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TAXATION 1: CASES

G.R. No. 147188 September 14, 2004


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario
Luza Bautista, respondents.
DECISION

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes
tax evasion that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision 1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799
affirming the 3 January 2000 Decision 2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that the
respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC)
in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued
by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency
income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated
on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding
capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not
less than P90 million.4

On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the same notary public. 5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other things, its
gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00, it paid
P26,341,2078 for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed
of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice 10 and demand letter to the CIC for
deficiency income tax for the year 1989 in the amount of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not
against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold
the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989. 11

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment 12 dated 9 January 1995 from the Commissioner of Internal Revenue
for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:

Income Tax – 1989

Net Income per return P75,987,725.00


Add: Additional gain on sale of real property taxable
under ordinary corporate income but were substituted 100,000,000.00
with individual capital gains(P200M – 100M)
Total Net Taxable Income per investigation P175,987,725.00
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains Tax made
by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due

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P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94

Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22


==============

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was
deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100
million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the
building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review 15 with the CTA alleging that the Commissioner erred in holding
the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and
unsupported; and that the right of the Commissioner to assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single
sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the
same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200
million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as
capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by
CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was
discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive
period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be
assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate
corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of
CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC,
should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by
him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability.

In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC,
the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the
applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after
the last day prescribed by law for the filing of the return. Thus, the government’s right to assess CIC prescribed on 15
April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate
corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of
P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of
the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close
business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign
corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied 20 the motion for
reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the
CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to
determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate." 22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following
grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH
INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE
CORPORATION.

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II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further
points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on
the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the
alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana
as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same
Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount
was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40
million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove
that the latter is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. 23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known
by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state
of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of
action or failure of action which is unlawful. 24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported
sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from
Altonaga. That P40 million was debited by RMI and reflected in its trial balance 26 as "other inv. – Cibeles Bldg." Also, as of
31 July 1989, another P40 million was debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg." This
would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many
trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC
and an old timer in the company. 27 But Mr. Prieto did not testify on this matter, hence, that information remains to be
hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of
Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax
planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred
percent. But isn’t this precisely the definition of tax planning? Change the structure of the funds and pay a lower
tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the
structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a
transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with
fraud.

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Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to
another, or by which an undue and unconscionable advantage is taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the
transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day
was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax
liabilities than for legitimate business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. 32 The incidence of
taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are
not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed
as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by
one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which
to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax
liabilities, would seriously impair the effective administration of the tax policies of Congress. 33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it
is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga
should be disregarded for income tax purposes. 34 The two sale transactions should be treated as a single direct sale by CIC
to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the
Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax
provided for in Section 34 (h) of the NIRC of 1986 35 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is
inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or
fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in
court after the collection of such tax may be begun without assessment, at any time within ten years after the
discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection
thereof… .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return,
the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax
consequence of the two sale transactions. 36 Thus, the BIR was amply informed of the transactions even prior to the
execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the
execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the
existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that
there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or

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actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax
liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery
of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only
on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the
issuance of the correct assessment for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners
or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa.
There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that
personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly
attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its
affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held
himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of
the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations,
contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of
Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles
for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CIC’s deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Toda’s contractual undertaking, as contained in the
Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering
respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation
for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent.

SO ORDERED.

Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

G.R. No. L-69259 January 26, 1988


DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention
that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades
Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease
contract.

Briefly, the facts of the case are summarized as follows:

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TAXATION 1: CASES
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified
as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila)
which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry.

On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and
providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased
shall first offer the same to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5)

On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the
contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin
Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)

The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the
parties (Exhs. A to D-3 inclusive)

On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant
Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together
with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of
stock of defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under
conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin
Pacheco.

After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads:

ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to
acquire the subject property (right of first refusal) and ordering the defendants and all persons deriving rights
therefrom to convey the said property to plaintiff who may offer to acquire the same at the rate of P14.00 per square
meter, more or less, for Lot 1095 whose area is 27,169 square meters only. Without pronouncement as to attorney's fees
and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.

The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.

We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it
due course.

The petitioners allege that:

The denial of the petition will work great injustice to the petitioners, in that:

1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial
land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll
expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is approximately
P300/sq. meter or P8.1 Million;

2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual
ownership interests by petitioners to third parties; and

3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the
land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided
in the same contractual provision invoked by private respondent. (pp. 251-252, Rollo)

The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the
one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the
private respondent's right of first refusal over the leased property included in the "deed of exchange."

Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia
Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land
leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro
Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a
deed of exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares;

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and that at the time of incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the
petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)

Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of
land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial
ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of actual
ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's shares of
stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere
alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there
being in substance and in effect an Identity of interest." (p. 254, Rollo)

The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged
the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract.
There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is
a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)

On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct
from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or
conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate
entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that there was
actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in
exchange for the latter's shares of stock.

We rule for the petitioners.

After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the
corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa.,
609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of
stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription
"The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or
to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,
Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties.

A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by
value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this
character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of
par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount
of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates
that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they
may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons
interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts.
(Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square
meter was turned over to the family's corporation for only P14.00 a square meter.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their
equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group.

In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their
properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on inheritance taxes.

As explained by Eduardo Neria:

xxx xxx xxx

ATTY. LINSANGAN:

Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in
connection with their execution of a deed of exchange on the properties for no par value shares of the defendant
corporation?

A Yes, sir.

COURT:

Q What do you mean by "point of view"?

7
TAXATION 1: CASES
A To take advantage for both spouses and corporation in entering in the deed of exchange.

ATTY. LINSANGAN:

Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange?

A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation.

Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of exchange?

A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to
execute the deed of exchange free from income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?

A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the
provision which I quote: "No gain or loss shall also be recognized if a person exchanges his property for stock in a
corporation of which as a result of such exchange said person alone or together with others not exceeding four persons
gains control of said corporation."

Q Did you explain to the spouses this benefit at the time you executed the deed of exchange?

A Yes, sir

Q You also, testified during the last hearing that the decision to have no par value share in the defendant corporation
was for the purpose of flexibility. Can you explain flexibility in connection with the ownership of the property in
question?

A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing
capitalization. The board can fix the value of the shares equivalent to the capital requirements of the corporation.

Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in
question?

A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50
years. On the other hand, if the property is held by the spouse the property will be tied up in succession proceedings
and the consequential payments of estate and inheritance taxes when an owner dies.

Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect
to taxation?

A The property is not subjected to taxes on succession as the corporation does not die.

Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos.
"The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory
v. Helvering, 293 U.S. 465, 7 L. ed. 596).

The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of
sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed
their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no
basis for its claim of a light of first refusal under the lease contract.

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate
Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First
Instance of Bulacan is DISMISSED. No costs.

SO ORDERED.

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

Feliciano, J., took no part.

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G.R. No. 175356 December 3, 2013

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


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

DECISION

DEL CASTILLO, J.:

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

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

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

Factual Antecedents

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

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

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

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

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

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

e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines to be issued by the
Department of Health, the Government Service Insurance System and the Social Security System;

f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the Government Service Insurance
System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be, as are enjoyed by those in actual service.

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

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

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

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TAXATION 1: CASES
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn, the Implementing
Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny such credit, despite the plain
mandate of the law and the regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is erroneous.
It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes." In ordinary
business language, the tax credit represents the amount of such discount. However, the manner by which the discount shall be credited
against taxes has not been clarified by the revenue regulations. By ordinary acceptation, a discount is an "abatement or reduction made
from the gross amount or value of anything." To be more precise, it is in business parlance "a deduction or lowering of an amount of
money;" or "a reduction from the full amount or value of something, especially a price." In business there are many kinds of discount,
the most common of which is that affecting the income statement or financial report upon which the income tax is based.

xxxx

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

Laws Not Amended by Regulations

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

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a regulation or any portion thereof
not adopted pursuant to law is no law and has neither the force nor the effect of law.7

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

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

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the exclusive use or enjoyment
of senior citizens, including funeral and burial services for the death of senior citizens;

xxxx

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost of the goods sold or
services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year
that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.

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

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME. – Establishments
enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale of goods and/or services specified
thereunder are entitled to deduct the said discount from gross income subject to the following conditions:

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

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

(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted
from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the
business enterprise concerned, for VAT or other percentage tax purposes.

(4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted.

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TAXATION 1: CASES
(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record[s] of
sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of
[transaction] and invoice number for every sale transaction to senior citizen.

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

xxxx

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

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

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted under Rule V, Section 4 – Discounts
for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections 10 and 11 – Air, Sea and Land
Transportation as tax deduction based on the net cost of the goods sold or services rendered.

Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is
granted; Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in
their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal
Revenue Code, as amended; Provided, finally, that the implementation of the tax deduction shall be subject to the Revenue Regulations
to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF).

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

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.

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

Petitioners’ Arguments

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

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

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

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation16 that the tax deduction scheme adopted by the
government is justified by police power.17

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

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

11
TAXATION 1: CASES
Petitioners also contend that the tax deduction scheme violates Article XV, Section 421 and Article XIII, Section 1122 of the Constitution
because it shifts the State’s constitutional mandate or duty of improving the welfare of the elderly to the private sector.23

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

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

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

Respondents’ Arguments

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

They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax deduction treatment is not a "fair
and full equivalent of the loss sustained" by them.29

As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that petitioners failed to
overturn its presumption of constitutionality.30

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

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

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

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

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

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

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

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

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a
mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly
compensated for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior
citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount
privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted
from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the
income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the
discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their
total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes
compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the

12
TAXATION 1: CASES
full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s
loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the
senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of
whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the
burden of partly subsidizing a government program. The Court believes so. The Senior Citizens Act was enacted primarily to maximize
the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being
as the State considers them an integral part of our society. The priority given to senior citizens finds its basis in the Constitution as set
forth in the law itself. Thus, the Act provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. — Pursuant to Article XV, Section 4 of the Constitution, it is the duty of the family
to take care of its elderly members while the State may design programs of social security for them. In addition to this, Section 10 in the
Declaration of Principles and State Policies provides: "The State shall provide social justice in all phases of national development."
Further, Article XIII, Section 11, provides: "The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall
be priority for the needs of the underprivileged sick, elderly, disabled, women and children." Consonant with these constitutional
principles the following are the declared policies of this Act:

………

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to actively seek their
partnership.

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar places of culture,
leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of
reimbursement, the law provides that business establishments extending the twenty percent discount to senior citizens may claim the
discount as a tax deduction. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions
and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least
limitable of powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the constitution to
make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without,
not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the
same." For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of
police power because property rights, though sheltered by due process, must yield to general welfare. Police power as an attribute to
promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and
capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of
the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor.
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business,
because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to
show properly whether or not the tax deduction scheme really works greatly to their disadvantage. In treating the discount as a tax
deduction, petitioners insist that they will incur losses because, referring to the DOF Opinion, for every P1.00 senior citizen discount
that petitioners would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of a tax
deduction. To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an example.
According to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%). If it
grants a 20% discount to senior citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which translates
to a loss from capital of P5.89 per tablet. Even if the government will allow a tax deduction, only P2.53 per tablet will be refunded and
not the full amount of the discount which is P7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores.
Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the discount shall be deducted from
gross income, the amount of income derived from all sources before deducting allowable expenses, which will result in net income.
Here, petitioners tried to show a loss on a per transaction basis, which should not be the case. An income statement, showing an
accounting of petitioners' sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the
discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss
should they give the discount. In addition, the computation was erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the cutthroat
nature of the players in the industry. It is a business decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right, petitioners
cannot reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of losing their customers
to competition. The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of
the business. While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the
exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the
process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for the protection of
property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and public utilities,
continuously serve as x x x reminder[s] that the right to property can be relinquished upon the command of the State for the promotion
of public good. Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the
other private establishments concerned. This being the case, the means employed in invoking the active participation of the private
sector, in order to achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4
(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a legislative act.36 (Bold in the original; underline supplied)

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TAXATION 1: CASES
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of the State.

No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug Corporation.

Petitioners argue that we have previously ruled in Central Luzon Drug Corporation37 that the 20% discount is an exercise of the power
of eminent domain, thus, requiring the payment of just compensation. They urge us to re-examine our ruling in Carlos Superdrug
Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation.39

They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction scheme under the assailed law does not
provide for sufficient just compensation. We agree with petitioners’ observation that there are statements in Central Luzon Drug
Corporation41 describing the 20% discount as an exercise of the power of eminent domain, viz.:

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

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

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a
mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly
compensated for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior
citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount
privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted
from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the
income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not
reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the
discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their
total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes
compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the
full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s
loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the
senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of
whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the
burden of partly subsidizing a government program. The Court believes so.44

This, notwithstanding, we went on to rule in Carlos Superdrug Corporation45 that the 20% discount and tax deduction scheme is a
valid exercise of the police power of the State. The present case, thus, affords an opportunity for us to clarify the above-quoted
statements in Central Luzon Drug Corporation46 and Carlos Superdrug Corporation.47

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation48 is obiter dicta and, thus, not
binding precedent. As stated earlier, in Central Luzon Drug Corporation,49 we ruled that the BIR acted ultra vires when it effectively
treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the previous law that
the same should be treated as a tax credit. We were, therefore, not confronted in that case with the issue as to whether the 20% discount
is an exercise of police power or eminent domain. Second, although we adverted to Central Luzon Drug Corporation50 in our ruling in
Carlos Superdrug Corporation,51 this referred only to preliminary matters. A fair reading of Carlos Superdrug Corporation52 would
show that we categorically ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current law, through
its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a peso for peso

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reimbursement of the 20% discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise
of police power, payment of just compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos
Superdrug Corporation53 and we find no cogent reason to overturn, modify or abandon it. We also note that petitioners’ arguments are
a mere reiteration of those raised and resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug Corporation.55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug Corporation56 as to why the 20%
discount is a valid exercise of police power and why it may not, under the specific circumstances of this case, be considered as an
exercise of the power of eminent domain contrary to the obiter in Central Luzon Drug Corporation.57

Police power versus eminent domain.

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

The only limitation is that the restriction imposed should be reasonable, not oppressive.59

In other words, to be a valid exercise of police power, it must have a lawful subject or objective and a lawful method of accomplishing
the goal.60

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

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

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

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

Traditional distinctions exist between police power and eminent domain. In the exercise of police power, a property right is impaired
by regulation,65 or the use of property is merely prohibited, regulated or restricted66 to promote public welfare. In such cases, there is
no compensable taking, hence, payment of just compensation is not required. Examples of these regulations are property condemned
for being noxious or intended for noxious purposes (e.g., a building on the verge of collapse to be demolished for public safety, or
obscene materials to be destroyed in the interest of public morals)67 as well as zoning ordinances prohibiting the use of property for
purposes injurious to the health, morals or safety of the community (e.g., dividing a city’s territory into residential and industrial
areas).68

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

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

Examples of these include establishment of easements such as where the land owner is perpetually deprived of his proprietary rights
because of the hazards posed by electric transmission lines constructed above his property71 or the compelled interconnection of the
telephone system between the government and a private company.72

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

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

It may not always be easy to determine whether a challenged governmental act is an exercise of police power or eminent domain. The
very nature of police power as elastic and responsive to various social conditions73 as well as the evolving meaning and scope of public
use74 and just compensation75 in eminent domain evinces that these are not static concepts. Because of the exigencies of rapidly
changing times, Congress may be compelled to adopt or experiment with different measures to promote the general welfare which may
not fall squarely within the traditionally recognized categories of police power and eminent domain. The judicious approach, therefore,
is to look at the nature and effects of the challenged governmental act and decide, on the basis thereof, whether the act is the exercise of
police power or eminent domain. Thus, we now look at the nature and effects of the 20% discount to determine if it constitutes an
exercise of police power or eminent domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age,
are less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably spent the
productive years of their lives on contributing to the development and progress of the nation. This distinct cultural Filipino practice of
honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount is a regulation affecting the ability of
private establishments to price their products and services relative to a special class of individuals, senior citizens, for which the
Constitution affords preferential concern.76

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

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

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

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

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

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

We adopted a similar line of reasoning in Carlos Superdrug Corporation85 when we ruled that petitioners therein failed to prove that
the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a financial report, to establish the impact
of the 20% discount on the overall profitability of petitioners was presented in order to show that they would be operating at a loss due
to the subject regulation or that the continued implementation of the law would be unconscionably detrimental to the business
operations of petitioners. In the case at bar, petitioners proceeded with a hypothetical computation of the alleged loss that they will
suffer similar to what the petitioners in Carlos Superdrug Corporation86 did. Petitioners went directly to this Court without first
establishing the factual bases of their claims. Hence, the present recourse must, likewise, fail. Because all laws enjoy the presumption of
constitutionality, courts will uphold a law’s validity if any set of facts may be conceived to sustain it.87

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

Conclusion

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In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will force establishments
to raise their prices in order to compensate for its impact on overall profits or income/gross sales. The general public, or those not
belonging to the senior citizen class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in petitioners’ view, is
unfair.

As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more importantly, this goes into
the wisdom, efficacy and expediency of the subject law which is not proper for judicial review. In a way, this law pursues its social
equity objective in a non-traditional manner unlike past and existing direct subsidy programs of the government for the poor and
marginalized sectors of our society. Verily, Congress must be given sufficient leeway in formulating welfare legislations given the
enormous challenges that the government faces relative to, among others, resource adequacy and administrative capability in
implementing social reform measures which aim to protect and uphold the interests of those most vulnerable in our society. In the
process, the individual, who enjoys the rights, benefits and privileges of living in a democratic polity, must bear his share in supporting
measures intended for the common good. This is only fair. In fine, without the requisite showing of a clear and unequivocal breach of
the Constitution, the validity of the assailed law must be sustained.

Refutation of the Dissent

The main points of Justice Carpio’s Dissent may be summarized as follows: (1) the discussion on eminent domain in Central Luzon
Drug Corporation89 is not obiter dicta ; (2) allowable taking, in police power, is limited to property that is destroyed or placed outside
the commerce of man for public welfare; (3) the amount of mandatory discount is private property within the ambit of Article III,
Section 990 of the Constitution; and (4) the permanent reduction in a private establishment’s total revenue, arising from the mandatory
discount, is a taking of private property for public use or benefit, hence, an exercise of the power of eminent domain requiring the
payment of just compensation. I We maintain that the discussion on eminent domain in Central Luzon Drug Corporation91 is obiter
dicta. As previously discussed, in Central Luzon Drug Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94, treated the
senior citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite the clear provision in that law
which stated –

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

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

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

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross
income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been
computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations
cannot amend or revoke the law.93

As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at this conclusion. All that was needed
was to point out that the revenue regulation contravened the law which it sought to implement. And, precisely, this was done in
Central Luzon Drug Corporation94 by comparing the wording of the previous law vis-à-vis the revenue regulation; employing the
rules of statutory construction; and applying the settled principle that a regulation cannot amend the law it seeks to implement. A close
reading of Central Luzon Drug Corporation95 would show that the Court went on to state that the tax credit "can be deemed" as just
compensation only to explain why the previous law provides for a tax credit instead of a tax deduction. The Court surmised that the
tax credit was a form of just compensation given to the establishments covered by the 20% discount. However, the reason why the
previous law provided for a tax credit and not a tax deduction was not necessary to resolve the issue as to whether the revenue
regulation contravenes the law. Hence, the discussion on eminent domain is obiter dicta.

A court, in resolving cases before it, may look into the possible purposes or reasons that impelled the enactment of a particular statute
or legal provision. However, statements made relative thereto are not always necessary in resolving the actual controversies presented
before it. This was the case in Central Luzon Drug Corporation96 resulting in that unfortunate statement that the tax credit "can be
deemed" as just compensation. This, in turn, led to the erroneous conclusion, by deductive reasoning, that the 20% discount is an
exercise of the power of eminent domain. The Dissent essentially adopts this theory and reasoning which, as will be shown below, is
contrary to settled principles in police power and eminent domain analysis. II The Dissent discusses at length the doctrine on "taking"
in police power which occurs when private property is destroyed or placed outside the commerce of man. Indeed, there is a whole class
of police power measures which justify the destruction of private property in order to preserve public health, morals, safety or welfare.
As earlier mentioned, these would include a building on the verge of collapse or confiscated obscene materials as well as those
mentioned by the Dissent with regard to property used in violating a criminal statute or one which constitutes a nuisance. In such
cases, no compensation is required. However, it is equally true that there is another class of police power measures which do not
involve the destruction of private property but merely regulate its use. The minimum wage law, zoning ordinances, price control laws,
laws regulating the operation of motels and hotels, laws limiting the working hours to eight, and the like would fall under this
category. The examples cited by the Dissent, likewise, fall under this category: Article 157 of the Labor Code, Sections 19 and 18 of the
Social Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to use the term of the Dissent, burden the
conduct of the affairs of business establishments. In such cases, payment of just compensation is not required because they fall within
the sphere of permissible police power measures. The senior citizen discount law falls under this latter category. III The Dissent
proceeds from the theory that the permanent reduction of profits or income/gross sales, due to the 20% discount, is a "taking" of
private property for public purpose without payment of just compensation. At the outset, it must be emphasized that petitioners never
presented any evidence to establish that they were forced to suffer enormous losses or operate at a loss due to the effects of the assailed
law. They came directly to this Court and provided a hypothetical computation of the loss they would allegedly suffer due to the
operation of the assailed law. The central premise of the Dissent’s argument that the 20% discount results in a permanent reduction in

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profits or income/gross sales, or forces a business establishment to operate at a loss is, thus, wholly unsupported by competent
evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary, oppressive or confiscatory.97

But this is not the case here.

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

Under the assailed law, the aforesaid product would have to be sold at P8.00 to senior citizens yet the business would still earn
P3.00102 or a 30%103 profit margin. On the other hand, if the product costs P9.00 to produce and is required to be sold at P8.00 to
senior citizens, then the business would experience a loss of P1.00.104

But note that since not all customers of a business establishment are senior citizens, the business establishment may continue to earn
P1.00 from non-senior citizens which, in turn, can offset any loss arising from sales to senior citizens.

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

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

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

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

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

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

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

18
TAXATION 1: CASES
illustrated above),108 and not all private establishments make a 20% profit margin (which conversely implies that there are those who
make more and, thus, would not be greatly affected by this regulation).109

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

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

Two things may be said of this argument. First, it contradicts the rest of the arguments of the Dissent. After it states that the issue of
profit or loss is immaterial, the Dissent proceeds to argue that the 20% discount is not a minimal loss 111 and that the 20% discount
forces business establishments to operate at a loss.112

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

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

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

V.

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

The above paragraph, in full, states –

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

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

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

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

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

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TAXATION 1: CASES
The point then is this – most, if not all, regulatory measures imposed by the State on business establishments impact, at some level, the
latter’s prices and/or profits or income/gross sales.123

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

Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they
will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the
alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which
every law has in its favor.

xxxx

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business.
While the Constitution protects property rights petitioners must the realities of business and the State, in the exercise of police power,
can intervene in the operations of a business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the percept for the protection of
property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and public utilities,
continously serve as a reminder for the promotion of public good.

Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the other private
establishments concerned. This being the case, the means employed in invoking the active participation of the private sector, in order to
achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of R.A. No.
9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to petitioners, the Court
will refrain form quashing a legislative act.125

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

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

SO ORDERED.

EN BANC

G.R. No. 92585 May 8, 1992


CALTEX PHILIPPINES, INC., petitioner,
vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and
HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of the Commission on Audit
(COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of
said Commission's decision denying its claims for recovery of financing charges from the Fund and reimbursement of underrecovery
arising from sales to the National Power Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and
Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances against its
reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the Office of Energy Affairs
(OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3 may be brought to this Court on
certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings of the administrator
of the fund itself and in disallowing a claim which is still pending resolution at the OEA level, and (b) "grave abuse of discretion and
completely without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it may be required
under the law to remit to the OPSF against any amount that it may receive by way of reimbursement therefrom are sufficient to bring
this petition within Rule 65 of the Rules of Court, and, considering further the importance of the issues raised, the error in the
designation of the remedy pursued will, in this instance, be excused.

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TAXATION 1: CASES
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as amended by Executive
Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to be designated as Oil Price
Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes brought about by exchange rate adjustments
and/or changes in world market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund may
be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products subject to
tax under this Decree arising from exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as may be
determined by the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate
Order that may be issued by the Board of Energy requiring payment by persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using the reference foreign exchange rate as fixed by the Board of
Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported petroleum products resulting from exchange
rate adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the reduction of domestic prices of
petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner, directing the latter to
remit to the OPSF its collection, excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum products
authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and informing it
that, pending such remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA showed that the grand
total of its unremitted collections of the above tax is P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the letter; advising it that the
COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF; and directing it to desist from further offsetting
the taxes collected against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates from the OPSF covering
claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in support thereof COA Circular No. 89-299 on the
lifting of pre-audit of government transactions of national government agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the
OPSF and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate
COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of the collections and the
recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of said claims
against the
OPSF will cause a very serious impairment of its cash position. 10 The proposal reads:

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TAXATION 1: CASES
We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and reimbursements will be
administered by the ERB/Finance Dept./OEA, as agencies designated by law to administer /regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA will deliver to
Caltex the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to preclude further accumulation of reimbursement
from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the above-stated proposal but
prohibiting petitioner from further offsetting remittances and reimbursements for the current and ensuing years. 11 Decision No. 921
reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation, and Mr. Francis Ablan,
President and Managing Director, Caltex (Philippines) Inc., for reconsideration of this Commission's adverse action embodied
in its letters dated February 2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization
Fund of collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter reiterating the
same directive but further advising the firms to desist from offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the aforenamed oil companies
were allowed to offset the amounts due to the Oil Price Stabilization Fund against their outstanding claims from the said Fund
for the calendar years 1987 and 1988, pending with the then Ministry of Energy, the government entity charged with
administering the OPSF. This Commission, however, expressing serious doubts as to the propriety of the offsetting of all types
of reimbursements from the OPSF against all categories of remittances, advised these oil companies that such offsetting was
bereft of legal basis. Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly manifest
their intent to make arrangements for the remittance to the Office of Energy Affairs of the amount of collections equivalent to
what has been previously offset, provided that this Commission authorizes the Office of Energy Affairs to prepare the
corresponding checks representing reimbursement from the OPSF. It is alleged that the implementation of such an
arrangement, whereby the remittance of collections due to the OPSF and the reimbursement of claims from the Fund shall be
made within a period of not more than one week from each other, will benefit the Fund and not unduly jeopardize the
continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no further objectionable
feature in the proposed arrangement, provided that 15% of whatever amount is due from the Fund is retained by the Office of
Energy Affairs, the same to be answerable for suspensions or disallowances, errors or discrepancies which may be noted in the
course of audit and surcharges for late remittances without prejudice to similar future retentions to answer for any deficiency
in such surcharges, and provided further that no offsetting of remittances and reimbursements for the current and ensuing
years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao R. De la Paz of the
Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial verification of documents
submitted to us by your Office in support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as
its outstanding claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office
that Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906, representing remittances to the
OPSF which were offset against its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby
authorize (sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially
allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535, which included P130,420,235
representing those claims disallowed by OEA, details of which is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a


Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

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TAXATION 1: CASES
Disallowances of OEA 130,420,235
————————— ——————
Total

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of financing charges by oil
companies is not among the items for which the OPSF may be utilized. Therefore, it is our view that recovery of financing
charges has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095 indicating that (sic) February
7, 1987 as the effectivity date that (sic) oil companies should pay OPSF impost on export sales of petroleum products. Effective
February 7, 1987 sales to international vessels/airlines should not be included as part of its domestic sales. Changing the
effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by subsequent ERB Resolution No. 88-12
dated November 18, 1988 has allowed Caltex to include in their domestic sales volumes to international vessels/airlines and
claim the corresponding reimbursements from OPSF during the period. It is our opinion that the effectivity of the said
resolution should be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA agreement, as they affect
the claims for reimbursements of ad valorem taxes. We observed that oil companies immediately settle ad valorem taxes for BLA
transaction (sic). Loan balances therefore are not tax paid inventories of Caltex subject to reimbursements but those of the
borrower. Hence, we recommend reduction of the claim for July, August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of payment of all taxes, duties, fees,
imposts and other charges whether direct or indirect due and payable by the copper mining companies in distress to the
national and local governments." It is our opinion that LOI 1416 which implements the exemption from payment of OPSF
imposts as effected by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein authorized shall be subject to
availability of funds of OPSF as of May 31, 1989 and applicable auditing rules and regulations. With regard to the
disallowances, it is further informed that the aggrieved party has 30 days within which to appeal the decision of the
Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS, RESOLUTIONS, CIRCULARS
ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE
ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER BY DEPARTMENT


OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED
UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE EXECUTIVE BRANCH OF
GOVERNMENT, REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez dissenting in part, handed
down Decision No. 1171 affirming the disallowance for recovery of financing charges, inventory losses, and sales to MARCOPPER and
ATLAS, while allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to recover financing charges from
the OPSF on the basis of Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil companies to
"recover cost of financing working capital associated with crude oil shipments," and provided a schedule of reimbursement in
terms of peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the President of the
Philippines explaining the nature of these financing charges and justifying their reimbursement as follows:

24
TAXATION 1: CASES
As part of your program to promote economic recovery, . . . oil companies (were authorized) to refinance their
imports of crude oil and petroleum products from the normal trade credit of 30 days up to 360 days from date of
loading . . . Conformably . . ., the oil companies deferred their foreign exchange remittances for purchases by
refinancing their import bills from the normal 30-day payment term up to the desired 360 days. This refinancing of
importations carried additional costs (financing charges) which then became, due to government mandate, an
inherent part of the cost of the purchases of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil costs and the schedule of
reimbursement rate in peso per barrel (Exhibit 1) used to support alleged increase (sic) were not validated in our independent
inquiry. As manifested in Exhibit 2, using the same formula which the DOF used in arriving at the reimbursement rate but
using comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies are actually gaining rather
than losing from the extension of credit because such extension enables them to invest the collections in marketable securities
which have much higher rates than those they incur due to the extension. The Data we used were obtained from CPI
(CALTEX) Management and can easily be verified from our records.

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is believed that export sales
(product sales) are entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of this Commission that the
OPSF is not liable to refund such surtax on inventory losses because these are paid to BIR and not OPSF, in view of which CPI
(CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim recovery from the OPSF
pursuant to LOI 1416 issued on July 17, 1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF
imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has no authority to claim
reimbursement for this uncollected OPSF impost because LOI 1416 dated July 17, 1984, which exempts distressed mining
companies from "all taxes, duties, import fees and other charges" was issued when OPSF was not yet in existence and could
not have contemplated OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the COA the commission of
the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING


CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON SALES TO ATLAS AND
MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT TO OFFSET ITS
REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL PENDING RESOLUTION BY ( SIC)
THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of the Solicitor General, filed
their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their respective Memoranda
within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6 September 1990 be
considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

25
TAXATION 1: CASES
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the reduction of domestic prices of
petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may include financing
charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude oil incurred by the oil companies," as
explained in the 6 November 1989 Memorandum to the President of the Department of Finance; they "directly translate to cost
underrecovery in cases where the money market placement rates decline and at the same time the tax on interest income increases. The
relationship is such that the presence of underrecovery or overrecovery is directly dependent on the amount and extent of financing
charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of Department of Finance
Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude oil shipments, the following
guidelines on the utilization of the Oil Price Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk
premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the first (6) months and
1/32 of one percent per month thereafter up to a maximum period of one year, to be applied on crude oil' shipments
from January 1, 1987. Shipments with outstanding financing as of January 1, 1987 shall be charged on the basis of the
fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to recover financing charges
directly from the OPSF per barrel of crude oil based on the following schedule:

Financing Period Reimbursement Rate


Pesos per Barrel

Less than 180 days None


180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty


days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO


Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and subsequent discussions held by the Price
Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to reduce the foreign exchange
risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such a reduction would allow the industry to recover partly
associated financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat
charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of one year, effective
January 1, 1987. In addition, since the prevailing company take would still leave unrecovered financing charges,
reimbursement may be secured from the OPSF in accordance with the provisions of the attached Department of Finance
circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the computation of the
foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

26
TAXATION 1: CASES
1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both crude and product shipments
loaded after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate


(PBbl.)

Less than 180 days None


180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines on the recoverability of
financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18, 1987 which allowed the
recovery of financing charges directly from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost differential for a particular
shipment and duly certified supporting documents provided for under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued by the Office of Energy Affairs.
The said certificate may be used to offset against amounts payable to the OPSF. The oil companies may also redeem said
certificates in cash if not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the determination of
executive agencies. The determination by the Department of Finance and the OEA that financing charges are recoverable from the
OPSF is entitled to great weight and consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing
certain expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner is gaining, instead of
losing, from the extension of credit, is belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary government expenditures and
as the monetary claims of petitioner are not allowed by law, the COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the OPSF pursuant to E.O. No.
137 can only include "factors which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department of Finance violates P.D.
No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow reimbursement of financing

charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner –– that such does not
extend to the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or use of government
funds and properties, but only to the promulgation of accounting and auditing rules for, among others, such disallowance –– to be
untenable in the light of the provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). 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 and
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

27
TAXATION 1: CASES
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.

These present powers, consistent with the declared independence of the Commission, 30
are broader and more extensive than that
conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues, 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, keep the general
accounts of the Government and, for such period as may be provided by law, preserve the vouchers pertaining thereto; and
promulgate accounting and auditing rules and regulations including those for the prevention of irregular, unnecessary,
excessive, or extravagant expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General Auditing Office, were,
unfortunately, limited; its very role was markedly passive. Section 2 of Article XI thereof provided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues and receipts from whatever
source, including trust funds derived from bond issues; and audit, in accordance with law and administrative regulations, all
expenditures of funds or property pertaining to or held in trust by the Government or the provinces or municipalities thereof.
He shall keep the general accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the duty of
the Auditor General to bring to the attention of the proper administrative officer expenditures of funds or property which, in
his opinion, are irregular, unnecessary, excessive, or extravagant. He shall also perform such other functions as may be
prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of funds, the 1935
Constitution did not grant the Auditor General the power to issue rules and regulations to prevent the same. His was merely to bring
that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32 and Ramos vs. Aquino, 33 are no longer
controlling as the two (2) were decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and the Commission on
Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds or uses of funds and property. Our present
Constitution retains that same power and authority, further strengthened by the definition of the COA's general jurisdiction in Section
26 of the Government Auditing Code of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate
accounting and auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant expenditures or
uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible for the enforcement of
the rules and regulations, it goes without saying that failure to comply with them is a ground for disapproving the payment of the
proposed expenditure. As observed by one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the Auditor General could not
correct "irregular, unnecessary, excessive or extravagant" expenditures of public funds but could only "bring [the matter] to
the attention of the proper administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the
Commission on Audit can "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." Hence, since the Commission on Audit must ultimately be responsible for the enforcement of these rules and
regulations, the failure to comply with these regulations can be a ground for disapproving the payment of a proposed
expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and invested it with broader and
more extensive powers, they did not intend merely to make the COA a toothless tiger, but rather envisioned a dynamic, effective,
efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87, Department of Finance
Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137,
authorizing it to determine "other factors" which may result in cost underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not included in "cost
underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O. No.
137, does not explicitly define what "cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

28
TAXATION 1: CASES
i. Reduction in oil company takes as directed by the Board of Energy without the corresponding reduction in the landed cost
of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by The Ministry of Finance to result in cost underrecovery.

These "other factors" can include only those which are of the same class or nature as the two specifically enumerated in subparagraphs
(i) and (ii). A common characteristic of both is that they are in the nature of government mandated price reductions. Hence, any other
factor which seeks to be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same class or nature
as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and unrestricted authority to
determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by words of a particular and
specific meaning, such general words are not to be construed in their widest extent, but are held to be as applying only to persons or
things of the same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they do
not have a common characteristic. The first relates to price reduction as directed by the Board of Energy while the second refers to
reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What
should be considered for purposes of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of the
Section which explicitly allows cost underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum
products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that such were incurred as a
result of the inability to fully offset financing expenses from yields in money market placements, they do not, however, fall under the
foregoing provision of P.D. No. 1956, as amended, because the same did not result from the reduction of the domestic price of
petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended by Congress, this Court can do
nothing. The duty of this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to emphasize
that as the facts in this case have shown, it was at the behest of the Government that petitioner refinanced its oil import payments from
the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that owing to the extended period
for payment, the financial institution which refinanced said payments charged a higher interest, thereby resulting in higher financing
expenses for the petitioner. It would appear then that equity considerations dictate that petitioner should somehow be allowed to
recover its financing losses, if any, which may have been sustained because it accommodated the request of the Government. Although
under Section 29 of the National Internal Revenue Code such losses may be deducted from gross income, the effect of that loss would
be merely to reduce its taxable income, but not to actually wipe out such losses. The Government then may consider some positive
measures to help petitioner and others similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in
order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of Finance to determine or
define "other factors" is to uphold an undue delegation of legislative power, it clearly appearing that the subject provision does not
provide any standard for the exercise of the authority. It is a fundamental rule that delegation of legislative power may be sustained
only upon the ground that some standard for its exercise is provided and that the legislature, in making the delegation, has prescribed
the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of the foregoing
disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it had in fact gained in the process.
Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being the case, how can petitioner claim for
reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The respondents themselves
admit in their Comment that underrecovery arising from sales to NPC are reimbursable because NPC was granted full exemption from
the payment of taxes; to prove this, respondents trace the laws providing for such exemption. 40 The last law cited is the Fiscal
Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges
of the National Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products . . . are
restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption was
confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is evident in the recently
passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support the OPSF. 41 The pertinent part of Section 2,
Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported crude oil and
finished petroleum products resulting from foreign exchange rate adjustments and/or increases in world market
prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the National Power Corporation (NPC); and
(c) other cost underrecoveries incurred as may be finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power Corporation.

29
TAXATION 1: CASES
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on Letter of Instruction (LOI)
1416, dated 17 July 1984, which ordered the suspension of payments of all taxes, duties, fees and other charges, whether direct or
indirect, due and payable by the copper mining companies in distress to the national government. Pursuant to this LOI, then Minister
of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated
Mining Corporation and Marcopper Mining Corporation are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to Executive Director
Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as
effected by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence
and could not have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is evident that
OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt said distressed mining
companies from the payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the OPSF was promulgated on
October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the government's effort to prevent
the collapse of the copper industry. P.D No. 1956, as amended, was issued for the purpose of minimizing frequent price
changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported
petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether direct or indirect, due and
payable by the copper mining companies in distress to the Notional and Local Governments . . ." On the other hand, OPSF
dues are not payable by (sic) distressed copper companies but by oil companies. It is to be noted that the copper mining
companies do not pay OPSF dues. Rather, such imposts are built in or already incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining companies, it does not accord
petitioner the same privilege with respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI 1416 was never
published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is
otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all unpublished presidential issuances
which are of general application, and unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for
their effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative
powers whenever the same are validly delegated by the legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their purpose is to enforce or implement existing laws
pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their approval, or as soon thereafter
as possible, be published in full in the Official Gazette, to become effective only after fifteen days from their publication, or on
another date specified by the legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its issuance or at any time after
the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987. As amended, the said
provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in the Official Gazette or in a
newspaper of general circulation in the Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive Order No. 200.

30
TAXATION 1: CASES
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax exemptions as a general
rule are construed strictly against the grantee and liberally in favor of the taxing authority. 48 The burden of proof rests upon the party
claiming exemption to prove that it is in fact covered by the exemption so claimed. The party claiming exemption must therefore be
expressly mentioned in the exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and MARCOPPER, to claim
reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the payment of taxes by copper mining companies, it
does not give petitioner the same privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of Finance has still to issue a
final and definitive ruling thereon; accordingly, it was premature for COA to disallow it. By doing so, the latter acted beyond its
jurisdiction. 49 Respondents, on the other hand, contend that said amount was already disallowed by the OEA for failure to substantiate
it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its contention that the amount of
P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no reason to doubt the submission of respondents
that said amount has already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said claim must be
upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may be offset against
petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to offset its claims from the OPSF against
its contributions to the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation and Section 21, Book V,
Title I-B of the Revised Administrative Code which provides for "Retention of Money for Satisfaction of Indebtedness to Government."
52
Petitioner also mentions communications from the Board of Energy and the Department of Finance that supposedly authorize
compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no offsetting of taxes against the
claims that a taxpayer may have against the government, as taxes do not arise from contracts or depend upon the will of the taxpayer,
but are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative
Code, is misplaced because "while this provision empowers the COA to withhold payment of a government indebtedness to a person
who is also indebted to the government and apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private person." 54 The reason for this, as stated in
Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government, either in the form of taxes or other dues, is its
lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the
Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of taxation because "P.D. 1956,
amended, did not create a source of taxation; it instead established a special fund . . .," 56 and that the OPSF contributions do not go to
the general fund of the state and are not used for public purpose, i.e., not for the support of the government, the administration of law,
or the payment of public expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence,
the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company which has an outstanding
obligation to the Government without said obligation being offset first, subject to the requirements of compensation or offset
under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because they go to a special fund of
the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government;
taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which
is affected with public interest as to be within the police power of the state. 57 There can be no doubt that the oil industry is greatly
imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a
majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others,
demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime
concern which the state, via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No amount of semantical
juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government. 58 Taxes cannot be the
subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act as agents for the
Government in the latter's collection since the taxes are, in reality, passed unto the end-users –– the consuming public. In that capacity,
the petitioner, as one of such companies, has the primary obligation to account for and remit the taxes collected to the administrator of

31
TAXATION 1: CASES
the OPSF. This duty stems from the fiduciary relationship between the two; petitioner certainly cannot be considered merely as a
debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally
feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is
no proof that petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order that compensation may be
proper, it is necessary that:

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

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to
the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952
does not authorize oil companies to offset their claims against their OPSF contributions. Instead, it prohibits the government from
paying any amount from the Petroleum Price Standby Fund to oil companies which have outstanding obligations with the government,
without said obligation being offset first subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of the Commission on Audit,
except that portion thereof disallowing petitioner's claim for reimbursement of underrecovery arising from sales to the National Power
Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado, Romero and Nocon, JJ.,
concur.

EN BANC
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos,
presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court below to execute
the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final
and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to
P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of
the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the
court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders of the court below
dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late
husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged
before Notary Public Salvador V. Esguerra, legal adviser in Malacañang to Executive Secretary De Leon dated December 14,
1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to
Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00
for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed in the
above note of the President. Considering these facts, the Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of
the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and
payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further
delay. (Order of August 20, 1960)

32
TAXATION 1: CASES
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the
Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein
amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its
citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that
the amount due to the Government draws interests while the credit due to the present state does not accrue any interest.
(Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate
must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased
person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the
administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of
Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of
administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real
property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real
estate is to be made, the regulations contained in Rule 90, section 7, should be complied with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the
estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained that there are
such debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by order for that purpose,
after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall
contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the
properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been
distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the proper
procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that
the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the
purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance
taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code,
and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and
extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter
Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.
Bengzon, C.J., took no part.

EN BANC
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal, dismissing the above entitled case and
dissolving the writ of preliminary injunction therein issued, without costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this action for declaratory relief, with
injunction, upon the ground that Republic Act No. 920, entitled "An Act Appropriating Funds for Public Works", approved on June 20, 1953,
contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and improvement"
of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta — Gen. Lucban — Gen. Capinpin — Gen. Segundo — Gen. Delgado — Gen.
Malvar — Gen. Lim)"; that, at the time of the passage and approval of said Act, the aforementioned feeder roads were "nothing but projected
and planned subdivision roads, not yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the
tracings attached to the petition as Annexes A and B, near Shaw Boulevard, not far away from the intersection between the latter and
Highway 54), which projected feeder roads "do not connect any government property or any important premises to the main highway"; that

33
TAXATION 1: CASES
the aforementioned Antonio Subdivision (as well as the lands on which said feeder roads were to be construed) were private properties of
respondent Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the Senate of the Philippines; that on
May, 1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to
the municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council, subject to the condition "that the donor would
submit a plan of the said roads and agree to change the names of two of them"; that no deed of donation in favor of the municipality of Pasig
was, however, executed; that on July 10, 1953, respondent Zulueta wrote another letter to said council, calling attention to the approval of
Republic Act. No. 920, and the sum of P85,000.00 appropriated therein for the construction of the projected feeder roads in question; that the
municipal council of Pasig endorsed said letter of respondent Zulueta to the District Engineer of Rizal, who, up to the present "has not made
any endorsement thereon" that inasmuch as the projected feeder roads in question were private property at the time of the passage and
approval of Republic Act No. 920, the appropriation of P85,000.00 therein made, for the construction, reconstruction, repair, extension and
improvement of said projected feeder roads, was illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the projected feeder roads in question were "public roads and not private streets of a
private subdivision"'; that, "in order to give a semblance of legality, when there is absolutely none, to the aforementioned appropriation",
respondents Zulueta executed on December 12, 1953, while he was a member of the Senate of the Philippines, an alleged deed of donation —
copy of which is annexed to the petition — of the four (4) parcels of land constituting said projected feeder roads, in favor of the Government
of the Republic of the Philippines; that said alleged deed of donation was, on the same date, accepted by the then Executive Secretary; that
being subject to an onerous condition, said donation partook of the nature of a contract; that, such, said donation violated the provision of our
fundamental law prohibiting members of Congress from being directly or indirectly financially interested in any contract with the
Government, and, hence, is unconstitutional, as well as null and void ab initio, for the construction of the projected feeder roads in question
with public funds would greatly enhance or increase the value of the aforementioned subdivision of respondent Zulueta, "aside from relieving
him from the burden of constructing his subdivision streets or roads at his own expense"; that the construction of said projected feeder roads
was then being undertaken by the Bureau of Public Highways; and that, unless restrained by the court, the respondents would continue to
execute, comply with, follow and implement the aforementioned illegal provision of law, "to the irreparable damage, detriment and prejudice
not only to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and void; that the alleged deed of donation of
the feeder roads in question be "declared unconstitutional and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of
Public Works and Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta from ordering or allowing
the continuance of the above-mentioned feeder roads project, and from making and securing any new and further releases on the
aforementioned item of Republic Act No. 920, and the disbursing officers of the Department of Public Works and Highways from making
any further payments out of said funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a writ of
preliminary injunction be issued enjoining the aforementioned parties respondent from making and securing any new and further releases on
the aforesaid item of Republic Act No. 920 and from making any further payments out of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue", and that the petition did "not state a
cause of action". In support to this motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should
represent the Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent is " not aware of any law
which makes illegal the appropriation of public funds for the improvements of . . . private property"; and that, the constitutional provision
invoked by petitioner is inapplicable to the donation in question, the same being a pure act of liberality, not a contract. The other respondents,
in turn, maintained that petitioner could not assail the appropriation in question because "there is no actual bona fide case . . . in which the
validity of Republic Act No. 920 is necessarily involved" and petitioner "has not shown that he has a personal and substantial interest" in said
Act "and that its enforcement has caused or will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated October 29, 1953, holding that, since
public interest is involved in this case, the Provincial Governor of Rizal and the provincial fiscal thereof who represents him therein, "have
the requisite personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that "the legislature is without
power appropriate public revenues for anything but a public purpose", that the instructions and improvement of the feeder roads in question,
if such roads where private property, would not be a public purpose; that, being subject to the following condition:

The within donation is hereby made upon the condition that the Government of the Republic of the Philippines will use the parcels
of land hereby donated for street purposes only and for no other purposes whatsoever; it being expressly understood that should the
Government of the Republic of the Philippines violate the condition hereby imposed upon it, the title to the land hereby donated
shall, upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA. (Emphasis supplied.)

which is onerous, the donation in question is a contract; that said donation or contract is "absolutely forbidden by the Constitution" and
consequently "illegal", for Article 1409 of the Civil Code of the Philippines, declares in existence and void from the very beginning contracts
"whose cause, objector purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not be contested,
however, by petitioner herein, because his "interest are not directly affected" thereby; and that, accordingly, the appropriation in question
"should be upheld" and the case dismissed.

At the outset, it should be noted that we are concerned with a decision granting the aforementioned motions to dismiss, which as much, are
deemed to have admitted hypothetically the allegations of fact made in the petition of appellant herein. According to said petition, respondent
Zulueta is the owner of several parcels of residential land situated in Pasig, Rizal, and known as the Antonio Subdivision, certain portions of
which had been reserved for the projected feeder roads aforementioned, which, admittedly, were private property of said respondent when
Republic Act No. 920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and improvement" of said roads, was
passed by Congress, as well as when it was approved by the President on June 20, 1953. The petition further alleges that the construction of
said roads, to be undertaken with the aforementioned appropriation of P85,000.00, would have the effect of relieving respondent Zulueta of
the burden of constructing his subdivision streets or roads at his own expenses, 1and would "greatly enhance or increase the value of the
subdivision" of said respondent. The lower court held that under these circumstances, the appropriation in question was "clearly for a private,
not a public purpose."

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However, respondent Zulueta contended, in his motion to
dismiss that:

34
TAXATION 1: CASES
A law passed by Congress and approved by the President can never be illegal because Congress is the source of all laws . . . Aside
from the fact that movant is not aware of any law which makes illegal the appropriation of public funds for the improvement of
what we, in the meantime, may assume as private property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of the Government established under the
Constitution of the Republic of the Philippines and the system of checks and balances underlying our political structure. Moreover, it is
refuted by the decisions of this Court invalidating legislative enactments deemed violative of the Constitution or organic laws. 3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle according to Ruling Case Law, is this:

It is a general rule that the legislature is without power to appropriate public revenue for anything but a public purpose . . . . It is the
essential character of the direct object of the expenditure which must determine its validity as justifying a tax, and not the magnitude
of the interest to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be
ultimately benefited by their promotion. Incidental to the public or to the state, which results from the promotion of private interest
and the prosperity of private enterprises or business, does not justify their aid by the use public money. (25 R.L.C. pp. 398-400;
Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:

In accordance with the rule that the taxing power must be exercised for public purposes only, discussed supra sec. 14, money raised
by taxation can be expended only for public purposes and not for the advantage of private individuals. (85 C.J.S. pp. 645-646;
emphasis supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public funds may be used only for public purpose. The right
of the legislature to appropriate funds is correlative with its right to tax, and, under constitutional provisions against taxation except
for public purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than for a public purpose.

xxx xxx xxx

The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public
interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally
serve the public. (81 C.J.S. pp. 1147; emphasis supplied.)

Needless to say, this Court is fully in accord with the foregoing views which, apart from being patently sound, are a necessary corollary to
our democratic system of government, which, as such, exists primarily for the promotion of the general welfare. Besides, reflecting as they
do, the established jurisprudence in the United States, after whose constitutional system ours has been patterned, said views and jurisprudence
are, likewise, part and parcel of our own constitutional law.lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon the ground that petitioner may not contest
the legality of the donation above referred to because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of the aforementioned appropriation; (2) that
the latter may not be annulled without a previous declaration of unconstitutionality of the said donation; and (3) that the rule set forth in
Article 1421 of the Civil Code is absolute, and admits of no exception. We do not agree with these premises.

The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon events occurring, or acts
performed, subsequently thereto, unless the latter consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in question, the
legality thereof depended upon whether said roads were public or private property when the bill, which, latter on, became Republic Act 920,
was passed by Congress, or, when said bill was approved by the President and the disbursement of said sum became effective, or on June 20,
1953 (see section 13 of said Act). Inasmuch as the land on which the projected feeder roads were to be constructed belonged then to
respondent Zulueta, the result is that said appropriation sought a private purpose, and hence, was null and void. 4 The donation to the
Government, over five (5) months after the approval and effectivity of said Act, made, according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of unconstitutionality of said appropriation.

Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions. For instance, the creditors of a party to
an illegal contract may, under the conditions set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only
those which are inherent in his person, including therefore, his right to the annulment of said contract, even though such creditors are not
affected by the same, except indirectly, in the manner indicated in said legal provision.

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a direct injury in consequence of its
enforcement. Yet, there are many decisions nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds, 5upon
the theory that "the expenditure of public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes a
misapplication of such funds," which may be enjoined at the request of a taxpayer. 6Although there are some decisions to the contrary, 7the
prevailing view in the United States is stated in the American Jurisprudence as follows:

In the determination of the degree of interest essential to give the requisite standing to attack the constitutionality of a statute, the
general rule is that not only persons individually affected, but also taxpayers, have sufficient interest in preventing the illegal

35
TAXATION 1: CASES
expenditure of moneys raised by taxation and may therefore question the constitutionality of statutes requiring expenditure of public
moneys. (11 Am. Jur. 761; emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon (262 U.S. 447), insofar as federal laws are
concerned, upon the ground that the relationship of a taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a
municipal corporation to its government. Indeed, under the composite system of government existing in the U.S., the states of the Union are
integral part of the Federation from an international viewpoint, but, each state enjoys internally a substantial measure of sovereignty, subject
to the limitations imposed by the Federal Constitution. In fact, the same was made by representatives of each state of the Union, not of the
people of the U.S., except insofar as the former represented the people of the respective States, and the people of each State has,
independently of that of the others, ratified said Constitution. In other words, the Federal Constitution and the Federal statutes have become
binding upon the people of the U.S. in consequence of an act of, and, in this sense, through the respective states of the Union of which they
are citizens. The peculiar nature of the relation between said people and the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by electors chosen by each State, in such manner as the legislature
thereof may direct (Article II, section 2, of the Federal Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the Republic of the Philippines, on the other, is
not identical to that obtaining between the people and taxpayers of the U.S. and its Federal Government. It is closer, from a domestic
viewpoint, to that existing between the people and taxpayers of each state and the government thereof, except that the authority of the
Republic of the Philippines over the people of the Philippines is more fully direct than that of the states of the Union, insofar as the simple
and unitary type of our national government is not subject to limitations analogous to those imposed by the Federal Constitution upon the
states of the Union, and those imposed upon the Federal Government in the interest of the Union. For this reason, the rule recognizing the
right of taxpayers to assail the constitutionality of a legislation appropriating local or state public funds — which has been upheld by the
Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater application in the Philippines than that adopted with respect to
acts of Congress of the United States appropriating federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by the Province of Tayabas, two (2)
taxpayers thereof were allowed to intervene for the purpose of contesting the price being paid to the owner thereof, as unduly exorbitant. It is
true that in Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the Government was not permitted to
question the constitutionality of an appropriation for backpay of members of Congress. However, in Rodriguez vs. Treasurer of the
Philippines and Barredo vs. Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of taxpayers impugning
the validity of certain appropriations of public funds, and invalidated the same. Moreover, the reason that impelled this Court to take such
position in said two (2) cases — the importance of the issues therein raised — is present in the case at bar. Again, like the petitioners in the
Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The Province of Rizal, which he represents officially as its
Provincial Governor, is our most populated political subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of
taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify petitioners action in contesting the
appropriation and donation in question; that this action should not have been dismissed by the lower court; and that the writ of preliminary
injunction should have been maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the lower court for further proceedings not
inconsistent with this decision, with the costs of this instance against respondent Jose C. Zulueta. It is so ordered.

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur.

SECOND DIVISION
G.R. No. 165109 December 14, 2009
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO, Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP,
ESTRELLA P. FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS, PREFERRED
VENTURES CORP., ASSET BUILDERS CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE
CO., and LAND BANK OF THE PHILIPPINES, Respondents.
DECISION

DEL CASTILLO, J.:

The decision to entertain a taxpayer’s suit is discretionary upon the Court. It can choose to strictly apply the rule or take a liberal stance
depending on the controversy involved. Advocates for a strict application of the rule believe that leniency would open floodgates to numerous
suits, which could hamper the government from performing its job. Such possibility, however, is not only remote but also negligible
compared to what is at stake - "the lifeblood of the State". For this reason, when the issue hinges on the illegal disbursement of public funds,
a liberal approach should be preferred as it is more in keeping with truth and justice.

This Petition for Review on Certiorari with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction, under Rule 45 of the
Rules of Court, seeks to set aside the April 27, 2004 Order 1 of the Regional Trial Court (RTC), Branch 5, Tuguegarao City, dismissing the
Petition for Annulment of Contracts and Injunction with prayer for the issuance of a Temporary Restraining Order/Writ of Preliminary
Injunction, 2 docketed as Civil Case No. 6283. Likewise assailed in this Petition is the August 20, 2004 Resolution 3 of RTC, Branch 1,
Tuguegarao City denying the Motion for Reconsideration of the dismissal.

Factual Antecedents

36
TAXATION 1: CASES
On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution No. 2001-272 4 authorizing Governor Edgar R. Lara
(Gov. Lara) to engage the services of and appoint Preferred Ventures Corporation as financial advisor or consultant for the issuance and
flotation of bonds to fund the priority projects of the governor without cost and commitment.

On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 290-2001, 5 ratified the Memorandum of Agreement (MOA)
6
entered into by Gov. Lara and Preferred Ventures Corporation. The MOA provided that the provincial government of Cagayan shall pay
Preferred Ventures Corporation a one-time fee of 3% of the amount of bonds floated.

On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No. 2002-061-A 7 authorizing Gov. Lara to negotiate, sign and
execute contracts or agreements pertinent to the flotation of the bonds of the provincial government in an amount not to exceed P500 million
for the construction and improvement of priority projects to be approved by the Sangguniang Panlalawigan.

On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of Cagayan approved Ordinance No. 19-2002, 8 authorizing
the bond flotation of the provincial government in an amount not to exceed P500 million to fund the construction and development of the
new Cagayan Town Center. The Resolution likewise granted authority to Gov. Lara to negotiate, sign and execute contracts and agreements
necessary and related to the bond flotation subject to the approval and ratification by the Sangguniang Panlalawigan.

9
On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-2003 ratifying the Cagayan Provincial Bond
Agreements entered into by the provincial government, represented by Gov. Lara, to wit:

a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) – Trust and Investment Division and Malayan
Insurance Company, Inc. (MICO).

b. Deed of Assignment by way of security with the RCBC and the Land Bank of the Philippines (LBP).

c. Transfer and Paying Agency Agreement with the RCBC – Trust and Investment Division.

d. Guarantee Agreement with the RCBC – Trust and Investment Division and MICO.

e. Underwriting Agreement with RCBC Capital Corporation.

On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-2003, 10 ratifying the Agreement for the Planning, Design,
Construction, and Site Development of the New Cagayan Town Center 11 entered into by the provincial government, represented by Gov.
Lara and Asset Builders Corporation, represented by its President, Mr. Rogelio P. Centeno.

On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation, giving to the latter the planning, design, construction
and site development of the town center project for a fee of P213,795,732.39. 12

Proceedings before the Regional Trial Court

On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides N. Fausto filed a Petition for Annulment of
Contracts and Injunction with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction 13 against Edgar R. Lara, Jenerwin C.
Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui,
Cecilia Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP.1avvphi1

At the time of the filing of the petition, Manuel N. Mamba was the Representative of the 3rd Congressional District of the province of
Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were members of the Sangguniang Panlalawigan of Cagayan. 15

Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa,
Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued as members of the
Sangguniang Panlalawigan of Cagayan. 17 Respondents Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP
were all impleaded as indispensable or necessary parties.

Respondent Preferred Ventures Corporation is the financial advisor of the province of Cagayan regarding the bond flotation undertaken by the
province. 18 Respondent Asset Builders Corporation was awarded the right to plan, design, construct and develop the proposed town center. 19
Respondent RCBC, through its Trust and Investment Division, is the trustee of the seven-year bond flotation undertaken by the province for
the construction of the town center, 20 while respondent MICO is the guarantor. 21 Lastly, respondent LBP is the official depositary bank of the
province. 22

In response to the petition, public respondents filed an Answer with Motion to Dismiss, 23 raising the following defenses: a) petitioners are
not the proper parties or they lack locus standi in court; b) the action is barred by the rule on state immunity from suit and c) the issues raised
are not justiciable questions but purely political.

For its part, respondent Preferred Ventures Corporation filed a Motion to Dismiss 24 on the following grounds: a) petitioners have no cause of
action for injunction; b) failure to join an indispensable party; c) lack of personality to sue and d) lack of locus standi. Respondent MICO
likewise filed a Motion to Dismiss 25 raising the grounds of lack of cause of action and legal standing. Respondent RCBC similarly argued in
its Motion to Dismiss 26 that: a) petitioners are not the real parties-in-interest or have no legal standing to institute the petition; b) petitioners
have no cause of action as the flotation of the bonds are within the right and power of both respondent RCBC and the province of Cagayan
and c) the viability of the construction of a town center is not a justiciable question but a political question.

37
TAXATION 1: CASES
Respondent Asset Builders Corporation, on the other hand, filed an Answer 27 interposing special and affirmative defenses of lack of legal
standing and cause of action. Respondent LBP also filed an Answer 28 alleging in the main that petitioners have no cause of action against it
as it is not an indispensable party or a necessary party to the case.

Two days after the filing of respondents’ respective memoranda on the issues raised during the hearing of the special and/or affirmative
defenses, petitioners filed a Motion to Admit Amended Petition 29 attaching thereto the amended petition. 30 Public respondents opposed the
motion for the following reasons: 1) the motion was belatedly filed; 2) the Amended Petition is not sufficient in form and in substance; 3) the
motion is patently dilatory and 4) the Amended Petition was filed to cure the defect in the original petition. 31

32 33
Petitioners also filed a Consolidated Opposition to the Motion to Dismiss followed by supplemental pleadings in support of their prayer
for a writ of preliminary injunction.

On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit Amended Petition and dismissing the petition for lack of
cause of action. It ruled that:

The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing on the filing of an amended pleading is quite clear. As
such, the Court rules that the motion was belatedly filed. The granting of leave to file amended pleadings is a matter peculiarly within the
sound discretion of the trial court. But the rule allowing amendments to pleadings is subject to the general but inflexible limitation that the
cause of action or defense shall not be substantially changed or the theory of the case altered to the prejudice of the other party (Avecilla vs.
Yatcvo, 103 Phil. 666).

On the assumption that the controversy presents justiciable issues which this Court may take cognizance of, petitioners in the present case
who presumably presented legitimate interests in the controversy are not parties to the questioned contract. Contracts produce effect as
between the parties who execute them. Only a party to the contract can maintain an action to enforce the obligations arising under said
contract (Young vs. CA, 169 SCRA 213). Since a contract is binding only upon the parties thereto, a third person cannot ask for its rescission
if it is in fraud of his rights. One who is not a party to a contract has no rights under such contract and even if the contrary may be voidable,
its nullity can be asserted only by one who is a party thereto; a third person would have absolutely no personality to ask for the annulment
(Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibañez vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-6501 &
6599, May 21, 1955).

It was, however, held that a person who is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the
contract if he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment which would positively
result to him from the contract in which he had no intervention (Bañez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113;
Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show that they were prejudiced in their rights [or that a]
detriment x x x would positively result to them. Hence, they lack locus standi in court.

xxxx

To the mind of the Court, procedural matters in the present controversy may be dispensed with, stressing that the instant case is a political
question, a question which the court cannot, in any manner, take judicial cognizance. Courts will not interfere with purely political questions
because of the principle of separation of powers (Tañada vs. Cuenco, 103 Phil. 1051). Political questions are those questions which, under the
Constitution, are to be decided by the people in their sovereign capacity or in regard to which full discretionary authority has been delegated
to the legislative or [to the] executive branch of the government (Nuclear Free Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs.
Gonzales, 152 SCRA 272; Citizen’s Alliance for Consumer Protection vs. Energy Regulatory Board, G.R. No. 78888-90, June 23, 1988).

The citation made by the provincial government[, to] which this Court is inclined to agree, is that the matter falls under the discretion of
another department, hence the decision reached is in the category of a political question and consequently may not be the subject of judicial
jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is correct.

It is [a] well-recognized principle that purely administrative and discretionary functions may not be interfered with by the courts (Adm. Law
Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).

The case therefore calls for the doctrine of ripeness for judicial review. This determines the point at which courts may review administrative
action. The basic principle of ripeness is that the judicial machinery should be conserved for problems which are real and present or imminent
and should not be squandered on problems which are future, imaginary or remote. This case is not ripe for judicial determination since there
is no imminently x x x substantial injury to the petitioners.

In other words, the putting up of the New Cagayan Town Center by the province over the land fully owned by it and the concomitant
contracts entered into by the same is within the bounds of its corporate power, an undertaking which falls within the ambit of its discretion
and therefore a purely political issue which is beyond the province of the court x x x. [Consequently, the court cannot,] in any manner, take
judicial cognizance over it. The act of the provincial government was in pursuance of the mandate of the Local Government Code of 1991.

xxxx

Indeed, adjudication of the procedural issues presented for resolution by the present action would be a futile exercise in exegesis.

What defeats the plea of the petitioners for the issuance of a writ of preliminary injunction is the fact that their averments are merely
speculative and founded on conjectures. An injunction is not intended to protect contingent or future rights nor is it a remedy to enforce an
abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637). An injunction, whether preliminary or final, will not issue
to protect a right not in in esse and which may never arise, or to restrain an act which does not give rise to a cause of action. The
complainant’s right on title, moreover, must be clear and unquestioned [since] equity, as a rule, will not take cognizance of suits to establish
title and will not lend its preventive aid by injunction where the complainant’s title or right is doubtful or disputed. The possibility of

38
TAXATION 1: CASES
irreparable damage, without proof of violation of an actual existing right, is no ground for injunction being a mere damnum, absque injuria
(Talisay-Silay Milling Company, Inc. vs. CFI of Negros Occidental, et. al. 42 SCRA 577, 582).

xxxx

For lack of cause of action, the case should be dismissed.

The facts and allegations [necessarily] suggest also that this court may dismiss the case for want of jurisdiction.

The rule has to be so because it can motu propio dismiss it as its only jurisdiction is to dismiss it if it has no jurisdiction. This is in line with
the ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993 where the court may dismiss a complaint even without a
motion to dismiss or answer.

Upon the foregoing considerations, the case is hereby dismissed without costs.

SO ORDERED. 34

Petitioners filed a Motion for Reconsideration 35 to which respondents filed their respective Oppositions. 36 Petitioners then filed a Motion to
Inhibit, which the court granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao City. 37

On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution denying petitioners’ plea for reconsideration. The court
found the motion to be a mere scrap of paper as the notice of hearing was addressed only to the Clerk of Court in violation of Section 5, Rule
15 of the Rules of Court. As to the merits, the court sustained the findings of Branch 5 that petitioners lack legal standing to sue and that the
issue involved is political.

Issues

Hence, the present recourse where petitioners argue that:

A. The lower court decided a question of substance in a way not in accord with law and with the applicable decision of the Supreme
Court, and

B. The lower court has so far departed from the accepted and usual course of judicial proceedings as to call for an exercise of the
power of supervision in that:

I. It denied locus standi to petitioners;


II. [It] determined that the matter of contract entered into by the provincial government is in the nature of a political
question;
III. [It] denied the admission of Amended Petition; and
IV. [It] found a defect of substance in the petitioners’ Motion for Reconsideration. 38
Our Ruling

The petition is partially meritorious.

Petitioners have legal standing to sue as taxpayers

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any
improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. 39 A person suing as
a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds derived from taxation. 40
He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a
direct injury because of the enforcement of the questioned statute or contract. 41 In other words, for a taxpayer’s suit to prosper, two requisites
must be met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is
violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act. 42

In light of the foregoing, it is apparent that contrary to the view of the RTC,

43
a taxpayer need not be a party to the contract to challenge its validity. As long as taxes are involved, people have a right to question
contracts entered into by the government.

In this case, although the construction of the town center would be primarily sourced from the proceeds of the bonds, which respondents
insist are not taxpayer’s money, a government support in the amount of P187 million would still be spent for paying the interest of the bonds.
44
In fact, a Deed of Assignment 45 was executed by the governor in favor of respondent RCBC over the Internal Revenue Allotment (IRA)
and other revenues of the provincial government as payment and/or security for the obligations of the provincial government under the Trust
Indenture Agreement dated September 17, 2003. Records also show that on March 4, 2004, the governor requested the Sangguniang
Panlalawigan to appropriate an amount of P25 million for the interest of the bond. 46 Clearly, the first requisite has been met.

As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury test" bearing in mind that locus standi is a
procedural technicality. 47 By invoking "transcendental importance", "paramount public interest", or "far-reaching implications", ordinary
citizens and taxpayers were allowed to sue even if they failed to show direct injury. 48 In cases where serious legal issues were raised or where
public expenditures of millions of pesos were involved, the court did not hesitate to give standing to taxpayers. 49

39
TAXATION 1: CASES
We find no reason to deviate from the jurisprudential trend.

To begin with, the amount involved in this case is substantial. Under the various agreements entered into by the governor, which were ratified
by the Sangguniang Panlalawigan, the provincial government of Cagayan would incur the following costs: 50

Compensation to Preferred Ventures - P 6,150,000.00


(3% of P205M) 51 Resolution No. 290-2001
Management and Underwriting Fees - 3,075,000.00
52
(1.5% of P205M)
Documentary Tax - 1,537,500.00
(0.75% of P205M) 53
Guarantee Fee 54 - 7,350,000.00
Construction and Design of town center 55 - 213,795,732.39
Total Cost - P231,908,232.39

What is more, the provincial government would be shelling out a total amount of P187 million for the period of seven years by way of
subsidy for the interest of the bonds. Without a doubt, the resolution of the present petition is of paramount importance to the people of
Cagayan who at the end of the day would bear the brunt of these agreements.

Another point to consider is that local government units now possess more powers, authority and resources at their disposal, 56 which in the
hands of unscrupulous officials may be abused and misused to the detriment of the public. To protect the interest of the people and to prevent
taxes from being squandered or wasted under the guise of government projects, a liberal approach must therefore be adopted in determining
locus standi in public suits.

In view of the foregoing, we are convinced that petitioners have sufficient standing to file the present suit. Accordingly, they should be given
the opportunity to present their case before the RTC.

Having resolved the core issue, we shall now proceed to the remaining issues.

The controversy involved is justiciable

A political question is a question of policy, which is to be decided by the people in their sovereign capacity or by the legislative or the
executive branch of the government to which full discretionary authority has been delegated. 57

In filing the instant case before the RTC, petitioners seek to restrain public respondents from implementing the bond flotation and to declare
null and void all contracts related to the bond flotation and construction of the town center. In the petition before the RTC, they alleged grave
abuse of discretion and clear violations of law by public respondents. They put in issue the overpriced construction of the town center; the
grossly disadvantageous bond flotation; the irrevocable assignment of the provincial government’s annual regular income, including the IRA,
to respondent RCBC to cover and secure the payment of the bonds floated; and the lack of consultation and discussion with the community
regarding the proposed project, as well as a proper and legitimate bidding for the construction of the town center.

Obviously, the issues raised in the petition do not refer to the wisdom but to the legality of the acts complained of. Thus, we find the instant
controversy within the ambit of judicial review. Besides, even if the issues were political in nature, it would still come within our powers of
review under the expanded jurisdiction conferred upon us by Section 1, Article VIII of the Constitution, which includes the authority to
determine whether grave abuse of discretion amounting to excess or lack of jurisdiction has been committed by any branch or instrumentality
of the government. 58

The Motion to Admit Amended Petition was properly denied

However, as to the denial of petitioners’ Motion to Admit Amended Petition, we find no reason to reverse the same. The inclusion of the
province of Cagayan as a petitioner would not only change the theory of the case but would also result in an absurd situation. The provincial
government, if included as a petitioner, would in effect be suing itself considering that public respondents are being sued in their official
capacity.

In any case, there is no need to amend the petition because petitioners, as we have said, have legal standing to sue as taxpayers.

Section 5, Rule 15 of the Rules of Court was substantially complied with

This brings us to the fourth and final issue.

A perusal of the Motion for Reconsideration filed by petitioners would show that the notice of hearing was addressed only to the Clerk of
Court in violation of Section 5, Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to all parties concerned.
This defect, however, did not make the motion a mere scrap of paper. The rule is not a ritual to be followed blindly. 59 The purpose of a notice
of hearing is simply to afford the adverse parties a chance to be heard before a motion is resolved by the court. 60 In this case, respondents
were furnished copies of the motion, and consequently, notified of the scheduled hearing. Counsel for public respondents in fact moved for
the postponement of the hearing, which the court granted. 61 Moreover, respondents were afforded procedural due process as they were given

40
TAXATION 1: CASES
sufficient time to file their respective comments or oppositions to the motion. From the foregoing, it is clear that the rule requiring notice to
all parties was substantially complied with. 62 In effect, the defect in the Motion for Reconsideration was cured.

We cannot overemphasize that procedural rules are mere tools to aid the courts in the speedy, just and inexpensive resolution of cases. 63
Procedural defects or lapses, if negligible, should be excused in the higher interest of justice as technicalities should not override the merits of
the case. Dismissal of cases due to technicalities should also be avoided to afford the parties the opportunity to present their case. Courts must
be reminded that the swift unclogging of the dockets although a laudable objective must not be done at the expense of substantial justice. 64

WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004 Order of Branch 5 and the August 20, 2004 Resolution
of Branch 1 of the Regional Trial Court of Tuguegarao City are hereby REVERSED and SET ASIDE insofar as the dismissal of the petition
is concerned. Accordingly, the case is hereby REMANDED to the court a quo for further proceedings.

SO ORDERED.

THIRD DIVISION
G.R. No. 155491 July 21, 2009

SMART COMMUNICATIONS, INC., Petitioner,


vs.
THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the SANGGUNIANG PANLUNSOD OF DAVAO CITY,
Respondents.

RESOLUTION

NACHURA, J.:

Before the Court is a Motion for Reconsideration 1 filed by Smart Communications, Inc. (Smart) of the Decision 2 of the Court dated September 16, 2008, denying its
appeal of the Decision and Order of the Regional Trial Court (RTC) of Davao City, dated July 19, 2002 and September 26, 2002, respectively.

Briefly, the factual antecedents are as follows:

On February 18, 2002, Smart filed a special civil action for declaratory relief 3 for the ascertainment of its rights and obligations under the Tax Code of the City of
Davao, which imposes a franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is
exempt from payment of franchise tax to the City.

On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for reconsideration, which was denied by the trial court in an Order dated
September 26, 2002. Smart filed an appeal before this Court, but the same was denied in a decision dated September 16, 2008. Hence, the instant motion for
reconsideration raising the following grounds: (1) the "in lieu of all taxes" clause in Smart’s franchise, Republic Act No. 7294 (RA 7294), covers local taxes; the rule of
strict construction against tax exemptions is not applicable; (2) the "in lieu of all taxes" clause is not rendered ineffective by the Expanded VAT Law; (3) Section 23 of
Republic Act No. 79254 (RA 7925) includes a tax exemption; and (4) the imposition of a local franchise tax on Smart would violate the constitutional prohibition
against impairment of the obligation of contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart’s legislative franchise contains the contentious "in lieu of all taxes"
clause. The Section reads:

Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of
this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall
pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the
said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for
income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be applicable thereto.

xxx5

Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality clause, contains the word "exemption," viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry — Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or
may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory
covered by the franchise, the life span of the franchise, or the type of the service authorized by the franchise. 6

A review of the recent decisions of the Court on the matter of exemptions from local franchise tax and the interpretation of the word "exemption" found in Section 23 of
RA 7925 is imperative in order to resolve this issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,7 Digitel used as an argument the "in lieu of all taxes" clauses/provisos found in the
legislative franchises of Globe,8 Smart and Bell,9 vis-à-vis Section 23 of RA 7925, in order to claim exemption from the payment of local franchise tax. Digitel claimed,
just like the petitioner in this case, that it was exempt from the payment of any other taxes except the national franchise and income taxes. Digitel alleged that Smart
was exempted from the payment of local franchise tax.

However, it failed to substantiate its allegation, and, thus, the Court denied Digitel’s claim for exemption from provincial franchise tax. Cited was the ruling of the Court
in PLDT v. City of Davao,10 wherein the Court, speaking through Mr. Justice Vicente V. Mendoza, held that in approving Section 23 of RA No. 7925, Congress did not
intend it to operate as a blanket tax exemption to all telecommunications entities. Section 23 cannot be considered as having amended PLDT’s franchise so as to entitle
it to exemption from the imposition of local franchise taxes. The Court further held that tax exemptions are highly disfavored and that a tax exemption must be
expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even in the instances when it is granted,
the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

41
TAXATION 1: CASES
The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word "exemption" as used in the statute refers or pertains merely to an
exemption from regulatory or reporting requirements of the Department of Transportation and Communication or the National Transmission Corporation and not to an
exemption from the grantee’s tax liability.

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, 11 PLDT was a holder of a legislative franchise under Act No. 3436, as amended. On
August 24, 1991, the terms and conditions of its franchise were consolidated under Republic Act No. 7082, Section 12 of which embodies the so-called "in-lieu-of-all
taxes" clause. Under the said Section, PLDT shall pay a franchise tax equivalent to three percent (3%) of all its gross receipts, which franchise tax shall be "in lieu of all
taxes." The issue that the Court had to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in view of the "in lieu of all taxes" clause in
its franchise and Section 23 of RA 7925.lawph!l

Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts are resolved in favor of municipal corporations in interpreting statutory
provisions on municipal taxing powers, the Court held that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to entitle it to
exemption from the imposition of local franchise taxes.

In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City of Davao 12 and PLDT v. City of Bacolod, 13 in denying the claim for
exemption from the payment of local franchise tax.

In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the franchisee is still liable to pay the local franchise tax, unless it is expressly
and unequivocally exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should categorically state
that the exemption applies to both local and national taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and liberally in favor of
the taxing authority.

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment of local franchise tax. It merely replaced the national
franchise tax that was previously paid by telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance with Section 108 of the
Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or municipaties.

The power to tax by local government units emanates from Section 5, Article X of the Constitution which empowers them to create their own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not inconsistent with the
advent of the VAT, which renders functus officio the franchise tax paid to the national government. VAT inures to the benefit of the national government, while a local
franchise tax is a revenue of the local government unit.

WHEREFORE, the motion for reconsideration is DENIED, and this denial is final.

SO ORDERED.

THIRD DIVISION
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.
PANGANIBAN, J.:

In conducting researches and studies of social organizations and cultural values thru its Institute of Philippine Culture, is the Ateneo de
Manila University performing the work of an independent contractor and thus taxable within the purview of then Section 205 of the
National Internal Revenue Code levying a three percent contractor's tax? This question is answer by the Court in the negative as it
resolves this petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27,
1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and branches all over the Philippines.
One such auxiliary unit is the Institute of Philippine Culture (IPC), which has no legal personality separate and distinct from
that of private respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research activities from international organizations, private foundations and
government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a demand letter dated June 3,
1983, assessing private respondent the sum of P174,043.97 for alleged deficiency contractor's tax, and an assessment dated
June 27, 1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978.
Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency income tax but modifying the
assessment for deficiency contractor's tax by increasing the amount due to P193,475.55. Unsatisfied, private respondent
requested for a reconsideration or reinvestigation of the modified assessment. At the same time, it filed in the respondent
court a petition for review of the said letter-decision of the petitioner. While the petition was pending before the respondent
court, petitioner issued a final decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax from
P193,475.55 to P46,516.41, exclusive of surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively reads:

42
TAXATION 1: CASES
WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency contractor's tax
assessment in the amount of P46,516.41 exclusive of surcharge and interest for the fiscal year ended March 31, 1978 is
hereby CANCELED. No pronouncement as to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for review raising the following issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF INDEPENDENT CONTRACTOR
PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX UNDER SECTION 205 OF THE
TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross
receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and contractors and except gross receipts of or from a pioneer
industry registered with the Board of Investments under Republic Act No. 5186:

xxx xxx xxx

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

xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is not an "independent contractor"
within the purview of Section 205 of the Tax Code. To petitioner, the term "independent contractor", as defined by the Code,
encompasses all kinds of services rendered for a fee and that the only exceptions are the following:

a. Persons, association and corporations under contract for embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old Section 182 [b] of the Tax Code); and

c. Regional or area headquarters established in the Philippines by multinational corporations, including their alien executives,
and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region (Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an "independent contractor" and is not
among the aforementioned exceptions, private respondent is therefore subject to the 3% contractor's tax imposed under the
same Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the assailed decision of the Court
of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor pursuant to Section 205 of the Tax
Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or branch — the Institute of
Philippine Culture — performing the work of an independent contractor and, thus, subject to the three percent contractor's tax levied
by then Section 205 of the National Internal Revenue Code?

The Court's Ruling

The petition is unmeritorious.

43
TAXATION 1: CASES
Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:

Sec. 205. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts
is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors, except persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and contractors, and except gross receipts of or from a pioneer
industry registered with the Board of Investments under the provisions of Republic Act No. 5186;

xxx xxx xxx

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

The term "independent contractor" shall not include regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal contractor as the total contract price,
undiminished by amount paid to the subcontractor, shall be excluded from the taxable gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila University "falls within the
definition" of an independent contractor and "is not one of those mentioned as excepted"; hence, it is properly a subject of the three
percent contractor's tax levied by the foregoing provision of law. 6 Petitioner states that the "term 'independent contractor' is not
specifically defined so as to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for a fee,
is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo has the burden of
proof to show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who
are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if
private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on
the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine
in the interpretation of tax laws that "(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and
unambiguously . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended
by implication." 8 Parenthetically, in answering the question of who is subject to tax statutes, it is basic that "in case of doubt, such
statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the independent contractor be engaged in
the business of selling its services. Hence, to impose the three percent contractor's tax on Ateneo's Institute of Philippine Culture, it
should be sufficiently proven that the private respondent is indeed selling its services for a fee in pursuit of an independent business.
And it is only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown does the rule of construction — that tax exemptions are to be strictly
construed against the taxpayer — come into play, contrary to petitioner's position. This is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contract


for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture ever sold its services for a fee
to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner Commissioner of Internal Revenue
contends that "the tax is due on its activity of conducting researches for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to
the contracts the latter entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of a taxable
activity. . . . [T]he sale of services of private respondent is made under a contract and the various contracts entered into between private
respondent and its clients are almost of the same terms, showing, among others, the compensation and terms of payment." 11 (Emphasis
supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that Ateneo's IPC in fact
contracted to sell its research services for a fee. Clearly then, as found by the Court of Appeals and the Court of Tax Appeals,
petitioner's theory is inapplicable to the established factual milieu obtaining in the instant case.

44
TAXATION 1: CASES
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed, contracts for sale of services were
ever entered into by the private respondent. As appropriately pointed out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of Tax Appeals shows that only the
following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A. Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between private respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the Ateneo de Manila University are
technically not a fee. They may however fall as gifts or donations which are tax-exempt" as shown by private respondent's compliance
with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational
institution. 13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:

To our mind, private respondent hardly fits into the definition of an "independent contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not engaged in business. Undisputedly,
private respondent is mandated by law to undertake research activities to maintain its university status. In fact, the research
activities being carried out by the IPC is focused not on business or profit but on social sciences studies of Philippine society
and culture. Since it can only finance a limited number of IPC's research projects, private respondent occasionally accepts sponsorship for
unfunded IPC research projects from international organizations, private foundations and governmental agencies. However, such
sponsorships are subject to private respondent's terms and conditions, among which are, that the research is confined to topics consistent
with the private respondent's academic agenda; that no proprietary or commercial purpose research is done; and that private respondent
retains not only the absolute right to publish but also the ownership of the results of the research conducted by the IPC . Quite clearly, the
aforementioned terms and conditions belie the allegation that private respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit educational corporation. The fact that it
accepted sponsorship for IPC's unfunded projects is merely incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the private respondent. Moreover the records do not show that in accepting
sponsorship of research work, IPC realized profits from such work. On the contrary, the evidence shows that for about 30
years, IPC had continuously operated at a loss, which means that sponsored funds are less than actual expenses for its
research projects. That IPC has been operating at a loss loudly bespeaks of the fact that education and not profit is the motive
for undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research projects, the fact still remains that there is no
proof that part of such earnings or profits was ever distributed as dividends to any stockholder, as in fact none was so
distributed because they accrued to the benefit of the private respondent which is a non-profit educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an object. Rather, the amounts are in the nature of an endowment or donation
given by IPC's benefactors solely for the purpose of sponsoring or funding the research with no strings attached. As found by the two
courts below, such sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done, and IPC
retains the ownership of the results of the research, including the absolute right to publish the same. The copyrights over the results of
the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts given to IPC, therefore, may
not be deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot be deemed either as a contract
of sale or a contract of a piece of work. "By the contract of sale, one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to transfer
ownership as an essential element of the contract of sale, following modern codes, such as the German and the Swiss. Even in the
absence of this express requirement, however, most writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating
that the delivery of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the case of a contract for a piece of work, "the
contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. . . . If the
contractor agrees to produce the work from materials furnished by him, he shall deliver the thing produced to the employer and
transfer dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks away with an object. 19 In the case at bench, it is clear from the evidence on record
that there was no sale either of objects or services because, as adverted to earlier, there was no transfer of ownership over the research
data obtained or the results of research projects undertaken by the Institute of Philippine Culture.

45
TAXATION 1: CASES
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance of maintaining Ateneo's
university status and not in the course of an independent business of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the following requirements before an application for
university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff at least three graduate departments in accordance
with the rules and standards for graduate education. One of the departments shall be science and technology. The competence of the
staff shall be judged by their effective teaching, scholarly publications and research activities published in its school journal as well as
their leadership activities in the profession.

(f) The institution must show evidence of adequate and stable financial resources and support, a reasonable portion of which should be
devoted to institutional development and research. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to maintain satisfactorily the standards and
requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is patently erroneous because
the former is not an independent juridical entity that is separate and distinct form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing
tax cases. Through its expertise, it is undeniably competent to determine the issue of whether" 21 Ateneo de Manila University may be
deemed a subject of the three percent contractor's tax "through the evidence presented before it." Consequently, "as a matter of
principle, this Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very nature of its
function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of authority . . ." 22 This point becomes more evident in the case before us
where the findings and conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the former free from any
palpable error.

Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit of P1,624,014.00 as shown in
its statements of fund and disbursements for the period 1972 to 1985. 23 In fact, it was Ateneo de Manila University itself that had
funded the research projects of the institute, and it was only when Ateneo could no longer produce the needed funds that the institute
sought funding from outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit nature of the institute's research activities done in furtherance of the university's purposes, as
follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of Philippine Culture) that as far as
grants from sponsored research it is possible that the grant sometimes is less than the actual cost. Will you please tell us in this
case when the actual cost is a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has to have its own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine Culture when it undisputedly
loses not an insignificant amount in the process? The plain and simple answer is that private respondent is not a contractor selling its
services for a fee but an academic institution conducting these researches pursuant to its commitments to education and, ultimately, to
public service. For the institute to have tenaciously continued operating for so long despite its accumulation of significant losses, we
can only agree with both the Court of Tax Appeals and the Court of Appeals that "education and not profit is [IPC's] motive for
undertaking the research
projects." 25

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of Appeals is hereby AFFIRMED in
full.

SO ORDERED.

Narvasa, C.J., Davide, Jr., Melo and Francisco JJ., concur.

46
TAXATION 1: CASES

FIRST DIVISION

G.R. No. 168129 April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, seeking to reverse the Decision 1 dated February 18, 2005 and Resolution dated May 9, 2005 of the Court of Appeals
(Fifteenth Division) in CA-G.R. SP No. 76449.

The factual antecedents of this case, as culled from the records, are:

The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and existing under the laws of the
Republic of the Philippines. Pursuant to its Articles of Incorporation, 2 its primary purpose is "To establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick
and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities
of the organization."1^vvphi1.net

On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the National Internal Revenue
Code of 1977 (Presidential Decree No. 1158) by imposing Value-Added Tax (VAT) on the sale of goods and services. This E.O.
took effect on January 1, 1988.

Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the Commissioner of Internal Revenue (CIR),
petitioner, inquiring whether the services it provides to the participants in its health care program are exempt from the payment
of the VAT.

On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR), issued VAT
Ruling No. 231-88 stating that respondent, as a provider of medical services, is exempt from the VAT coverage. This Ruling was
subsequently confirmed by Regional Director Osmundo G. Umali of Revenue Region No. 8 in a letter dated April 22, 1994.

Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect, amending further the
National Internal Revenue Code of 1977. Then on January 1, 1998, R.A. No. 8424 (National Internal Revenue Code of 1997)
became effective. This new Tax Code substantially adopted and reproduced the provisions of E.O. No. 273 on VAT and R.A. No.
7716 on E-VAT.

In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice for deficiency in its payment of the
VAT and documentary stamp taxes (DST) for taxable years 1996 and 1997.

On October 20, 1999, respondent filed a protest with the BIR.

On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of "deficiency VAT" in the amount of
P100,505,030.26 and DST in the amount of P124,196,610.92, or a total of P224,702,641.18 for taxable years 1996 and 1997. Attached
to the demand letter were four (4) assessment notices.

On February 23, 2000, respondent filed another protest questioning the assessment notices.

Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000, respondent filed with the Court
of Tax Appeals (CTA) a petition for review, docketed as CTA Case No. 6166.

On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED TO PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January
20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from
January 20, 1998 until paid for the 1997 VAT deficiency.1awphi1.nét Accordingly, VAT Ruling No. 231-88 is declared void and
without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET
ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

47
TAXATION 1: CASES
Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to pay the deficiency VAT.

In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus:

WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is GRANTED. Accordingly, the VAT
assessment issued by herein respondent against petitioner for the taxable years 1996 and 1997 is hereby WITHDRAWN and SET
ASIDE.

SO ORDERED.

The CTA held:

Moreover, this court adheres to its conclusion that petitioner is a service contractor subject to VAT since it does not actually
render medical service but merely acts as a conduit between the members and petitioner's accredited and recognized hospitals
and clinics.

However, after a careful review of the facts of the case as well as the Law and jurisprudence applicable, this court resolves to
grant petitioner's "Motion for Partial Reconsideration." We are in accord with the view of petitioner that it is entitled to the
benefit of non-retroactivity of rulings guaranteed under Section 246 of the Tax Code, in the absence of showing of bad faith on
its part. Section 246 of the Tax Code provides:

Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, x x x.

Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be retroactively applied to
its case. VAT Ruling No. 231-88 issued by no less than the respondent itself has confirmed petitioner's entitlement to VAT
exemption under Section 103 of the Tax Code. In saying so, respondent has actually broadened the scope of "medical services" to
include the case of the petitioner. This VAT ruling was even confirmed subsequently by Regional Director Ormundo G. Umali
in his letter dated April 22, 1994 (Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor of
the petitioner sufficiently described the business of petitioner and there is no way BIR could be misled by the said
representation as to the real nature of petitioner's business. Such being the case, this court is convinced that petitioner's reliance
on the said ruling is premised on good faith. The facts of the case do not show that petitioner deliberately committed mistakes or
omitted material facts when it obtained the said ruling from the Bureau of Internal Revenue. Thus, in the absence of such proof,
this court upholds the application of Section 246 of the Tax Code. Consequently, the pronouncement made by the BIR in VAT
Ruling No. 231-88 as to the VAT exemption of petitioner should be upheld.

Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 76449.

In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.

Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its Resolution 4 dated May 9, 2005.

Hence, the instant petition for review on certiorari raising these two issues: (1) whether respondent's services are subject to VAT;
and (2) whether VAT Ruling No. 231-88 exempting respondent from payment of VAT has retroactive application.

On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for taxable years 1996 and 1997.

Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT Law) and R.A. No. 7716 (E-VAT
Law), provides:

SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed
and collected, a value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the
use or lease of properties.

The phrase "sale or exchange of service" means the performance of all kinds of services in the Philippines for a fee, remuneration
or consideration, including those performed or rendered by construction and service contractors x x x.

Section 1036 of the same Code specifies the exempt transactions from the provision of Section 102, thus:

SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax:

xxx

(l) Medical, dental, hospital and veterinary services except those rendered by professionals

xxx

48
TAXATION 1: CASES
The import of the above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of taxpayers
engaged in the performance of medical, dental, hospital, and veterinary services. In Commissioner of International Revenue v.
Seagate Technology (Philippines),7 we defined an exempt transaction as one involving goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT, under the Tax Code, without regard to the tax status of the party in
the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this definition.

In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described its services as follows:

Under the prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in Health Care's
health care program are entitled to preventive, diagnostic, and corrective medical services to be dispensed by Health Care's duly
licensed physicians, specialists, and other professional technical staff participating in said group practice health care delivery
system established and operated by Health Care. Such medical services will be dispensed in a hospital or clinic owned,
operated, or accredited by Health Care. To be entitled to receive such medical services from Health Care, an individual must
enroll in Health Care's health care program and pay an annual fee. Enrollment in Health Care's health care program is on a year-
to-year basis and enrollees are issued identification cards.

From the foregoing, the CTA made the following conclusions:

a) Respondent "is not actually rendering medical service but merely acting as a conduit between the members and
their accredited and recognized hospitals and clinics."

b) It merely "provides and arranges for the provision of pre-need health care services to its members for a fixed
prepaid fee for a specified period of time."

c) It then "contracts the services of physicians, medical and dental practitioners, clinics and hospitals to perform such
services to its enrolled members;" and

d) Respondent "also enters into contract with clinics, hospitals, medical professionals and then negotiates with them
regarding payment schemes, financing and other procedures in the delivery of health services."

We note that these factual findings of the CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that
findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final,
binding, and conclusive upon this Court, more so where these do not conflict with the findings of the Court of Appeals. 9
Perforce, as respondent does not actually provide medical and/or hospital services, as provided under Section 103 on exempt
transactions, but merely arranges for the same, its services are not VAT-exempt.

Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and
regulations promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them would
prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal Revenue; (2) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3) where the taxpayer
acted in bad faith.

We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying its VAT liabilities has retroactive
application.

In its Resolution dated March 23, 2003, the CTA found that there is no showing that respondent "deliberately committed
mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter
which served as the basis for the VAT ruling "sufficiently described" its business and "there is no way the BIR could be misled
by the said representation as to the real nature" of said business.

In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to itself as a health maintenance
organization is not an indication of bad faith or a deliberate attempt to make false representations." As "the term health
maintenance organization did not as yet have any particular significance for tax purposes," respondent's failure "to include a
term that has yet to acquire its present definition and significance cannot be equated with bad faith."

We agree with both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil Service Commission v.
Maala,10 we described good faith as "that state of mind denoting honesty of intention and freedom from knowledge of
circumstances which ought to put the holder upon inquiry; an honest intention to abstain from taking any unconscientious
advantage of another, even through technicalities of law, together with absence of all information, notice, or benefit or belief of
facts which render transaction unconscientious."

According to the Court of Appeals, respondent's failure to describe itself as a "health maintenance organization," which is
subject to VAT, is not tantamount to bad faith. We note that the term "health maintenance organization" was first recorded in
the Philippine statute books only upon the passage of "The National Health Insurance Act of 1995" (Republic Act No. 7875).
Section 4 (o) (3) thereof defines a health maintenance organization as "an entity that provides, offers, or arranges for coverage of
designated health services needed by plan members for a fixed prepaid premium." Under this law, a health maintenance
organization is one of the classes of a "health care provider."

49
TAXATION 1: CASES
It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term "health maintenance
organization" was yet unknown or had no significance for taxation purposes. Respondent, therefore, believed in good faith that
it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88.

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, 11 this Court held that under Section 246 of the 1997 Tax Code, the
Commissioner of Internal Revenue is precluded from adopting a position contrary to one previously taken where injustice
would result to the taxpayer. Hence, where an assessment for deficiency withholding income taxes was made, three years after
a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an assessment was prejudicial to the
taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later cases of Commissioner of Internal
Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp.13 Commissioner of Internal Revenue v.
Telefunken Semiconductor (Phils.) Inc., 14 and Commissioner of Internal Revenue v. Court of Appeals.15 The rule is that the BIR rulings
have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer, as in this case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16 wherein the taxpayer was entitled to tax refunds or
credits based on the BIR's own issuances but later was suddenly saddled with deficiency taxes due to its subsequent ruling
changing the category of the taxpayer's transactions for the purpose of paying its VAT, this Court ruled that applying such
ruling retroactively would be prejudicial to the taxpayer.

WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 76449. No costs.

SO ORDERED.

G.R. No. L-9996 October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners,


vs.
THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.


Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of the Court of
Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax and the
residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment for the same in the total
amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs
against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with their personal monies
was used by them for the purpose of buying real properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including
improvements thereon from the sum of P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of 3,718.40 sq. m.
including improvements thereon for P130,000.00; this property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including improvements
thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements thereon for
P237,234.34. This property has an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage their properties
with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such payment, to bring suits
against the defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and
checks for them;

7. That after having bought the above-mentioned real properties the petitioners had the same rented or leases to various
tenants;

50
TAXATION 1: CASES
8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as rents on their real
properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a net rental income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was deducted in the sum
of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted the sum of P4,837.65
as expenses, thereby leaving them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of
income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949,
computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and compromise P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted
the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated
September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question, with costs against the
respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a petition for
reconsideration and new trial having been subsequently denied, the case is now before Us for review at the instance of the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No.
466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers
fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership," as used
in section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income
received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered general co-partnerships (compañias
colectivas), a tax upon such income equal to the sum of the following: . . .

51
TAXATION 1: CASES
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations or insurance companies, but does not include duly registered general
copartnerships. (compañias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry to a common
fund, with the intention of dividing the profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present
in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we
are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among
themselves, because:

1. Said common fund was not something they found already in existence. It was not property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common
fund.

2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On February 2, 1943, they
bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944,
by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each,
particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property acquired by the petitioners in
February, 1943. In other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in
the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties
were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.

4. Since August, 1945, the properties have been under the management of one person, namely Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes
and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business
and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to,
or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the
aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by them, a legal
entity, with a personality independent of that of its members, did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from
"partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said
Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships which constitute precisely
one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture
need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to
the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general copartnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term
"corporation" It may not be amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the
lots above referred to, under the management of one person — even if true, on which we express no opinion — tends to increase the
similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in favor of the imposition
of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By specific provisions
of said laws, such "corporations" include "associations, joint-stock companies and insurance companies." However, the term
"association" is not used in the aforementioned laws.

52
TAXATION 1: CASES
. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed affairs, or the
attainment of some object, which like a corporation, continues notwithstanding that its members or participants change, and
the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group,
acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of
trust, a statute, or otherwise. It includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the management type), an
interinsuarance exchange operating through an attorney in fact, a partnership association, and any other type of organization
(by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as known at
common law but, as well, a syndicate, group, pool, joint venture or other unincorporated organizations which carries on any business
financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's
Law of Federal Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of
which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63;
emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of duly
registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign,
engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax
which in no case, shall exceed one thousand pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion),
association or insurance company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal Revenue Code
(commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after the approval of said
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over twelve
years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject
to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section
194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property or 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.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein. It is so
ordered.

Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

EN BANC

G.R. No. 172087 March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,


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

DECISION

PERALTA, J.:

For resolution of this Court is the Petition for Certiorari and Prohibition 1 with prayer for the issuance of a Temporary Restraining Order
and/or Preliminary Injunction, dated April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking

53
TAXATION 1: CASES
the declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant to Sections 1 and 10 of
Article III of the Constitution. Petitioner further seeks to prohibit the implementation of Bureau of Internal Revenue (BIR) Revenue
Regulations No. 16-2005 for being contrary to law.

The undisputed facts follow.

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

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 6 was issued. Section 13 thereof reads as
follows:

Sec. 13. Exemptions. — x x x

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

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

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

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

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

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

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

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

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

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

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

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special general laws to the
contrary notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the

54
TAXATION 1: CASES
Government Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation (PAGCOR), shall
pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar
business, industry, or activity.9

With the enactment of R.A. No. 9337 10 on May 24, 2005, certain sections of the National Internal Revenue Code of 1997 were amended.
The particular amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National
Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate
income tax, thus:

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

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

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

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

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

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

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

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

xxxx

(h) x x x

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

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

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

II

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

III

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

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

55
TAXATION 1: CASES
I

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

II

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

III

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

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

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

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

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

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal
protection of the laws.

In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:

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

xxxx

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

1) It must be based on substantial distinctions.

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

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

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

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

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

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

56
TAXATION 1: CASES
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.

CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

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

CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we included a tax on
cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the ---

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

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

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

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

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

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

CHAIRMAN ENRILE. There’s a VAT.

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

CHAIRMAN JAVIER. Not anything.

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

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

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

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

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

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

THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the amendment.

SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to show the world who
our creditors, that we are increasing official revenues that go to the national budget. Unfortunately today, Pagcor is unofficial.

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

57
TAXATION 1: CASES
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

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

SEN. OSMEÑA. And Negros.

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

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

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

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

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

REP. TEVES. Mr. Chair, please.

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

MR. PURISIMA. Thank you, Mr. Chair.

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

xxxx

REP. TEVES. Mr. Chairman.

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

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

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

xxxx

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

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

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

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

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

xxxx

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

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

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

58
TAXATION 1: CASES
Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed. 24 As a rule, tax exemptions are construed strongly against the claimant. 25 Exemptions must
be shown to exist clearly and categorically, and supported by clear legal provision.26

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering that Section 1 of R.A.
No. 9337 amended Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The
legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income
tax; hence, the omission or removal of PAGCOR from exemption from the payment of corporate income tax. It is a basic precept of
statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius.27 Thus, the express mention of the GOCCs exempted from payment of corporate income
tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule
that GOCCs shall pay corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non exceptis. 28

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCOR’s exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was not made pursuant to a
valid classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so
that the law may operate only on some, and not all, without violating the equal protection clause. The legislative records show that the
basis of the grant of exemption to PAGCOR from corporate income tax was PAGCOR’s own request to be exempted.

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

Petitioner’s contention lacks merit.

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

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

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

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

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

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

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

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

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

xxxx

59
TAXATION 1: CASES
(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except
Presidential Decree No. 529.37

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

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

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

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

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

xxxx

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

xxxx

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

x x x x38

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

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

xxxx

PAGCOR is exempt from payment of indirect taxes

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

Sec. 13. Exemptions. —

xxxx

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

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

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

We disagree.

60
TAXATION 1: CASES
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are
direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

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

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

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

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

VAT exemption extends to Acesite

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

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

xxxx

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

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

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

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

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

No costs.

SO ORDERED.

EN BANC
G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,
vs.

61
TAXATION 1: CASES
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE,
respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C.
JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER
OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496,
also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal
Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act


No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be expressed in the
title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any person be denied
the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their
rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective
memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for
being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The
Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. — A tax is
hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein,
determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%


but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%


but not over P120,00 of excess over P30,000

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TAXATION 1: CASES
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%


of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and
25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section: Provided, however, That
in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their
profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas
declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be
proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their
gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be
considered as having now adopted a gross income, instead of as having still retained the net income, taxation scheme. The allowance for
deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net
income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well
provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the
members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud
upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the
subjects of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be
to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable"
in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on
corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the
prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly
situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not
forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the
classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR,
197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax
system towards the schedular approach 2 in the income taxation of individual taxpayers and to maintain, by and large, the present
global treatment 3 on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance
between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court
cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure
becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all
its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have
been reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process
must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such transgression is so evident to us.

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TAXATION 1: CASES
G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded
their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership (GPP) and the partners comprising the GPP are
covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law
are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in
the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are
not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to
partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment of Republic
Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's
privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of
the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who
are earning, I mean, who earn through business enterprises and therefore, should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase
collections as far as individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated,
thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and
professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the
payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of
their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional
partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the
corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax
exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section
23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons exercising a common profession in
general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the
general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be
returned for taxation and the tax paid in accordance with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each partner —

(1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit
to the extent provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross
income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and
one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of
the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals
deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely
independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is
understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under
the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code,

64
TAXATION 1: CASES
and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of
nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax
liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can
subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how
created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as
in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its
deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the
payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable
entities for income tax purposes. A general professional partnership is such an example. 4 Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of
income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax
liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the
general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income
by, and the ultimate distribution of such income to, respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic
Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation
income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in
significant variance the income tax treatment of professionals who practice their respective professions individually and of those who
do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur.

Padilla and Bidin, JJ., are on leave.

EN BANC
G.R. No. L-53961 June 30, 1987
NATIONAL DEVELOPMENT COMPANY, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.:

We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have carefully studied it and find it is
not; on the contrary, it is supported by law and doctrine. So finding, we affirm.

Reduced to simplest terms, the background facts are as follows.

The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of
twelve ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments
were made in cash and through irrevocable letters of credit. 3 Fourteen promissory notes were signed for the balance by the NDC and, as
required by the shipbuilders, guaranteed by the Republic of the Philippines. 4 Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax
was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed.
The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The NDC went to the
Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise
penalty. 7 The NDC then came to this Court in a petition for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus:

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TAXATION 1: CASES
SEC. 37. Income from sources within the Philippines. — (a) Gross income from sources within the Philippines. — The following
items of gross income shall be treated as gross income from sources within the Philippines:

(1) Interest. — Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing
obligations of residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities — the
signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in
Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic and resident
corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest received by
foreign corporations not engaged in trade or business within the Philippines is not planted upon the condition that 'the activity or
labor — and the sale from which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived
from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or
otherwise.' Nothing there speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where the contract is
signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the
place of payment, is the determining factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p.
128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard
Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the
interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or
other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the laws of the
Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally
promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract
price of the twelve (12) ocean-going vessels purchased and acquired by it from the Japanese corporations, including the interest on
the principal sum at the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11,
Partial Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which are duly signed by its Vice
Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the
sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase price of the
aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest under consideration,
petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized and existing under the laws of
the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest
paid by petitioner, which is admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly, therefore, the
interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the
vessels acquired by petitioner is interest derived from sources within the Philippines subject to income tax under the then Section
24(b)(1) of the National Internal Revenue Code. 9

There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the
NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

(b) Exclusion from gross income. — The following items shall not be included in gross income and shall be exempt from taxation
under this Title:

xxx xxx xxx

(4) Interest on Government Securities. — Interest upon the obligations of the Government of the Republic of the Philippines or any
political subdivision thereof, but in the case of such obligations issued after approval of this Code, only to the extent provided in the
act authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No.
182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such
securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking
signed by the Secretary of Finance in each of the promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and
unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual payment of both principal and
interest of the above note. 10

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TAXATION 1: CASES
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right
to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. 11 Any doubt concerning
this question must be resolved in favor of the taxing power. 12

Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by
the government in consonance with and certainly not against the following provisions of the Tax Code:

Sec. 53(b). Nonresident aliens. — All persons, corporations and general co-partnership (companies colectivas), in whatever capacity
acting, including lessees or mortgagors of real or personal capacity, executors, administrators, receivers, conservators, fiduciaries,
employers, and all officers and employees of the Government of the Philippines having control, receipt, custody; disposal or
payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other
fixed or determinable annual or categorical gains, profits and income of any nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or place of business therein, shall (except in the cases provided for in
subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits and income a tax to twenty (now
30%) per centum thereof: ...

Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having any office or place of business therein, there shall be deducted
and withheld at the source in the same manner and upon the same items as is provided in section fifty-three a tax equal to thirty
(now 35%) per centum thereof, and such tax shall be returned and paid in the same manner and subject to the same conditions as
provided in that section:....

Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of
its taxing power under existing laws.

In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the
nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation
Code and other pertinent laws.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It
was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese
shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. — Every person required to deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of
the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such
person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of
any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, 13 the Court quoted with approval the
following regulation of the BIR on the responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to
withholding, the withholding agent may thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax
Regulations).

"Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson,
who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed
strictissimi juris." 14

The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so should be held liable for its
omission.

WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered.

Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Gancayno, Padilla, Bidin, Sarmiento and Cortez,
JJ., concur

THIRD DIVISION

G.R. No. 176667 November 22, 2007

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TAXATION 1: CASES
ERICSSON TELECOMMUNICATIONS, INC., petitioner,
vs.
CITY OF PASIG, represented by its City Mayor, Hon. Vicente P. Eusebio, et al. *, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in Pasig City, is engaged in the design, engineering, and marketing
of telecommunication facilities/system. In an Assessment Notice dated October 25, 2000 issued by the City Treasurer of Pasig City, petitioner was
assessed a business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00 and P4,993,682.00, respectively, based on its gross
revenues as reported in its audited financial statements for the years 1997 and 1998. Petitioner filed a Protest dated December 21, 2000, claiming that
the computation of the local business tax should be based on gross receipts and not on gross revenue.

The City of Pasig (respondent) issued another Notice of Assessment to petitioner on November 19, 2001, this time based on business tax deficiencies
for the years 2000 and 2001, amounting to P4,665,775.51 and P4,710,242.93, respectively, based on its gross revenues for the years 1999 and 2000.
Again, petitioner filed a Protest on January 21, 2002, reiterating its position that the local business tax should be based on gross receipts and not gross
revenue.

Respondent denied petitioner's protest and gave the latter 30 days within which to appeal the denial. This prompted petitioner to file a petition for
review1 with the Regional Trial Court (RTC) of Pasig, Branch 168, praying for the annulment and cancellation of petitioner's deficiency local
business taxes totaling P17,262,205.66.

Respondent and its City Treasurer filed a motion to dismiss on the grounds that the court had no jurisdiction over the subject matter and that
petitioner had no legal capacity to sue. The RTC denied the motion in an Order dated December 3, 2002 due to respondents' failure to include a
notice of hearing. Thereafter, the RTC declared respondents in default and allowed petitioner to present evidence ex- parte.

In a Decision2 dated March 8, 2004, the RTC canceled and set aside the assessments made by respondent and its City Treasurer. The dispositive
portion of the RTC Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and ordering defendants to CANCEL and SET
ASIDE Assessment Notice dated October 25, 2000 and Notice of Assessment dated November 19, 2001.

SO ORDERED.3

On appeal, the Court of Appeals (CA) rendered its Decision4 dated November 20, 2006, the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby ordered SET ASIDE and a new one entered DISMISSING the plaintiff/appellee's
complaint WITHOUT PREJUDICE.

SO ORDERED.5

The CA sustained respondent's claim that the petition filed with the RTC should have been dismissed due to petitioner's failure to show that Atty.
Maria Theresa B. Ramos (Atty. Ramos), petitioner's Manager for Tax and Legal Affairs and the person who signed the Verification and Certification
of Non-Forum Shopping, was duly authorized by the Board of Directors.

Its motion for reconsideration having been denied in a Resolution 6 dated February 9, 2007, petitioner now comes before the Court via a Petition for
Review on Certiorari under Rule 45 of the Rules of Court, on the following grounds:

(1) THE COURT OF APPEALS ERRED IN DISMISSING THE CASE FOR LACK OF SHOWING THAT THE SIGNATORY OF THE
VERIFICATION/ CERTIFICATION IS NOT SPECIFICALLY AUTHORIZED FOR AND IN BEHALF OF PETITIONER.

(2) THE COURT OF APPEALS ERRED IN GIVING DUE COURSE TO RESPONDENT'S APPEAL, CONSIDERING THAT IT HAS
NO JURISDICTION OVER THE SAME, THE MATTERS TO BE RESOLVED BEING PURE QUESTIONS OF LAW, JURISDICTION
OVER WHICH IS VESTED ONLY WITH THIS HONORABLE COURT.

(3) ASSUMING THE COURT OF APPEALS HAS JURISDICTION OVER RESPONDENT'S APPEAL, SAID COURT ERRED IN NOT
DECIDING ON THE MERITS OF THE CASE FOR THE SPEEDY DISPOSITION THEREOF, CONSIDERING THAT THE
DEFICIENCY LOCAL BUSINESS TAX ASSESSMENTS ISSUED BY RESPONDENT ARE CLEARLY INVALID AND CONTRARY
TO THE PROVISIONS OF THE PASIG REVENUE CODE AND THE LOCAL GOVERNMENT CODE. 7

After receipt by the Court of respondent's complaint and petitioner's reply, the petition is given due course and considered ready for decision without
the need of memoranda from the parties.

The Court grants the petition.

First, the complaint filed by petitioner with the RTC was erroneously dismissed by the CA for failure of petitioner to show that its Manager for Tax
and Legal Affairs, Atty. Ramos, was authorized by the Board of Directors to sign the Verification and Certification of Non-Forum Shopping in behalf
of the petitioner corporation.

Time and again, the Court, under special circumstances and for compelling reasons, sanctioned substantial compliance with the rule on the
submission of verification and certification against non-forum shopping. 8

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TAXATION 1: CASES
In General Milling Corporation v. National Labor Relations Commission,9 the Court deemed as substantial compliance the belated attempt of the
petitioner to attach to the motion for reconsideration the board resolution/secretary's certificate, stating that there was no attempt on the part of the
petitioner to ignore the prescribed procedural requirements.

In Shipside Incorporated v. Court of Appeals,10 the authority of the petitioner's resident manager to sign the certification against forum shopping was
submitted to the CA only after the latter dismissed the petition. The Court considered the merits of the case and the fact that the petitioner
subsequently submitted a secretary's certificate, as special circumstances or compelling reasons that justify tempering the requirements in regard to
the certificate of non-forum shopping.11

There were also cases where there was complete non-compliance with the rule on certification against forum shopping and yet the Court proceeded to
decide the case on the merits in order to serve the ends of substantial justice. 12

In the present case, petitioner submitted a Secretary's Certificate signed on May 6, 2002, whereby Atty. Ramos was authorized to file a protest at the
local government level and to "sign, execute and deliver any and all papers, documents and pleadings relative to the said protest and to do and
perform all such acts and things as may be necessary to effect the foregoing." 13

Applying the foregoing jurisprudence, the subsequent submission of the Secretary's Certificate and the substantial merits of the petition, which will
be shown forthwith, justify a relaxation of the rule.

Second, the CA should have dismissed the appeal of respondent as it has no jurisdiction over the case since the appeal involves a pure question of
law. The CA seriously erred in ruling that the appeal involves a mixed question of law and fact necessitating an examination and evaluation of the
audited financial statements and other documents in order to determine petitioner's tax base.

There is a question of law when the doubt or difference is on what the law is on a certain state of facts. On the other hand, there is a question of fact
when the doubt or difference is on the truth or falsity of the facts alleged. 14 For a question to be one of law, the same must not involve an examination
of the probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law provides
on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the
test of whether a question is one of law or of fact is not the appellation given to such question by the party raising the same; rather, it is whether the
appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question of law; otherwise it is a
question of fact.15

There is no dispute as to the veracity of the facts involved in the present case. While there is an issue as to the correct amount of local business tax to
be paid by petitioner, its determination will not involve a look into petitioner's audited financial statements or documents, as these are not disputed;
rather, petitioner's correct tax liability will be ascertained through an interpretation of the pertinent tax laws, i.e., whether the local business tax, as
imposed by the Pasig City Revenue Code (Ordinance No. 25-92) and the Local Government Code of 1991, should be based on gross receipts, and not
on gross revenue which respondent relied on in computing petitioner's local business tax deficiency. This, clearly, is a question of law, and beyond the
jurisdiction of the CA.

Section 2(c), Rule 41 of the Rules of Court provides that in all cases where questions of law are raised or involved, the appeal shall be to this Court
by petition for review on certiorari under Rule 45.

Thus, as correctly pointed out by petitioner, the appeal before the CA should have been dismissed, pursuant to Section 5(f), Rule 56 of the Rules of
Court, which provides:

Sec. 5. Grounds for dismissal of appeal.- The appeal may be dismissed motu proprio or on motion of the respondent on the following
grounds:

xxxx

(f) Error in the choice or mode of appeal.

xxxx

Third, the dismissal of the appeal, in effect, would have sustained the RTC Decision ordering respondent to cancel the Assessment Notices issued by
respondent, and therefore, would have rendered moot and academic the issue of whether the local business tax on contractors should be based on
gross receipts or gross revenues.

However, the higher interest of substantial justice dictates that this Court should resolve the same, to evade further repetition of erroneous
interpretation of the law,16 for the guidance of the bench and bar.

As earlier stated, the substantive issue in this case is whether the local business tax on contractors should be based on gross receipts or gross revenue.

Respondent assessed deficiency local business taxes on petitioner based on the latter's gross revenue as reported in its financial statements, arguing
that gross receipts is synonymous with gross earnings/revenue, which, in turn, includes uncollected earnings. Petitioner, however, contends that only
the portion of the revenues which were actually and constructively received should be considered in determining its tax base.

Respondent is authorized to levy business taxes under Section 143 in relation to Section 151 of the Local Government Code.

Insofar as petitioner is concerned, the applicable provision is subsection (e), Section 143 of the same Code covering contractors and other
independent contractors, to wit:

SEC. 143. Tax on Business. - The municipality may impose taxes on the following businesses:

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TAXATION 1: CASES
xxxx

(e) On contractors and other independent contractors, in accordance with the following schedule:

With gross receipts for the preceding calendar Amount of Tax Per
year in the amount of: Annum

xxxx

(Emphasis supplied)

The above provision specifically refers to gross receipts which is defined under Section 131 of the Local Government Code, as follows:

xxxx

(n) "Gross Sales or Receipts" include the total amount of money or its equivalent representing the contract price, compensation or service
fee, including the amount charged or materials supplied with the services and the deposits or advance payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at
the time of sales, sales return, excise tax, and value-added tax (VAT);

xxxx

The law is clear. Gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles
sold, exchanged or leased, whether actual or constructive.

In Commissioner of Internal Revenue v. Bank of Commerce,17 the Court interpreted gross receipts as including those which were actually or
constructively received, viz.:

Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical receipt or constructive
receipt. When the depository bank withholds the final tax to pay the tax liability of the lending bank, there is prior to the withholding a
constructive receipt by the lending bank of the amount withheld. From the amount constructively received by the lending bank, the
depository bank deducts the final withholding tax and remits it to the government for the account of the lending bank. Thus, the interest
income actually received by the lending bank, both physically and constructively, is the net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld comes from the income
earned by the taxpayer. Since the amount of the tax withheld constitutes income earned by the taxpayer, then that amount manifestly forms
part of the taxpayer's gross receipts. Because the amount withheld belongs to the taxpayer, he can transfer its ownership to the government
in payment of his tax liability. The amount withheld indubitably comes from income of the taxpayer, and thus forms part of his gross
receipts. (Emphasis supplied)

Further elaboration was made by the Court in Commissioner of Internal Revenue v. Bank of the Philippine Islands,18 in this wise:

Receipt of income may be actual or constructive. We have held that the withholding process results in the taxpayer's constructive receipt of
the income withheld, to wit:

By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in Articles 531 and 532 of our Civil
Code.

Under Article 531:

"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action
of our will, or by the proper acts and legal formalities established for acquiring such right."

Article 532 states:

"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his agent, or by any person
without any power whatever; but in the last case, the possession shall not be considered as acquired until the person in whose
name the act of possession was executed has ratified the same, without prejudice to the juridical consequences of negotiorum
gestio in a proper case."

The last means of acquiring possession under Article 531 refers to juridical acts—the acquisition of possession by sufficient title
—to which the law gives the force of acts of possession. Respondent argues that only items of income actually received should
be included in its gross receipts. It claims that since the amount had already been withheld at source, it did not have actual receipt
thereof.

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts
and legal formalities established therefor. The withholding process is one such act. There may not be actual receipt of the income
withheld; however, as provided for in Article 532, possession by any person without any power whatsoever shall be considered as
acquired when ratified by the person in whose name the act of possession is executed.

In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the
taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping

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TAXATION 1: CASES
and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed—for legal purposes
—tantamount to delivery, receipt or remittance. 19

Revenue Regulations No. 16-2005 dated September 1, 200520 defined and gave examples of "constructive receipt", to wit:

SEC. 4. 108-4. Definition of Gross Receipts. -- x x x

"Constructive receipt" occurs when the money consideration or its equivalent is placed at the control of the person who rendered the
service without restrictions by the payor. The following are examples of constructive receipts:

(1) deposit in banks which are made available to the seller of services without restrictions;

(2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered;
and

(3) transfer of the amounts retained by the payor to the account of the contractor.

There is, therefore, constructive receipt, when the consideration for the articles sold, exchanged or leased, or the services rendered has already been
placed under the control of the person who sold the goods or rendered the services without any restriction by the payor.

In contrast, gross revenue covers money or its equivalent actually or constructively received, including the value of services rendered or articles
sold, exchanged or leased, the payment of which is yet to be received. This is in consonance with the International Financial Reporting
Standards,21 which defines revenue as the gross inflow of economic benefits (cash, receivables, and other assets) arising from the ordinary operating
activities of an enterprise (such as sales of goods, sales of services, interest, royalties, and dividends), 22 which is measured at the fair value of the
consideration received or receivable.23

As aptly stated by the RTC:

"[R]evenue from services rendered is recognized when services have been performed and are billable." It is "recorded at the amount
received or expected to be received." (Section E [17] of the Statements of Financial Accounting Standards No. 1). 24

In petitioner's case, its audited financial statements reflect income or revenue which accrued to it during the taxable period although not yet actually
or constructively received or paid. This is because petitioner uses the accrual method of accounting, where income is reportable when all the events
have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy; the right to receive
income, and not the actual receipt, determines when to include the amount in gross income. 25

The imposition of local business tax based on petitioner's gross revenue will inevitably result in the constitutionally proscribed double taxation –
taxing of the same person twice by the same jurisdiction for the same thing 26 – inasmuch as petitioner's revenue or income for a taxable year will
definitely include its gross receipts already reported during the previous year and for which local business tax has already been paid.

Thus, respondent committed a palpable error when it assessed petitioner's local business tax based on its gross revenue as reported in its audited
financial statements, as Section 143 of the Local Government Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should
be computed based on gross receipts.

WHEREFORE, the petition is GRANTED. The Decision dated November 20, 2006 and Resolution dated February 9, 2007 issued by the Court of
Appeals are SET ASIDE, and the Decision dated March 8, 2004 rendered by the Regional Trial Court of Pasig, Branch 168 is REINSTATED.

SO ORDERED.

Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, Reyes, JJ., concur.

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