Planters vs. fertiphil corp. REYES, R.T., J.

THE

Regional

Trial

Courts

(RTC) have the

authority

and

jurisdiction

to

consider

the

constitutionality of statutes, executive orders, presidential decrees and other issuances. The Constitution vests that power not only in the Supreme Court but in all Regional Trial Courts. The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) affirming with modification that of the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465. The Facts Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.[3] They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals. On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in thePhilippines.[4] The LOI provides: 3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less thanP10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6] After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.[7] Fertiphil filed a complaint for collection and damages[8] against FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of

law.[9] Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry. In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller. RTC Disposition On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows: WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former: 1) 2) 3) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand; the sum of P100,000 as attorneys fees; the cost of suit.

SO ORDERED.[11]

Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the RTC invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.: It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the exercise of the power of taxation. It is a settled principle that the power of taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations. One of the inherent limitations is that a tax may be levied only for public purposes: The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token, taxes may not be levied for purely private purposes, for building up of private fortunes, or for the redress of private wrongs. They cannot be levied for the improvement of private property, or for the benefit, and promotion of private enterprises, except where the aid is incident to the public benefit. It is well-settled principle of constitutional law that no general tax can be levied except for the purpose of raising money which is to be

expended for public use. Funds cannot be exacted under the guise of taxation to promote a purpose that is not of public interest. Without such limitation, the power to tax could be exercised or employed as an authority to destroy the economy of the people. A tax, however, is not held void on the ground of want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371-372) In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount to the defendant Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc., another private domestic corporation, became richer by the amount of P6,698,144.00. Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and orders that the said amount should go to the defendant Planters Product, Inc. is unlawful because it violates the mandate that a tax can be levied only for a public purpose and not to benefit, aid and promote a private enterprise such as Planters Product, Inc.[12] PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court[14] allowed the appeal of PPI and remanded the case to the CA for proper disposition. CA Decision On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the followingfallo: IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION that the award of attorneys fees is hereby DELETED.[15] In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the constitutionality of LOI No. 1465, thus: The question then is whether it was proper for the trial court to exercise its power to judicially determine the constitutionality of the subject statute in the instant case. As a rule, where the controversy can be settled on other grounds, the courts will not resolve the constitutionality of a law ( Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of political departments are valid, absent a clear and unmistakable showing to the contrary. However, the courts are not precluded from exercising such power when the following requisites are obtaining in a controversy before it: First, there must be before the court an actual case calling for the exercise of judicial review. Second, the

question must be ripe for adjudication. Third, the person challenging the validity of the act must have standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest opportunity; and lastly, the issue of constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora,338 SCRA 81 [2000]). Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of the complaint also reveals that the instant action is founded on the claim that the levy imposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that the constitutionality of the law in question be the very lis mota of the case is present, making it proper for the trial court to rule on the constitutionality of LOI 1465.[16] The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it is still unconstitutional because it did not promote public welfare. The CA explained: In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law was an invalid exercise of the States power of taxation inasmuch as it violated the inherent and constitutional prescription that taxes be levied only for public purposes. It reasoned out that the amount collected under the levy was remitted to the depository bank of PPI, which the latter used to advance its private interest. On the other hand, appellant submits that the subject statutes passage was a valid exercise of police power. In addition, it disputes the courta quos findings arguing that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PPI. Of the three fundamental powers of the State, the exercise of police power has been characterized as the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It may be exercised as long as the activity or the property sought to be regulated has some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition). Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the test to determine the validity of a police measure as follows: (1) the interests of the public generally, as distinguished from those of a particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]). It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare. The governments commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To

rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals.[17] The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated: Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion dated October 12, 1987, to wit: 2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by Planters and Planters Foundation) (such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital), and subsequently for such capital increases as may be required for the continuing viability of Planters. The capital recovery component shall be in the minimum amount of P10 per bag, which will be added to the price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother company. In this connection, the Republic hereby acknowledges that the advances by Planters to Planters Foundation which were applied to the payment of the Planters shares now held in trust by Planters Foundation, have been assigned to, among others, the Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the proceeds of the capital recovery component in the special trust account designated in the notice datedApril 2, 1985, addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or before the 15 th day of each month.

The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currency-denominated obligations. (Records, pp. 42-43) Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister Virata taken together with the Justice Secretarys Opinion does

not preponderantly demonstrate that the collections made were held in trust in favor of millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this Court is constrained to rely on what is explicitly provided in LOI 1465 that one of the primary aims in imposing the levy is to support the successful rehabilitation and continued viability of PPI.[18] PPI moved for reconsideration but its motion was denied.[19] It then filed the present petition with this Court. Issues Petitioner PPI raises four issues for Our consideration, viz.: I THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO. II LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES. III THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE GOVERNMENT, ANDBECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIESAND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465. IV THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT CASE.[20] (Underscoring supplied) Our Ruling We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve constitutional issues. Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural technicality which may be waived. PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not have a personal and substantial interest in the case or will sustain direct injury as

a result of its enforcement.[21] It asserts that Fertiphil did not suffer any damage from the CRC imposition because incidence of the levy fell on the ultimate consumer or the farm ers themselves, not on the seller fertilizer company.[22] We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a real party in interest, which is defined as the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit. [23] In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a public right on behalf of the general public because of conflicting public policy issues. [24] On one end, there is the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official action. At the other end, there is the public policy precluding excessive judicial interference in official acts, which may unnecessarily hinder the delivery of basic public services. In this jurisdiction, We have adopted the direct injury test to determine locus standi in public suits. In People v. Vera,[25] it was held that a person who impugns the validity of a statute must have a personal and substantial interest in the case such that he has sustaine d, or will sustain direct injury as a result. The direct injury test in public suits is similar to the real party in interest rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.[26] Recognizing that a strict application of the direct injury test may hamper public interest, this Court relaxed the requirement in cases of transcendental importance or with far reachi ng implications. Being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest.[27]

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more expensive. The harm to their business consists not only in fewer clients because of the increased price, but also in adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus standi. Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this Court onlocus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided that the capital contribution shall be collected until adequate capital is raised to make PPI viable. The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a mere procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue. RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint; it is the lis mota of the case. PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the constitutionality of the LOI cannot be collaterally attacked in a complaint for collection.[28] Alternatively, the resolution of the constitutional issue is not necessary for a determination of the complaint for collection.[29] Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim without resolving the issue.[30] It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers: xxxx (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: (a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring supplied) In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to resolve constitutional issues, thus: On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the constitutionality of a statute, presidential decree, or executive order. The Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.[32] In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33] this Court reiterated: There is no denying that regular courts have jurisdiction over cases involving the validity or constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however, is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take cognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts.[34] Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in criminal actions, as inPeople v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality of laws prohibiting aliens from acquiring public lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota presented.[37]

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the complaint for collection filed with the RTC. The pertinent portions of the complaint allege: 6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because: xxxx (c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense and disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation and were then exerting all efforts and maximizing management and marketing skills to remain viable; xxxx (e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been presumptuously masqueraded as the fertilizer industry itself, was the sole and anointed beneficiary; 7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount to illegal exaction amounting to a denial of due process since the persons of entities which had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary it was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the detriment of other distributors and importers.[38] (Underscoring supplied) The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be refunded under the civil code principle against unjust enrichment. The refund is a mere consequence of the law being declared unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the very lis mota of the complaint with the RTC. The P10 levy under LOI No. 1465 is an exercise of the power of taxation. At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the LOI. PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer supply and

distribution in the country and for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI. Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is still unconstitutional because it did not promote the general welfare of the people or public interest. Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, [39] while the power of taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The lawful subjects and lawful means tests are used to determine the validity of a law enacted under the police power.[40] The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations. We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power,[41] the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.[42] In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle registration fee is not an exercise by the State of its police power, but of its taxation power, thus: It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation. Taxation may be made the implement of the state's police power ( Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a tax or fee. x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an additional tax. Rep. Act 4136 also speaks of other fees such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not

mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61.[44] (Underscoring supplied) The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as five percent.[45] A plain reading of the LOI also supports the conclusion that the levy was for revenue generation. The LOI expressly provided that the levy was imposed until adequate capital is raised to make PPI viable. Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI. An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons.[46] The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation.[47] The term public purpose is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that public purpose should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. While the categories of what may constitute a public purpose are continually expanding in light of the expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of public purpose. The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit from Clause 3 of the law, thus: 3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less thanP10 per bag. This capital contribution shall be collected until adequate capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law would expressly name a private company as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony capitalism. Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming financially viable. This suggests that the levy was actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when PPI is deemed financially viable. Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy until adequate capital is raised for PPI. Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI. [49] This proves that PPI benefited from the LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage to PPI. Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial problem because of its huge corporate debts. There were pending petitions for rehabilitation against PPI before the Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding read: Republic of the Philippines Office of the Prime Minister Manila LETTER OF UNDERTAKING

May 18, 1985 TO: THE BANKING AND FINANCIAL INSTITUTIONS LISTED IN ANNEX A HERETO WHICH ARE CREDITORS (COLLECTIVELY, THE CREDITORS) OF PLANTERS PRODUCTS, INC. (PLANTERS) Gentlemen: This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine Government confirms its awareness of the following: (1) that Planters has outstanding obligations in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial difficulties, and (3) that there are presently pending with the Securities and Exchange Commission of the Philippines a petition filed at Planters own behest for the suspension of payment of all its obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters. In connection with the foregoing, the Republic of the Philippines (the Republic) confirms that it considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration of your expressed willingness to consider and participate in the effort to rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and obligates itself to the creditors and Planters, as follows: xxxx 2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million (subject to validation by Planters and Planters Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter referred to as the Unpaid Capital), and subsequently for such capital increases as may be required for the continuing viability of Planters. xxxx The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currency-denominated obligations. REPUBLIC OF THE PHILIPPINES By: (signed) CESAR E. A. VIRATA Prime Minister and Minister of Finance[51]

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of a private corporation. All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws. The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest. Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for failing to comply with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1) the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals.[52] For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The law was enacted to give undue advantage to a private corporation. We quote with approval the CA ratiocination on this point, thus: It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare. The governments commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the countrys farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statutes public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals. (Underscoring supplied) The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable. PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks on the doctrine of operative fact, which provides that an unconstitutional

law has an effect before being declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared to be unconstitutional. We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine of operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional law. At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid should be refunded in accordance with the general civil code principle against unjust enrichment. The general rule is supported by Article 7 of the Civil Code, which provides: ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary. When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern. The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play.[55] It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have consequences which cannot always be ignored. The past cannot always be erased by a new judicial declaration.[56] The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in double jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon a law creating it.[58] Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and deposited to its bank account. Quite the reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that every person who, through an act of performance by another comes into possession of something at the expense of the latter without just or legal ground shall return the same to him. We cannot allow PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil. WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.

Diaz vs. Sec of Finance

May toll fees collected by tollway operators be subjected to value- added tax? The Facts and the Case Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief[1] assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators. Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past administration. Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino IIIs assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution. On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT. The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10 days from notice. [2] Later, the Court issued another resolution treating the petition as one for prohibition.[3] On August 23, 2010 the Office of the Solicitor General filed the governments comment. [4] The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where the law provides otherwise; that the Court should seek the meaning

and intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.[5] The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and tollway operators. At any rate, the non-impairment clause cannot limit the States sovereign taxing power which is generally read into contracts. Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways. In their reply[6] to the governments comment, petitioners point out that tollway operators cannot be regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this would be illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be implemented. The Issues Presented The case presents two procedural issues: 1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and 2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

The case also presents two substantive issues: 1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations in the terms franchise grantees and sale of services under Section 108 of the Code; and 2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair the tollway operators right to a reasonable return of investment under their TOAs; and c) is not administratively feasible and cannot be implemented.

The Courts Rulings A. On the Procedural Issues: On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The government has sought reconsideration of the Courts resolution, [7] however, arguing that petitioners allegations clearly made out a case for declaratory relief, an action over which the Court has no original jurisdiction. The government adds, moreover, that the petition does not meet the requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasijudicial, or ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR action in the form of an appeal to the Secretary of Finance. But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-reaching implications and raises questions that need to be resolved for the public good.[8] The Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that amount to usurpation of legislative authority.[9] Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on the more than half a million motorists who use the tollways everyday, but more so on the governments effort to raise revenue for funding various projects and for reducing budgetary deficits. To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could cause more mischief both to the tax-paying public and the government. A belated declaration of nullity of the BIR action would make any attempt to refund to the motorists what they paid an administrative nightmare with no solution. Consequently, it is not only the right, but the duty of the Court to take cognizance of and resolve the issues that the petition raises. Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive such technical requirements when the legal questions to be resolved are of great importance to the public. The same may be said of the requirement of locus standi which is a mere procedural requisite.[10] B. On the Substantive Issues: One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected, according to Section 108, on the gross receipts derived from the sale or

exchange of services as well as from the use or lease of properties. The third paragraph of Section 108 defines sale or exchange of services as follows: The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. (Underscoring supplied) It is plain from the above that the law imposes VAT on all kinds of services rendered in the Philippines for a fee, including those specified in the list. The enumeration of affected services is not exclusive.[11] By qualifying services with the words all kinds, Congress has given the term services an all-encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is the VATs reach rather than establish concrete limits to its application. Thus, every activity that can be imagined as a form of service rendered for a fee should be deemed included unless some provision of law especially excludes it. Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services that tollway operators render. Essentially, tollway operators construct, maintain, and operate expressways, also called tollways, at the operators expense. Tollways serve as alternatives to regular public highways that meander through populated areas and branch out to local roads. Traffic in the regular public highways is for this reason slow-moving. In consideration for constructing tollways at their expense, the operators are allowed to collect government-approved fees from motorists using the tollways until such operators could fully recover their expenses and earn reasonable returns from their investments. When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities over which the operator enjoys private proprietary rights [12] that its contract

and the law recognize. In this sense, the tollway operator is no different from the following service providers under Section 108 who allow others to use their properties or facilities for a fee: 1. Lessors of property, whether personal or real; 2. Warehousing service operators; 3. Lessors or distributors of cinematographic films; 4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; 5. Lending investors (for use of money); 6. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; and 7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines. It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered for a fee regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. human knowledge and skills. And not only do tollway operators come under the broad term all kinds of services, they also come under the specific class described in Section 108 as all other franchise grantees who are subject to VAT, except those under Section 119 of this Code. Tollway operators are franchise grantees and they do not belong to exceptions (the lowincome radio and/or television broadcasting companies with gross annual incomes of less than P10 million and gas and water utilities) that Section 119 [13] spares from the payment of VAT. The word franchise broadly covers government grants of a special right to do an act or series of acts of public concern.[14] Petitioners of course contend that tollway operators cannot be considered franchise grantees under Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates that the franchise grantees it speaks of are those who hold legislative franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction between franchises granted by Congress and franchises granted by some other government agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state, constitute as much a legislative franchise as though the grant had been made by Congress itself.[15] The term franchise has been broadly construed as referring, not only to authorizations that Congress directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant franchises has been delegated by Congress.[16] This means that services to be subject to VAT need not fall under the traditional concept of services, the personal or professional kinds that require the use of

Tollway operators are, owing to the nature and object of their business, franchise grantees. The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted special franchise for the operation of tollways to the Philippine National Construction Company, the former tollway concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D. 1112.[17] The franchise in this case is evidenced by a Toll Operation Certificate.[18] Petitioners contend that the public nature of the services rendered by tollway operators excludes such services from the term sale of services under Section 108 of the Code. But, again, nothing in Section 108 supports this contention. The reverse is true. In specifically including by way of example electric utilities, telephone, telegraph, and broadcasting companies in its list of VATcovered businesses, Section 108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for its use or service is a franchise.[19] Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of congressional deliberations of the would-be law. As the Court said in South African Airways v. Commissioner of Internal Revenue,[20]statements made by individual members of Congress in the consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law. The congressional will is ultimately determined by the language of the law that the lawmakers voted on. Consequently, the meaning and intention of the law must first be sought in the words of the statute itself, read and considered in their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage and without resorting to forced or subtle construction. Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this argument on the following discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:[22] No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like roads, canals, rivers, torrents, ports and bridges constructed by the State, are owned by the State. The term ports includes seaports and airports. TheMIAA Airport Lands and Buildings constitute a port constructed by the State. Under Article 420 of the Civil Code, the MIAAAirport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines. x x x The operation by the government of a tollway does not change the character of the road as one for public use. Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay upon using the road. The tollway system

is even a more efficient and equitable manner of taxing the public for the maintenance of public roads. The charging of fees to the public does not determine the character of the property whether it is for public dominion or not. Article 420 of the Civil Code defines property of public dominion as one intended for public use. Even if the government collects toll fees, the road is still intended for public use if anyone can use the road under the same terms and conditions as the rest of the public.The charging of fees, the limitation on the kind of vehicles that can use the road, the speed restrictions and other conditions for the use of the road do not affect the public character of the road. The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use. Such fees are often termed users tax. This means taxing those among the public who actually use a public facility instead of taxing all the public including those who never use the particular public facility. A users tax is more equitable a principle of taxation mandated in the 1987 Constitution.[23] (Underscoring supplied) Petitioners assume that what the Court said above, equating terminal fees to a users tax must also pertain to tollway fees. But the main issue in the MIAA case was whether or not Paraaque City could sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the national government, the Court held that the City could not proceed with the auction sale. MIAA forms part of the national government although not integrated in the department framework. [24] Thus, its airport lands and buildings are properties of public dominion beyond the commerce of man under Article 420(1)[25] of the Civil Code and could not be sold at public auction. As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that tollway fees are users tax, but to make the point that airport lands and buildings are properties of public dominion and that the collection of terminal fees for their use does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the government. It would of course be another matter if Congress enacts a law imposing a users tax, collectible from motorists, for the construction and maintenance of certain roadways. The tax in such a case goes directly to the government for the replenishment of resources it spends for the roadways. This is not the case here. What the government seeks to tax here are fees collected from tollways that are constructed, maintained, and operated by private tollway operators at their own expense under the build, operate, and transfer scheme that the government has adopted for expressways. [26] Except for a fraction given to the government, the toll fees essentially end up as earnings of the tollway operators.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures.[27] Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.[28] Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a ca se, what is transferred is not the sellers liability but merely the burden of the VAT.[29] Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax[30] and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees. For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a users tax. VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways.[32] Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged diminution in return of investments that may result from the VAT imposition. She has no interest at all in the profits to be earned under the TOAs. The interest in and right to recover investments solely belongs to the private tollway investors.

Besides, her allegation that the private investors rate of recovery will be adversely aff ected by imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic grounds. Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in order to claim input VAT, the name, address and tax identification number of the tollway user must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT by rounding off the toll rate and putting any excess collection in an escrow account is also illegal, while the alternative of giving change to thousands of motorists in order to meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively feasible.[33] Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired.[34] Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any declaration by the Court that the manner of its implementation is illegal or unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the BIR intends to go about it,[35] the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on. Besides, any concern about how the VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt the BIRs discretion on the matter, absent any clear violation of law or the Constitution. For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section 111(A)[36] of the Code which grants first time VAT payers a transitional input VAT of 2% on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the tollway operators who have not questioned the circulars validity. They are thus the ones who have a right to challenge the circular in a direct and proper action brought for the purpose. Conclusion In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT laws coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code clearly states that services of all other franchise grantees are subject to VAT, except as may be provided under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions under Section 109 of the Code. If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on language in the law too plain to be mistaken. [37] But as the law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is found. Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of Congress. The Courts role is to merely uphold this legislative policy, as reflected first and foremost in the language of the tax statute. Thus, any unwarranted burden that may be perceived to result from enforcing such policy must be properly referred to Congress. The Court has no discretion on the matter but simply applies the law. The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now, however, that the executive has earnestly pursued the VAT imposition against tollway operators. The executive exercises exclusive discretion in matters pertaining to the implementation and execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and practical consequences of the VAT imposition. WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES

G.R. No. 173863

September 15, 2010

CHEVRON PHILIPPINES, INC. (Formerly CALTEX PHILIPPINES, INC.), Petitioner, vs. BASES CONVERSION DEVELOPMENT AUTHORITY and CLARK DEVELOPMENT CORPORATION,Respondents. DECISION VILLARAMA, JR., J.: This petition for review on certiorari assails the Decision1 dated November 30, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 87117, which affirmed the Resolution2 dated August 2, 2004 and the Order3 dated September 30, 2004 of the Office of the President in O.P. Case No. 04-D-170. The facts follow. On June 28, 2002, the Board of Directors of respondent Clark Development Corporation (CDC) issued and approved Policy Guidelines on the Movement of Petroleum Fuel to and from the Clark Special Economic Zone (CSEZ)4 which provided, among others, for the following fees and charges: 1. Accreditation Fee xxxx 2. Annual Inspection Fee xxxx 3. Royalty Fees Suppliers delivering fuel from outside sources shall be assessed the following royalty fees: - Php0.50 per liter those delivering Coastal petroleum fuel to CSEZ locators not sanctioned by CDC - Php1.00 per liter those bringing-in petroleum fuel (except Jet A-1) from outside sources xxxx 4. Gate Pass Fee x x x x5 The above policy guidelines were implemented effective July 27, 2002. On October 1, 2002, CDC sent a letter6 to herein petitioner Chevron Philippines, Inc. (formerly Caltex Philippines, Inc.), a domestic corporation which has been supplying fuel to Nanox Philippines, a locator inside the CSEZ since 2001, informing the petitioner that a royalty fee of P0.50 per liter shall be assessed on its deliveries to Nanox Philippines effective August 1, 2002. Thereafter, on October 21, 2002 a Statement of Account7 was sent by CDC billing the petitioner for royalty fees in the amount of P115,000.00 for its fuel sales from Coastal depot to Nanox Philippines from August 1-31 to September 3-21, 2002. Claiming that nothing in the law authorizes CDC to impose royalty fees or any fees based on a per unit measurement of any commodity sold within the special economic zone, petitioner sent a letter8 dated October

30, 2002 to the President and Chief Executive Officer of CDC, Mr. Emmanuel Y. Angeles, to protest the assessment for royalty fees. Petitioner nevertheless paid the said fees under protest on November 4, 2002. On August 18, 2003, CDC again wrote a letter9 to petitioner regarding the latters unsettled royalty fees covering the period of December 2002 to July 2003. Petitioner responded through a letter10 dated September 8, 2003 reiterating its continuing objection over the assessed royalty fees and requested a refund of the amount paid under protest on November 4, 2002. The letter also asked CDC to revoke the imposition of such royalty fees. The request was denied by CDC in a letter11 dated September 29, 2003. Petitioner elevated its protest before respondent Bases Conversion Development Authority (BCDA) arguing that the royalty fees imposed had no reasonable relation to the probable expenses of regulation and that the imposition on a per unit measurement of fuel sales was for a revenue generating purpose, thus, akin to a "tax". The protest was however denied by BCDA in a letter12 dated March 3, 2004. Petitioner appealed to the Office of the President which dismissed13 the appeal for lack of merit on August 2, 2004 and denied14 petitioners motion for reconsideration thereof on September 30, 2004. Aggrieved, petitioner elevated the case to the CA which likewise dismissed15 the appeal for lack of merit on November 30, 2005 and denied16 the motion for reconsideration on July 26, 2006. The CA held that in imposing the challenged royalty fees, respondent CDC was exercising its right to regulate the flow of fuel into CSEZ, which is bolstered by the fact that it possesses exclusive right to distribute fuel within CSEZ pursuant to its Joint Venture Agreement (JVA)17 with Subic Bay Metropolitan Authority (SBMA) and Coastal Subic Bay Terminal, Inc. (CSBTI) dated April 11, 1996. The appellate court also found that royalty fees were assessed on fuel delivered, not on the sale, by petitioner and that the basis of such imposition was petitioners delivery receipts to Nanox Philippines. The fact that revenue is incidentally also obtained does not make the imposition a tax as long as the primary purpose of such imposition is regulation. 18 Petitioner filed a motion for reconsideration but the CA denied the same in its Resolution 19 dated July 26, 2006. Hence, this petition raising the following grounds: I. THE ISSUE RAISED BEFORE THE COURT A QUO IS A QUESTION OF SUBSTANCE NOT HERETOFORE DETERMINED BY THE HONORABLE SUPREME COURT. II. THE RULING OF THE COURT OF APPEALS THAT THE CDC HAS THE POWER TO IMPOSE THE QUESTIONED "ROYALTY FEES" IS CONTRARY TO LAW. III. THE COURT OF APPEALS WAS MANIFESTLY MISTAKEN AND COMMITTED GRAVE ABUSE OF DISCRETION AND A CLEAR MISUNDERSTANDING OF FACTS WHEN IT RULED CONTRARY TO THE EVIDENCE THAT: (i) THE QUESTIONED "ROYALTY FEE" IS PRIMARILY FOR REGULATION; AND (ii) ANY REVENUE EARNED THEREFROM IS MERELY INCIDENTAL TO THE PURPOSE OF REGULATION. IV. THE COURT OF APPEALS FAILED TO GIVE DUE WEIGHT AND CONSIDERATION TO THE EVIDENCE PRESENTED BY CPI SUCH AS THE LETTERS COMING FROM RESPONDENT CDC ITSELF PROVING THAT THE QUESTIONED ROYALTY FEES ARE IMPOSED ON THE BASIS OF FUEL SALES (NOT DELIVERY OF FUEL) AND NOT FOR REGULATION BUT PURELY FOR INCOME GENERATION, I.E. AS PRICE OR CONSIDERATION FOR THE RIGHT TO MARKET AND DISTRIBUTE FUEL INSIDE THE CSEZ. 20 Petitioner argues that CDC does not have any power to impose royalty fees on sale of fuel inside the CSEZ on the basis of purely income generating functions and its exclusive right to market and distribute goods inside the CSEZ. Such imposition of royalty fees for revenue generating purposes would amount to a tax, which the respondents have no power to impose. Petitioner stresses that the royalty fee imposed by CDC is not regulatory in nature but a revenue generating measure to increase its profits and to further enhance its exclusive right to market and distribute fuel in CSEZ.21

Petitioner would also like this Court to note that the fees imposed, assuming arguendo they are regulatory in nature, are unreasonable and are grossly in excess of regulation costs. It adds that the amount of the fees should be presumed to be unreasonable and that the burden of proving that the fees are not unreasonable lies with the respondents.22 On the part of the respondents, they argue that the purpose of the royalty fees is to regulate the flow of fuel to and from the CSEZ. Such being its main purpose, and revenue (if any) just an incidental product, the imposition cannot be considered a tax. It is their position that the regulation is a valid exercise of police power since it is aimed at promoting the general welfare of the public. They claim that being the administrator of the CSEZ, CDC is responsible for the safe distribution of fuel products inside the CSEZ.23 The petition has no merit. In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state, even though incidentally, revenue is generated. Thus, in Gerochi v. Department of Energy,24 the Court stated: The conservative and pivotal distinction between these two (2) powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax. In the case at bar, we hold that the subject royalty fee was imposed primarily for regulatory purposes, and not for the generation of income or profits as petitioner claims. The Policy Guidelines on the Movement of Petroleum Fuel to and from the Clark Special Economic Zone25 provides: DECLARATION OF POLICY It is hereby declared the policy of CDC to develop and maintain the Clark Special Economic Zone (CSEZ) as a highly secured zone free from threats of any kind, which could possibly endanger the lives and properties of locators, would-be investors, visitors, and employees. It is also declared the policy of CDC to operate and manage the CSEZ as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the CSEZ.26 (Emphasis supplied.) From the foregoing, it can be gleaned that the Policy Guidelines was issued, first and foremost, to ensure the safety, security, and good condition of the petroleum fuel industry within the CSEZ. The questioned royalty fees form part of the regulatory framework to ensure "free flow or movement" of petroleum fuel to and from the CSEZ. The fact that respondents have the exclusive right to distribute and market petroleum products within CSEZ pursuant to its JVA with SBMA and CSBTI does not diminish the regulatory purpose of the royalty fee for fuel products supplied by petitioner to its client at the CSEZ. As pointed out by the respondents in their Comment, from the time the JVA took effect up to the time CDC implemented its Policy Guidelines on the Movement of Petroleum Fuel to and from the CSEZ, suppliers/distributors were allowed to bring in petroleum products inside CSEZ without any charge at all. But this arrangement clearly negates CDCs mandate under the JVA as exclusive distributor of CSBTIs fuel products within CSEZ and respondents ownership of the Subic-Clark Pipeline.27 On this score, respondents were justified in charging royalty fees on fuel delivered by outside suppliers. However, it was erroneous for petitioner to argue that such exclusive right of respondent CDC to market and distribute fuel inside CSEZ is the sole basis of the royalty fees imposed under the Policy Guidelines. Being the administrator of CSEZ, the responsibility of ensuring the safe, efficient and orderly distribution of fuel products within the Zone falls on CDC. Addressing specific concerns demanded by the nature of goods or products involved is encompassed in the range of services which respondent CDC is expected to provide under the law,

in pursuance of its general power of supervision and control over the movement of all supplies and equipment into the CSEZ. Section 2 of Executive Order No. 8028 provides: SEC. 2. Powers and Functions of the Clark Development Corporation. The BCDA, as the incorporator and holding company of its Clark subsidiary, shall determine the powers and functions of the CDC. Pursuant to Section 15 of RA 7227, the CDC shall have the specific powers of the Export Processing Zone Authority as provided for in Section 4 of Presidential Decree No. 66 (1972) as amended. Among those specific powers granted to CDC under Section 4 of Presidential Decree No. 66 are: (a) To operate, administer and manage the export processing zone established in the Port of Mariveles, Bataan, and such other export processing zones as may be established under this Decree; to construct, acquire, own, lease, operate and maintain infrastructure facilities, factory building, warehouses, dams, reservoir, water distribution, electric light and power system, telecommunications and transportation, or such other facilities and services necessary or useful in the conduct of commerce or in the attainment of the purposes and objectives of this Decree; xxxx (g) To fix, assess and collect storage charges and fees, including rentals for the lease, use or occupancy of lands, buildings, structure, warehouses, facilities and other properties owned and administered by the Authority; and to fix and collect the fees and charges for the issuance of permits, licenses and the rendering of services not enumerated herein, the provisions of law to the contrary notwithstanding; (h) For the due and effective exercise of the powers conferred by law and to the extend (sic) [extent] requisite therefor, to exercise exclusive jurisdiction and sole police authority over all areas owned or administered by the Authority. For this purpose, the Authority shall have supervision and control over the bringing in or taking out of the Zone, including the movement therein, of all cargoes, wares, articles, machineries, equipment,supplies or merchandise of every type and description; x x x x (Emphasis supplied.) In relation to the regulatory purpose of the imposed fees, this Court in Progressive Development Corporation v. Quezon City,29 stated that "x x x the imposition questioned must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences as well." In the case at bar, there can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare.30 In addition, fuel is a highly combustible product which, if left unchecked, poses a serious threat to life and property. Also, the reasonable relation between the royalty fees imposed on a "per liter" basis and the regulation sought to be attained is that the higher the volume of fuel entering CSEZ, the greater the extent and frequency of supervision and inspection required to ensure safety, security, and order within the Zone. Respondents submit that increased administrative costs were triggered by security risks that have recently emerged, such as terrorist strikes in airlines and military/government facilities. Explaining the regulatory feature of the charges imposed under the Policy Guidelines, then BCDA President Rufo Colayco in his letter dated March 3, 2004 addressed to petitioners Chief Corporate Counsel, stressed: The need for regulation is more evident in the light of the 9/11 tragedy considering that what is being moved from one location to another are highly combustible fuel products that could cause loss of lives and damage to

properties, hence, a set of guidelines was promulgated on 28 June 2002. It must be emphasized also that greater security measure must be observed in the CSEZ because of the presence of the airport which is a vital public infrastructure.
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We are therefore constrained to sustain the imposition of the royalty fees on deliveries of CPIs fuel products to Nanox Philippines.31 As to the issue of reasonableness of the amount of the fees, we hold that no evidence was adduced by the petitioner to show that the fees imposed are unreasonable. Administrative issuances have the force and effect of law.32 They benefit from the same presumption of validity and constitutionality enjoyed by statutes. These two precepts place a heavy burden upon any party assailing governmental regulations.33 Petitioners plain allegations are simply not enough to overcome the presumption of validity and reasonableness of the subject imposition. WHEREFORE, the petition is DENIED for lack of merit and the Decision of the Court of Appeals dated November 30, 2005 in CA-G.R. SP No. 87117 is hereby AFFIRMED. With costs against the petitioner. SO ORDERED.