Republic of the Philippines SUPREME COURT Manila EN BANC DECISION THE YOUNG MENS CHRISTIAN ASSOCIATION OF MANILA, plaintiff-appellant,

vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee. Haussermann, Cohn and Fisher for appellant. City Attorney Escaler for appellee. MORELAND, J.: The question at issue in this case is whether or not the building and grounds of the Young Mens Christian Association of Manila are subject to taxation, under section 48 of the charter of the city of Manila quoted in the footnote [syllabus]. The city of Manila, contending that the property is taxable, assessed it and levied a tax thereon. It was paid under protest and this action begun to recover it on the ground that the property was exempt from taxation under the charter of the city of Manila. The decision was for the city and the association appealed. The Young Mens Christian Association came to the Philippine with the army of occupation in 1898. When the large body of troops in Manila was removed to permanent quarters at Fort William McKinley in February, 1905, an independent association for Manila was organized under the direction of the Army and navy departments. Shortly after the organization of the association the directors made a formal request to the international committee of the Young Mens Christian Association in New York City for the assistance and cooperation of its foreign department. I response to this request Mr. John R. Mott, general secretary of the foreign department, visited Manila in January 1907. After a conference with the directors and interested friends it was decided to conduct a campaign to secure funds for an adequate and permanent association. In the name of the international committee and friends in America Mr. Mott guaranteed P170,000 for the construction of a building on condition that friend in the Philippines secure the site and adequately furnish

the building. The campaign for funds was begun here on February 15, 1907, and, by the 15th of March following, P83,000 was subscribed, nearly one thousand different persons contributing. Thereupon the Young Mens Christian Association of Manila was incorporated under the law of the Philippine Islands and received its character in June, 1907. A site for the new building was selected on Calle Concepcion, Ermita, and the building contract was let on the 8th of January following. The cornerstone was laid with appropriate ceremonies on July 10, 1908, and the building was formally dedicated on October 20, 1909. The building is composed of three parts. The main structure, located in the center, is three stories high and includes a reception hall, social hall and game rooms, lecture room, library, reading room and rooming apartments. The small building lying to the left of the principal structure, as one faces the front from Called Concepcion, is the kitchen and servants quarters. The large wing to the right is known as the athletic building, where the bowling alleys, swimming pool, locker rooms and gymnasiumauditorium are located. The construction is of reinforced concrete with steel trussed roof covered with interlocking red tiles. The main or central portion of the building is 150 by 45 feet and stands 20 meters back from the sidewalk. An iron canopy, suspended by brackets, projects over the driveway which lies in front and shelters the main entrance. A wide arched doorway opens into a large reception room, on the left of which is the public office and the secretarys private office, while on the right is the reading and writing rooms, and beyond that the library, each about 30 feet square. From the reception room, on the left, a broad concrete stairway leads to the second floor. Passing out of the rear of the reception hall one enters upon a veranda some 15 feet in width running the full length of the main structure which looks out on the tennis courts and affords an excellent place for lounging, games and general social purposes. To the left of the entrance hall and also opening upon the veranda are two large rooms of about the same size as those on the right of the reception hall, the first being the billiard room and the other the restaurant. The athletic building is entered from the rear veranda. It is a two story wing 68 by 85 feet. Passing from the veranda into the athletic hall one finds first, on the left, the toilet room, and beyond this, to the rear, the shower baths and locker rooms. The swimming pool

is in the center of the athletic wing and is 60 by 19 feet in size, lined with cement. To the right of the swimming pool are the bowling alleys. A wide stairways leads to the second floor. Above the swimming-pool and bowling alley is a large room 50 by 85 feet which is the gymnasium and also the auditorium when occasion requires. About one-third of the roof converting the athletic wing is used as a roof garden. The second and third floors of the main building are given over almost wholly to rooming apartments and baths. On the second floor over the entrance hall is a members parlor, from which a small balcony projects over the main entrance. The remainder of the second floor and all to the third are composed of the living rooms. These apartments, of which there are 14 on the second and 20 on the third floor are approximately 18 by 14 feet each. They provide accommodations for 64 men. The purposes of the association, as set forth in its charter and constitution, are: To develop the Christian character and usefulness of its members, to improve the spiritual, intellectual, social and physical condition of young men, and to acquire, hold, mortgage, and dispose of the necessary lands, buildings and personal property for the use of said corporation exclusively for religious, charitable and educational purposes, and not for investment or profit. The purposes of this association shall be exclusively religious, charitable and educational, in developing the Christian character and usefulness of its members and in improving the spiritual, mental, social and physical condition of young men. Speaking generally, the association claims exemption from taxation on the ground that it is a religious, charitable and educational institution combined. That it has an educational department is not denied. It is undisputed that the aim of this department is to furnish, at much less than cost, instruction in subjects that will greatly increase the mental efficiency and wage-earning capacity of young men, prepare them in special lines of business and offer them special lines of study. Attention is given to subjects included in civil service and consular examinations both here and in the United States. The courses offer commercial subjects, as well as many others, and include stenography and typewriting, bookkeeping, arithmetic, English composition, foreign languages, including elementary and advanced Spanish and

Tagalog, special courses in Philippine history, public speaking, surveying, horticulture, tropical dependencies, and the group of subjects required for entrance into the consular services, such as political economy, American and modern history. Courses are also offered in law, social, ethics, political economy and other subjects. The institution has also its religious department. In that department there are, generally speaking, three main lines of work Bible study, religious meetings and special classes. Course are offered in the Life of Christ and the Old Testament and in the larger social significance of the teachings of Jesus. Meetings are held on Sunday afternoons and several times during the week and courses are offered in the study of missions, in the method of teaching the Bible and kindred subjects. The atmosphere of the Young Mens Christian Association is distinctly religious and there is constant effort on the part of the officials to create a religious spirit; and to that end there is continuous pressure to induce members to attend not only the religious services of the association but also those of one or another of the churches of Manila. While the association is nonsectarian, it is preeminently religious; and the fundamental basis and groundwork is the Christian religion. All of the officials of the association are devoted Christians, members of a church, and have dedicated their lives to the spread of the Christian principles and building of Christian character. The institution also has charitable features. It makes no profit on any of its activities. The professors and instructors in all departments serve without pay and freely give of their time and ability to further the purposes of the institution. The chief secretary and his assistant receive no salary from the institution. Whatever they are paid comes from the United States. In estimating the cost of instruction in the various departments, or of the other things for which pay is received, no account is taken of the interest on the money invested in the grounds and building, of deterioration in value resulting from the lapse of time, or of the fact that the professors and instructors and certain officials receive no pay. We have, then, a building and grounds, professors and instructors, and certain institution officials, furnished free of charge, and which makes no profit even on that basis. This, it would seem, would lend some color to the claim that the association takes on some of the aspect of a charitable institution. While it appears that the association is not exclusively religious or charitable

or educational, it is demonstrated that it is a happy combination of all three, giving to its membership the religious opportunities of the church, the educational opportunities of the school and the blessings of charity where needed without the recipient feeling or even knowing that he is the object of charity. It is claimed, however, that the institution is run as a business in that it keeps a lodging and boarding house. It may be admitted that there are 64 persons occupying rooms in the main building as lodgers or roomers and that they take their meals at the restaurant below. These facts, however, are far from constituting a business in ordinary acceptation of the word. In the first place, no profit is realized by the association in any sense. In the second place, it is undoubted, as it is undisputed, that the purpose of the association is not, primarily, to obtain the money which comes from the lodgers and boarders. The real purpose is to keep the membership continually within the sphere of influence of the institution; and thereby to prevent, as far as possible, the opportunities which vice president to young men in foreign countries who lack home or other similar influences. We regard this feature of the institution not as a business or means of making money, but, rather, as a very efficient means of maintaining the influence of the institution over its membership. As we held in the case of the Columbia Club, religious and moral teachings do not always stop with the spoken word; but to be effective in the highest degree they must follow the young man through as many moments of his life as possible. To this end the feature of the Young Mens Christian Association to which objection is made lends itself with great effect; and we are, accordingly, forced to regards this activity of the institution not as a business but as a method by which the institution maintains its influence and conserves the benefits which its organization was designed to confer. As we have seen in the description already given of the association building and grounds, no part is occupied for any but institutional purposes. From end to end the building and grounds are devoted exclusively to the purposes stated in the constitution of the association. The library and reading rooms, the game and lounging halls, the lecture rooms, the auditorium, the baths, pools, devices for physical development, and the grounds, are all dedicated exclusively to the objects and purpose of the association the building of Christian character and the creation of moral sentiment and fiber in men. It is the belief of the Young Mens Christian Association that a Christian man, a man of moral sentiment and firm moral fiber, is yet a better man for being also

all-round man one who is sound not only according to Christian principles and the highest moral conceptions, but physically and mentally; whose body and mind act in harmony and within the limits which the rights of others set; who are gentleman in physical and mental struggles, as well as in religious service; who have self-respect and self-restraint; who can hit hard and still kindly; who can lose without envy; who can congratulate his conqueror with sincerity; who can vie without temper, contend without malice, concede without regret; who can win and still be generous, in short, one who fights hard but square. To the production of such men the association lends all its efforts, husbands all its resources. We are aware that there are many decisions holding that institutions of this character are not exempt from taxation; but, on investigation, we find that the majority of them are based on statutes much narrower than the one under consider and that in all probability the decisions would have been otherwise if the court had been passing on a statute similar to ours. On the other hand, there are many decisions of the courts in the United States founded on statutes like the Philippine statute which hold that associations of this class are exempt from taxation. We have examined all of the decisions, both for and against, with care and deliberation, and we are convinced that the weight of authority sustains the positions we take in this case. There is no doubt about the correctness of the contention that an institution must devote itself exclusively to one or the other of the purpose mentioned in the statute before it can be exempt from taxation; but the statute does not say that it must be devoted exclusively to any one of the purposes therein mentioned. It may be a combination of two or three or more of those purposes and still be entitled to exempt. The Young Mens Christian Association of Manila cannot be said to be an institution used exclusively for religious purposes, or an institution used exclusively for charitable purposes, or an institution devoted exclusively to educational purposes; but we believe it can be truthfully said that it is an institution used exclusively for all three purposes, and that, as such, it is entitled to be exempted from taxation. The judgment appealed from is reversed and the cause remanded with instructions to enter a judgment against the city of Manila and in favor of the Young Mens Christian Association of Manila in the sum of P6,221.35. Without costs in this instance. So ordered.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-19201 June 16, 1965

After hearing, the CTA rendered judgment, the pertinent portions of which are quoted below: ... . Parish priests of the Roman Catholic Church under canon laws are similarly situated as its Archbishops and Bishops with respect to the properties of the church within their parish. They are the guardians, superintendents or administrators of these properties, with the right of succession and may sue and be sued. xxx xxx xxx

REV. FR. CASIMIRO LLADOC, petitioner, vs. The COMMISSIONER OF INTERNAL REVENUE and The COURT of TAX APPEALS, respondents. Hilado and Hilado for petitioner. Office of the Solicitor General for respondents. PAREDES, J.: Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner, for the construction of a new Catholic Church in the locality. The total amount was actually spent for the purpose intended. On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment for donee's gift tax against the Catholic Parish of Victorias, Negros Occidental, of which petitioner was the priest. The tax amounted to P1,370.00 including surcharges, interests of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late filing of the return. Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The petitioner appealed to the Court of Tax Appeals on November 2, 1960. In the petition for review, the Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he was not the parish priest in Victorias; that there is no legal entity or juridical person known as the "Catholic Parish Priest of Victorias," and, therefore, he should not be liable for the donee's gift tax. It was also asserted that the assessment of the gift tax, even against the Roman Catholic Church, would not be valid, for such would be a clear violation of the provisions of the Constitution.

The petitioner impugns the, fairness of the assessment with the argument that he should not be held liable for gift taxes on donation which he did not receive personally since he was not yet the parish priest of Victorias in the year 1957 when said donation was given. It is intimated that if someone has to pay at all, it should be petitioner's predecessor, the Rev. Fr. Crispin Ruiz, who received the donation in behalf of the Catholic parish of Victorias or the Roman Catholic Church. Following petitioner's line of thinking, we should be equally unfair to hold that the assessment now in question should have been addressed to, and collected from, the Rev. Fr. Crispin Ruiz to be paid from income derived from his present parish where ever it may be. It does not seem right to indirectly burden the present parishioners of Rev. Fr. Ruiz for donee's gift tax on a donation to which they were not benefited. xxx xxx xxx

We saw no legal basis then as we see none now, to include within the Constitutional exemption, taxes which partake of the nature of an excise upon the use made of the properties or upon the exercise of the privilege of receiving the properties. (Phipps vs. Commissioner of Internal Revenue, 91 F [2d] 627; 1938, 302 U.S. 742.) It is a cardinal rule in taxation that exemptions from payment thereof are highly disfavored by law, and the party claiming exemption must justify his claim by a clear, positive, or express grant of such privilege by law. (Collector vs. Manila Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)

The phrase "exempt from taxation" as employed in Section 22(3), Article VI of the Constitution of the Philippines, should not be interpreted to mean exemption from all kinds of taxes. Statutes exempting charitable and religious property from taxation should be construed fairly though strictly and in such manner as to give effect to the main intent of the lawmakers. (Roman Catholic Church vs. Hastrings 5 Phil. 701.) xxx xxx xxx

WHEREFORE, in view of the foregoing considerations, the decision of the respondent Commissioner of Internal Revenue appealed from, is hereby affirmed except with regard to the imposition of the compromise penalty in the amount of P20.00 (Collector of Internal Revenue v. U.S.T., G.R. No. L-11274, Nov. 28, 1958); ..., and the petitioner, the Rev. Fr. Casimiro Lladoc is hereby ordered to pay to the respondent the amount of P900.00 as donee's gift tax, plus the surcharge of five per centum (5%) as ad valorem penalty under Section 119 (c) of the Tax Code, and one per centum (1%) monthly interest from May 15, 1958 to the date of actual payment. The surcharge of 25% provided in Section 120 for failure to file a return may not be imposed as the failure to file a return was not due to willful neglect.( ... ) No costs. The above judgment is now before us on appeal, petitioner assigning two (2) errors allegedly committed by the Tax Court, all of which converge on the singular issue of whether or not petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction of the Victorias Parish Church. Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as property taxes, as contra distinguished from excise taxes. In the present case, what the Collector assessed was a donee's gift tax; the assessment was not on the properties themselves. It did not rest upon general ownership; it was an excise upon the use made of the properties, upon the exercise of the privilege of receiving the

properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation," as employed in the Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes. And there being no clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must be denied. The next issue which readily presents itself, in view of petitioner's thesis, and Our finding that a tax liability exists, is, who should be called upon to pay the gift tax? Petitioner postulates that he should not be liable, because at the time of the donation he was not the priest of Victorias. We note the merit of the above claim, and in order to put things in their proper light, this Court, in its Resolution of March 15, 1965, ordered the parties to show cause why the Head of the Diocese to which the parish of Victorias pertains, should not be substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the Head of such Diocese is the real party in interest. The Solicitor General, in representation of the Commissioner of Internal Revenue, interposed no objection to such a substitution. Counsel for the petitioner did not also offer objection thereto. On April 30, 1965, in a resolution, We ordered the Head of the Diocese to present whatever legal issues and/or defenses he might wish to raise, to which resolution counsel for petitioner, who also appeared as counsel for the Head of the Diocese, the Roman Catholic Bishop of Bacolod, manifested that it was submitting itself to the jurisdiction and orders of this Court and that it was presenting, by reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own and for all purposes. In view here of and considering that as heretofore stated, the assessment at bar had been properly made and the imposition of the tax is not a violation of the constitutional provision exempting churches, parsonages or convents, etc. (Art VI, sec. 22 [3], Constitution), the Head of the Diocese, to which the parish Victorias Pertains, is liable for the payment thereof. The decision appealed from should be, as it is hereby affirmed insofar as tax liability is concerned; it is

modified, in the sense that petitioner herein is not personally liable for the said gift tax, and that the Head of the Diocese, herein substitute petitioner, should pay, as he is presently ordered to pay, the said gift tax, without special, pronouncement as to costs. Republic of the Philippines SUPREME COURT Manila EN BANC

to us, the decisive issue being one of law. The statute having restricted the privilege to the satisfaction of a tax, a liability for fees under the police power being thus excluded from its benefits, we cannot uphold the decision appealed from. We reverse. The complaint of plaintiff-appellant Republic of the Philippines was filed on January 17, 1963 alleging that defendant-appellee, as the registered owner of two hundred thirty eight (238) motor vehicles, paid to the Motor Vehicles Office in Baguio the amount of P78,636.17, corresponding to the second installment of registration fees for 1959, not in cash but in the form of negotiable certificate of indebtedness, the defendant being merely an assignee and not the backpay holder itself. The complaint sought the payment of such amount with surcharges plus the legal rate of interest from the filing thereof and a declaration of the nullity of the use of such negotiable certificate of indebtedness to satisfy its obligation. The answer by defendantappellee, filed on February 18, 1963, alleged that what it did was in accordance with law, both the Treasurer of the Philippines and the General Auditing Office having signified their conformity to such a mode of payment. It sought the dismissal of the complaint. After noting the respective theories of both parties in its pleadings, the lower court, in its decision, stated that the issue before it "is whether or not the acceptance of the negotiable certificates of indebtedness tendered by defendant bus firms to and accepted by the Motor Vehicles Office of Baguio City and the corresponding issuance of official receipts therefor acknowledging such payment by said 4 office is valid and binding on plaintiff Republic." In the decision now on appeal, the lower court, after referring to a documentary evidence introduced by plaintiff-appellant continued: "From the evidence adduced by defendant bus firm, it appears that as early as August 28, 1958, the National Treasurer upon whom devolves the function of administering the Back Pay Law (Republic Act 304 as amended by Republic Act Nos. 800 and 897), in his letter to the Chief of the Motor Vehicles Office who in turn quoted and circularized same in his Circular No. 5 dated September 1, 1958, to draw the attention thereto of all Motor Vehicle Supervisors, Registrars and employees ..., had approved the acceptance of

G.R. No. L-26862 March 30, 1970 REPUBLIC OF THE PHILIPPINES, plaintiffappellant, vs. PHILIPPINE RABBIT BUS LINES, INC., defendant-appellee. Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Pacifico P. de Castro and Solicitor Enrique M. Reyes for plaintiff-appellant. Angel A. Sison for defendant-appellee.

FERNANDO, J.: The right of a holder of a backpay certificate to use the same in the payment of his taxes has 1 been recognized by law. Necessarily, this 2 Court, in Tirona v. Cudiamat, yielding obedience to such statutory prescription, saw nothing objectionable in a taxpayer taking advantage of such a provision. That much is clear; it is settled beyond doubt. What is involved in this appeal from a lower court decision of November 24, 1965, dismissing a complaint by plaintiff-appellant Republic of the Philippines, seeking the invalidation of the payment by defendant-appellee Philippine 3 Rabbit Bus Lines, Inc. for the registration fees of its motor vehicles in the sum of P78,636.17, in the form of such negotiable backpay certificates of indebtedness, is the applicability of such a provision to such a situation. The lower court held that it did. The Republic of the Philippines appealed. While originally the matter was elevated to the Court of Appeals, it was certified

negotiable certificates of indebtedness in payment of registration fees of motor vehicles with the view that such certificates 'should be accorded with the same confidence by other governmental instrumentalities as other evidences of public debt, such as bonds and treasury certificates'. Significantly, the Auditor General concurred in the said view of the 5 National Treasurer." The argument of plaintiff-appellant that only the holders of the backpay certificates themselves could apply the same to the payment of motor vehicle registration fees did not find favor with the lower court. Thus, "[Plaintiff] Republic urges that defendant bus firm being merely an assignee of the negotiable certificates of indebtedness in question, it could not use the same in payment of taxes. Such contention, this Court believes, runs counter to the recitals appearing on the said certificates which states that 'the Republic of the Philippines hereby acknowledges to (name) or assigns ...', legally 6 allowing the assignment of backpay rights." It therefore, as above noted, rendered judgment in favor of defendant-appellee "upholding the validity and efficacy" of such payment made and dismissing the complaint. Hence this appeal which, on the decisive legal issue already set forth at the outset, we find meritorious. 1. If a registration fee were a tax, then what was done by defendant-appellee was strictly in accordance with law and its nullity, as sought by plaintiff-appellant Republic of the Philippines, cannot be decreed. But is it? The answer to that question is decisive of this controversy. A tax refers to a financial obligation imposed by a state on persons, whether natural or juridical, within its jurisdiction, for property owned, income earned, business or profession engaged in, or any such activity analogous in character for raising the necessary revenues to take care of 7 the responsibilities of government. An oftenquoted definition is that of Cooley: "Taxes are the enforced proportional contributions from persons and property levied by the state by virtue of its sovereignty for the support of 8 government and for all public needs." As distinguished from other pecuniary burdens, the differentiating factor is that the purpose to be subserved is the raising of revenue. A tax then is neither a penalty that must be satisfied or a

liability arising from contract. Much less can it be confused or identified with a license or a fee as a manifestation of an exercise of the police power. It has been settled law in this jurisdiction as far back as Cu Unjieng v. Potstone, decided in 1962, 10 that this broad and all-encompassing governmental competence to restrict rights of liberty and property carries with it the undeniable power to collect a regulatory fee. Unlike a tax, it has not for its object the raising of revenue but looks rather to the enactment of specific measures that govern the relations not only as between individuals but also as between private parties and the political society. To quote from Cooley anew: "Legislation for these purposes it would seem proper to look upon as being made in the exercise of that authority ... spoken of as the police power." 11 The registration fee which defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law. 12 Its heading speaks of "registration fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee for registration." 13 A subsection starts with a categorical statement "No fees shall be charged." 14 The conclusion is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police power. Hence the inapplicability of the section relied upon by defendant-appellee under the Back Pay Law. It is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay certificate to meet such an obligation. Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by Republic Act No. 5448. 15 A special science fund was thereby created and its title expressly sets forth that a tax on privately-owned passenger automobiles, motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly specifies that "additional tax" was to be paid as distinguished from the registration fee under the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative will, even on the assumption that the earlier legislation could be stretching the point be susceptible of the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where the legislative body relies on its authority to tax it

expressly so states, and where it is enacting a regulatory measure, it is equally explicit. It may further be stated that a statute is meaningful not only by what it includes but also by what it omits. What is left out is not devoid of significance. As observed by Frankfurter: "An omission at the time of enactment, whether careless or calculated, cannot be judicially supplied however much later wisdom may recommend the inclusion. 16 In the light of this consideration, the reversal of the appealed judgment is unavoidable. 2. In the brief for plaintiff-appellant Republic of the Philippines, filed by the then Solicitor General, now Justice Antonio P. Barredo, the principal error imputed to the trial court is its failure to hold that the Back Pay Law prohibits an assignee, as is defendant-appellee, from using certificates of indebtedness to pay their taxes. In view of the conclusion reached by us that the liability of defendant-appellee under the Motor Vehicle Act does not arise under the taxing power of the state, there is no need to pass upon this particular question. 3. The Republic of the Philippines, in its brief, likewise assigned as error the failure of the lower court to hold that estoppel does not lie against the government for mistakes committed by its agents. As could be discerned from an excerpt of the decision earlier referred to, the lower court was impressed by the fact that the national treasurer to whom it correctly referred as being vested with the function of administering the backpay law did in a communication to the Motor Vehicles Office approve the acceptance of negotiable certificate of indebtedness in payment of registration fees, a view with which the Auditor General was in concurrence. The appealed decision likewise noted: "By the testimonies of Pedro Flores, the then Registrar of the Motor Vehicles Office of Baguio City and Casiano Catbagan, the Cashier of the Bureau of Public Highways in the same city, defendant bus firm has undisputedly shown that, after the said certificates of indebtedness were properly indorsed in favor of the Motor Vehicles Office of Baguio City and accepted by the Bureau of Public Highways on May 29, 1959, it was duly and properly issued official receipts ... acknowledging full payment of its registration fees for the second installment of 1959 of its 238 vehicles, and that the Bureau of

Public Highways, thru its collecting and disbursing officer, was validly and regularly authorized to receive such payment." 17 Thus did the lower court, as pointed out by the then Solicitor General, conclude that the government was bound by the mistaken interpretation arrived at by the national treasurer and the auditor general. It would consider estoppel as applicable. That is not the law. Estoppel does not lie. Such a principle dates back to Aguinaldo de Romero v. Director of Lands, 18 a 1919 decision. Insofar as the taxing power is concerned, Pineda v. Court of First Instance, a 1929 decision, speaks categorically: "The Government is never estopped by mistake or error on the part of its agents. It follows that, in so far as this record shows, the petitioners have not made it appear that the additional tax claimed by the Collector is not in fact due and collectible. The assessment of the tax by the Collector creates, it must be remembered, a charge that is at least prima facie valid." 19 That principle has since been subsequently followed. 20 While the question here is one of the collection of a regulatory fee under the police power, reliance on the above course of decisions is not inappropriate. There is nothing to stand in the way, therefore, of the collection of the registration fees from defendant-appellee. WHEREFORE, the decision of November 24, 1965 is reversed and defendant-appellee ordered to pay the sum of P78,636.17. With costs against defendant-appellee. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. L-49336 August 31, 1981 THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial Assessor, petitioner, vs. HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF BANGUED, INC., represented by Bishop Odilo etspueler and Reverend Felipe Flores, respondents.

FERNANDO, C.J.: On the face of this certiorari and mandamus 1 petition filed by the Province of Abra, it clearly appears that the actuation of respondent Judge Harold M. Hernando of the Court of First Instance of Abra left much to be desired. First, 2 there was a denial of a motion to dismiss an action for declaratory relief by private respondent Roman Catholic Bishop of Bangued desirous of being exempted from a real estate 3 tax followed by a summary judgment granting such exemption, without even hearing the side of petitioner. In the rather vigorous language of the Acting Provincial Fiscal, as counsel for petitioner, respondent Judge "virtually ignored the pertinent provisions of the Rules of Court; ... wantonly violated the rights of petitioner to due process, by giving due course to the petition of private respondent for declaratory relief, and thereafter without allowing petitioner to answer and without any hearing, adjudged the case; all in total disregard of basic laws of procedure and basic provisions of due process in the constitution, thereby indicating a failure to grasp and understand the law, which goes into the competence of the Honorable Presiding Judge."
4

taxpayer; nor shall any court declare any portion of the tax assessed under the provisions of this Code invalid except upon condition that the taxpayer shall pay the just amount of the tax, as determined by the court in the pending 6 proceeding." When asked to comment, respondent Judge began with the allegation that there "is no question that the real properties sought to be taxed by the Province of Abra are properties of the respondent Roman Catholic Bishop of 7 Bangued, Inc." The very next sentence assumed the very point it asked when he categorically stated: "Likewise, there is no dispute that the properties including their procedure are actually, directly and exclusively used by the Roman Catholic Bishop of Bangued, 8 Inc. for religious or charitable purposes." For him then: "The proper remedy of the petitioner is 9 appeal and not this special civil action." A more exhaustive comment was submitted by private respondent Roman Catholic Bishop of Bangued, Inc. It was, however, unable to lessen the force of the objection raised by petitioner Province of Abra, especially the due process aspect. it is to be admitted that his opposition to the petition, pressed with vigor, ostensibly finds a semblance of support from the authorities cited. It is thus impressed with a scholarly aspect. It suffers, however, from the grave infirmity of stating that only a pure question of law is presented when a claim for exemption is made. The petition must be granted. 1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the present Constitution with that appearing in the 1935 Charter on the tax exemption of "lands, buildings, and improvements." There is a marked difference. Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be 10 exempt from taxation." The present Constitution added "charitable institutions, mosques, and non-profit cemeteries" and required that for the exemption of ":lands, buildings, and improvements," they should not only be "exclusively" but also "actually and "directly" used for religious or charitable 11 purposes. The Constitution is worded

It was the submission of counsel that an action for declaratory relief would be proper only before a breach or violation of any statute, executive 5 order or regulation. Moreover, there being a tax assessment made by the Provincial Assessor on the properties of respondent Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available under Presidential Decree No. 464 before filing such court action. Further, it was pointed out to respondent Judge that he failed to abide by the pertinent provision of such Presidential Decree which provides as follows: "No court shall entertain any suit assailing the validity of a tax assessed under this Code until the taxpayer, shall have paid, under protest, the tax assessed against him nor shall any court declare any tax invalid by reason of irregularities or informalities in the proceedings of the officers charged with the assessment or collection of taxes, or of failure to perform their duties within this time herein specified for their performance unless such irregularities, informalities or failure shall have impaired the substantial rights of the

differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions would have sufficed were the words "actually" as well as "directly" not added. There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be exempt from taxation. According to Commissioner of Internal Revenue v. 12 Guerrero: "From 1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the constant and uniform holding that exemption from taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be 13 construed strictissimi juris." In Manila Electric 14 Company v. Vera, a 1975 decision, such principle was reiterated, reference being made to Republic Flour Mills, Inc. v. Commissioner of 15 Internal Revenue; Commissioner of Customs 16 v. Philippine Acetylene Co. & CTA; and Davao Light and Power Co., Inc. v. Commissioner of 17 Customs. 2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural due process. If there is any case where proof is necessary to demonstrate that there is compliance with the constitutional provision that allows an exemption, this is it. Instead, respondent Judge accepted at its face the allegation of private respondent. All that was alleged in the petition for declaratory relief filed by private respondents, after mentioning certain parcels of land owned by it, are that they are used "actually, directly and exclusively" as sources of support of the parish priest and his helpers and also of private respondent Bishop. 18 In the motion to dismiss filed on behalf of petitioner Province of Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be questioned before the Local Board of Assessment Appeals and not with a court. There was also mention of a lack of a cause of action, but only because, in its view, declaratory relief is not proper, as there had been breach or violation of the right of government to assess and collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing to petitioner Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge

failed to abide by the constitutional command of procedural due process. WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set aside. Respondent Judge, or who ever is acting on his behalf, is ordered to hear the case on the merit. No costs. Barredo, Concepcion, Jr., and De Castro, JJ., concur. Aquino, J., concur in the result. Abad Santos, J., is on leave. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-59431 July 25, 1984 ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents. Antero Sison for petitioner and for his own behalf. The Solicitor General for respondents.

FERNANDO, C.J.: The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a)

taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted 2 3 gross income. Petitioner as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried 4 individual taxpayers. He characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in 5 character For petitioner, therefore, there is a transgression of both the equal protection and 6 due process clauses of the Constitution as well 7 as of the rule requiring uniformity in taxation. The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after two extensions were granted the Office of the 8 Solicitor General, was filed on May 28, 1982. The facts as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative 9 Defenses." The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit. This Court finds such a plea more than justified. The petition must be dismissed. 1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11 Hence the need for

more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12 2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines. 3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as petitioner here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm. 4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would

condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18 5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19 6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group equally 20 binding on the rest." That same formulation applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of the

laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in 21 law as though they were the same." Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. 22 Araneta, this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no 23 constitutional limitation.'" 7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be 24 uniform and equitable." This requirement is met according to Justice Laurel in Philippine 25 Trust Company v. Yatco, decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be 26 found. " He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly 27 attainable." The problem of classification did not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for 28 purposes of taxation, ... . As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is 29 therefore uniform." There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to

all persons, firms and corporations placed in 30 similar situation." 8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income. 9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the arbitrary 31 character of the assailed provision; (2) the force of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and businessman certainly not a suspect classification, WHEREFORE, the petition is dismissed. Costs against petitioner.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 81311 June 30, 1988 KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C. DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners, vs. HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent. G.R. No. 81820 June 30, 1988 KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and alliances, petitioners, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE, and SECRETARY OF BUDGET, respondents. G.R. No. 81921 June 30, 1988 INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B. BANAL, petitioners, vs. The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent. G.R. No. 82152 June 30, 1988 RICARDO C. VALMONTE, petitioner, vs. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF BUDGET, respondent. Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311. Jaime C. Opinion for individual petitioners in G.R. No. 81311.

Banzuela, Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No 81820. Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820. Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

in keeping with the Court's duty, under the 1987 Constitution, to determine wether or not the other branches of government have kept themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to them, the Court has brushed aside technicalities of procedure and has taken cognizance of these petitions. But, before resolving the issues raised, a brief look into the tax law in question is in order. The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross receipts realized from the sale of services. The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it is principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more equitable, to enable the country to attain economic recovery. The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and was imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers. Subsequent sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or exempt. Petitioners first contend that EO 273 is unconstitutional on the Ground that the

PADILLA, J.: These four (4) petitions, which have been consolidated because of the similarity of the main issues involved therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal Revenue Code and adopted the valueadded tax (VAT, for short), for being unconstitutional in that its enactment is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process and equal protection clauses and other provisions of the 1987 Constitution. The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to the Solicitor General, only the third requisite that the constitutional question should be raised at the earliest opportunity has been complied with. He also questions the legal standing of the petitioners who, he contends, are merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution. Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main procedural matters. Considering the importance to the public of the cases at bar, and

President had no authority to issue EO 273 on 25 July 1987. The contention is without merit. It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states: Sec. 1. Until a legislature is elected and convened under a new Constitution, the President shall continue to exercise legislative powers. On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said Constitution, hereafter referred to as the 1987 Constitution, provides: Sec. 6. The incumbent President shall continue to exercise legislative powers until the first Congress is convened. It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with legislative powers until a legislature under a new Constitution is convened. The first Congress, created and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was within the President's constitutional power and authority to legislate. Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987). He contends that the word "convene" is synonymous with "the date when the elected members of Congress assumed office." The contention is without merit. The word "convene" which has been interpreted to mean "to call together, cause to assemble, or 1 convoke," is clearly different from assumption of office by the individual members of Congress

or their taking the oath of office. As an example, we call to mind the interim National Assembly created under the 1973 Constitution, which had not been "convened" but some members of the body, more particularly the delegates to the 1971 Constitutional Convention who had opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their oath of office. To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress to convene once every year on the fourth Monday of July for its regular session would be a contrariety, since Congress would already be deemed to be in session after the individual members have taken their oath of office. A portion of the provisions of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law calling for a special election to elect a President and Vice-President in case a vacancy occurs in said offices, would also be a surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to decide a conflict between the President and the Cabinet as to whether or not the President and the Cabinet as to whether or not the President can re-assume the powers and duties of his office, would also be redundant. The same is true with the portion of Art. VII, sec. 18, which requires Congress to convene within twenty-four (24) hours following the declaration of martial law or the suspension of the privilage of the writ of habeas corpus. The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the framers of said Constitution had intended to terminate the exercise of legislative powers by the President at the beginning of the term of office of the members of Congress, they should have so stated (but did not) in clear and unequivocal terms. The Court has not power to re-write the Constitution and give it a meaning different from that intended. The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave abuse of discretion amounting to lack or

excess of jurisdiction. "Grave abuse of discretion" has been defined, as follows: Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz. 834), or, in other words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. (TaveraLuna, Inc. vs. Nable, 38 Off. 2 Gaz. 62). Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or despotic manner by reason of passion or personal hostility. It appears that a comprehensive study of the VAT had been extensively discussed by this framers and other government agencies involved in its implementation, even under the past administration. As the Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in the exercise of her legislative powers. The legislative process started long before the signing when the data were gathered, proposals were weighed and the final wordings of the measure were drafted, revised and finalized. Certainly, it cannot be said that the President made a jump, so to speak, on the 3 Congress, two days before it convened." Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states: Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their conclusions. They have failed to

adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To justify the nullification of a law. there must be a clear and unequivocal breach of the Constitution, not 4 a doubtful and argumentative implication. As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The 5 court, in City of Baguio vs. De Leon, said: ... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court, stated: "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found." There was no occasion in that case to consider the possible effect on such a constitutional requirement where there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; . . ." About two years later, Justice Tuason, speaking for this Court in Manila Race Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in his opinion and continued; "Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution." To satisfy this requirement then, all that is needed as held in another case decided two years later, (Uy Matias v. City of Cebu,

93 Phil. 300) is that the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation." This Court is on record as accepting the view in a leading American case (Carmichael v. Southern Coal and Coke Co., 301 US 495) that "inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation." (Lutz v. Araneta, 98 Phil. 148, 153). The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not exempt, at the constant rate of 0% or 10%. The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engage in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, spared as they are from the incidence of the VAT, are expected to be relatively lower 6 and within the reach of the general public. The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal Revenue Code, unduly discriminates against customs brokers. The contested provision states: Sec. 103. Exempt transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (r) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax under the Local Tax Code, and professional services performed by registered general professional partnerships;

The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of customs brokers subject to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the payment of an occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102 read: Sec. 102. Value-added tax on sale of services. There shall be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase sale of services" means the performance of all kinds of services 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 personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services regardless of whether or not the performance thereof call for the exercise or use of the physical or mental faculties: ... With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted. At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National

Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers then, the Court sees no reason why it should protest now. The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities and services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact that nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be more imagined than real. It would seem that the VAT is not as bad as we are made to believe. In any event, if petitioners seriously believe that the adoption and continued application of the VAT are prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse and relief from the political branches of the government. The Court, following the time-honored doctrine of separation of powers, cannot substitute its judgment for that of the President as to the wisdom, justice and advisability of the adoption of the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as law, in the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason to impede its application or continued implementation. WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs. SO ORDERED.

G.R. No. 109289 October 3, 1994 RUFINO R. TAN, petitioner, vs. 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

Republic of the Philippines SUPREME COURT Manila EN BANC

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 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 1 made, of the subjects of legislation. 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 2 towards the schedular approach in the income taxation of individual taxpayers and to maintain, 3 by and large, the present global treatment 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. 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, 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 4 partnership is such an example. 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. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

We resolved to give due course to this petition for its raises issues dwelling on the scope of the taxing power of local government-owned and controlled corporations. The uncontradicted factual antecedents are summarized in the instant petition as follows: Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic Act No. 6958, mandated to "principally undertake the economical, efficient and effective control, management and supervision of the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . . and such other Airports as may be established in the Province of Cebu . . . (Sec. 3, RA 6958). It is also mandated to: a ) e n c o u r a g e , p r o m o t e a n d d e v

G.R. No. 120082 September 11, 1996 MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.: For review under Rule 45 of the Rules of Court on a pure question of law are the 1 decision of 22 March 1995 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for declaratory relief in Civil Case No. CEB16900 entitled "Mactan Cebu International Airport Authority vs. City of 2 Cebu", and its order of 4, May 1995 denying the motion to reconsider the decision.

e l o p i n t e r n a t i o n a l a n d d o m e s t i c a i r t r a f f i c i n t h e C e n t r

a l V i s a y a s a n d M i n d a n a o r e g i o n s a s a m e a n s o f m a k i n g t h e

r e g i o n s c e n t e r s o f i n t e r n a t i o n a l t r a d e a n d t o u r i s m , a n d

a c c e l e r a t i n g t h e d e v e l o p m e n t o f t h e m e a n s o f t r a n s p o r t a

t i o n a n d c o m m u n i c a t i o n i n t h e c o u n t r y ; a n d b ) u p g r a d e t h

e s e r v i c e s a n d f a c i l i t i e s o f t h e a i r p o r t s a n d t o f o r m u l a

t e i n t e r n a t i o n a l l y a c c e p t a b l e s t a n d a r d s o f a i r p o r t a c c o m

m o d a t i o n a n d s e r v i c e . Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of realty taxes in accordance with Section 14 of its Charter. Sec. 14. Tax Exemptions. The authority shall be exempt from realty taxes imposed by the National Government or any of its political subdivisions, agencies and instrumentalitie s... On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officerin-Charge, Office of the Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),

located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of P2,229,078.79. Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also asserted that it is an instrumentality of the government performing governmental functions, citing section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of local government units: Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangay shall not extend to the levy of the following: a ) . . .

o ) T a x e s , f e e s o r c h a r g e s o f a n y k i n d o n t h e N a t i o n a l G o

xxx xxx xxx

v e r n m e n t , i t s a g e n c i e s a n d i n s t r u m e n t a l i t i e s , a n d l o c a l

g o v e r n m e n t u n i t s . ( E m p h a s i s s u p p l i e d ) Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the MCIAA is a governmentcontrolled corporation whose tax exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the Local Governmental Code that took effect on January 1, 1992: Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons whether natural

or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under RA No. 6938, non-stock, and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied) xxx xxx xxx Sec. 234. Exemptions from Real Property taxes. . . . (a) . . . xxx xxx xxx (c) . . . Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations are hereby withdrawn upon the effectivity of this Code. As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the latter was compelled to pay its tax account "under protest" and thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29, 1994. MCIAA

basically contended that the taxing powers of local government units do not extend to the levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national government. Petitioner insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same footing as an agency or instrumentality of the national government by the very nature of its powers and functions. Respondent City, however, asserted that MACIAA is not an instrumentality of the government but merely a government-owned corporation performing proprietary functions As such, all exemptions previously granted to it were deemed withdrawn by operation of law, as provided under Sections 193 and 234 of the Local Government Code when it 3 took effect on January 1, 1992. The petition for declaratory relief was docketed as Civil Case No. CEB-16900. In its decision of 22 March 1995, the trial court dismissed the petition in light of its findings, to wit: A close reading of the New Local Government Code of 1991 or RA 7160 provides the express cancellation and withdrawal of exemption of taxes by government owned and controlled corporation per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]
4

Petitioners claimed that its real properties assessed by respondent City Government of Cebu are exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the same (citing Section 14 of RA 6958). However, RA 7160 expressly provides that "All general and special laws, acts, city charters, decress [sic], executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly." ([f], Section 534, RA 7160). With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided for in RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local Government Code of 1991. So that petitioner in this case has to pay the assessed realty tax of its properties effective after January 1, 1992 until the present. This Court's ruling finds expression to give impetus and meaning to the overall objectives of the New Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that the territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them more effective partners in the attainment of national goals. Towards this end, the State shall provide for a more

responsive and accountable local government structure instituted through a system of decentralization whereby local government units shall be given more powers, authority, responsibilities, and resources. The process of decentralization shall proceed from the national government to the local 5 government units. . . . Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the petitioner filed the instant petition based on the following assignment of errors: I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENT ALITY OR AGENCY OF THE GOVERNMENT . II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned or controlled corporation it is mandated to perform functions in the same category as an instrumentality of Government. An instrumentality of Government is one created to perform governmental functions primarily to promote certain aspects of the economic life of the 6 people. Considering its task "not merely to efficiently operate and manage the Mactan-Cebu International Airport, but more importantly, to carry out the Government policies of promoting and developing the Central Visayas and Mindanao regions as centers of international trade and tourism, and accelerating the development of the means of transportation and communication in the 7 country," and that it is an attached agency of the Department of Transportation and Communication 8 (DOTC), the petitioner "may stand in [sic] the same footing as an agency or instrumentality of the national government." Hence, its tax exemption privilege under Section 14 of its Charter "cannot be considered withdrawn with the passage of the Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing powers of local government units shall not extend to the levy of taxes of fees or charges of any kind on the national government its agencies and instrumentalities." As to the second assigned error, the petitioner contends that being an instrumentality of the National Government, respondent City of Cebu has no power nor authority to impose realty taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco vs. Philippine 9 Amusement and Gaming Corporation; Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original character, PD

1869. All its shares of stock are owned by the National Government. . . . PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is governmental, which places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local government. The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation of constitutional laws enacted by Congress to carry into execution the powers vested in the federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579). This doctrine emanates from the "supremacy" of the National Government over local government. Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau Modern Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it. (Emphasis supplied) It then concludes that the respondent Judge "cannot therefore correctly say that the questioned provisions of the Code do not contain any distinction between a governmental function as against one performing merely proprietary ones such that the exemption privilege withdrawn under the said Code would apply to all government corporations." For it is clear from Section 133, in relation to Section 234, of the LGC that the legislature meant to exclude instrumentalities of the national government from the taxing power of the local government units. In its comment respondent City of Cebu alleges that as local a government unit and a political subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such power is guaranteed by the Constitution 10 and enhanced further by the LGC. While it may be true that under its Charter the petitioner was exempt from 11 the payment of realty taxes, this exemption was withdrawn by Section 234 of the LGC. In response to the petitioner's claim that such exemption was not repealed because being an instrumentality of the National Government, Section 133 of the LGC prohibits local government units from imposing taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the petitioner is likewise a

government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish between government-owned corporation, and Section 234 thereof does not distinguish between government-owned or controlled corporations performing governmental and purely proprietary functions. Respondent city of Cebu urges this the Manila International Airport Authority is a governmental12 owned corporation, and to reject the application of Basco because it was "promulgated . . . before the enactment and the singing into law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the framers of the said law. As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people through their 13 Constitutions. Our Constitution, for instance, provides that the rule of taxation shall be uniform and equitable and Congress shall evolve a 14 progressive system of taxation. So potent indeed is the power that it was once opined that "the power to tax 15 involves the power to destroy." Verily, taxation is a destructive power which interferes with the personal and property for the support of the government. Accordingly, tax statutes must be construed strictly against the government and liberally in favor of the 16 taxpayer. But since taxes are what we 17 pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the 18 taxing authority. A claim of exemption from tax payment must be clearly shown and based on language in the law too 19 plain to be mistaken. Elsewise stated,

taxation is the rule, exemption therefrom 20 is the exception. However, if the grantee of the exemption is a political subdivision or instrumentality, the rigid rule of construction does not apply because the practical effect of the exemption is merely to reduce the amount of money that has to be handled by the government in the course of its 21 operations. The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the 22 Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the exemption was granted to private parties based on material consideration of a mutual nature, which then becomes contractual and is thus covered by the non-impairment clause of the 23 Constitution. The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by local government units of their power to tax, the scope thereof or its limitations, and the exemption from taxation. Section 133 of the LGC prescribes the common limitations on the taxing powers of local government units as follows:

Sec. 133. Common Limitations on the Taxing Power of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein (d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all other kinds of customs fees charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned: (e) Taxes, fees and charges and other imposition upon

goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise or charges for wharfages, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise; (f) Taxes fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen; (g) Taxes on business enterprise certified to be the Board of Investment as pioneer or nonpioneer for a period of six (6) and four (4) years, respectively from the date of registration; (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended,

and taxes, fees or charges on petroleum products; (i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein; (j) Taxes on the gross receipts of transportation contractor and person engage in the transportation of passengers of freight by hire and common carriers by air, land, or water, except as provided in this code; (k) Taxes on premiums paid by ways reinsurance or retrocession; (l) Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving of thereof, except, tricycles; (m) Taxes, fees, or other

charges on Philippine product actually exported, except as otherwise provided herein; (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and Cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines; and (o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT , ITS AGENCIES AND INSTRUMENT ALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis supplied) Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred to are "of any kind", hence they include all of these, unless otherwise provided by the LGC. The term "taxes" is well understood so as to need no further elaboration, especially in the light of the above enumeration.

The term "fees" means charges fixed by law or Ordinance for the regulation or 24 inspection of business activity, while "charges" are pecuniary liabilities such as rents or fees against person or 25 property. Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232. It reads as follows: Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area may levy on an annual ad valorem tax on real property such as land, building, machinery and other improvements not hereafter specifically exempted. Section 234 of LGC provides for the exemptions from payment of real property taxes and withdraws previous exemptions therefrom granted to natural and juridical persons, including government owned and controlled corporations, except as provided therein. It provides: Sec. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof had been granted, for reconsideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques nonprofits or religious cemeteries and all lands, building and improvements actually, directly, and exclusively used for religious charitable or educational purposes; (c) All machineries and equipment that are actually, directly and exclusively used by local water districts and governmentowned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; (d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and; (e) Machinery and equipment

used for pollution control and environmental protection. Except as provided herein, any exemptions from payment of real property tax previously granted to or presently enjoyed by, all persons whether natural or juridical, including all government owned or controlled corporations are hereby withdrawn upon the effectivity of his Code. These exemptions are based on the ownership, character, and use of the property. Thus; (a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered cooperatives. (b) Character Exemptions. Exempted from real property taxes on the

basis of their character are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents appurtenant thereto, mosques, and (iii) non profit or religious cemeteries. (c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and exclusive use to which they are devoted are: (i) all lands buildings and improvements which are actually, directed and exclusively used for religious, charitable or educational purpose; (ii) all machineries and equipment actually, directly and exclusively used or by local water districts or by governmentowned or controlled corporations engaged in the supply and distribution of water and/or generation and

transmission of electric power; and (iii) all machinery and equipment used for pollution control and environmental protection. To help provide a healthy environment in the midst of the modernization of the country, all machinery and equipment for pollution control and environmental protection may not be taxed by local governments. 2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical persons including governmentowned or controlled corporations are withdrawn upon the effectivity of the 26 Code. Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It provides: Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including government-owned, or controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non stock and

non profit hospitals and educational constitutions, are hereby withdrawn upon the effectivity of this Code. On the other hand, the LGC authorizes local government units to grant tax exemption privileges. Thus, Section 192 thereof provides: Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary. The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local government units and the exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto. The use of exceptions of provisos in these section, as shown by the following clauses: (1) "unless otherwise provided herein" in the opening paragraph of Section 133; (2) "Unless otherwise provided in this Code" in section 193; (3) "not hereafter specifically exempted" in Section 232; and (4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided herein," with the "herein" to mean, of course, the section, it should have used the clause "unless otherwise provided in this Code." The former results in absurdity since the section itself enumerates what are beyond the taxing powers of local government units and, where exceptions were intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which excepts the income taxes "when livied on banks and other financial institutions", item (d) which excepts "wharfage on wharves constructed and maintained by the local government until concerned"; and item (1) which excepts taxes, fees, and charges for the registration and issuance of license or permits for the driving of "tricycles". It may also be observed that within the body itself of the section, there are exceptions which can be found only in other parts of the LGC, but the section interchangeably uses therein the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in item (j). These clauses would be obviously unnecessary or mere surplusages if the opening clause of the section were" "Unless otherwise provided in this Code" instead of "Unless otherwise provided herein". In any event, even if the latter is used, since under Section 232 local government units have the power to levy real property tax, except those exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section 133. Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as laid down in Section 133 the taxing powers of local government units cannot extend to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and instrumentalties, and local government

units"; however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial used thereof has been granted, for consideration or otherwise, to a taxable person", as provided in item (a) of the first paragraph of Section 234. As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons, including government-owned and controlled corporations, Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to Section 234, which enumerates the properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real property taxes are concerned by limiting the retention only to those enumerated there-in; all others not included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has been granted to taxable person for consideration or otherwise. Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real property taxes granted to natural or juridical persons, including governmentowned or controlled corporations, except as provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it

necessarily follows that its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said section is qualified by Section 232 and 234. In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers of the local government units cannot extend to the levy of: (o) taxes, fees, or charges of any kind on the National Government, its agencies, or instrumentalitie s, and local government units. I must show that the parcels of land in question, which are real property, are any one of those enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most likely, it could only be the first, but not under any explicit provision of the said section, for one exists. In light of the petitioner's theory that it is an "instrumentality of the Government", it could only be within be first item of the first paragraph of the section by expanding the scope of the terms Republic of the Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote: (a) real property owned by the Republic of the Philippines, or any of the Philippines, or any of its political subdivisions except when

the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of the Government is based on Section 133(o), which expressly mentions the word "instrumentalities"; and in the second place it fails to consider the fact that the legislature used the phrase "National Government, its agencies and instrumentalities" "in Section 133(o),but only the phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a). The terms "Republic of the Philippines" and "National Government" are not interchangeable. The former is boarder and synonymous with "Government of the Republic of the Philippines" which the Administrative Code of the 1987 defines as the "corporate governmental entity though which the functions of the government are exercised through at the Philippines, including, saves as the contrary appears from the context, the various arms through which political authority is made effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city, municipal or barangay subdivision or 27 other forms of local government." These autonomous regions, provincial, city, municipal or barangay subdivisions" 28 are the political subdivision. On the other hand, "National Government" refers "to the entire machinery of the central government, as distinguished from the different forms of 29 local Governments." The National Government then is composed of the three great departments the executive, 30 the legislative and the judicial. An "agency" of the Government refers to "any of the various units of the Government, including a department,

bureau, office instrumentality, or government-owned or controlled corporation, or a local government or a 31 distinct unit therein;" while an "instrumentality" refers to "any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy; usually through a charter. This term includes regulatory agencies, chartered institutions and government32 owned and controlled corporations". If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from payment of real property taxes under the last sentence of the said section to the agencies and instrumentalities of the National Government mentioned in Section 133(o), then it should have restated the wording of the latter. Yet, it did not Moreover, that Congress did not wish to expand the scope of the exemption in Section 234(a) to include real property owned by other instrumentalities or agencies of the government including government-owned and controlled corporations is further borne out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax Code, which reads: Sec 40. Exemption from Real Property Tax. The exemption shall be as follows: ( a ) R e a l p r o p e

r t y o w n e d b y t h e R e p u b l i c o f t h e P h i l i p p i n e s o r a n y o f i

t s p o l i t i c a l s u b d i v i s i o n s a n d a n y g o v e r n m e n t o w n e d o r c o

n t r o l l e d c o r p o r a t i o n s s o e x e m p t b y i s c h a r t e r : P r o v i d e d ,

h o w e v e r , t h a t t h i s e x e m p t i o n s h a l l n o t a p p l y t o r e a l p r

o p e r t y o f t h e a b o v e m e n t i o n e d e n t i t i e s t h e b e n e f i c i a l u s

e o f w h i c h h a s b e e n g r a n t e d , f o r c o n s i d e r a t i o n o r o t h e r w

i s e , t o a t a x a b l e p e r s o n . Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled corporation so exempt by its charter" was excluded. The justification for this restricted exemption in Section 234(a) seems obvious: to limit further tax exemption privileges, specially in light of the general provision on withdrawal of exemption from payment of real property taxes in the last paragraph of property taxes in the last paragraph of Section 234. These policy considerations are consistent with the State policy to ensure autonomy to local 33 governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them effective partners in the attainment 34 of national goals. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that the

original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need for this entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes 35 and other charges due from them. The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the petitioner is a "taxable person". Section 15 of the petitioner's Charter provides: Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities, runways, lands, buildings and other properties, movable or immovable, belonging to or presently administered by the airports, and all assets, powers, rights, interests and privileges relating on airport works, or air operations, including all equipment which are necessary for the operations of air navigation, acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to the Authority: Provided however, that the operations control of all equipment necessary for the operation of radio aids to air navigation, airways communication, the approach control office, and the area control center shall be retained by the Air Transportation Office. No equipment, however, shall be removed by the Air Transportation Office from Mactan without the concurrence

of the authority. The authority may assist in the maintenance of the Air Transportation Office equipment. The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International AirPort in the Province of 36 Cebu", which belonged to the Republic of the Philippines, then under 37 the Air Transportation Office (ATO). It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then administered by the Lahug Air Port and includes the parcels of land the respondent City of Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among other things, to the petitioner and not just the transfer of the beneficial use thereof, with the ownership being retained by the Republic of the Philippines. This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's authorized capital stock consists of, inter alia "the value of such real estate owned and/or 38 administered by the airports." Hence, the petitioner is now the owner of the land in question and the exception in Section 234(c) of the LGC is inapplicable. Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It was only exempted from the payment of real property taxes. The grant of the privilege only in respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except real property tax. Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in light of the forgoing disquisitions, it had already become even if it be conceded to be an "agency" or "instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in the last paragraph of Section 234 of

exemptions from the payment of real property taxes, which, as earlier adverted to, applies to the petitioner. Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine Amusement and 39 Gaming Corporation is unavailing since it was decided before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom. WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED. No pronouncement as to costs. SO ORDERED. FIRST DIVISION [G.R. No. 124043. October 14, 1998] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MENS CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents. DECISION PANGANIBAN, J.: Is the income derived from rentals of real property owned by the Young Mens Christian Association of the Philippines, Inc. (YMCA) established as a welfare, educational and charitable non-profit corporation -- subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution? The Case

This is the main question raised before us in this petition for review on certiorari challenging two Resolutions issued by the Court of Appealsi[1] on September 28, 1995ii[2] and February 29, 1996iii[3] in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the latters income from the lease of its real property. The Facts The Facts are undisputed.iv[4] Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. Private respondent formally protested the assessment and, as a supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA. Contesting the denial of its protest, the YMCA filed a petition for review at the Court if Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA: xxx [T]he leasing of private respondents facilities to small shop owners, to restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the [private respondents]. It appears from the testimonies of the witnesses for the [private respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these facilities were leased to members and that they have to service the needs of its members and their guests. The Rentals were minimal as for example, the barbershop was only charged P300 per month. He also testified that there was actually no lot devoted for parking space but the parking was done at the sides of the building. The parking was primarily for members with stickers on the

windshields of their cars and they charged P.50 for non-members. The rentals and parking fees were just enough to cover the costs of operation and maintenance only. The earning[s] from these rentals and parking charges including those from lodging and other charges for the use of the recreational facilities constitute [the] bulk of its income which [is] channeled to support its many activities and attainment of its objectives. As pointed out earlier, the membership dues are very insufficient to support its program. We find it reasonably necessary therefore for [private respondent] to make [the] most out [of] its existing facilities to earn some income. It would have been different if under the circumstances, [private respondent] will purchase a lot and convert it to a parking lot to cater to the needs of the general public for a fee, or construct a building and lease it out to the highest bidder or at the market rate for commercial purposes, or should it invest its funds in the buy and sell of properties, real or personal. Under these circumstances, we could conclude that the activities are already profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the association and therefore, will fall under the last paragraph of section 27 of the Tax Code and any income derived therefrom shall be taxable. Considering our findings that [private respondent] was not engaged in the business of operating or contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and [a] contractors tax in the amount[s] of P353.15 and P3,129.73, respectively. xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack of merit: 1980 Deficiency Fixed Tax P353,15; 1980 Deficiency Contractors Tax P3,129.23; 1980 Deficiency Income Tax P372,578.20. While the following assessments are hereby sustained: 1980 Deficiency Expanded Withholding Tax P1,798.93; 1980 Deficiency Withholding Tax on Wages P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal Revenue Code effective as of 1984.v[5] Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of February 16, 1994, the CAvi[6] initially decided in favor of the CIR and disposed of the appeal in the following manner: Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that the leasing of petitioners (herein respondent) facilities to small shop owners, to restaurant and canteen operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the petitioners,' and the income derived therefrom are tax exempt, must be reversed. WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for: 1980 Deficiency Income Tax P 353.15 1980 Deficiency Contractors Tax P 3,129.23, & 1980 Deficiency Income Tax P372,578.20, but the same is AFFIRMED in all other respect.vii[7] Aggrieved, the YMCA asked for reconsideration based on the following grounds: I The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantial evidence [are] final and conclusive. II The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on rentals of small shops and parking fees [are] in accord with the applicable law and jurisprudence.viii[8]

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads: The Court cannot depart from the CTAs findings of fact, as they are supported by evidence beyond what is considered as substantial. xxx xxx xxx

The second ground raised is that the respondent CTA did not err in saying that the rental from small shops and parking fees do not result in the loss of the exemption. Not even the petitioner would hazard the suggestion that YMCA is designed for profit. Consequently, the little income from small shops and parking fees help[s] to keep its head above the water, so to speak, and allow it to continue with its laudable work. The Court, therefore, finds the second ground of the motion to be meritorious and in accord with law and jurisprudence. WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs decision is AFFIRMED in toto.ix[9] The internal revenue commissioners own Motion for Reconsideration was denied by Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the Rules of Court.x[10] The Issues Before us, petitioner imputes to the Court of Appeals the following errors: I In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it rendered its Decision dated February 16, 1994; and II In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondent from rentals of small shops and parking fees [is] exempt from taxation.xi[11]

This Courts Ruling The Petition is meritorious. First Issue: Factual Findings of the CTA Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the ruling of the CTA that the leasing of private respondents facilities to small shop owners, to restaurant and canteen operators and the operation of parking lots are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the private respondent and that the income derived therefrom are tax exempt.xii[12] Petitioner insists that what the appellate court reversed was the legal conclusion, not the factual finding, of the CTA.xiii[13] The commissioner has a point. Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial evidence, will not be disturbed on appeal unless it is shown that the said court committed gross error in the appreciation of facts.xiv[14] In the present case, this Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to the facts as found by the CTA and ruled on the issue raised by the CIR: Whether or not the collection or earnings of rental income from the lease of certain premises and income earned from parking fees shall fall under the last paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended.xv[15] Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed it was expected to. That it did so in a manner different from that of the CTA did not necessarily imply a reversal of factual findings. The distinction between a question of law and a question of fact is clear-cut. It has been held that [t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of alleged facts.xvi[16] In the present case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied the law to the facts. That its interpretation or conclusion is different from that of the CTA is not irregular or abnormal.

Second Issue: Is the Rental Income of the YMCA Taxable? We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the outset, we set forth the relevant provision of the NIRC: SEC. 27. Exemptions from tax on corporations. -The following organizations shall not be taxed under this Title in respect to income received by them as such -xxx xxx xxx

(g) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; xxx xxx xxx

Notwithstanding the provision in the preceding paragraphs, the income of whatever kind and character of the foregoing organization from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed under this Code. (as amended by Pres. Decree No. 1457) Petitioners argues that while the income received by the organizations enumerated in Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax in respect to income received by them as such, the exemption does not apply to income derived xxx from any if their properties, real or personal, or from any of their activities conducted for profit, regardless, of the disposition made of such income xxx. Petitioner adds that rented income derived by a taxexempt organization from the lease of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income [is] exclusively used for the accomplishment of its objectives.xvii[17] We agree with the commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions.xviii[18] Furthermore, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption must expressly be granted in a statute stated in a language too clear to be mistaken.xix[19] In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their properties, real or personal, be subject to the imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the rent income f the YMCA from its rental property,xx[20] the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be applied.xxi[21] Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is on whether to apply a strict construction or a literal one on statutes that grant tax exemptions to religious, charitable and educational propert[ies] or institutions.xxii[22] The last paragraph of Section 27, the YMCA argues, should be subject to the qualification that the income from the properties must arise from activities conducted for profit before it may be considered taxable.xxiii[23] This argument is erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable. The phrase any of their activities conducted for profit does not qualify the word properties. This makes income from the property of the organization taxable, regardless of how that income is used -- whether for profit or for lofty non-profit purposes. Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but unconvincing ground that the said income is not collected for profit but is merely incidental to its operation. The law does not make a distinction. The rental income is

taxable regardless of whence such income is derived and how it used or disposed of. Where the law does not distinguish, neither should we. Constitutional Provisions on Taxation Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI, Section 28 of par. 3 of the 1987 Constitution,xxiv[24] exempts charitable institutions from the payment not only of property taxes but also of income tax from any source.xxv[25] In support of its novel theory, it compares the use of the words charitable institutions, actually and directly in the 1973 and the 1987 Constitutions, on the hand; and in Article VI Section 22, par. 3 of the 1935 Constitution, on the other hand.xxvi[26] Private respondent enunciates three points. First, the present provision is divisible into two categories: (1) [c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques and non-profit cemeteries, the incomes of which are, from whatever source, all tax-exempt;xxvii[27] and (2) [a]ll lands, buildings and improvements actually and directly used for religious, charitable or educational purposes, which are exempt only from property taxes.xxviii[28] Second, Lladoc v. Commissioner of Internal Revenue,xxix[29] which limited the exemption only to the payment of property taxes, referred to the provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987 Constitutions.xxx[30] Third, the phrase actually, directly and exclusively used for religious, charitable or educational purposes refers not only to all lands, buildings and improvements, but also to the abovequoted first category which includes charitable institutions like the private respondent.xxxi[31] The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the Constitution reveal their intent which, in turn, may have guided the people in ratifying the Charter.xxxii[32] Such intent must be effectuated. Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this Court, stressed during the Concom debates that xxx what is exempted is not the institution itself xxx; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.xxxiii[33] Father Joaquin G. Bernas, an eminent authority on the Constitution and

also a member of the Concom, adhered to the same view that the exemption created by said provision pertained only to property taxes.xxxiv[34] In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax exemption covers property taxes only."xxxv[35] Indeed, the income tax exemption claimed by private respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution. Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,xxxvi[36] claiming that the YMCA is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational purposes so it is exempt from taxes on its properties and income.xxxvii[37] We reiterate that private respondent is exempt from the payment of property tax, but not income tax on the rentals from its property. The bare allegation alone that it is a nonstock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites. Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3 of the Constitution? We rule that it is not. The term educational institution or institution of learning has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant.xxxviii[38] Under the Education Act of 1982, such term refers to schools.xxxix[39] The school system is synonymous with formal education,xl[40] which refers to the hierarchically structured and chronological graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels.xli[41] The Court has examined the Amended Articles of Incorporationxlii[42] and By-Lawsxliii[43] of the

YMCA, but found nothing in them that even hints that it is a school or an educational institution.xliv[44] Furthermore, under the Education Act of 1982, even non-formal education is understood to be schoolbased and private auspices such as foundations and civic-spirited organizations are ruled out.xlv[45] It is settled that the term educational institution, when used in laws granting tax exemptions, refers to a xxx school seminary, college or educational establishment xxx.xlvi[46] Therefore, the private respondent cannot be deemed one of the educational institutions covered by the constitutional provision under consideration. xxx Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadest and best sense education embraces all forms and phrases of instruction, improvement and development of mind and body, and as well of religious and moral sentiments, yet in the common understanding and application it means a place where systematic instruction in any or all of the useful branches of learning is given by methods common to schools and institutions of learning. That we conceive to be the true intent and scope of the term [educational institutions,] as used in the Constitution.xlvii[47] Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also notes that the former did not submit proof of the proportionate amount of the subject income that was actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently insufficient, since the same merely signified that [t]he net income derived from the rentals of the commercial buildings shall be apportioned to the Federation and Member Associations as the National Board may decide.xlviii[48] In sum, we find no basis for granting the YMCA exemption from income tax under the constitutional provision invoked Cases Cited by Private Respondent Inapplicable The casesxlix[49] relied on by private respondent do not support its cause. YMCA of Manila v. Collector of Internal Revenuel[50] and Abra Valley College, Inc. v. Aquinoli[51] are not applicable, because the controversy in both cases involved exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay

Citylii[52] is not in point either, because it involves a claim for exemption from the payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that involved in a claimed exemption from the payment if income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. Of Internal Revenue,liii[53] the party therein, which claimed an exemption from the payment of income tax, was an educational institution which submitted substantial evidence that the income subject of the controversy had been devoted or used solely for educational purposes. On the other hand, the private respondent in the present case had not given any proof that it is an educational institution, or that of its rent income is actually, directly and exclusively used for educational purposes. Epilogue In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the nobility its cause. However, the Courts power and function are limited merely to applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation. We concede that private respondent deserves the help and the encouragement of the government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government. Indeed, some of the member of the Court may even believe in the wisdom and prudence of granting more tax exemptions to private respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the power to change or amend the law. WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995 is REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income tax. No pronouncement as to costs. SO ORDERED.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN, respondent. PUNO, J.: This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan. Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others, the power to construct, operate and maintain power plants, auxiliary plants, power stations and substations for the purpose of developing hydraulic power and supplying such power to the inhabitants.6 For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding year.9 Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-profit and shall devote all its return from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power."12 The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly interest.13 Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160, 14 which reads as follows: "Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all

persons, whether natural or juridical, including government owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the national government. Pertinent portion of the Order reads: "The question of whether a particular law has been repealed or not by a subsequent law is a matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing provisions which expressly and specifically cite(s) the particular law or laws, and portions thereof, that are intended to be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law, identified by its number or title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause because it fails to identify the act or acts that are intended to be repealed. It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored. The presumption is against inconsistency and repugnancy for the legislative is presumed to know the existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law does not repeal a special law unless it clearly appears that the legislative has intended by the latter general act to modify or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that: 'Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original charter, PD 1869. All of its shares of stocks are owned by the National Government. xxx Being an instrumentality of the government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by mere local government.' Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter and its shares of stocks owned by the National Government, is beyond the taxing power of the Local Government. Corollary to this, it should be noted here that in the NPC Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines through the development of power from all services to meet the needs of industrial development and dispersal and needs of rural electrification are primary objectives of the nations which shall be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions.' (underscoring supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal of this government instrumentality. Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to that which is provided for in its charter or other statute. Any grant of taxing power is to be construed strictly, with doubts resolved against its existence. From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could not impose the subject tax on the defendant."16

On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19 On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This was denied by the appellate court, viz: "The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to private persons or corporations in which category it (NPC) does not belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a special lawfinds the answer in Section 193 of the LGC to the effect that 'tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations except local water districts xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied. IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED. SO ORDERED."20 In this petition for review, petitioner raises the following issues: "A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW. C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21 It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137 of the LGC, viz: "Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied) x x x

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes." Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent city government to private entities that are engaged in trade or occupation for profit.22 Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of the public welfare, security and safety." From the phraseology of this provision, the petitioner claims that the word "private" modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it should refer specifically to franchises granted to private natural persons and to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of imposing the franchise tax in question. On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its operation; all these profits are required by law to be channeled for expansion and improvement of its facilities and services.24 Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming Corporation26 where this Court held that local governments have no power to tax instrumentalities of the National Government, viz: "Local governments have no power to tax instrumentalities of the National Government.

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code.

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is governmental, which places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere local government. 'The states have no power by taxation or otherwise, to retard, impede, burden or in any manner control the operation of constitutional laws enacted by Congress to carry into execution the powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)' This doctrine emanates from the 'supremacy' of the National Government over local governments. 'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can regulate a federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even seriously burden it from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied) Otherwise, mere creatures of the State can defeat National policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the power to tax as ' a tool regulation' (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or

creation of the very entity which has the inherent power to wield it."27 Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of governmentowned or controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be amended or modified impliedly by the local government code which is a general law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its charter subsists despite the passage of the LGC, viz: "It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored and as much as possible, effect must be given to all enactments of the legislature. Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a later legislation which is a general law cannot be construed to have repealed a special law. Where there is a conflict between a general law and a special statute, the special statute should prevail since it evinces the legislative intent more clearly than the general statute."28 Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail over the LGC. It alleges that the power of the local government to impose franchise tax is subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the least limitable and most demanding of all powers, including the power of taxation."29 The petition is without merit. Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity;32 without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. In recent years, the increasing social challenges of the times expanded the scope of state activity, and

taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives.33 Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz: "Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments." This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country's highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders."35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers, viz: "Section 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and

all other matters relating to the organization and operation of the local units." To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the shackles of dependence on the national government remained. Local government units were faced with the same problems that hamper their capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control over personnel of national line agencies.41 Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to the respective sanggunian.43 One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities, viz: "Section 133. Common Limitations on the Taxing Powers of the Local Government Units.- Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and

barangays shall not extend to the levy of the following: x x x

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and local government units." (emphasis supplied) In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax.46 In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government, was subject to real property tax, viz: "Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid down in section 133, the taxing power of local governments cannot extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies and instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities and municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter alia, 'real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise, to a taxable person as provided in the item (a) of the first paragraph of section 12.'"47 In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city government to impose on the petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by government authority, which does not belong to citizens of the country generally as a matter of common right.48 In its specific sense, a franchise may refer to a general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the corporation.49 The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires.51 The rights under a secondary or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use.52 In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.56 It is within this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city government. Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its composition, capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span.57 As its

secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are not available to ordinary corporations, viz: "x x x (e) To conduct investigations and surveys for the development of water power in any part of the Philippines; (f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian owners and from persons owning or interested in waters which are or may be necessary for said purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase the flow of water in streams or water channels intersecting or connecting therewith or contiguous to its works or any part thereof: Provided, That just compensation shall be paid to any person or persons whose property is, directly or indirectly, adversely affected or damaged thereby; (g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains, transmission lines, power stations and substations, and other works for the purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers, generators and machinery in plants and/or auxiliary plants for the production of electric power; to establish, develop, operate, maintain and administer power and lighting systems for the transmission and utilization of its power generation; to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x x x; (h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose of property incident to, or necessary, convenient or proper to carry out

the purposes for which the Corporation was created: Provided, That in case a right of way is necessary for its transmission lines, easement of right of way shall only be sought: Provided, however, That in case the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at the time of the taking of such property; (i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street, avenue, highway or railway of private and public ownership, as the location of said works may require xxx; (j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by law for instituting condemnation proceedings by the national, provincial and municipal governments; x x x

(m) To cooperate with, and to coordinate its operations with those of the National Electrification Administration and public service entities; (n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon determination by the Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced within the watersheds, subject to existing private rights, the needs of waterworks systems, and the requirements of domestic water supply; (o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to prevent environmental pollution and promote the conservation, development and maximum utilization of natural resources xxx "58

With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40,59 nationalizing the electric power industry. Although Exec. Order No. 21560 thereafter allowed private sector participation in the generation of electricity, the transmission of electricity remains the monopoly of the petitioner. Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the franchise tax in question. Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government, and its charter characterized it as a "non-profit" organization. These contentions must necessarily fail. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name,61 and can exercise all the powers of a corporation under the Corporation Code.62 To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 63 classifies government-owned or controlled corporations (GOCCs) into those performing governmental functions and those performing proprietary functions, viz: "A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by special law or if organized under the general corporation law is owned or controlled by the government directly, or indirectly through a

parent corporation or subsidiary corporation, to the extent of at least a majority of its outstanding voting capital stock x x x." (emphases supplied) Governmental functions are those pertaining to the administration of government, and as such, are treated as absolute obligation on the part of the state to perform while proprietary functions are those that are undertaken only by way of advancing the general interest of society, and are merely optional on the government.64 Included in the class of GOCCs performing proprietary functions are "business-like" entities such as the National Steel Corporation (NSC), the National Development Corporation (NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA),65 among others. Petitioner was created to "undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis." 66 Pursuant to this mandate, petitioner generates power and sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the government. They are purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.67 A closer reading of its charter reveals that even the legislature treats the character of the petitioner's enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68 "(n) When essential to the proper administration of its corporate affairs or necessary for the proper transaction of its business or to carry out the purposes for which it was organized, to contract indebtedness and issue bonds subject to approval of the President upon recommendation of the Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied) It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its capital investment, as well as excess revenues from its operation, for expansion"70 while other franchise holders have the option to distribute their profits to its stockholders by declaring dividends. We do not see why this fact can be a source of difference in tax treatment. In both instances, the taxable entity is the corporation, which exercises the franchise, and not the individual stockholders. We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist despite the passage of the LGC. As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes.72 It reads: "Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby

withdrawn upon the effectivity of this Code." (emphases supplied) 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.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly does not belong to the exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it exemption from local taxes. But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose franchise tax "notwithstanding any exemption granted by any law or other special law." This particular provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an issue before this Court. The same issue was involved in the subsequent case of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in both instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under special laws, viz: "It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support their position that MERALCO's tax exemption has been withdrawn. The explicit language of section 137 which authorizes the province to impose franchise tax 'notwithstanding any exemption granted by any law or other special law' is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws. Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations except (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is

to limit the exemptions to the three enumerated entities. 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. In the absence of any provision of the Code to the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be withdrawn. Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used."76 (emphases supplied). It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city government clearly did not intend to exempt the petitioner from the coverage thereof. Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax exemption privileges granted to government-owned or controlled corporations and all other units of

government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises." 78 With the added burden of devolution, it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or other charges due from them. IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED. SO ORDERED. Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur. EN BANC

BRITISH AMERICAN TOBACCO, 163583 Petitioner, Present:

G.R.

No.

P u n o , C . J . ,

Quisumbing,

Ynares-Santiago,

Carpio,

. ,

Austria-Martinez,

C o r o n a ,

N a c h u r a ,

- versus Carpio Morales,

T i n g a ,

L e o n a r d o D e C a s t r o ,

C h i c o N a z a r i o ,

B r i o n ,

V e l a s c o , J r

P e r a l t a , a

n d

B e r s a m i n , J J . JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue, Respondents.

PHILIP MORRIS PHILIPPINES MANUFACTURING, INC., FORTUNE TOBACCO, CORP., Promulgated: MIGHTY CORPOR.A.TION, and JT INTERNATIONAL, S.A., Respondents-in-Intervention. April 15, 2009

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

In its Motion for Reconsideration, petitioner RESOLUTION insists that the assailed provisions (1) violate the equal protection and uniformity of taxation clauses of the Constitution, (2) contravene Section 19,1[1] Article XII of the Constitution on unfair competition, YNARES-SANTIAGO, J.: and (3) infringe the constitutional provisions on regressive and inequitable taxation. Petitioner further argues that assuming the assailed provisions are constitutional, petitioner is entitled to a downward reclassification of Lucky Strike from the premiumOn August 20, 2008, the Court rendered a Decision partially granting the petition in this case, viz: priced to the high-priced tax bracket.

The Court is not persuaded. WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional Trial Court of Makati, Branch 61, in Civil Case No. 031032, is AFFIRMED with MODIFICATION. As modified, this Court declares that: (1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that (2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are INVALID insofar as they grant the BIR the power to reclassify or update the classification of new brands every two years or earlier. SO ORDERED.

T h e a s s a i l e d l a w d o e s n o

t v i o l a t e t h e e q u a l p r o t e c t i o n a n d

n c l a u s e s .

Petitioner argues that the classification freeze provision violates the equal protection and uniformity of taxation clauses because Annex D brands are taxed based on their 1996 net retail prices while new brands are taxed based on their present day net retail prices. Citing Ormoc Sugar Co. v. Treasurer of Ormoc City,2[2] petitioner asserts that the assailed provisions accord a special or privileged status to Annex D brands while at the same time discriminate against other brands.

These contentions are without merit and a u n i f o r m i t y o f t a x a t i o rehash of petitioners previous arguments before this Court. As held in the assailed Decision, the instant case neither involves a suspect classification nor impinges on a fundamental right. Consequently, the rational basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal protection challenge. It has been held that in the areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be

upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.3[3] Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest. Court ruled in the assailed Decision, viz: As the

A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present and future conditions; and (4) it applies equally to all those belonging to the same class. The first, third and fourth requisites are satisfied. The classification freeze provision was inserted in the law for reasons of practicality and expediency. That is, since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand. The current net retail price, similar to what was used to classify the brands under Annex D as of October 1, 1996, was thus the logical and practical choice. Further, with the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to Annex D brands but to newer brands introduced after the effectivity of RA 8240 on January

1, 1997 and any new brand that will be introduced in the future. (However, as will be discussed later, the intent to apply the freezing mechanism to newer brands was already in place even prior to the amendments introduced by RA 9334 to RA 8240.) This does not explain, however, why the classification is frozen after its determination based on current net retail price and how this is germane to the purpose of the assailed law. An examination of the legislative history of RA 8240 provides interesting answers to this question. xxxx From the foregoing, it is quite evident that the classification freeze provision could hardly be considered arbitrary, or motivated by a hostile or oppressive attitude to unduly favor older brands over newer brands. Congress was unequivocal in its unwillingness to delegate the power to periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and reclassify the cigarette brands based on the increase in the consumer price index to the DOF and the BIR. Congress doubted the constitutionality of such delegation of power, and likewise, considered the ethical implications thereof. Curiously, the classification freeze provision was put in place of the periodic adjustment and reclassification provision because of the belief that the latter would foster an anti-competitive atmosphere in the market. Yet, as it is, this same criticism is being foisted by petitioner upon the classification freeze provision. To our mind, the classification freeze provision was in the main the result of Congresss earnest efforts to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with other State interests. In

particular, the questioned provision addressed Congresss administrative concerns regarding delegating too much authority to the DOF and BIR as this will open the tax system to potential areas for abuse and corruption. Congress may have reasonably conceived that a tax system which would give the least amount of discretion to the tax implementers would address the problems of tax avoidance and tax evasion. To elaborate a little, Congress could have reasonably foreseen that, under the DOF proposal and the Senate Version, the periodic reclassification of brands would tempt the cigarette manufacturers to manipulate their price levels or bribe the tax implementers in order to allow their brands to be classified at a lower tax bracket even if their net retail prices have already migrated to a higher tax bracket after the adjustment of the tax brackets to the increase in the consumer price index. Presumably, this could be done when a resurvey and reclassification is forthcoming. As briefly touched upon in the Congressional deliberations, the difference of the excise tax rate between the medium-priced and the high-priced tax brackets under RA 8240, prior to its amendment, was P3.36. For a moderately popular brand which sells around 100 million packs per year, this easily translates to P336,000,000. The incentive for tax avoidance, if not outright tax evasion, would clearly be present. Then again, the tax implementers may use the power to periodically adjust the tax rate and reclassify the brands as a tool to unduly oppress the taxpayer in order for the government to achieve its revenue targets for a given year. Thus, Congress sought to, among others, simplify the whole tax system for sin products to remove these potential areas of

abuse and corruption from both the side of the taxpayer and the government. Without doubt, the classification freeze provision was an integral part of this overall plan. This is in line with one of the avowed objectives of the assailed law to simplify the tax administration and compliance with the tax laws that are about to unfold in order to minimize losses arising from inefficiencies and tax avoidance scheme, if not outright tax evasion. RA 9334 did not alter this classification freeze provision of RA 8240. On the contrary, Congress affirmed this freezing mechanism by clarifying the wording of the law. We can thus reasonably conclude, as the deliberations on RA 9334 readily show, that the administrative concerns in tax administration, which moved Congress to enact the classification freeze provision in RA 8240, were merely continued by RA 9334. Indeed, administrative concerns may provide a legitimate, rational basis for legislative classification. In the case at bar, these administrative concerns in the measurement and collection of excise taxes on sin products are readily apparent as afore-discussed. Aside from the major concern regarding the elimination of potential areas for abuse and corruption from the tax administration of sin products, the legislative deliberations also show that the classification freeze provision was intended to generate buoyant and stable revenues for government. With the frozen tax classifications, the revenue inflow would remain stable and the government would be able to predict with a greater degree of certainty the amount of taxes that a cigarette manufacturer would pay given the trend in its sales volume over time. The reason for this is that the previously classified cigarette brands would be

prevented from moving either upward or downward their tax brackets despite the changes in their net retail prices in the future and, as a result, the amount of taxes due from them would remain predictable. The classification freeze provision would, thus, aid in the revenue planning of the government. All in all, the classification freeze provision addressed Congresss administrative concerns in the simplification of tax administration of sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable revenue generation, and ease of projection of revenues. Consequently, there can be no denial of the equal protection of the laws since the rational-basis test is amply satisfied.

unconstitutional because it is not intrinsically equal and uniform in its operation.7[7] The uniformity rule does not prohibit classification for purposes of taxation.8[8] As ruled in Tan v. Del Rosario, Jr.:9[9]

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 (citations omitted). 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 (citations omitted).10[10]

Moreover, petitioners contention that the assailed provisions violate the uniformity of taxation clause is similarly unavailing. In Churchill v. Concepcion,4[4] we explained that a tax is uniform when it operates with the same force and effect in every place where the subject of it is found.5[5] It does not signify an intrinsic but simply a In the instant case, there is no question that the classification freeze provision meets the geographical uniformity requirement because the assailed law applies to all cigarette brands in the Philippines.

geographical uniformity.6[6] A levy of tax is not

And, for reasons already adverted to in our August 20, 2008 Decision, the above four-fold test has been met in the present case.

choices.11[11]

We

reiterate,

therefore,

that

petitioners remedy is with Congress and not this Court.

Petitioners reliance on Ormoc Sugar Co. is misplaced. In said case, the controverted municipal ordinance specifically named and taxed only the Ormoc Sugar Company, and excluded any

T h e a s s a i l e d p r o v i s i o n s d o n o t v i o l a t e t h e

subsequently established sugar central from its coverage. Thus, the ordinance was found

unconstitutional on equal protection grounds because its terms do not apply to future conditions as well. This is not the case here. The classification freeze provision uniformly applies to all cigarette brands whether existing or to be introduced in the market at some future time. It does not purport to exempt any brand from its operation nor single out a brand for the purpose of imposition of excise taxes.

At any rate, petitioners real disagreement lies with the legitimate State interests. Although it concedes that the Court utilized the rationality test and that the classification freeze provision was necessitated by several legitimate State interests, however, it refuses to accept the justifications given by Congress for the classification freeze provision. As we elucidated in our August 20, 2008 Decision, this line of argumentation revolves around the wisdom and expediency of the assailed law which we cannot inquire into, much less overrule. Equal

protection is not a license for courts to judge the wisdom, fairness, or logic of legislative

Petitioner asserts that the Court erroneously c o n s t i t u t i o n a l p r o h i b i t i o n o n u n f a i r c o m p e t i t i o n . applied the rational basis test allegedly because this test does not apply in a constitutional challenge based on a violation of Section 19, Article XII of the Constitution on unfair competition. Citing Tatad v. Secretary of the Department of Energy,12[12] it argues that the classification freeze provision gives the brands under Annex D a decisive edge because it constitutes a substantial barrier to the entry of prospective players; that the Annex D provision is no different from the 4% tariff differential which we invalidated in Tatad; that some of the new brands, like Astro, Memphis, Capri, L&M, Bowling Green, Forbes, and Canon, which were introduced into the market after the effectivity of the assailed law on January 1, 1997, were killed by Annex D brands because the former brands were reclassified by the BIR to higher tax brackets; that the finding that price is not the only factor in the market as there are other factors like consumer preference, active ingredients, etc. is contrary to the evidence presented and the deliberations in Congress; that the classification freeze provision will encourage predatory pricing in contravention of the constitutional prohibition on unfair competition; and that the cumulative effect of the operation of the classification freeze provision is to perpetuate the oligopoly of intervenors Philip Morris and Fortune Tobacco in contravention of the constitutional edict for the State to regulate or prohibit monopolies, and to disallow combinations in restraint of trade and unfair competition.

The argument lacks merit. While previously arguing that the rational basis test was not satisfied, petitioner now asserts that this test does not apply in this case and that the proper matrix to evaluate the constitutionality of the assailed law is the prohibition on unfair competition under Section 19, Article XII of the Constitution. It should be noted that during the trial below, petitioner did not invoke said

As we stated in our August 20, 2008 Decision, petitioner failed to convincingly prove that there is a substantial barrier to the entry of new brands in the cigarette market due to the classification freeze provision. We further observed that several new

brands were introduced in the market after the assailed law went into effect thus negating petitioners sweeping claim that the classification freeze provision is an insurmountable barrier to the entry of new brands. We also noted that price is not the only factor affecting competition in the market for there are other factors such as taste, brand loyalty, etc.

constitutional provision as it relied solely on the alleged violation of the equal protection and uniformity of taxation clauses. Well-settled is the rule that points of law, theories, issues and arguments not adequately brought to the attention of the lower court will not be ordinarily considered by a reviewing court as they cannot be raised for the first time on appeal.13[13] At any rate, even if we were to relax this rule, as previously stated, the evidence presented before the trial court is insufficient to establish the alleged violation of the constitutional proscription against unfair competition.

We see no reason to depart from these findings for the following reasons:

First, petitioner did not lay down the factual foundations, as supported by verifiable documentary Indeed, in Tatad we ruled that a law which imposes substantial barriers to the entry and exit of new players in our downstream oil industry may be struck down for being violative of Section 19, Article XII of the Constitution.14[14] However, we went on to say in that case that if they are insignificant impediments, they need not be stricken down.15[15] proof, which would establish, among others, the cigarette brands in competition with each other; the current net retail prices of Annex D brands, as determined through a market survey, to provide a sufficient point of comparison with those covered by the BIRs market survey of new brands; and the causal connection with as well as the extent of the impact on the competition in the cigarette market of the classification freeze provision. Other than petitioners self-serving allegations and testimonial evidence, no adequate documentary evidence was presented to substantiate its claims. Absent ample documentary proof, we cannot accept petitioners

claim that the classification freeze provision is an insurmountable barrier to the entry of new players.

sufficient documentary evidence, provide reasonable basis for petitioners conclusion that there arose an unconstitutional unfair competition due to the operation of the classification freeze provision. Petitioner should be reminded that it appealed this

Second,

we cannot lend

credence to

petitioners claim that it cannot produce cigarettes that can compete with Marlboro and Philip Morris in the high-priced tax bracket. serving testimonial Except for its selfno sufficient

case from the adverse ruling of the trial court directly to this Court on pure questions of law instead of resorting to the Court of Appeals.

evidence,

documentary evidence was presented to substantiate this claim. The current net retail price, which is the basis for determining the tax bracket of a cigarette brand, more or less consists of the costs of raw materials, labor, advertising and profit margin. To a large extent, these factors are controllable by the manufacturer, as such, the decision to enter which tax bracket will depend on the pricing strategy adopted by the individual manufacturer. The same holds true for its claims that other new brands, like Astro, Memphis, Capri, L&M, Bowling Green, Forbes, and Canon, were killed by Annex D brands due to the effects of the operation of the classification freeze provision over time. The evidence that petitioner case. Third, Tatad is not applicable to the instant In Tatad, we found that the 4% tariff

differential between imported crude oil and imported refined petroleum products erects a high barrier to the entry of new players because (1) it imposes an undue burden on new players to spend billions of pesos to build refineries in order to compete with the old players, and (2) new players, who opt not to build refineries, suffer from the huge disadvantage of increasing their product cost by 4%.16[16] The tariff was imposed on the raw materials uniformly used by the players in the oil industry. Thus, the adverse effect on competition arising from this discriminatory treatment was readily apparent. In contrast, the

presented before the trial court failed to substantiate the basis for these claims.

excise tax under the assailed law is imposed based on the current net retail price of a cigarette brand. As previously explained, the current net retail price is determined by the pricing strategy of the

Essentially, petitioner would want us to accept its conclusions of law without first laying down the factual foundations of its arguments. This Court, which is not a trier of facts, cannot take judicial notice of the factual premises of these arguments as petitioner now seems to suggest. The evidence should have been presented before the trial court to allow it to examine and determine for itself whether such factual premises, as supported by

manufacturer. This Court cannot simply speculate that the reason why a new brand cannot enter a specific tax bracket and compete with the brands therein was because of the classification freeze provision, rather than the manufacturers own pricing

decision or some other factor solely attributable to the manufacturer. Again, the burden of proof in this regard is on petitioner which it failed to muster.

constitutionality of a law carries the heavy burden of proof for laws enjoy a strong presumption of constitutionality as it is an act of a co-equal branch of government. Petitioner failed to carry this burden.

Fourth, the finding in our August 20, 2008 Decision that price is not the only factor which affects consumer behavior in the cigarette market is based on petitioners own evidence. On crossa s s a i l e d l a w d o e s n o t t r a n s g r e s s t h e c o n s t examination, petitioners witness admitted that notwithstanding the change in price, a cigarette smoker may prefer the old brand because of its addictive formulation.17[17] As a result, even if we were to assume that the classification freeze provision distorts the pricing scheme of the market players, it is not clear whether a substantial barrier to the entry of new players would thereby be created because of these other factors affecting consumer behavior. T h e

Last, the claim that the assailed provisions encourage predatory pricing was never raised nor substantiated before the trial court. It is merely an afterthought and cannot be given weight.

In sum, the totality of the evidence presented by petitioner before the trial court failed to convincingly establish the alleged violation of the constitutional prohibition on unfair competition. It is a basic postulate that the one who challenges the

i t u t i o n a l p r o v i s i o n s o n r e g r e s s i v e a n d i n e q u i t a b l e t a x a t

i o n .

Petitioner argues that the classification freeze provision is a form of regressive and inequitable tax system which is proscribed under Article VI, Section 28(1)18[18] of the Constitution. It claims that people in equal positions should be treated alike. The use of different tax bases for brands under Annex D vis--vis new brands is discriminatory, and thus, iniquitous. Petitioner further posits that the classification freeze provision is regressive in character. It asserts that the

harmonization of revenue flow projections and ease of tax administration cannot override this

constitutional command.

We note that the points raised by petitioner with respect to alleged inequitable taxation

perpetuated by the classification freeze provision are a mere reformulation of its equal protection challenge. As stated earlier, the assailed provisions do not infringe the equal protection clause because the four-fold test is satisfied. In particular, the

classification freeze provision has been found to rationally further legitimate State interests consistent with rationality review. Petitioners repackaged

argument has, therefore, no merit.

Anent the issue of regressivity, it may be conceded that the assailed law imposes an excise tax on cigarettes which is a form of indirect tax, and thus, regressive in character. While there was an attempt to make the imposition of the excise tax more equitable by creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate. To this extent, the tax does not take into account the persons ability to pay. i s n o t e n t i t l e d t o a d o w n w a r d r e c l a s s i P e t i t i o n e r

Nevertheless, this does not mean that the assailed law may be declared unconstitutional for being regressive in character because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation. As we explained in Tolentino v. Secretary of Finance:19[19]

[R]egressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities [Art. XIII, Section 1] or for the promotion of the right to "quality education" [Art. XIV, Section 1]. These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.20[20]

f i c a t i o n o f L u c k y S t r i k e .

years from product launch constitutes gross neglect on the part of the BIR. Consequently, for failure of the BIR to conduct a timely market survey, Lucky Strikes classification based on its suggested gross retail price should be deemed its official tax classification. Finally, petitioner asserts that had the market survey been timely conducted sometime in 2001, the current net retail price of Lucky Strike would have been found to be under the high-priced tax bracket.

These misleading.

contentions

are

untenable

and

First, BIR Ruling No. 018-2001 was requested by petitioner for the purpose of fixing Petitioner alleges that assuming the assailed law is constitutional, its Lucky Strike brand should be reclassified from the premium-priced to the highpriced tax bracket. Relying on BIR Ruling No. 0182001 dated May 10, 2001, it claims that it timely sought redress from the BIR to have the market survey conducted within three months from product launch, as provided for under Section 4(B)21[21] of Revenue Regulations No. 1-97, in order to determine the actual current net retail price of Lucky Strike, and thus, fix its tax classification. Further, the upward reclassification of Lucky Strike amounts to Lucky Strikes initial tax classification based on its suggested gross retail price relative to its planned introduction of Lucky Strike in the market sometime in 2001 and not for the conduct of the market survey within three months from product launch. In fact, the said Ruling contained an express reservation that the tax classification of Lucky Strike set therein is without prejudice, however, to the subsequent conduct of a survey x x x in order to determine if the actual gross retail price thereof is consistent with [petitioners] suggested gross retail price.22[22] In short, petitioner acknowledged that the initial tax classification of Lucky Strike may be modified depending on the outcome of the survey which will

deprivation of property right without due process of law. The conduct of the market survey after two

determine the actual current net retail price of Lucky Strike in the market.

Strike in 2001, based on a market survey at least comparable to the one mandated by law, was presented before the trial court. Evidently, it cannot be assumed that had the BIR conducted the market survey within three months from its product launch

Second,

there

was

no

upward

sometime in 2001, Lucky Strike would have been found to fall under the high-priced tax bracket and not the premium-priced tax bracket. To so hold would run roughshod over the States right to due process. Verily, petitioner prosecuted its case before the trial court solely on the theory that the assailed law is unconstitutional instead of merely challenging the timeliness of the market survey. The rule is that a party is bound by the theory he adopts and by the cause of action he stands on. He cannot be permitted after having lost thereon to repudiate his theory and cause of action, and thereafter, adopt another and seek to re-litigate the matter anew either in the same

reclassification of Lucky Strike because it was taxed based on its suggested gross retail price from the time of its introduction in the market in 2001 until the BIR market survey in 2003. We reiterate that Lucky Strikes actual current net retail price was surveyed for the first time in 2003 and was found to be from P10.34 to P11.53 per pack, which is within the premium-priced tax bracket. There was, thus, no

prohibited upward reclassification of Lucky Strike by the BIR based on its current net retail price.

Third, the failure of the BIR to conduct the market survey within the three-month period under the revenue regulations then in force can in no way make the initial tax classification of Lucky Strike based on its suggested gross retail price permanent. Otherwise, this would contravene the clear mandate of the law which provides that the basis for the tax classification of a new brand shall be the current net retail price and not the suggested gross retail price. It is a basic principle of law that the State cannot be estopped by the mistakes of its agents.

forum or on appeal.23[23]

Having pursued one

theory and lost thereon, petitioner may no longer pursue another inconsistent theory without thereby trifling with court processes and burdening the courts with endless litigation.

WHEREFORE, reconsideration is DENIED.

the

motion

for

Last, the issue of timeliness of the market survey was never raised before the trial court because petitioners theory of the case was wholly anchored on the alleged unconstitutionality of the classification freeze provision. As a consequence, no documentary evidence as to the actual net retail price of Lucky