resolution shall be published in any newspaper of general
circulation.
SECTION 188. Publication of Tax Ordinances and Revenue Measures. –
Within ten (10) days after their approval, certified true copies of all
provincial, city, and municipal tax ordinances or revenue measures shall
be published in full for three (3) consecutive days in a newspaper of local
circulation: Provided, however, That in provinces, cities and municipalities
where there are no newspapers of local circulation, the same may be
posted in at least two (2) conspicuous and publicly accessible places.
(Emphasis supplied)
On October 17, 2011, respondent Quezon City Council enacted Ordinance
No. SP-2095, which provides that it would take effect after its publication
in a newspaper of general circulation.163 On the other hand, Ordinance
No. SP-2235, which was passed by the City Council on December 16,
2013, provides that it would be effective upon its approval.164
Ten (10) days after its enactment, or on December 26, 2013, respondent
City Mayor approved the same.165
The case records are bereft of any evidence to prove petitioner’s negative
allegation that respondents did not comply with the posting and publication
requirements of the law. Thus, We are constrained not to give credit to his
unsupported claim.
WHEREFORE, the petition is PARTIALLY GRANTED. The
constitutionality and legality of Ordinance No. SP-2095, S-2011, or the
"Socialized Housing Tax of Quezon City," is· SUSTAINED for being
consistent ·with Section·43 of Republic Act No. ·7279. On the other hand,
Ordinance No. SP-2235, S-2013, which collects an annual garbage fee on
all domestic households in Quezon City, is hereby declared as
UNCONSTITUTIONAL AND ILLEGAL. Respondents are DIRECTED to
REFUND with reasonable dispatch the sums of money collected relative
to its enforcement. The temporary restraining order issued by the Court on
February 5, 2014 is LIFTED with respect to Ordinance No. SP-2095. In
contrast, respondents are PERMANENTLY ENJOINED from taking any
further action to enforce Ordinance No. SP. 2235.
SO ORDERED.
EN BANC
CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
96
VELASCO, JR., to implement said provision and those involving creditable withholding
NACHURA, taxes.[3]
- v e r s u s - LEONARDO-DE CASTRO,
BRION, Petitioner is an association of real estate developers and builders in the
PERALTA, Philippines. It impleaded former Executive Secretary Alberto Romulo, then
BERSAMIN, acting Secretary of Finance Juanita D. Amatong and then Commissioner
DEL CASTILLO, of Internal Revenue Guillermo Parayno, Jr. as respondents.
ABAD,
VILLARAMA, JR., Petitioner assails the validity of the imposition of minimum corporate
PEREZ and income tax (MCIT) on corporations and creditable withholding tax (CWT)
MENDOZA, JJ. on sales of real properties classified as ordinary assets.

THE HON. EXECUTIVE Section 27(E) of RA 8424 provides for MCIT on domestic corporations and
SECRETARY ALBERTO ROMULO, is implemented by RR 9-98. Petitioner argues that the MCIT violates the
THE HON. ACTING SECRETARY OF due process clause because it levies income tax even if there is no realized
FINANCE JUANITA D. AMATONG, gain.
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-
PARAYNO, JR., 2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003,
Respondents. Promulgated: all of which prescribe the rules and procedures for the collection of CWT
on the sale of real properties categorized as ordinary assets. Petitioner
March 9, 2010 contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary
x-------------------------------------------------x assets and capital assets and second, respondent Secretary of Finance
DECISION has no authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as ordinary
CORONA, J.: assets.

Petitioner also asserts that the enumerated provisions of the subject

In this original petition for certiorari and mandamus,[1] petitioner Chamber
of Real Estate and Builders Associations, Inc. is questioning the
constitutionality of Section 27 (E) of Republic Act (RA) 8424[2] and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR)
revenue regulations violate the due process clause because, like the
MCIT, the government collects income tax even when the net income has
not yet been determined. They contravene the equal protection clause as
well because the CWT is being levied upon real estate enterprises but not
97
on other business enterprises, more particularly those in the manufacturing
sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is
unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-
2003, is unconstitutional.
OVERVIEW OF THE ASSAILED PROVISIONS
Under the MCIT scheme, a corporation, beginning on its fourth year of
operation, is assessed an MCIT of 2% of its gross income when such MCIT
is greater than the normal corporate income tax imposed under Section
27(A).[4] If the regular income tax is higher than the MCIT, the corporation
does not pay the MCIT. Any excess of the MCIT over the normal tax shall
be carried forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income
as of the end of the taxable year, as defined herein, is hereby imposed on
a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT]
over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income
tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of
Finance is hereby authorized to suspend the imposition of the [MCIT] on
any corporation which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of legitimate business
reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulations that shall define the terms and conditions under which he may
suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided
under Subsection (E) hereof, the term gross income shall mean gross
sales less sales returns, discounts and allowances and cost of goods sold.
Cost of goods sold shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
For trading or merchandising concern, cost of goods sold shall include the
invoice cost of the goods sold, plus import duties, freight in transporting
the goods to the place where the goods are actually sold including
insurance while the goods are in transit.
For a manufacturing concern, cost of goods manufactured and sold shall
include all costs of production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factory
or warehouse.
98
In the case of taxpayers engaged in the sale of service, gross income
means gross receipts less sales returns, allowances, discounts and cost
of services. Cost of services shall mean all direct costs and expenses
necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided, however, that in
the case of banks, cost of services shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section 27(E).[5] The pertinent
portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year (whether calendar or fiscal year,
depending on the accounting period employed) is hereby imposed upon
any domestic corporation beginning the fourth (4th) taxable year
immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the
normal income tax due from such corporation.
For purposes of these Regulations, the term, normal income tax means
the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the
Code xxx at 32% effective January 1, 2000 and thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the
normal income tax as computed under Sec. 27(A) of the Code shall be
carried forward on an annual basis and credited against the normal income
tax for the three (3) immediately succeeding taxable years.
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon
recommendation of respondent CIR, promulgated RR 2-98 implementing
certain provisions of RA 8424 involving the withholding of taxes.[6] Under
Section 2.57.2(J) of RR No. 2-98, income payments from the sale,
exchange or transfer of real property, other than capital assets, by persons
residing in the Philippines and habitually engaged in the real estate
business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent
paid to the seller/owner for the sale, exchange or transfer of. Real property,
other than capital assets, sold by an individual, corporation, estate, trust,
trust fund or pension fund and the seller/transferor is habitually engaged
in the real estate business in accordance with the following schedule
Those which are exempt from a withholding tax at source as prescribed in
Sec. 2.57.5 of these regulations.
99

Exempt
With a selling price of five hundred thousand pesos (P500,000.00) or less.
1.5%
With a selling price of more than five hundred thousand pesos
(P500,000.00) but not more than two million pesos (P2,000,000.00).
3.0%
With selling price of more than two million pesos (P2,000,000.00)
5.0%
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales
document or the fair market value determined in accordance with Section
6 (E) of the Code, as amended, whichever is higher. In an exchange, the
fair market value of the property received in exchange, as determined in
the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments to be
paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld by the
buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent
paid to the seller/owner for the sale, exchange or transfer of real property
classified as ordinary asset. - A [CWT] based on the gross selling
price/total amount of consideration or the fair market value determined in
accordance with Section 6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real property, other than
capital asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec.
2.57.5 of these regulations.
Exempt
Upon the following values of real property, where the seller/transferor is
habitually engaged in the real estate business.
100

With a selling price of Five Hundred Thousand Pesos (P500,000.00) or
less.
1.5%
With a selling price of more than Five Hundred Thousand Pesos
(P500,000.00) but not more than Two Million Pesos (P2,000,000.00).
3.0%
With a selling price of more than two Million Pesos (P2,000,000.00).
5.0%
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales
document or the fair market value determined in accordance with Section
6 (E) of the Code, as amended, whichever is higher. In an exchange, the
fair market value of the property received in exchange shall be considered
as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments
in the year of sale do not exceed 25% of the selling price), the tax shall be
deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a cash basis or is a deferred-
payment sale not on the installment plan (that is, payments in the year of
sale exceed 25% of the selling price), the buyer shall withhold the tax
based on the gross selling price or fair market value of the property,
whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued
to the buyer unless the [CWT] due on the sale, transfer or exchange of real
property other than capital asset has been fully paid. (Underlined
amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424
provides that any sale, barter or exchange subject to the CWT will not be
recorded by the Registry of Deeds until the CIR has certified that such
transfers and conveyances have been reported and the taxes thereof have
been duly paid:[7]
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of
conveyances of land or land and building/improvement thereon arising
from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such transfers
and conveyances have been reported and the expanded withholding tax,
inclusive of the documentary stamp tax, due thereon have been fully paid
xxxx.
101
On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for
the guidelines in determining whether a particular real property is a capital
or an ordinary asset for purposes of imposing the MCIT, among others.
The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition
of real properties shall, unless otherwise exempt, be subject to applicable
taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or business in
the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified
as ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of
the Code, whichever is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset
and other real property (other than land and/or building treated as capital
asset), regardless of the classification thereof, all of which are located in
the Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
EXISTENCE OF A JUSTICIABLE CONTROVERSY
Courts will not assume jurisdiction over a constitutional question unless
the following requisites are satisfied: (1) there must be an actual case
calling for the exercise of judicial review; (2) the question before the court
must be ripe for adjudication; (3) the person challenging the validity of the
act must have standing to do so; (4) the question of constitutionality must
have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.[9] (*lis mota-
the cause or motivation of
a legal action or lawsuit)
Respondents aver that the first three requisites are absent in this case.
According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its
members, has been assessed by the BIR for the payment of [MCIT] or
[CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of
the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances cited
102
that the assailed law and revenue regulations have actually and adversely
affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real
property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication would
be no different from the giving of advisory opinion that does not really settle
legal issues.[10]
An actual case or controversy involves a conflict of legal rights or an
assertion of opposite legal claims which is susceptible of judicial resolution
as distinguished from a hypothetical or abstract difference or dispute.[11]
On the other hand, a question is considered ripe for adjudication when the
act being challenged has a direct adverse effect on the individual
challenging it.[12]
Contrary to respondents assertion, we do not have to wait until petitioners
members have shut down their operations as a result of the MCIT or CWT.
The assailed provisions are already being implemented. As we stated in
Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA)
v. Gozun:[13]
By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial
duty.[14]
If the assailed provisions are indeed unconstitutional, there is no better
time than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and
builders in the Philippines. Petitioners did not allege that [it] itself is in the
real estate business. It did not allege any material interest or any wrong
that it may suffer from the enforcement of [the assailed provisions].[15]
Legal standing or locus standi is a partys personal and substantial interest
in a case such that it has sustained or will sustain direct injury as a result
of the governmental act being challenged.[16] In Holy Spirit Homeowners
Association, Inc. v. Defensor,[17] we held that the association had legal
standing because its members stood to be injured by the enforcement of
the assailed provisions:
Petitioner association has the legal standing to institute the instant petition
xxx. There is no dispute that the individual members of petitioner
association are residents of the NGC. As such they are covered and stand
to be either benefited or injured by the enforcement of the IRR, particularly
as regards the selection process of beneficiaries and lot allocation to
qualified beneficiaries. Thus, petitioner association may assail those
provisions in the IRR which it believes to be unfavorable to the rights of its
members. xxx Certainly, petitioner and its members have sustained direct
injury arising from the enforcement of the IRR in that they have been
disqualified and eliminated from the selection process.[18]
In any event, this Court has the discretion to take cognizance of a suit
which does not satisfy the requirements of an actual case, ripeness or legal
standing when paramount public interest is involved.[19] The questioned
MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the
issues raised and their overreaching significance to society make it proper
for us to take cognizance of this petition.[20]
103
CONCEPT AND RATIONALE OF THE MCIT
The MCIT on domestic corporations is a new concept introduced by RA
8424 to the Philippine taxation system. It came about as a result of the
perceived inadequacy of the self-assessment system in capturing the true
income of corporations.[21] It was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income tax
which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the public
sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of
certain corporations of reporting constantly a loss in their operations to
avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time
a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will pay
their just share in supporting our public life and our economic
advancement.[22]
Domestic corporations owe their corporate existence and their privilege to
do business to the government. They also benefit from the efforts of the
government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to
make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while
having large turn-overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through under-
declaration of income or over-deduction of expenses otherwise called tax
shelters.[23]
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is
why they have proposed the [MCIT]. Because from experience too, you
have corporations which have been losing year in and year out and paid
no tax. So, if the corporation has been losing for the past five years to ten
years, then that corporation has no business to be in business. It is dead.
Why continue if you are losing year in and year out? So, we have this
provision to avoid this type of tax shelters, Your Honor.[24]
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes
resorted to by corporations are allowed in our jurisdiction. The MCIT
serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need
to recoup initial major capital expenditures, the imposition of the MCIT
commences only on the fourth taxable year immediately following the year
in which the corporation commenced its operations.[25] This grace period
allows a new business to stabilize first and make its ventures viable before
it is subjected to the MCIT.[26]
Second, the law allows the carrying forward of any excess of the MCIT
paid over the normal income tax which shall be credited against the normal
income tax for the three immediately succeeding years.[27]
104
Third, since certain businesses may be incurring genuine repeated losses,
the law authorizes the Secretary of Finance to suspend the imposition of
MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.[28]
Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum
corporate income taxation. Our lawmakers noted that most developing
countries, particularly Latin American and Asian countries, have the same
form of safeguards as we do. As pointed out during the committee
hearings:
[Mr. Medalla:] Note that most developing countries where you have of
course quite a bit of room for underdeclaration of gross receipts have this
same form of safeguards.
In the case of Thailand, half a percent (0.5%), there is a minimum of
income tax of half a percent (0.5%) of gross assessable income. In Korea
a 25% of taxable income before deductions and exemptions. Of course the
different countries have different basis for that minimum income tax.
The other thing you’ll notice is the preponderance of Latin American
countries that employed this method. Okay, those are additional Latin
American countries.[29]
At present, the United States of America, Mexico, Argentina, Tunisia,
Panama and Hungary have their own versions of the MCIT.[30]
MCIT IS NOT VIOLATIVE OF DUE PROCESS
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers
the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are
equally necessary to produce gross income, were not taken into
account.[31] Thus, pegging the tax base of the MCIT to a corporations
gross income is tantamount to a confiscation of capital because gross
income, unlike net income, is not realized gain.[32]
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. The exercise of taxing power derives its
source from the very existence of the State whose social contract with its
citizens obliges it to promote public interest and the common good.[33]
Taxation is an inherent attribute of sovereignty.[34] It is a power that is
purely legislative.[35] Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.[36] It has the authority to prescribe a certain tax at a specific rate
for a particular public purpose on persons or things within its jurisdiction.
In other words, the legislature wields the power to define what tax shall be
imposed, why it should be imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check
against its abuse is to be found only in the responsibility of the legislature
(which imposes the tax) to its constituency who are to pay it.[37]
Nevertheless, it is circumscribed by constitutional limitations. At the same
time, like any other statute, tax legislation carries a presumption of
constitutionality.
105
The constitutional safeguard of due process is embodied in the fiat [no]
person shall be deprived of life, liberty or property without due process of
law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue
measure[39] when it amounts to a confiscation of property.[40] But in the
same case, we also explained that we will not strike down a revenue
measure as unconstitutional (for being violative of the due process clause)
on the mere allegation of arbitrariness by the taxpayer.[41] There must be
a factual foundation to such an unconstitutional taint.[42] This merely
adheres to the authoritative doctrine that, where the due process clause is
invoked, considering that it is not a fixed rule but rather a broad standard,
there is a need for proof of such persuasive character.[43]
Petitioner is correct in saying that income is distinct from capital.[44]
Income means all the wealth which flows into the taxpayer other than a
mere return on capital. Capital is a fund or property existing at one distinct
point in time while income denotes a flow of wealth during a definite period
of time.[45] Income is gain derived and severed from capital.[46] For
income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]
Certainly, an income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. In other words, it is income, not capital,
which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of
goods[48] and other direct expenses from gross sales. Clearly, the capital
is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net
income tax due from a corporation, pegging the rate at a very much
reduced 2% and uses as the base the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income
by eliminating all deductible items and at the same time reducing the
applicable tax rate.[49]
Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held
to be within the power of a state to impose; or constitutional, unless it
interferes with interstate commerce or violates the requirement as to
uniformity of taxation.[50]
The United States has a similar alternative minimum tax (AMT) system
which is generally characterized by a lower tax rate but a broader tax
base.[51] Since our income tax laws are of American origin, interpretations
by American courts of our parallel tax laws have persuasive effect on the
interpretation of these laws.[52] Although our MCIT is not exactly the same
as the AMT, the policy behind them and the procedure of their
implementation are comparable. On the question of the AMTs
constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:[53]
In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of taxpayers
with large incomes who were yet paying no taxes.
xxx xxx xxx
106
We thus join a number of other courts in upholding the constitutionality of
the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and
therefore is constitutional.[54]
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes was a
legitimate governmental end to which the AMT bore a reasonable
relation.[55]
American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive at
the net that it chooses to tax.[56] This is because deductions are a matter
of legislative grace.[57]
Absent any other valid objection, the assignment of gross income, instead
of net income, as the tax base of the MCIT, taken with the reduction of the
tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical data to
show that the implementation of the MCIT resulted in the confiscation of
their property.
In sum, petitioner failed to support, by any factual or legal basis, its
allegation that the MCIT is arbitrary and confiscatory. The Court cannot
strike down a law as unconstitutional simply because of its yokes.[58]
Taxation is necessarily burdensome because, by its nature, it adversely
affects property rights.[59] The party alleging the laws unconstitutionality
has the burden to demonstrate the supposed violations in understandable
terms.[60]
RR 9-98 MERELY CLARIFIES
SECTION 27(E) OF RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due
process of law because the MCIT is being imposed and collected even
when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount
of [MCIT] is greater than the normal income tax due from such corporation.
(Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines the
coverage of Section 27(E). This means that even if a corporation incurs a
net loss in its business operations or reports zero income after deducting
its expenses, it is still subject to an MCIT of 2% of its gross income. This
is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the law also states that
the MCIT is to be paid only if it is greater than the normal net income.
Obviously, it may well be the case that the MCIT would be less than the
net income of the corporation which posts a zero or negative taxable
income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including
income taxes) are collected.[61] Under Section 57 of RA 8424, the types
of income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the
second category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary assets are
unconstitutional.
107

Petitioner, after enumerating the distinctions between capital and ordinary
assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR
2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with
grave abuse of discretion amounting to lack of jurisdiction and patently in
contravention of law[62] because they ignore such distinctions. Petitioners
conclusion is based on the following premises: (a) the revenue regulations
use gross selling price (GSP) or fair market value (FMV) of the real estate
as basis for determining the income tax for the sale of real estate classified
as ordinary assets and (b) they mandate the collection of income tax on a
per transaction basis, i.e., upon consummation of the sale via the CWT,
contrary to RA 8424 which calls for the payment of the net income at the
end of the taxable period.[63]
Petitioner theorizes that since RA 8424 treats capital assets and ordinary
assets differently, respondents cannot disregard the distinctions set by the
legislators as regards the tax base, modes of collection and payment of
taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE
COLLECTION OF CWT ON SALES OF REAL PROPERTY
CONSIDERED AS ORDINARY ASSETS
The Secretary of Finance is granted, under Section 244 of RA 8424, the
authority to promulgate the necessary rules and regulations for the
effective enforcement of the provisions of the law. Such authority is subject
to the limitation that the rules and regulations must not override, but must
remain consistent and in harmony with, the law they seek to apply and
implement.[64] It is well-settled that an administrative agency cannot
amend an act of Congress.[65]
We have long recognized that the method of withholding tax at source is a
procedure of collecting income tax which is sanctioned by our tax laws.[66]
The withholding tax system was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income
tax liability; second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file the
corresponding returns and third, to improve the governments cash
flow.[67] This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and
remedies.[68]
Respondent Secretary has the authority to require the withholding of a tax
on items of income payable to any person, national or juridical, residing in
the Philippines. Such authority is derived from Section 57(B) of RA 8424
which provides:
SEC. 57. Withholding of Tax at Source.
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the
authority given by Section 57(B) to the Secretary, i.e., the graduated rate
of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed
108
on the income payable and the tax is creditable against the income tax
liability of the taxpayer for the taxable year.
EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF
INDIVIDUALS OR CORPORATIONS ENGAGED IN THE REAL ESTATE
BUSINESS
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax
base of a real estate business income tax from net income to GSP or FMV
of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to extinguish its possible tax obligation. [69] They are
installments on the annual tax which may be due at the end of the taxable
year.[70]
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entitys net income
imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less
allowable deductions. The CWT is to be deducted from the net income tax
payable by the taxpayer at the end of the taxable year.[71] Precisely,
Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the
sale of real property classified as ordinary assets remains to be the net
taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition
of real properties shall unless otherwise exempt, be subject to applicable
taxes imposed under the Code, depending on whether the subject
properties are classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts), resident
aliens, and non-resident aliens engaged in trade or business in the
Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV]
as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net
taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J)
of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however,
domestic corporations may become subject to the [MCIT] under Sec. 27(E)
of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income
tax return and credit the taxes withheld (by the withholding agent/buyer)
against its tax due. If the tax due is greater than the tax withheld, then the
109
taxpayer shall pay the difference. If, on the other hand, the tax due is less
than the tax withheld, the taxpayer will be entitled to a refund or tax credit.
Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold the tax does not
know, nor is he privy to, how much the taxpayer/seller will have as its net
income at the end of the taxable year. Instead, said withholding agents
knowledge and privity are limited only to the particular transaction in which
he is a party. In such a case, his basis can only be the GSP or FMV as
these are the only factors reasonably known or knowable by him in
connection with the performance of his duties as a withholding agent.
NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS
AND CAPITAL ASSETS
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV
of the real property categorized as ordinary assets. On the other hand,
Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the
gain presumed to be realized from the sale of a capital asset based on its
GSP or FMV. This final tax is also withheld at source.[72]
The differences between the two forms of withholding tax, i.e., creditable
and final, show that ordinary assets are not treated in the same manner as
capital assets. Final withholding tax (FWT) and CWT are distinguished as
follows:
FWT
CWT
a) The amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the
payee on the said income.
a) Taxes withheld on certain income payments are intended to equal or at
least approximate the tax due of the payee on said income.
b)The liability for payment of the tax rests primarily on the payor as a
withholding agent.
b) Payee of income is required to report the income and/or pay the
difference between the tax withheld and the tax due on the income. The
payee also has the right to ask for a refund if the tax withheld is more than
the tax due.
c) The payee is not required to file an income tax return for the particular
income.[73]
c) The income recipient is still required to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended.[74]
As previously stated, FWT is imposed on the sale of capital assets. On the
other hand, CWT is imposed on the sale of ordinary assets. The inherent
and substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and
treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time
of transaction are contrary to the provisions of RA 8424 on the manner and
time of filing of the return, payment and assessment of income tax
involving ordinary assets.[75]
The fact that the tax is withheld at source does not automatically mean that
it is treated exactly the same way as capital gains. As aforementioned, the
mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by
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withholding the tax due from the income payable is the essence of the
withholding tax method of tax collection.
NO RULE THAT ONLY PASSIVE
INCOMES CAN BE SUBJECT TO CWT
Petitioner submits that only passive income can be subjected to
withholding tax, whether final or creditable. According to petitioner, the
whole of Section 57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to passive income being
subjected to FWT. It follows that Section 57(B) on CWT should also be
limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and
regulations, the [Secretary] may promulgate, upon the recommendation of
the [CIR], requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner
and subject to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain
kinds of income and enumerates these as passive income. The BIR
defines passive income by stating what it is not:
if the income is generated in the active pursuit and performance of the
corporations primary purposes, the same is not passive income[76]
It is income generated by the taxpayers assets. These assets can be in
the form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require
a CWT on income payable to natural or juridical persons, residing in the
Philippines. There is no requirement that this income be passive income.
If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT
while Section 57(B) pertains to CWT. The former covers the kinds of
passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify
or deviate from the text of Section 57(B). RR 2-98 merely implements the
law by specifying what income is subject to CWT. It has been held that,
where a statute does not require any particular procedure to be followed
by an administrative agency, the agency may adopt any reasonable
method to carry out its functions.[77] Similarly, considering that the law
111
uses the general term income, the Secretary and CIR may specify the
kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight
and respect by the courts[78] in view of the rule-making authority given to
those who formulate them and their specific expertise in their respective
fields.
NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS
Petitioner avers that the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their property without
due process of law because, in their line of business, gain is never assured
by mere receipt of the selling price. As a result, the government is
collecting tax from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from
the seller of the property at the end of the taxable year. The seller will be
able to claim a tax refund if its net income is less than the taxes withheld.
Nothing is taken that is not due so there is no confiscation of property
repugnant to the constitutional guarantee of due process. More
importantly, the due process requirement applies to the power to tax.[79]
The CWT does not impose new taxes nor does it increase taxes.[80] It
relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort
to litigation before they are granted a refund.[81] This argument is
misleading. The practical problems encountered in claiming a tax refund
do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.
Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages, materials, cost of money and
other expenses which can then save the entity from having to obtain loans
entailing considerable interest expense. Petitioner also lists the expenses
and pitfalls of the trade which add to the burden of the realty industry: huge
investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive up-front
regulatory fees from at least 20 government agencies.[82]
Petitioners lamentations will not support its attack on the constitutionality
of the CWT. Petitioners complaints are essentially matters of policy best
addressed to the executive and legislative branches of the government.
Besides, the CWT is applied only on the amounts actually received or
receivable by the real estate entity. Sales on installment are taxed on a
per-installment basis.[83] Petitioners desire to utilize for its operational and
capital expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which can be
demanded from the court or from the government.
NO VIOLATION OF EQUAL PROTECTION
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their
manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that goods
produced by the real estate business are house and lot units.[84]
112
Again, we disagree.
The equal protection clause under the Constitution means that no person
or class of persons shall be deprived of the same protection of laws which
is enjoyed by other persons or other classes in the same place and in like
circumstances.[85] Stated differently, all persons belonging to the same
class shall be taxed alike. It follows that the guaranty of the equal
protection of the laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial
distinctions; (2) be germane to the purpose of the law; (3) not be limited to
existing conditions only and (4) apply equally to all members of the same
class.[86]
The taxing power has the authority to make reasonable classifications for
purposes of taxation.[87] Inequalities which result from a singling out of
one particular class for taxation, or exemption, infringe no constitutional
limitation.[88] The real estate industry is, by itself, a class and can be
validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the real
estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of
their goods sold and the number of transactions involved. The income from
the sale of a real property is bigger and its frequency of transaction limited,
making it less cumbersome for the parties to comply with the withholding
tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month
involving both minimal and substantial amounts. To require the customers
of manufacturing enterprises, at present, to withhold the taxes on each of
their transactions with their tens or hundreds of suppliers may result in an
inefficient and unmanageable system of taxation and may well defeat the
purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive
items are also sold infrequently, e.g. heavy equipment, jewelry, furniture,
appliance and other capital goods yet these are not similarly subjected to
the CWT.[89] As already discussed, the Secretary may adopt any
reasonable method to carry out its functions.[90] Under Section 57(B), it
may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners
argument is not accurate. The sales of manufacturers who have clients
within the top 5,000 corporations, as specified by the BIR, are also subject
to CWT for their transactions with said 5,000 corporations.[91]
SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58
OF RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that
the Registry of Deeds should not effect the regisration of any document
transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to
strike down this rule except to rely on its contention that the CWT is
unconstitutional. We have ruled that it is not. Furthermore, this provision
uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document
transferring real property shall be effected by the Register of Deeds unless
the [CIR] or his duly authorized representative has certified that such
113
transfer has been reported, and the capital gains or [CWT], if any, has
been paid: xxxx any violation of this provision by the Register of Deeds
shall be subject to the penalties imposed under Section 269 of this Code.
(Emphasis supplied)
CONCLUSION
The renowned genius Albert Einstein was once quoted as saying [the]
hardest thing in the world to understand is the income tax.[92] When a
party questions the constitutionality of an income tax measure, it has to
contend not only with Einsteins observation but also with the vast and well-
established jurisprudence in support of the plenary powers of Congress to
impose taxes. Petitioner has miserably failed to discharge its burden of
convincing the Court that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188497 February 19, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PILIPINAS SHELL PETROLEUM CORPORATION, Respondent.
RESOLUTION
VILLARAMA, JR., J.:
For resolution are the Motion for Reconsideration dated May 22, 2012 and
Supplemental Motion for Reconsideration dated December 12, 2012 filed
by Pilipinas Shell Petroleum Corporation (respondent). As directed, the
Solicitor General on behalf of petitioner Commissioner of Internal Revenue
filed their Comment, to which respondent filed its Reply.
In our Decision promulgated on April 25, 2012, we ruled that the Court of
Tax Appeals (CTA) erred in granting respondent's claim for tax refund
because the latter failed to establish a tax exemption in its favor under
Section 135(a) of the National Internal Revenue Code of 1997 (NIRC).
WHEREFORE, the petition for review on certiorari is GRANTED. The
Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the
Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED
and SET ASIDE. The claims for tax refund or credit filed by respondent
Pilipinas Shell Petroleum Corporation are DENIED for lack of basis.
No pronouncement as to costs.
SO ORDERED.1
Respondent argues that a plain reading of Section 135 of the NIRC reveals
that it is the petroleum products sold to international carriers which are
exempt from excise tax for which reason no excise taxes are deemed to
have been due in the first place. It points out that excise tax being an
indirect tax, Section 135 in relation to Section 148 should be interpreted as
114
referring to a tax exemption from the point of production and removal from
the place of production considering that it is only at that point that an excise
tax is imposed. The situation is unlike the value-added tax (VAT) which is
imposed at every point of turnover – from production to wholesale, to retail
and to end-consumer. Respondent thus concludes that exemption could
only refer to the imposition of the tax on the statutory seller, in this case
the respondent. This is because when a tax paid by the statutory seller is
passed on to the buyer it is no longer in the nature of a tax but an added
cost to the purchase price of the product sold.
Respondent also contends that our ruling that Section 135 only prohibits
local petroleum manufacturers like respondent from shifting the burden of
excise tax to international carriers has adverse economic impact as it
severely curtails the domestic oil industry. Requiring local petroleum
manufacturers to absorb the tax burden in the sale of its products to
international carriers is contrary to the State’s policy of "protecting gasoline
dealers and distributors from unfair and onerous trade conditions," and
places them at a competitive disadvantage since foreign oil producers,
particularly those whose governments with which we have entered into
bilateral service agreements, are not subject to excise tax for the same
transaction. Respondent fears this could lead to cessation of supply of
petroleum products to international carriers, retrenchment of employees of
domestic manufacturers/producers to prevent further losses, or worse,
shutting down of their production of jet A-1 fuel and aviation gas due to
unprofitability of sustaining operations. Under this scenario, participation
of Filipino capital, management and labor in the domestic oil industry is
effectively diminished.
Lastly, respondent asserts that the imposition by the Philippine
Government of excise tax on petroleum products sold to international
carriers is in violation of the Chicago Convention on International Aviation
("Chicago Convention") to which it is a signatory, as well as other
international agreements (the Republic of the Philippines’ air transport
agreements with the United States of America, Netherlands, Belgium and
Japan).
In his Comment, the Solicitor General underscores the statutory basis of
this Court’s ruling that the exemption under Section 135 does not attach to
the products. Citing Exxonmobil Petroleum & Chemical Holdings, Inc.-
Philippine Branch v. Commissioner of Internal Revenue,2 which held that
the excise tax, when passed on to the purchaser, becomes part of the
purchase price, the Solicitor General claims this refutes respondent’s
theory that the exemption attaches to the petroleum product itself and not
to the purchaser for it would have been erroneous for the seller to pay the
excise tax and inequitable to pass it on to the purchaser if the excise tax
exemption attaches to the product.
As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v.
Commissioner of Internal Revenue3 and Exxonmobil Petroleum &
Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal
Revenue,4 the Solicitor General points out that there was no
pronouncement in these cases that petroleum manufacturers selling
petroleum products to international carriers are exempt from paying excise
taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene Co,
Inc. v. Commissioner of Internal Revenue.5 Further, the ruling in Maceda
v. Macaraig, Jr.6 which confirms that Section 135 does not intend to
exempt manufacturers or producers of petroleum products from the
payment of excise tax.
The Court will now address the principal arguments proffered by
respondent: (1) Section 135 intended the tax exemption to apply to
petroleum products at the point of production; (2) Philippine Acetylene Co.,
Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr. are
inapplicable in the light of previous rulings of the Bureau of Internal
Revenue (BIR) and the CTA that the excise tax on petroleum products sold
to international carriers for use or consumption outside the Philippines
115
attaches to the article when sold to said international carriers, as it is the
article which is exempt from the tax, not the international carrier; and (3)
the Decision of this Court will not only have adverse impact on the
domestic oil industry but is also in violation of international agreements on
aviation.
Under Section 129 of the NIRC, excise taxes are those applied to goods
manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to things imported. Excise
taxes as used in our Tax Code fall under two types – (1) specific tax which
is based on weight or volume capacity and other physical unit of
measurement, and (2) ad valorem tax which is based on selling price or
other specified value of the goods. Aviation fuel is subject to specific tax
under Section 148 (g) which attaches to said product "as soon as they are
in existence as such."
On this point, the clarification made by our esteemed colleague, Associate
Justice Lucas P. Bersamin regarding the traditional meaning of excise tax
adopted in our Decision, is well-taken.
The transformation undergone by the term "excise tax" from its traditional
concept up to its current definition in our Tax Code was explained in the
case of Petron Corporation v. Tiangco,7 as follows:
Admittedly, the proffered definition of an excise tax as "a tax upon the
performance, carrying on, or exercise of some right, privilege, activity,
calling or occupation" derives from the compendium American
Jurisprudence, popularly referred to as Am Jur and has been cited in
previous decisions of this Court, including those cited by Petron itself. Such
a definition would not have been inconsistent with previous incarnations of
our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of
1977 because in those laws the term "excise tax" was not used at all. In
contrast, the nomenclature used in those prior laws in referring to taxes
imposed on specific articles was "specific tax." Yet beginning with the
National Internal Revenue Code of 1986, as amended, the term "excise
taxes" was used and defined as applicable "to goods manufactured or
produced in the Philippines… and to things imported." This definition was
carried over into the present NIRC of 1997. Further, these two latest codes
categorize two different kinds of excise taxes: "specific tax" which is
imposed and based on weight or volume capacity or any other physical
unit of measurement; and "ad valorem tax" which is imposed and based
on the selling price or other specified value of the goods. In other words,
the meaning of "excise tax" has undergone a transformation, morphing
from the Am Jur definition to its current signification which is a tax on
certain specified goods or articles.
The change in perspective brought forth by the use of the term "excise tax"
in a different connotation was not lost on the departed author Jose Nolledo
as he accorded divergent treatments in his 1973 and 1994 commentaries
on our tax laws. Writing in 1973, and essentially alluding to the Am Jur
definition of "excise tax," Nolledo observed:
Are specific taxes, taxes on property or excise taxes –
In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that
specific taxes are property taxes, a ruling which seems to be erroneous.
Specific taxes are truly excise taxes for the fact that the value of the
property taxed is taken into account will not change the nature of the tax.
It is correct to say that specific taxes are taxes on the privilege to import,
manufacture and remove from storage certain articles specified by law.
In contrast, after the tax code was amended to classify specific taxes as a
subset of excise taxes, Nolledo, in his 1994 commentaries, wrote:
1. Excise taxes, as used in the Tax Code, refers to taxes applicable to
certain specified goods or articles manufactured or produced in the
116
Philippines for domestic sale or consumption or for any other disposition
and to things imported into the Philippines. They are either specific or ad
valorem.
2. Nature of excise taxes. – They are imposed directly on certain specified
goods. (infra) They are, therefore, taxes on property. (see Medina vs. City
of Baguio, 91 Phil. 854.)
A tax is not excise where it does not subject directly the produce or goods
to tax but indirectly as an incident to, or in connection with, the business to
be taxed.
In their 2004 commentaries, De Leon and De Leon restate the Am Jur
definition of excise tax, and observe that the term is "synonymous with
‘privilege tax’ and [both terms] are often used interchangeably." At the
same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is
not to be confused with excise tax imposed [by the NIRC] on certain
specified articles manufactured or produced in, or imported into, the
Philippines, ‘for domestic sale or consumption or for any other
disposition.’"
It is evident that Am Jur aside, the current definition of an excise tax is that
of a tax levied on a specific article, rather than one "upon the performance,
carrying on, or the exercise of an activity."
This current definition was already in place when the Code was enacted in
1991, and we can only presume that it was what the Congress had
intended as it specified that local government units could not impose
"excise taxes on articles enumerated under the [NIRC]." This prohibition
must pertain to the same kind of excise taxes as imposed by the NIRC,
and not those previously defined "excise taxes" which were not integrated
or denominated as such in our present tax law.8 (Emphasis supplied.)
That excise tax as presently understood is a tax on property has no bearing
at all on the issue of respondent’s entitlement to refund. Nor does the
nature of excise tax as an indirect tax supports respondent’s postulation
that the tax exemption provided in Sec. 135 attaches to the petroleum
products themselves and consequently the domestic petroleum
manufacturer is not liable for the payment of excise tax at the point of
production. As already discussed in our Decision, to which Justice
Bersamin concurs, "the accrual and payment of the excise tax on the
goods enumerated under Title VI of the NIRC prior to their removal at the
place of production are absolute and admit of no exception." This also
underscores the fact that the exemption from payment of excise tax is
conferred on international carriers who purchased the petroleum products
of respondent.
On the basis of Philippine Acetylene, we held that a tax exemption being
enjoyed by the buyer cannot be the basis of a claim for tax exemption by
the manufacturer or seller of the goods for any tax due to it as the
manufacturer or seller. The excise tax imposed on petroleum products
under Section 148 is the direct liability of the manufacturer who cannot
thus invoke the excise tax exemption granted to its buyers who are
international carriers. And following our pronouncement in Maceda v.
Macarig, Jr. we further ruled that Section 135(a) should be construed as
prohibiting the shifting of the burden of the excise tax to the international
carriers who buy petroleum products from the local manufacturers. Said
international carriers are thus allowed to purchase the petroleum products
without the excise tax component which otherwise would have been added
to the cost or price fixed by the local manufacturers or distributors/sellers.
Excise tax on aviation fuel used for international flights is practically nil as
most countries are signatories to the 1944 Chicago Convention on
International Aviation (Chicago Convention). Article 249 of the Convention
has been interpreted to prohibit taxation of aircraft fuel consumed for
international transport. Taxation of international air travel is presently at
117
such low level that there has been an intensified debate on whether these
should be increased to "finance development rather than simply to
augment national tax revenue" considering the "cross-border
environmental damage" caused by aircraft emissions that contribute to
global warming, not to mention noise pollution and congestion at
airports).10 Mutual exemptions given under bilateral air service
agreements are seen as main legal obstacles to the imposition of indirect
taxes on aviation fuel. In response to present realities, the International
Civil Aviation Organization (ICAO) has adopted policies on charges and
emission-related taxes and charges.11
Section 135(a) of the NIRC and earlier amendments to the Tax Code
represent our Governments’ compliance with the Chicago Convention, its
subsequent resolutions/annexes, and the air transport agreements
entered into by the Philippine Government with various countries. The
rationale for exemption of fuel from national and local taxes was expressed
by ICAO as follows:
...The Council in 1951 adopted a Resolution and Recommendation on the
taxation of fuel, a Resolution on the taxation of income and of aircraft, and
a Resolution on taxes related to the sale or use of international air transport
(cf. Doc 7145) which were further amended and amplified by the policy
statements in Doc 8632 published in 1966. The Resolutions and
Recommendation concerned were designed to recognize the uniqueness
of civil aviation and the need to accord tax exempt status to certain aspects
of the operations of international air transport and were adopted because
multiple taxation on the aircraft, fuel, technical supplies and the income of
international air transport, as well as taxes on its sale and use, were
considered as major obstacles to the further development of international
air transport. Non-observance of the principle of reciprocal exemption
envisaged in these policies was also seen as risking retaliatory action with
adverse repercussions on international air transport which plays a major
role in the development and expansion of international trade and travel.12
In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF)
held on March 18-22, 2013 at Montreal, among matters agreed upon was
that "the proliferation of various taxes and duties on air transport could
have negative impact on the sustainable development of air transport and
on consumers." Confirming that ICAO’s policies on taxation remain valid,
the Conference recommended that "ICAO promote more vigorously its
policies and with industry stakeholders to develop analysis and guidance
to States on the impact of taxes and other levies on air transport."13 Even
as said conference was being held, on March 7, 2013, President Benigno
Aquino III has signed into law Republic Act (R.A.) No. 1037814 granting
tax incentives to foreign carriers which include exemption from the 12%
value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT).
GPBT is a form of income tax applied to international airlines or shipping
companies. The law, based on reciprocal grant of similar tax exemptions
to Philippine carriers, is expected to increase foreign tourist arrivals in the
country.
Indeed, the avowed purpose of a tax exemption is always "some public
benefit or interest, which the law-making body considers sufficient to offset
the monetary loss entailed in the grant of the exemption."15 The exemption
from excise tax of aviation fuel purchased by international carriers for
consumption outside the Philippines fulfills a treaty obligation pursuant to
which our Government supports the promotion and expansion of
international travel through avoidance of multiple taxation and ensuring the
viability and safety of international air travel. In recent years, developing
economies such as ours focused more serious attention to significant
gains for business and tourism sectors as well. Even without such recent
incidental benefit, States had long accepted the need for international
cooperation in maintaining a capital intensive, labor intensive and fuel
intensive airline industry, and recognized the major role of international air
transport in the development of international trade and travel.
118
Under the basic international law principle of pacta sunt servanda, we have
the duty to fulfill our treaty obligations in good faith. This entails
harmonization of national legislation with treaty provisions. In this case,
Sec. 135(a) of the NIRC embodies our compliance with our undertakings
under the Chicago Convention and various bilateral air service agreements
not to impose excise tax on aviation fuel purchased by international
carriers from domestic manufacturers or suppliers. In our Decision in this
case, we interpreted Section 135 (a) as prohibiting domestic manufacturer
or producer to pass on to international carriers the excise tax it had paid
on petroleum products upon their removal from the place of production,
pursuant to Article 148 and pertinent BIR regulations. Ruling on
respondent’s claim for tax refund of such paid excise taxes on petroleum
products sold to tax-exempt international carriers, we found no basis in the
Tax Code and jurisprudence to grant the refund of an "erroneously or
illegally paid" tax.
Justice Bersamin argues that "(T)he shifting of the tax burden by
manufacturers-sellers is a business prerogative resulting from the
collective impact of market forces," and that it is "erroneous to construe
Section 135(a) only as a prohibition against the shifting by the
manufacturers-sellers of petroleum products of the tax burden to
international carriers, for such construction will deprive the manufacturers-
sellers of their business prerogative to determine the prices at which they
can sell their products."
We maintain that Section 135 (a), in fulfillment of international agreement
and practice to exempt aviation fuel from excise tax and other impositions,
prohibits the passing of the excise tax to international carriers who buys
petroleum products from local manufacturers/sellers such as respondent.
However, we agree that there is a need to reexamine the effect of denying
the domestic manufacturers/sellers’ claim for refund of the excise taxes
they already paid on petroleum products sold to international carriers, and
its serious implications on our Government’s commitment to the goals and
objectives of the Chicago Convention.
The Chicago Convention, which established the legal framework for
international civil aviation, did not deal comprehensively with tax matters.
Article 24 (a) of the Convention simply provides that fuel and lubricating
oils on board an aircraft of a Contracting State, on arrival in the territory of
another Contracting State and retained on board on leaving the territory of
that State, shall be exempt from customs duty, inspection fees or similar
national or local duties and charges. Subsequently, the exemption of
airlines from national taxes and customs duties on spare parts and fuel
has become a standard element of bilateral air service agreements (ASAs)
between individual countries.
The importance of exemption from aviation fuel tax was underscored in the
following observation made by a British author16 in a paper assessing the
debate on using tax to control aviation emissions and the obstacles to
introducing excise duty on aviation fuel, thus:
Without any international agreement on taxing fuel, it is highly likely that
moves to impose duty on international flights, either at a domestic or
European level, would encourage 'tankering': carriers filling their aircraft as
full as possible whenever they landed outside the EU to avoid paying
tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft
would be travelling further than necessary to fill up in low-tax jurisdictions;
in addition they would be burning up more fuel when carrying the extra
weight of a full fuel tank.
With the prospect of declining sales of aviation jet fuel sales to international
carriers on account of major domestic oil companies' unwillingness to
shoulder the burden of excise tax, or of petroleum products being sold to
said carriers by local manufacturers or sellers at still high prices , the
practice of "tankering" would not be discouraged. This scenario does not
119
augur well for the Philippines' growing economy and the booming tourism
industry. Worse, our Government would be risking retaliatory action under
several bilateral agreements with various countries. Evidently,
construction of the tax exemption provision in question should give primary
consideration to its broad implications on our commitment under
international agreements.
In view of the foregoing reasons, we find merit in respondent's motion for
reconsideration. We therefore hold that respondent, as the statutory
taxpayer who is directly liable to pay the excise tax on its petroleum
products, is entitled to a refund or credit of the excise taxes it paid for
petroleum products sold to international carriers, the latter having been
granted exemption from the payment of said excise tax under Sec. 135 (a)
of the NIRC.
WHEREFORE, the Court hereby resolves to:
(1) GRANT the original and supplemental motions for reconsideration filed
by respondent Pilipinas Shell Petroleum Corporation; and
(2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June
24, 2009 of the Court of Tax Appeals En Banc in CT A EB No. 415; and
DIRECT petitioner Commissioner of Internal Revenue to refund or to issue
a tax credit certificate to Pilipinas Shell Petroleum Corporation in the
amount of J195,014,283.00 representing the excise taxes it paid on
petroleum products sold to international carriers from October 2001 to
June 2002.
SO ORDERED.
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] are the Decision[2] dated
December 18, 2013 and the Resolution[3] dated June 10, 2014 of the
Court of Tax Appeals (CTA) En Banc in CTA EB No. 924, which affirmed
the Resolution[4] dated July 31, 2012 of the CTA Third Division (CTA
Division) in CTA Case No. 6967, granting respondent Nippon Express
(Phils.) Corporation's (Nippon) motion to withdraw petition for review[5]
(motion to withdraw).
The Facts
Nippon is a domestic corporation duly organized and existing under
Philippine laws which is primarily engaged in the business of freight
forwarding, namely, in the international and domestic air and sea freight
and cargo forwarding, hauling, carrying, handling, distributing, loading, and
unloading general cargoes and all classes of goods, wares, and
merchandise, and the operation of container depots, warehousing,
storage, hauling, and packing facilities.[6] It is a Value-Added Tax (VAT)
registered entity with Tax Identification No./VAT Registration No. 004-669-
434-000.[7] As such, it filed its quarterly VAT returns for the year 2002 on
April 25, 2002, July 25, 2002, October 25, 2002, and January 27, 2003,
respectively.[8] It maintained that during the said period it incurred input
VAT attributable to its zero-rated sales in the amount of f 28,405,167.60,
from which only P3,760,660.74 was applied as tax credit, thus, reflecting
refundable excess input VAT in the amount of P24,644,506.86.[9]
On April 22, 2004, Nippon filed an administrative claim for refund[10] of its
unutilized input VAT in the amount of P24,644,506.86 for the year 2002
before the Bureau of Internal Revenue (BIR).[11] A day later, or on April
23, 2004, it filed a judicial claim for tax refund, by way of petition for
review,[12] before the CTA, docketed as CTA Case No. 6967.[13]
120
For its part, petitioner the Commissioner of Internal Revenue (CIR)
asserted, inter alia, that the amounts being claimed by Nippon as unutilized
input VAT were not properly documented, hence, should be denied.[14]
Proceedings Before the CTA Division
In a Decision[15] dated August 10, 2011, the CTA Division partially granted
Nippon's claim for tax refund, and thereby ordered the CIR to issue a tax
credit certificate in the reduced amount of P2,614,296.84, representing its
unutilized input VAT which was attributable to its zero-rated sales.[16] It
found that while Nippon timely filed its administrative and judicial claims
within the two (2)-year prescriptive period,[17] it, however, failed to show
that the recipients of its services - which, in this case, were mostly
Philippine Economic Zone Authority registered enterprises - were non-
residents "doing business outside the Philippines." Accordingly, it
concluded that Nippon's purported sales therefrom could not qualify as
zero-rated sales, hence, the reduction in the amount of tax credit certificate
claimed.[18]
Before its receipt of the August 10, 2011 Decision, or on August 12, 2011,
Nippon filed a motion to withdraw,[19] considering that the BIR, acting on
its administrative claim, already issued a tax credit certificate in the amount
of P21,675,128.91 on July 27, 2011 (July 27, 2011 Tax Credit Certificate).
Separately, the CIR moved for reconsideration[20] of the August 10, 2011
Decision and filed its comment/opposition[21] to Nippon's motion to
withdraw, claiming that: (a) the CTA Division had already resolved the
factual issue pertaining to Nippon's entitlement to a tax credit certificate,
which, after trial, was proven to be only in the amount of P2,614,296.84;
(b) the issuance of the July 27, 2011 Tax Credit Certificate was bereft of
factual and legal bases, and prejudicial to the interest of the government;
and (c) Nippon's motion to withdraw was "tantamount to [a] withdrawal and
abandonment of its [mjotion for [reconsideration also filed in this case."[22]
Thereafter, Nippon, which maintained that it only had notice of the August
10, 2011 Decision on August 16, 2011,[23] likewise sought for
reconsideration,[24] praying that the CTA Division set aside its August 10,
2011 Decision and render judgment ordering the CIR to issue a tax credit
certificate in the full amount of F24,644,506.86, or in the alternative, grant
its motion to withdraw.[25]
In a Resolution dated July 31, 2012,[26] the CTA Division granted Nippon's
motion to withdraw and, thus, considered the case closed and
terminated.[27] It found that pursuant to Revenue Memorandum Circular
No. 49-03 (RMC No. 49-03) dated August 15, 2003, Nippon correctly
availed of the proper remedy notwithstanding the promulgation of the
August 10, 2011 Decision. It added that in approving the withdrawal of
Nippon's petition for review, it exercised its discretionary authority under
Section 3, Rule 50 of the Rules of Court after due consideration of the
reasons proffered by Nippon, namely: (a) that the parties had already
arrived at a reasonable settlement of the issues; (b) further legal and
related costs would be avoided; and (c) the court's time and resources
would be saved.[28]
Aggrieved, the CIR elevated[29] its case to the CTA En Banc.
The CTA En Banc Ruling
In a Decision[30] dated December 18, 2013, the CTA En Banc affirmed
the July 31, 2012 Resolution of the CTA Division granting Nippon's motion
to withdraw.[31] It debunked the CIR's assertions that Nippon failed to
comply with the requirements set forth in RMC No. 49-03 - i.e., that Nippon
failed to notify the BIR that it agreed with its findings and to file the
necessary motion before the CTA Division prior to the promulgation of its
Decision -noting that RMC No. 49-03 did not expressly require a taxpayer
to inform the BIR of its assent nor prescribe a definite period for filing a
121
motion to withdraw. It also observed that the CIR did not deny the
existence and issuance of the July 27, 2011 Tax Credit Certificate. In this
regard, the same may be taken judicial notice of, and the need for its formal
offer dispensed with.[32]
The CIR moved for partial reconsideration[33] which was, however, denied
by the CTA En Banc in a Resolution[34] dated June 10, 2014; hence, this
petition.
The Issue Before the Court
The core issue in this case is whether the CTA properly granted Nippon's
motion to withdraw.
The Court's Ruling
The petition is meritorious.
A perusal of the Revised Rules of the Court of Tax Appeals[35] (RRCTA)
reveals the lack of provisions governing the procedure for the withdrawal
of pending appeals before the CTA. Hence, pursuant to Section 3, Rule 1
of the RRCTA, the Rules of Court shall suppletorily apply:
Sec. 3. Applicability of the Rules of Court. - The Rules of Court in the
Philippines shall apply suppletorily to these Rules.
Rule 50 of the Rules of Court - an adjunct rule to the appellate procedure
in the CA under Rules 42, 43, 44, and 46 of the Rules of Court which are
equally adopted in the RRCTA[36] - states that when the case is deemed
submitted for resolution, withdrawal of appeals made after the filing of the
appellee's brief may still be allowed in the discretion of the court:
RULE 50
DISMISSAL OF APPEAL
xxxx
Section 3. Withdrawal of appeal. — An appeal may be withdrawn as of
right at any time before the filing of the appellee's brief. Thereafter, the
withdrawal may be allowed in the discretion of the court. (Emphasis
supplied)
Impelled by the BIR's supervening issuance of the July 27, 2011 Tax Credit
Certificate, Nippon filed a motion to withdraw the case, proffering that:
Having arrived at a reasonable settlement of the issues with the [CIR]/BIR,
and to avoid incurring further legal and related costs, not to mention the
time and resources of [the CTA], [Nippon] most respectfully moves for the
withdrawal of its Petition for Review.[37]
Finding the aforementioned grounds to be justified, the CTA Division
allowed the withdrawal of Nippon's appeal thereby ordering the case
closed and terminated, notwithstanding the fact that the said motion was
filed after the promulgation of its August 10, 2011 Decision.
While it is true that the CTA Division has the prerogative to grant a motion
to withdraw under the authority of the foregoing legal provisions, the
attendant circumstances in this case should have incited it to act
otherwise.
First, it should be pointed out that the August 10, 2011 Decision was
rendered by the CTA Division after a full-blown hearing in which the parties
had already ventilated their claims. Thus, the findings contained therein
were the results of an exhaustive study of the pleadings and a judicious
evaluation of the evidence submitted by the parties, as well as the report
of the commissioned certified public accountant. In Reyes v. Commission
on Elections,[38] the Court only noted, and did not grant, a motion to
withdraw the petition filed after it had already acted on said petition,
ratiocinating in the following wise:
It may well be in order to remind petitioner that jurisdiction, once acquired,
is not lost upon the instance of the parties, but continues until the case is
terminated. When petitioner filed her Petition for Certiorari jurisdiction
122
vested in the Court and, in fact, the Court exercised such jurisdiction when
it acted on the petition. Such jurisdiction cannot be lost by the unilateral
withdrawal of the petition by petitioner.[39]
The primary reason, however, that militates against the granting of the
motion to withdraw is the fact that the CTA Division, in its August 10, 2011
Decision, had already determined that Nippon was only entitled to refund
the reduced amount of P2,614,296.84 since it failed to prove that the
recipients of its services were non-residents "doing business outside the
Philippines"; hence, Nippon's purported sales therefrom could not qualify
as zero-rated sales, necessitating the reduction in the amount of refund
claimed. Markedly different from this is the BIR's determination that Nippon
should receive P21,675,128.91 as per the July 27, 2011 Tax Credit
Certificate, which is, in all, P19,060,832.07 larger than the amount found
due by the CTA Division. Therefore, as aptly pointed out by Associate
Justice Teresita J. Leonardo-De Castro during the deliberations on this
case, the massive discrepancy alone between the administrative and
judicial determinations of the amount to be refunded to Nippon should have
already raised a red flag to the CTA Division. Clearly, the interest of the
government, and, more significantly, the public, will be greatly prejudiced
by the erroneous grant of refund - at a substantial amount at that - in favor
of Nippon. Hence, under these circumstances, the CTA Division should
not have granted the motion to withdraw.
2004, or beyond the two (2)-year prescriptive period pursuant to Section
112(A)[42] of the National Internal Revenue Code of 1997. Although
prescription was not raised as an issue, it is well-settled that if the
pleadings or the evidence on record show that the claim is barred by
prescription, the Court may motu proprio order its dismissal on said
ground.[43]
All told, the CTA committed a reversible error in granting Nippon's motion
to withdraw. The August 10, 2011 Decision of the CTA Division should
therefore be reinstated, without prejudice, however, to the right of either
party to appeal the same in accordance with the RRCTA.
WHEREFORE, the petition is GRANTED. The Decision dated December
18, 2013 and the Resolution dated June 10, 2014 of the Court of Tax
Appeals En Banc in CTA EB Case No. 924 are hereby SET ASIDE. The
Decision dated August 10, 2011 of the Court of Tax Appeals Third Division
in CTA Case No. 6967 is REINSTATED, without prejudice, however, to the
right of either party to appeal the same in accordance with the Revised
Rules of the Court of Tax Appeals.
SO ORDERED.

In this relation, it deserves mentioning that the CIR is not estopped from
assailing the validity of the July 27, 2011 Tax Credit Certificate which was
issued by her subordinates in the BIR. In matters of taxation, the
government cannot be estopped by the mistakes, errors or omissions of
its agents for upon it depends the ability of the government to serve the
people for whose benefit taxes are collected.[40]

Finally, the Court has observed that based on the records, Nippon's
administrative claim for the first taxable quarter of 2002 which closed on
March 31, 2002 was already time-barred[41] for being filed on April 22,
123
 VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,*
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.
Republic of the Philippines
Supreme Court Promulgated:
Manila
February 7, 2012
EN BANC
x--------------------------------------------------x
GUALBERTO J. DELA LLANA,
Petitioner, DECISION

- versus - SERENO, J.:

THE CHAIRPERSON, COMMISSION ON AUDIT, THE EXECUTIVE This is a Petition for Certiorari under Rule 65 of the Rules of Court with a
SECRETARY and THE NATIONAL TREASURER, prayer for the issuance of a temporary restraining order pursuant to
Respondents. Section 7, Article IX-D of the 1987 Constitution, seeking to annul and set
G. R. No. 180989 aside Commission on Audit (COA) Circular No. 89-299, which lifted its
system of pre-audit of government financial transactions.
Present:

CORONA, C.J.,
CARPIO, Statement of the Facts and the Case
124

On 26 October 1982, the COA issued Circular No. 82-195, lifting the
system of pre-audit of government financial transactions, albeit with certain
exceptions. The circular affirmed the state policy that all resources of the
government shall be managed, expended or utilized in accordance with
law and regulations, and safeguarded against loss or wastage through
illegal or improper disposition, with a view to ensuring efficiency, economy
and effectiveness in the operations of government. Further, the circular
emphasized that the responsibility to ensure faithful adherence to the
policy rested directly with the chief or head of the government agency
concerned. The circular was also designed to further facilitate or expedite
government transactions without impairing their integrity.
After the change in administration due to the February 1986 revolution,
grave irregularities and anomalies in the governments financial
transactions were uncovered. Hence, on 31 March 1986, the COA issued
Circular No. 86-257, which reinstated the pre-audit of selected government
transactions. The selective pre-audit was perceived to be an effective,
although temporary, remedy against the said anomalies.
With the normalization of the political system and the stabilization of
government operations, the COA saw it fit to issue Circular No. 89-299,
which again lifted the pre-audit of government transactions of national
government agencies (NGAs) and government-owned or -controlled
corporations (GOCCs). The rationale for the circular was, first, to reaffirm
the concept that fiscal responsibility resides in management as embodied
in the Government Auditing Code of the Philippines; and, second, to
contribute to accelerating the delivery of public services and improving
government operations by curbing undue bureaucratic red tape and
ensuring facilitation of government transactions, while continuing to
preserve and protect the integrity of these transactions. Concomitant to the
lifting of the pre-audit of government transactions of NGAs and GOCCs,
Circular No. 89-299 mandated the installation, implementation and
monitoring of an adequate internal control system, which would be the
direct responsibility of the government agency head.
Circular No. 89-299 further provided that the pre-audit activities retained
by the COA as therein outlined shall no longer be a pre-requisite to the
implementation or prosecution of projects and the payment of claims. The
COA aimed to henceforth focus its efforts on the post-audit of financial
accounts and transactions, as well as on the assessment and evaluation
of the adequacy and effectivity of the agencys fiscal control process.
However, the circular did not include the financial transactions of local
government units (LGUs) in its coverage.
The COA later issued Circular No. 94-006 on 17 February 1994 and
Circular No. 95-006 on 18 May 1995. Both circulars clarified and expanded
the total lifting of pre-audit activities on all financial transactions of NGAs,
GOCCs, and LGUs. The remaining audit activities performed by COA
auditors would no longer be pre-requisites to the implementation or
prosecution of projects, perfection of contracts, payment of claims, and/or
approval of applications filed with the agencies.[1]
It also issued COA Circular No. 89-299, as amended by Circular No. 89-
299A, which in Section 3.2 provides:
3.2 Whenever circumstances warrant, however, such as where the internal
control system of a government agency is inadequate, This Commission
may reinstitute pre-audit or adopt such other control measures, including
temporary or special pre-audit, as are necessary and appropriate to protect
the funds and property of the agency.
On 18 May 2009, COA issued Circular No. 2009-002, which reinstituted
the selective pre-audit of government transactions in view of the rising
incidents of irregular, illegal, wasteful and anomalous disbursements of
huge amounts of public funds and disposals of public property. Two years
125
later, or on 22 July 2011, COA issued Circular No. 2011-002, which lifted
the pre-audit of government transactions implemented by Circular No.
2009-002. In its assessment, subsequent developments had shown
heightened vigilance of government agencies in safeguarding their
resources.
In the interregnum, on 3 May 2006, petitioner dela Llana wrote to the COA
regarding the recommendation of the Senate Committee on Agriculture
and Food that the Department of Agriculture set up an internal pre-audit
service. On 18 July 2006, the COA replied to petitioner, informing him of
the prior issuance of Circular No. 89-299.[2] The 18 July 2006 reply of the
COA further emphasized the required observance of Administrative Order
No. 278 dated 8 June 1992, which directed the strengthening of internal
control systems of government offices through the installation of an internal
audit service (IAS).
On 15 January 2008, petitioner filed this Petition for Certiorari under Rule
65. He alleges that the pre-audit duty on the part of the COA cannot be
lifted by a mere circular, considering that pre-audit is a constitutional
mandate enshrined in Section 2 of Article IX-D of the 1987 Constitution.[3]
He further claims that, because of the lack of pre-audit by COA, serious
irregularities in government transactions have been committed, such as
the P728-million fertilizer fund scam, irregularities in the P550-million call
center laboratory project of the Commission on Higher Education, and
many others.
On 22 February 2008, public respondents filed their Comment[4] on the
Petition. They argue therein that the Petition must be dismissed, as it is
not proper for a petition for certiorari, considering that (1) there is no
allegation showing that the COA exercised judicial or quasi-judicial
functions when it promulgated Circular No. 89-299; and (2) there is no
convincing explanation showing how the promulgation of the circular was
done with grave abuse of discretion. Further, the Petition is allegedly
defective in form, in that there is no discussion of material dates as to when
petitioner received a copy of the circular; there is no factual background of
the case; and petitioner failed to attach a certified true copy of the circular.
In any case, public respondents aver that the circular is valid, as the COA
has the power under the 1987 Constitution to promulgate it.
On 9 May 2008, petitioner filed his Reply[5] to the Comment.
On 17 June 2008, this Court resolved to require the parties to submit their
respective memoranda. On 12 September 2008, public respondents
submitted their Memorandum.[6] On 15 September 2008, Amethya dela
Llana-Koval, daughter of petitioner, manifested to the Court his demise on
8 July 2008 and moved that she be allowed to continue with the Petition
and substitute for him. Her motion for substitution was granted by this
Court in a Resolution dated 7 October 2008. On 5 January 2009, petitioner,
substituted by his daughter,[7] filed his Memorandum.[8]
The main issue for our resolution in this Petition is whether or not petitioner
is entitled to the extraordinary writ of certiorari.
Procedural Issues
Technical Defects of the Petition
Public respondents correctly allege that petitioner failed to attach a
certified true copy of the assailed Order, and that the Petition lacked a
statement of material dates. In view, however, of the serious matters dealt
with in this Petition, this Court opts to tackle the merits thereof with least
regard to technicalities. A perusal of the Petition shows that the factual
background of the case, although brief, has been sufficiently alleged by
petitioner.
Standing
126

This Petition has been filed as a taxpayers suit.
A taxpayer is deemed to have the standing to raise a constitutional issue
when it is established that public funds from taxation have been disbursed
in alleged contravention of the law or the Constitution.[9] Petitioner claims
that the issuance of Circular No. 89-299 has led to the dissipation of public
funds through numerous irregularities in government financial
transactions. These transactions have allegedly been left unchecked by
the lifting of the pre-audit performed by COA, which, petitioner argues, is
its Constitutional duty. Thus, petitioner has standing to file this suit as a
taxpayer, since he would be adversely affected by the illegal use of public
money.
Propriety of Certiorari
Public respondents aver that a petition for certiorari is not proper in this
case, as there is no indication that the writ is directed against a tribunal, a
board, or an officer exercising judicial or quasi-judicial functions, as
required in certiorari proceedings.[10] Conversely, petitioner for his part
claims that certiorari is proper under Section 7, Article IX-A of the 1987
Constitution, which provides in part:
Section 7. x x x. Unless otherwise provided by this Constitution or by law,
any decision, order, or ruling of each Commission may be brought to the
Supreme Court on certiorari by the aggrieved party within thirty days from
receipt of a copy thereof.
Petitioner is correct in that decisions and orders of the COA are reviewable
by the court via a petition for certiorari. However, these refer to decisions
and orders which were rendered by the COA in its quasi-judicial capacity.
Circular No. 89-299 was promulgated by the COA under its quasi-
legislative or rule-making powers. Hence, Circular No. 89-299 is not
reviewable by certiorari.
Neither is a petition for prohibition appropriate in this case. A petition for
prohibition is filed against any tribunal, corporation, board, or person
whether exercising judicial, quasi-judicial, or ministerial functions who has
acted without or in excess of jurisdiction or with grave abuse of discretion,
and the petitioner prays that judgment be rendered, commanding the
respondent to desist from further proceeding in the action or matter
specified in the petition.[11] However, prohibition only lies against judicial
or ministerial functions, but not against legislative or quasi-legislative
functions.[12]
Nonetheless, this Court has in the past seen fit to step in and resolve
petitions despite their being the subject of an improper remedy, in view of
the public importance of the issues raised therein.[13] In this case,
petitioner avers that the conduct of pre-audit by the COA could have
prevented the occurrence of the numerous alleged irregularities in
government transactions that involved substantial amounts of public
money. This is a serious allegation of a grave deficiency in observing a
constitutional duty if proven correct.
This Court can use its authority to set aside errors of practice or
technicalities of procedure, including the aforementioned technical defects
of the Petition, and resolve the merits of a case with such serious
allegations of constitutional breach. Rules of procedure were promulgated
to provide guidelines for the orderly administration of justice, not to shackle
the hand that dispenses it.[14]
Substantive Issues
The 1987 Constitution has made the COA the guardian of public funds,
vesting it with broad powers over all accounts pertaining to government
127
revenues and expenditures and the use of public funds and property,
including the exclusive authority to define the scope of its audit and
examination; to establish the techniques and methods for the review; and
to promulgate accounting and auditing rules and regulations.[15] Its
exercise of its general audit power is among the constitutional mechanisms
that give life to the check and balance system inherent in our form of
government.[16]
Petitioner claims that the constitutional duty of COA includes the duty to
conduct pre-audit. A pre-audit is an examination of financial transactions
before their consumption or payment.[17] It seeks to determine whether
the following conditions are present: (1) the proposed expenditure
complies with an appropriation law or other specific statutory authority; (2)
sufficient funds are available for the purpose; (3) the proposed expenditure
is not unreasonable or extravagant, and the unexpended balance of
appropriations to which it will be charged is sufficient to cover the entire
amount of the expenditure; and (4) the transaction is approved by the
proper authority and the claim is duly supported by authentic underlying
evidence.[18] It could, among others, identify government agency
transactions that are suspicious on their face prior to their implementation
and prior to the disbursement of funds.
Petitioner anchors his argument on Section 2 of Article IX-D of the 1987
Constitution, which reads as follows:
Section 2.
1.The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held
in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned or controlled
corporations with original charters, and on a post- audit basis:
a.constitutional bodies, commissions and offices that have been granted
fiscal autonomy under this Constitution;
b.autonomous state colleges and universities;
c.other government-owned or controlled corporations and their
subsidiaries; and
d.such non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the Government, which are required by law or
the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited agencies
is inadequate, the Commission may adopt such measures, including
temporary or special pre-audit, as are necessary and appropriate to correct
the deficiencies. It shall keep the general accounts of the Government and,
for such period as may be provided by law, preserve the vouchers and
other supporting papers pertaining thereto.
2. The Commission shall have exclusive authority, subject to the limitations
in this Article, to define the scope of its audit and examination, establish
the techniques and methods required therefor, and promulgate accounting
and auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures or uses of government funds and properties.
(Emphasis supplied)
He claims that under the first paragraph quoted above, government
transactions must undergo a pre-audit, which is a COA duty that cannot
be lifted by a mere circular.
We find for public respondents.
128
Petitioners allegations find no support in the aforequoted Constitutional
provision. There is nothing in the said provision that requires the COA to
conduct a pre-audit of all government transactions and for all government
agencies. The only clear reference to a pre-audit requirement is found in
Section 2, paragraph 1, which provides that a post-audit is mandated for
certain government or private entities with state subsidy or equity and only
when the internal control system of an audited entity is inadequate. In such
a situation, the COA may adopt measures, including a temporary or special
pre-audit, to correct the deficiencies.

Hence, the conduct of a pre-audit is not a mandatory duty that this Court
may compel the COA to perform. This discretion on its part is in line with
the constitutional pronouncement that the COA has the exclusive authority
to define the scope of its audit and examination. When the language of the
law is clear and explicit, there is no room for interpretation, only
application.[19] Neither can the scope of the provision be unduly enlarged
by this Court.

WHEREFORE, premises considered, the Petition is DISMISSED.

SO ORDERED.
_____________________________________________________

Republic of the Philippines

129
SUPREME COURT
Baguio
EN BANC
G.R. Nos. 147036-37 April 10, 2012
Petitioner-Organizations, namely: PAMBANSANG KOALISYON NG MGA
SAMAHANG MAGSASAKA AT MANGGAGAWA SA NIYUGAN
(PKSMMN), COCONUT INDUSTRY REFORM MOVEMENT (COIR),
BUKLOD NG MALAYANG MAGBUBUKID, PAMBANSANG KILUSAN NG
MGA SAMAHANG MAGSASAKA (PAKISAMA), CENTER FOR
AGRARIAN REFORM, EMPOWERMENT AND TRANSFORMATION
(CARET), PAMBANSANG KATIPUNAN NG MGA SAMAHAN SA
KANAYUNAN (PKSK); Petitioner-Legislator: REPRESENTATIVE
LORETA ANN ROSALES; and Petitioner-Individuals, namely: VIRGILIO
V. DAVID, JOSE MARIE FAUSTINO, JOSE CONCEPCION, ROMEO
ROYANDOYAN, JOSE V. ROMERO, JR., ATTY. CAMILO L. SABIO, and
ATTY. ANTONIO T. CARPIO, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE,
SECRETARY OF AGRARIAN REFORM, PRESIDENTIAL COMMISSION
ON GOOD GOVERNMENT, THE SOLICITOR GENERAL, PHILIPPINE
COCONUT PRODUCERS FEDERATION, INC. (COCOFED), and
UNITED COCONUT PLANTERS BANK (UCPB), Respondents.
x-----------------------x
G.R. No. 147811
TEODORO J. AMOR, representing the Peasant Alliance of Samar and
Leyte (PASALEY), DOMINGO C. ENCALLADO, representing Aniban ng
Magsasaka at Manggagawa sa Niyugan (AMMANI), and VIDAL M. PILIIN,
representing the Laguna Coalition, Petitioners,
vs.
EXECUTIVE SECRETARY, SECRETARY OF AGRICULTURE,
SECRETARY OF AGRARIAN REFORM, PRESIDENTIAL COMMISSION
ON GOOD GOVERNMENT, THE SOLICITOR GENERAL, PHILIPPINE
COCONUT PRODUCERS FEDERATION, UNITED COCONUT
PLANTERS BANK, Respondents.
DECISION
ABAD, J.:
These are consolidated petitions to declare unconstitutional certain
presidential decrees and executive orders of the martial law era relating to
the raising and use of coco-levy funds.
The Facts and the Case
On June 19, 1971 Congress enacted Republic Act (R.A.) 62601 that
established a Coconut Investment Fund (CI Fund) for the development of
the coconut industry through capital financing.2 Coconut farmers were to
capitalize and administer the Fund through the Coconut Investment
Company (CIC)3 whose objective was, among others, to advance the
coconut farmers’ interests. For this purpose, the law imposed a levy of
₱0.55 on the coconut farmer’s first domestic sale of every 100 kilograms
of copra, or its equivalent, for which levy he was to get a receipt convertible
into CIC shares of stock.4
About a year following his proclamation of martial law in the country or on
August 20, 1973 President Ferdinand E. Marcos issued Presidential
Decree (P.D.) 276,5 which established a Coconut Consumers Stabilization
Fund (CCS Fund), to address the crisis at that time in the domestic market
130
for coconut-based consumer goods. The CCS Fund was to be built up
through the imposition of a ₱15.00-levy for every first sale of 100 kilograms
of copra resecada.6 The levy was to cease after a year or earlier provided
the crisis was over. Any remaining balance of the Fund was to revert to the
CI Fund established under R.A. 6260.7
A year later or on November 14, 1974 President Marcos issued P.D. 582,8
creating a permanent fund called the Coconut Industry Development Fund
(CID Fund) to channel for the ultimate direct benefit of coconut farmers
part of the levies that they were already paying. The Philippine Coconut
Authority (PCA) was to provide ₱100 million as initial capital of the CID
Fund and, thereafter, give the Fund at least ₱0.20 per kilogram of copra
resecada out of the PCA’s collection of coconut consumers stabilization
levy. In case of the lifting of this levy, the PCA was then to impose a
permanent levy of ₱0.20 on the first sale of every kilogram of copra to form
part of the CID Fund.9 Also, under P.D. 582, the Philippine National Bank
(PNB), then owned by the Government, was to receive on deposit,
administer, and use the CID Fund.10 P.D. 582 authorized the PNB to
invest the unused portion of the CID Fund in easily convertible
investments, the earnings of which were to form part of the Fund.11
In 1975 President Marcos enacted P.D. 75512 which approved the
acquisition of a commercial bank for the benefit of the coconut farmers to
enable such bank to promptly and efficiently realize the industry’s credit
policy.13 Thus, the PCA bought 72.2% of the shares of stock of First
United Bank, headed by Pedro Cojuangco.14 Due to changes in its
corporate identity and purpose, the bank’s articles of incorporation were
amended in July 1975, resulting in a change in the bank’s name from First
United Bank to United Coconut Planters Bank (UCPB).15
On July 14, 1976 President Marcos enacted P.D. 961,16 the Coconut
Industry Code, which consolidated and codified existing laws relating to
the coconut industry. The Code provided that surpluses from the CCS
Fund and the CID Fund collections, not used for replanting and other
authorized purposes, were to be invested by acquiring shares of stock of
corporations, including the San Miguel Corporation (SMC), engaged in
undertakings related to the coconut and palm oil industries.17 UCPB was
to make such investments and equitably distribute these for free to coconut
farmers.18 These investments constituted the Coconut Industry
Investment Fund (CIIF). P.D. 961 also provided that the coconut levy funds
(coco-levy funds) shall be owned by the coconut farmers in their private
capacities.19 This was reiterated in the PD 146820 amendment of June
11, 1978.
In 1980, President Marcos issued P.D. 1699,21 suspending the collections
of the CCS Fund and the CID Fund. But in 1981 he issued P.D. 184122
which revived the collection of coconut levies. P.D. 1841 renamed the CCS
Fund into the Coconut Industry Stabilization Fund (CIS Fund).23 This Fund
was to be earmarked proportionately among several development
programs, such as coconut hybrid replanting program, insurance coverage
for the coconut farmers, and scholarship program for their children.24
In November 2000 then President Joseph Estrada issued Executive Order
(E.O.) 312,25 establishing a Sagip Niyugan Program which sought to
provide immediate income supplement to coconut farmers and encourage
the creation of a sustainable local market demand for coconut oil and other
coconut products.26 The Executive Order sought to establish a ₱1-billion
fund by disposing of assets acquired using coco-levy funds or assets of
entities supported by those funds.27 A committee was created to manage
the fund under this program.28 A majority vote of its members could
engage the services of a reputable auditing firm to conduct periodic
audits.29
At about the same time, President Estrada issued E.O. 313,30 which
created an irrevocable trust fund known as the Coconut Trust Fund (the
Trust Fund). This aimed to provide financial assistance to coconut farmers,
131
to the coconut industry, and to other agri-related programs.31 The shares
of stock of SMC were to serve as the Trust Fund’s initial capital.32 These
shares were acquired with CII Funds and constituted approximately 27%
of the outstanding capital stock of SMC. E.O. 313 designated UCPB,
through its Trust Department, as the Trust Fund’s trustee bank. The Trust
Fund Committee would administer, manage, and supervise the operations
of the Trust Fund.33 The Committee would designate an external auditor
to do an annual audit or as often as needed but it may also request the
Commission on Audit (COA) to intervene.34
To implement its mandate, E.O. 313 directed the Presidential Commission
on Good Government, the Office of the Solicitor General, and other
government agencies to exclude the 27% CIIF SMC shares from Civil
Case 0033, entitled Republic of the Philippines v. Eduardo Cojuangco, Jr.,
et al., which was then pending before the Sandiganbayan and to lift the
sequestration over those shares.35
On January 26, 2001, however, former President Gloria Macapagal-Arroyo
ordered the suspension of E.O.s 312 and 313.36 This notwithstanding, on
March 1, 2001 petitioner organizations and individuals brought the present
action in G.R. 147036-37 to declare E.O.s 312 and 313 as well as Article
III, Section 5 of P.D. 1468 unconstitutional. On April 24, 2001 the other
sets of petitioner organizations and individuals instituted G.R. 147811 to
nullify Section 2 of P.D. 755 and Article III, Section 5 of P.D.s 961 and 1468
also for being unconstitutional.
The Issues Presented
The parties submit the following issues for adjudication:
Procedurally –
1. Whether or not petitioners’ special civil actions of certiorari under Rule
65 constituted the proper remedy for their actions; and
2. Whether or not petitioners have legal standing to bring the same to court.
On the substance –
3. Whether or not the coco-levy funds are public funds; and
4. Whether or not (a) Section 2 of P.D. 755, (b) Article III, Section 5 of
P.D.s 961 and 1468, (c) E.O. 312, and (d) E.O. 313 are unconstitutional.
The Rulings of the Court
First. UCPB questions the propriety of the present petitions for certiorari
and mandamus under Rule 65 on the ground that there are no ongoing
proceedings in any tribunal or board or before a government official
exercising judicial, quasi-judicial, or ministerial functions.37 UCPB insists
that the Court exercises appellate jurisdiction with respect to issues of
constitutionality or validity of laws and presidential orders.38
But, as the Court previously held, where there are serious allegations that
a law has infringed the Constitution, it becomes not only the right but the
duty of the Court to look into such allegations and, when warranted, uphold
the supremacy of the Constitution.39 Moreover, where the issues raised
are of paramount importance to the public, as in this case, the Court has
the discretion to brush aside technicalities of procedure.40
Second. The Court has to uphold petitioners’ right to institute these
petitions. The petitioner organizations in these cases represent coconut
farmers on whom the burden of the coco-levies attaches. It is also primarily
for their benefit that the levies were imposed.
132
The individual petitioners, on the other hand, join the petitions as
taxpayers. The Court recognizes their right to restrain officials from wasting
public funds through the enforcement of an unconstitutional statute.41 This
so-called taxpayer’s suit is based on the theory that expenditure of public
funds for the purpose of executing an unconstitutional act is a
misapplication of such funds.42
Besides, the 1987 Constitution accords to the citizens a greater
participation in the affairs of government. Indeed, it provides for people's
initiative, the right to information on matters of public concern (including
the right to know the state of health of their President), as well as the right
to file cases questioning the factual bases for the suspension of the
privilege of writ of habeas corpus or declaration of martial law. These
provisions enlarge the people’s right in the political as well as the judicial
field. It grants them the right to interfere in the affairs of government and
challenge any act tending to prejudice their interest.
Third. For some time, different and conflicting notions had been formed as
to the nature and ownership of the coco-levy funds. The Court, however,
finally put an end to the dispute when it categorically ruled in Republic of
the Philippines v. COCOFED43 that these funds are not only affected with
public interest; they are, in fact, prima facie public funds. Prima facie
means a fact presumed to be true unless disproved by some evidence to
the contrary.44
The Court was satisfied that the coco-levy funds were raised pursuant to
law to support a proper governmental purpose. They were raised with the
use of the police and taxing powers of the State for the benefit of the
coconut industry and its farmers in general. The COA reviewed the use of
the funds. The Bureau of Internal Revenue (BIR) treated them as public
funds and the very laws governing coconut levies recognize their public
character.45
The Court has also recently declared that the coco-levy funds are in the
nature of taxes and can only be used for public purpose.46 Taxes are
enforced proportional contributions from persons and property, levied by
the State by virtue of its sovereignty for the support of the government and
for all its public needs.47 Here, the coco-levy funds were imposed
pursuant to law, namely, R.A. 6260 and P.D. 276. The funds were
collected and managed by the PCA, an independent government
corporation directly under the President.48 And, as the respondent public
officials pointed out, the pertinent laws used the term levy,49 which means
to tax,50 in describing the exaction.
Of course, unlike ordinary revenue laws, R.A. 6260 and P.D. 276 did not
raise money to boost the government’s general funds but to provide means
for the rehabilitation and stabilization of a threatened industry, the coconut
industry, which is so affected with public interest as to be within the police
power of the State.51 The funds sought to support the coconut industry,
one of the main economic backbones of the country, and to secure
economic benefits for the coconut farmers and farm workers. The subject
laws are akin to the sugar liens imposed by Sec. 7(b) of P.D. 388,52 and
the oil price stabilization funds under P.D. 1956,53 as amended by E.O.
137.54
Respondent UCPB suggests that the coco-levy funds are closely similar
to the Social Security System (SSS) funds, which have been declared to
be not public funds but properties of the SSS members and held merely in
trust by the government.55 But the SSS Law56 collects premium
contributions. It does not collect taxes from members for a specific public
purpose. They pay contributions in exchange for insurance protection and
benefits like loans, medical or health services, and retirement packages.
The benefits accrue to every SSS member, not to the public, in general.57
Furthermore, SSS members do not lose ownership of their contributions.
The government merely holds these in trust, together with his employer’s
133
contribution, to answer for his future benefits.58 The coco-levy funds, on
the other hand, belong to the government and are subject to its
administration and disposition. Thus, these funds, including its incomes,
interests, proceeds, or profits, as well as all its assets, properties, and
shares of stocks procured with such funds must be treated, used,
administered, and managed as public funds.59
Lastly, the coco-levy funds are evidently special funds. In Gaston v.
Republic Planters Bank,60 the Court held that the State collected
stabilization fees from sugar millers, planters, and producers for a special
purpose: to finance the growth and development of the sugar industry and
all its components. The fees were levied for a special purpose and,
therefore, constituted special fund when collected. Its character as such
fund was made clear by the fact that they were deposited in the PNB (then
a wholly owned government bank) and not in the Philippine Treasury. In
Osmeña v. Orbos,61 the Court held that the oil price stabilization fund was
a special fund mainly because this was segregated from the general fund
and placed in what the law referred to as a trust account. Yet it remained
subject to COA scrutiny and review. The Court finds no substantial
distinction between these funds and the coco-levy funds, except as to the
industry they each support.
Fourth. Petitioners in G.R. 147811 assert that Section 2 of P.D. 755 above
is void and unconstitutional for disregarding the public character of coco-
levy funds. The subject section provides:
Section 2. Financial Assistance. x x x and since the operations, and
activities of the Philippine Coconut Authority are all in accord with the
present social economic plans and programs of the Government, all
collections and levies which the Philippine Coconut Authority is authorized
to levy and collect such as but not limited to the Coconut Consumers’
Stabilization Levy, and the Coconut Industry Development Fund as
prescribed by Presidential Decree No. 582 shall not be considered or
construed, under any law or regulation, special and/or fiduciary funds and
do not form part of the general funds of the national government within the
contemplation of Presidential Decree No. 711. (Emphasis ours)
The Court has, however, already passed upon this question in Philippine
Coconut Producers Federation, Inc. (COCOFED) v. Republic of the
Philippines.62 It held as unconstitutional Section 2 of P.D. 755 for
"effectively authorizing the PCA to utilize portions of the CCS Fund to pay
the financial commitment of the farmers to acquire UCPB and to deposit
portions of the CCS Fund levies with UCPB interest free. And as there also
provided, the CCS Fund, CID Fund and like levies that PCA is authorized
to collect shall be considered as non-special or fiduciary funds to be
transferred to the general fund of the Government, meaning they shall be
deemed private funds."
Identical provisions of subsequent presidential decrees likewise declared
coco-levy funds private properties of coconut farmers. Article III, Section 5
of P.D. 961 reads:
Section 5. Exemptions. The Coconut Consumers Stabilization Fund and
the Coconut Industry Development Fund as well as all disbursements of
said funds for the benefit of the coconut farmers as herein authorized shall
not be construed or interpreted, under any law or regulation, as special
and/or fiduciary funds, or as part of the general funds of the national
government within the contemplation of P.D. No. 711; nor as a subsidy,
donation, levy, government funded investment, or government share
within the contemplation of P.D. 898, the intention being that said Fund
and the disbursements thereof as herein authorized for the benefit of the
coconut farmers shall be owned by them in their own private capacities.
(Emphasis ours)
Section 5 of P.D. 1468 basically reproduces the above provision, thus–
134
Section 5. Exemption. — The Coconut Consumers Stabilization Fund and
the Coconut Industry Development Fund, as well as all disbursements as
herein authorized, shall not be construed or interpreted, under any law or
regulation, as special and/or fiduciary funds, or as part of the general funds
of the national government within the contemplation of P.D. 711; nor as
subsidy, donation, levy government funded investment, or government
share within the contemplation of P.D. 898, the intention being that said
Fund and the disbursements thereof as herein authorized for the benefit
of the coconut farmers shall be owned by them in their private capacities:
Provided, however, That the President may at any time authorize the
Commission on Audit or any other officer of the government to audit the
business affairs, administration, and condition of persons and entities who
receive subsidy for coconut-based consumer products x x x. (Emphasis
ours)
Notably, the raising of money by levy on coconut farm production, a form
of taxation as already stated, began in 1971 for the purpose of developing
the coconut industry and promoting the interest of coconut farmers. The
use of the fund was expanded in 1973 to include the stabilization of the
domestic market for coconut-based consumer goods and in 1974 to divert
part of the funds for obtaining direct benefit to coconut farmers. After five
years or in 1976, however, P.D. 961 declared the coco-levy funds private
property of the farmers. P.D. 1468 reiterated this declaration in 1978. But
neither presidential decree actually turned over possession or control of
the funds to the farmers in their private capacity. The government
continued to wield undiminished authority over the management and
disposition of those funds.
In any event, such declaration is void. There is ownership when a thing
pertaining to a person is completely subjected to his will in everything that
is not prohibited by law or the concurrence with the rights of another.63 An
owner is free to exercise all attributes of ownership: the right, among
others, to possess, use and enjoy, abuse or consume, and dispose or
alienate the thing owned.64 The owner is of course free to waive all or
some of these rights in favor of others. But in the case of the coconut
farmers, they could not, individually or collectively, waive what have not
been and could not be legally imparted to them.
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961, and Article III,
Section 5 of P.D. 1468 completely ignore the fact that coco-levy funds are
public funds raised through taxation. And since taxes could be exacted
only for a public purpose, they cannot be declared private properties of
individuals although such individuals fall within a distinct group of
persons.65
The Court of course grants that there is no hard-and-fast rule for
determining what constitutes public purpose. It is an elastic concept that
could be made to fit into modern standards. Public purpose, for instance,
is no longer restricted to traditional government functions like building
roads and school houses or safeguarding public health and safety. Public
purpose has been construed as including the promotion of social justice.
Thus, public funds may be used for relocating illegal settlers, building low-
cost housing for them, and financing both urban and agrarian reforms that
benefit certain poor individuals. Still, these uses relieve volatile iniquities
in society and, therefore, impact on public order and welfare as a whole.
But the assailed provisions, which removed the coco-levy funds from the
general funds of the government and declared them private properties of
coconut farmers, do not appear to have a color of social justice for their
purpose. The levy on copra that farmers produce appears, in the first
place, to be a business tax judging by its tax base. The concept of farmers-
businessmen is incompatible with the idea that coconut farmers are victims
of social injustice and so should be beneficiaries of the taxes raised from
their earnings.
135
It would altogether be different of course if the laws mentioned set apart a
portion of the coco-levy fund for improving the lives of destitute coconut
farm owners or workers for their social amelioration to establish a proper
government purpose. The support for the poor is generally recognized as
a public duty and has long been an accepted exercise of police power in
the promotion of the common good.66 But the declarations do not
distinguish between wealthy coconut farmers and the impoverished ones.
And even if they did, the Government cannot just embark on a
philanthropic orgy of inordinate dole-outs for motives political or
otherwise.67 Consequently, such declarations are void since they
appropriate public funds for private purpose and, therefore, violate the
citizens’ right to substantive due process.68
On another point, in stating that the coco-levy fund "shall not be construed
or interpreted, under any law or regulation, as special and/or fiduciary
funds, or as part of the general funds of the national government," P.D.s
961 and 1468 seek to remove such fund from COA scrutiny.
This is also the fault of President Estrada’s E.O. 312 which deals with ₱1
billion to be generated out of the sale of coco-fund acquired assets. Thus–
Section 5. Audit of Fund and Submission of Report. – The Committee, by
a majority vote, shall engage the services of a reputable auditing firm to
conduct periodic audits of the fund. It shall render a quarterly report on all
pertinent transactions and availments of the fund to the Office of the
President within the first three (3) working days of the succeeding quarter.
(Emphasis ours)
E.O. 313 has a substantially identical provision governing the management
and disposition of the Coconut Trust Fund capitalized with the substantial
SMC shares of stock that the coco-fund acquired. Thus–
Section 13. Accounting. — x x x
The Fund shall be audited annually or as often as necessary by an external
auditor designated by the Committee. The Committee may also request
the Commission on Audit to conduct an audit of the Fund. (Emphasis ours)
But, since coco-levy funds are taxes, the provisions of P.D.s 755, 961 and
1468 as well as those of E.O.s 312 and 313 that remove such funds and
the assets acquired through them from the jurisdiction of the COA violate
Article IX-D, Section 2(1)69 of the 1987 Constitution. Section 2(1) vests in
the COA the power and authority to examine uses of government money
and property. The cited P.D.s and E.O.s also contravene Section 270 of
P.D. 898 (Providing for the Restructuring of the Commission on Audit),
which has the force of a statute.
And there is no legitimate reason why such funds should be shielded from
COA review and audit. The PCA, which implements the coco-levy laws
and collects the coco-levy funds, is a government-owned and controlled
corporation subject to COA review and audit.
E.O. 313 suffers from an additional infirmity. Its title, "Rationalizing the Use
of the Coconut Levy Funds by Constituting a ‘Fund for Assistance to
Coconut Farmers’ as an Irrevocable Trust Fund and Creating a Coconut
Trust Fund Committee for the Management thereof" tends to mislead.
Apparently, it intends to create a trust fund out of the coco-levy funds to
provide economic assistance to the coconut farmers and, ultimately,
benefit the coconut industry.71 But on closer look, E.O. 313 strays from
the special purpose for which the law raises coco-levy funds in that it
permits the use of coco-levy funds for improving productivity in other food
areas. Thus:
Section 2. Purpose of the Fund. — The Fund shall be established for the
purpose of financing programs of assistance for the benefit of the coconut
farmers, the coconut industry, and other agri-related programs intended to
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maximize food productivity, develop business opportunities in the
countryside, provide livelihood alternatives, and promote anti-poverty
programs. (Emphasis ours)
xxxx
Section 9. Use and Disposition of the Trust Income. — The Coconut Trust
Fund Committee, on an annual basis, shall determine and establish the
amount comprising the Trust Income. After such determination, the
Committee shall earmark, allocate and disburse the Trust Income for the
following purposes, namely:
xxxx
(d) Thirty percent (30%) of the Trust Income shall be used to assist and
fund agriculturally-related programs for the Government, as reasonably
determined by the Trust Fund Committee, implemented for the purpose of:
(i) maximizing food productivity in the agriculture areas of the country, (ii)
enhancing the upliftment and well-being of the living conditions of farmers
and agricultural workers, (iii) developing viable industries and business
opportunities in the countryside, (iv) providing alternative means of
livelihood to the direct dependents of agriculture businesses and
enterprises, and (v) providing financial assistance and support to coconut
farmers in times of economic hardship due to extremely low prices of copra
and other coconut products, natural calamities, world market dislocation
and similar occurrences, including financial support to the ERAP’s Sagip
Niyugan Program established under Executive Order No. 312 dated
November 3, 2000; x x x. (Emphasis ours)
Clearly, E.O. 313 above runs counter to the constitutional provision which
directs that all money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such purpose only.72
Assisting other agriculturally-related programs is way off the coco-fund’s
objective of promoting the general interests of the coconut industry and its
farmers.
A final point, the E.O.s also transgress P.D. 1445,73 Section 84(2),74 the
first part by the previously mentioned sections of E.O. 313 and the second
part by Section 4 of E.O. 312 and Sections 6 and 7 of E.O. 313. E.O. 313
vests the power to administer, manage, and supervise the operations and
disbursements of the Trust Fund it established (capitalized with SMC
shares bought out of coco-levy funds) in a Coconut Trust Fund Committee.
Thus–
Section 6. Creation of the Coconut Trust Fund Committee. — A Committee
is hereby created to administer, manage and supervise the operations of
the Trust Fund, chaired by the President with ten (10) members, as follows:
(a) four (4) representatives from the government sector, two of whom shall
be the Secretary of Agriculture and the Secretary of Agrarian Reform who
shall act as Vice Chairmen;
(b) four (4) representatives from coconut farmers’ organizations, one of
whom shall come from a list of nominees from the Philippine Coconut
Producers Federation Inc. ("COCOFED");
(c) a representative from the CIIF; and
(d) a representative from a non-government organization (NGO) involved
in agricultural and rural development.
All decisions of the Coconut Trust Fund Committee shall be determined by
a majority vote of all the members.
The Coconut Trust Fund Committee shall perform the functions and duties
set forth in Section 7 hereof, with the skill, care, prudence and diligence
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necessary under the circumstances then prevailing that a prudent man
acting in like capacity would exercise.
The members of the Coconut Trust Fund Committee shall be appointed by
the President and shall hold office at his pleasure.
The Coconut Trust Fund Committee is authorized to hire administrative,
technical and/or support staff as may be required to enable it to effectively
perform its functions and responsibilities. (Emphasis ours)
Section 7. Functions and Responsibilities of the Committee. — The
Coconut Trust Fund Committee shall have the following functions and
responsibilities:
(a) set the investment policy of the Trust Fund;
(b) establish priorities for assistance giving preference to small coconut
farmers and farmworkers which shall be reviewed periodically and revised
as necessary in accordance with changing conditions;
(c) receive, process and approve project proposals for financing by the
Trust Fund;
(d) decide on the use of the Trust Fund’s income or net earnings including
final action on applications for assistance, grants and/or loans;
(e) avail of professional counsel and services by retaining an investment
and financial manager, if desired;
(f) formulate the rules and regulations governing the allocation, utilization
and disbursement of the Fund; and
(g) perform such other acts and things as may be necessary proper or
conducive to attain the purposes of the Fund. (Emphasis ours)
Section 4 of E.O. 312 does essentially the same thing. It vests the
management and disposition of the assistance fund generated from the
sale of coco-levy fund-acquired assets into a Committee of five members.
Thus, Section 4 of E.O. 312 provides –
Section 4. Funding. – Assets acquired through the coconut levy funds or
by entities financed by the coconut levy funds identified by the President
for appropriate disposal or sale, shall be sold or disposed to generate a
maximum fund of ONE BILLION PESOS (₱1,000,000,000.00) which shall
be managed by a Committee composed of a Chairman and four (4)
members to be appointed by the President whose term shall be co-
terminus with the Program. x x x (Emphasis ours)
In effect, the above transfers the power to allocate, use, and disburse
coco-levy funds that P.D. 232 vested in the PCA and transferred the same,
without legislative authorization and in violation of P.D. 232, to the
Committees mentioned above. An executive order cannot repeal a
presidential decree which has the same standing as a statute enacted by
Congress.
UCPB invokes the principle of separability to save the assailed laws from
being struck down. The general rule is that where part of a statute is void
as repugnant to the Constitution, while another part is valid, the valid
portion, if susceptible to being separated from the invalid, may stand and
be enforced. When the parts of a statute, however, are so mutually
dependent and connected, as conditions, considerations, or
compensations for each other, as to warrant a belief that the legislature
intended them as a whole, the nullity of one part will vitiate the rest. In
which case, if some parts are unconstitutional, all the other provisions
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which are thus dependent, conditional, or connected must consequently
fall with them.75

But, given that the provisions of E.O.s 312 and 313, which as already
stated invalidly transferred powers over the funds to two committees that
President Estrada created, the rest of their provisions became non-
operational. It is evident that President Estrada would not have created the
new funding programs if they were to be managed by some other entity.
Indeed, he made himself Chairman of the Coconut Trust Fund and left to
his discretion the appointment of the members of the other committee.

WHEREFORE, the Court GRANTS the petition in G.R. 147036-37,

PARTLY GRANTS the petition in G.R. 147811, and declares the following
VOID:

a) E.O. 312, for being repugnant to Section 84(2) of P.D. 1445, and Article
IX-D, Section 2(1) of the Constitution; and

b) E.O. 313, for being in contravention of Section 84(2) of P.D. 1445, and
Article IX-D, Section 2(1) and Article VI, Section 29(3) of the Constitution.

The Court has previously declared Section 2 of P.D. 755 and Article III,
Section 5 of P.D.s 961 and 1468 unconstitutional.

SO ORDERED.

ROBERTO A. ABAD
Associate Justice
__________________________________________________________
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