PART I – GENERAL PRINCIPLES OF TAXATION

Phil. Guaranty Co., Inc. vs. CIR, G.R. No. L-22074, April 4, 1965:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on various dates, with foreign insurance companies not doing
business in the Philippines namely: Imperio Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima de
Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance Limited.
Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the
Philippines, in consideration for the assumption by the latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were signed by
Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company, which was
signed by both parties in Switzerland.

The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of Philippine Guaranty Co., Inc. under the original insurance.
Philippine Guaranty Co., Inc. was required to keep a register in Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding
upon the reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original assured were to be paid for by the foreign reinsurers.
The foreign reinsurers further agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the Philippine Guaranty Co.,
Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance contracts were to be arbitrated
in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by the laws of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the following premiums:

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax returns for 1953 and 1954. Furthermore, it did not
withhold or pay tax on them. Consequently, per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums, thus:

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines
are not subject to withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal
Revenue the respective sums of P202,192.00 and P173,153.00 or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954,
plus the statutory delinquency penalties thereon. With costs against petitioner. Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
Commissioner of Internal Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from sources within the Philippines because the foreign reinsurers
did not engage in business in the Philippines, nor did they have office here.

The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with
the liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the foreign resinsurers, localizing in the Philippines the actual cession of the risks and premiums and assumption of
the reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing insurance business in

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the Philippines were payable by the foreign reinsurers when the same were not recoverable from the original assured. The foreign reinsurers paid Philippine
Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and management by the latter of the affairs of the
former in the Philippines in regard to their reinsurance activities here. Disputes and differences between the parties were subject to arbitration in the City of
Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines and later
signed by the foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties
in Switzerland, the same specifically provided that its provision shall be construed according to the laws of the Philippines, thereby manifesting a clear intention of
the parties to subject themselves to Philippine law.

Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines. The word "sources" has been interpreted as
the activity, property or service giving rise to the income.  1 The reinsurance premiums were income created from the undertaking of the foreign reinsurance
companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate income tax.

The foreign insurers' place of business should not be confused with their place of activity. Business should not be continuity and progression of transactions 2 while
activity may consist of only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed or done in the
Philippines. What is controlling, therefore, is not the place of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines because they are not specifically mentioned in
Section 37 of the Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be treated as
income from sources within the Philippines but it does not require that other kinds of income should not be considered likewise. The power to tax is an attribute of
sovereignty. It is a power emanating from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist
an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the citizenry and
those which come within the State's territory, and facilities and protection which a government is supposed to provide. Considering that the reinsurance premiums
in question were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state. Petitioner would wish to stress that its reliance in good faith on the rulings
of the Commissioner of Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question relieved it of the duty to pay the
corresponding withholding tax thereon. This defense of petitioner may free if from the payment of surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The Government is not estopped from collecting
taxes by the mistakes or errors of its agents. 3

In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines are subject to withholding tax
under Section 53 and 54 of the Tax Code, suffice it to state that this question has already been answered in the affirmative in  Alexander Howden & Co., Ltd. vs.
Collector of Internal Revenue, L-19393, April 14, 1965.

Finally, petitioner contends that the withholding tax should be computed from the amount actually remitted to the foreign reinsurers instead of from the total
amount ceded. And since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding tax was due.

The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to taxation under this Title not engaged in trade or
business within the Philippines and not having any office or place of business therein, there shall be deducted and withheld at the source in the same

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 manner and upon the same items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof, and such tax shall be returned and
paid in the same manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships (compañias colectivas), in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and
all officers and employees of the Government of the Philippines having the control, receipt, custody, disposal, or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and
income of any nonresident alien individual, not engaged in trade or business within the Philippines and not having any office or place of business therein,
shall (except in the case provided for in subsection [a] of this section) deduct and withhold from such annual or periodical gains, profits, and income a tax
equal to twelve per centum thereof: Provided That no deductions or withholding shall be required in the case of dividends paid by a foreign corporation
unless (1) such corporation is engaged in trade or business within the Philippines or has an office or place of business therein, and (2) more than eighty-
five per centum of the gross income of such corporation for the three-year period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in existence)was derived from sources within the Philippines as determined
under the provisions of section thirty-seven: Provided, further, That the Collector of Internal Revenue may authorize such tax to be deducted and withheld
from the interest upon any securities the owners of which are not known to the withholding agent.

The above-quoted provisions allow no deduction from the income therein enumerated in determining the amount to be withheld. According, in computing the
withholding tax due on the reinsurance premium in question, no deduction shall be recognized.

WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the
sums of P202,192.00 and P173,153.00, or a total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount of
P375,345.00 is not paid within 30 days from the date this judgement becomes final, there shall be collected a surcharged of 5% on the amount unpaid, plus interest
at the rate of 1% a month from the date of delinquency to the date of payment, provided that the maximum amount that may be collected as interest shall not
exceed the amount corresponding to a period of three (3) years. With costs againsts petitioner.

Republic vs. Caguioa,

Petitioners seek via petition for certiorari and prohibition to annul (1) the May 4, 2005 Order 1 issued by public respondent Judge Ramon S. Caguioa of the
Regional Trial Court (RTC), Branch 74, Olongapo City, granting private respondents’ application for the issuance of a writ of preliminary injunction and (2) the
Writ of Preliminary Injunction2 that was issued pursuant to such Order, which stayed the implementation of Republic Act (R.A.) No. 9334, AN ACT
INCREASING THE EXCISE TAX RATES IMPOSED ON ALCOHOL AND TOBACCO PRODUCTS, AMENDING FOR THE PURPOSE SECTIONS 131,
141, 142, 143, 144, 145 AND 288 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED.

Petitioners likewise seek to enjoin, restrain and inhibit public respondent from enforcing the impugned issuances and from further proceeding with the trial of Civil
Case No. 102-0-05.

The relevant facts are as follows:

In 1992, Congress enacted Republic Act (R.A) No. 7227 3 or the Bases Conversion and Development Act of 1992 which, among other things, created the Subic
Special Economic and Freeport Zone (SBF4) and the Subic Bay Metropolitan Authority (SBMA).

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R.A. No. 7227 envisioned the SBF to be developed into a "self-sustaining, industrial, commercial, financial and investment center to generate employment
opportunities in and around the zone and to attract and promote productive foreign investments." 5 In line with this vision, Section 12 of the law provided:

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods
and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations
of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the
other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws
of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of
the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the
gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside
the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to be base areas.

In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be
resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and future shall be allowed and maintained in the
Subic Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and other financial institutions within the Subic
Special Economic Zone;

(f) Banking and finance shall be liberalized with the establishment of foreign currency depository units of local commercial banks and offshore banking
units of foreign banks with minimum Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than Two hundred fifty thousand dollars
($250,000), his/her spouse and dependent children under twenty-one (21) years of age, shall be granted permanent resident status within the Subic Special
Economic Zone. They shall have freedom of ingress and egress to and from the Subic Special Economic Zone without any need of special authorization
from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this Act may also issue working visas
renewal every two (2) years to foreign executives and other aliens possessing highly-technical skills which no Filipino within the Subic Special Economic
Zone possesses, as certified by the Department of Labor and Employment. The names of aliens granted permanent residence status and working visas by
the Subic Bay Metropolitan Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30) days after issuance thereof;

x x x x. (Emphasis supplied)

Pursuant to the law, private respondents Indigo Distribution Corporation, W Star Trading and Warehousing Corporation, Freedom Brands Philippines Corporation,
Branded Warehouse, Inc., Altasia, Inc., Tainan Trade (Taiwan) Inc., Subic Park ‘N Shop, Incorporated, Trading Gateways International Philipines, Inc., Duty Free
Superstore (DFS) Inc., Chijmes Trading, Inc., Premier Freeport, Inc., Future Trade Subic Freeport, Inc., Grand Comtrade Int’l., Corp., and First Platinum

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International, Inc., which are all domestic corporations doing business at the SBF, applied for and were granted Certificates of Registration and Tax Exemption 6 by
the SBMA.

These certificates allowed them to engage in the business either of trading, retailing or wholesaling, import and export, warehousing, distribution and/or
transshipment of general merchandise, including alcohol and tobacco products, and uniformly granted them tax exemptions for such importations as contained in
the following provision of their respective Certificates:

ARTICLE IV. The Company shall be entitled to tax and duty-free importation of raw materials, capital equipment, and household and personal
items for use solely within the Subic Bay Freeport Zone pursuant to Sections 12(b) and 12(c) of the Act and Sections 43, 45, 46 and 49 of the
Implementing Rules. All importations by the Company are exempt from inspection by the Societe Generale de Surveillance if such importations are
delivered immediately to and for use solely within the Subic Bay Freeport Zone. (Emphasis supplied)

Congress subsequently passed R.A. No. 9334, however, effective on January 1, 2005, 7 Section 6 of which provides:

Sec. 6. Section 131 of the National Internal Revenue Code of 1977, as amended, is hereby amended to read as follows:

Sec. 131. Payment of Excise Taxes on Imported Articles. –

(A) Persons Liable. – Excise taxes on imported articles shall be paid by the owner or importer to the Customs Officers, conformably with the regulations
of the Department of Finance and before the release of such articles from the customshouse or by the person who is found in possession of articles which
are exempt from excise taxes other than those legally entitled to exemption.

In the case of tax-free articles brought or imported into the Philippines by persons, entities or agencies exempt from tax which are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers or recipients shall be considered the importers thereof, and
shall be liable for the duty and internal revenue tax due on such importation.

The provision of any special or general law to the contrary notwithstanding, the importation of cigars and cigarettes, distilled spirits, fermented
liquors and wines into the Philippines, even if destined for tax and duty free shops, shall be subject to all applicable taxes, duties, charges,
including excise taxes due thereon. This shall apply to cigars and cigarettes, distilled spirits, fermented liquors and wines brought directly into the
duly chartered or legislated freeports of the Subic Economic Freeport Zone, created under Republic Act No. 7227 ; x x x and such other freeports as
may hereafter be established or created by law: Provided, further, That importations of cigars and cigarettes, distilled spirits, fermented liquors and wines
made directly by a government-owned and operated duty-free shop, like the Duty Free Philippines (DFP), shall be exempted from all applicable duties
only: x x x Provided, finally, That the removal and transfer of tax and duty-free goods, products, machinery, equipment and other similar articles other
than cigars and cigarettes, distilled spirits, fermented liquors and wines, from one Freeport to another Freeport, shall not be deemed an introduction into
the Philippine customs territory. x x x. (Emphasis and underscoring supplied)

On the basis of Section 6 of R.A. No. 9334, SBMA issued on January 10, 2005 a Memorandum 8 declaring that effective January 1, 2005, all importations of cigars,
cigarettes, distilled spirits, fermented liquors and wines into the SBF, including those intended to be transshipped to other free ports in the Philippines, shall be
treated as ordinary importations subject to all applicable taxes, duties and charges, including excise taxes.

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Meanwhile, on February 3, 2005, former Bureau of Internal Revenue (BIR) Commissioner Guillermo L. Parayno, Jr. requested then Customs Commissioner
George M. Jereos to immediately collect the excise tax due on imported alcohol and tobacco products brought to the Duty Free Philippines (DFP) and Freeport
zones.9

Accordingly, the Collector of Customs of the port of Subic directed the SBMA Administrator to require payment of all appropriate duties and taxes on all
importations of cigars and cigarettes, distilled spirits, fermented liquors and wines; and for all transactions involving the said items to be covered from then on by a
consumption entry and no longer by a warehousing entry.10

On February 7, 2005, SBMA issued a Memorandum11 directing the departments concerned to require locators/importers in the SBF to pay the corresponding duties
and taxes on their importations of cigars, cigarettes, liquors and wines before said items are cleared and released from the freeport. However, certain SBF locators
which were "exclusively engaged in the transshipment of cigarette products for foreign destinations" were allowed by the SBMA to process their import
documents subject to their submission of an Undertaking with the Bureau of Customs. 12

On February 15, 2005, private respondents wrote the offices of respondent Collector of Customs and the SBMA Administrator requesting for a reconsideration of
the directives on the imposition of duties and taxes, particularly excise taxes, on their shipments of cigars, cigarettes, wines and liquors. 13 Despite these letters,
however, they were not allowed to file any warehousing entry for their shipments.

Thus, private respondent enterprises, through their representatives, brought before the RTC of Olongapo City a special civil action for declaratory relief 14 to have
certain provisions of R.A. No. 9334 declared as unconstitutional, which case was docketed as Civil Case No. 102-0-05.

In the main, private respondents submitted that (1) R.A. No. 9334 should not be interpreted as altering, modifying or amending the provisions of R.A. No. 7227
because repeals by implication are not favored; (2) a general law like R.A. No. 9334 cannot amend R.A. No. 7727, which is a special law; and (3) the assailed law
violates the one bill-one subject rule embodied in Section 26(1), Article VI 15 of the Constitution as well as the constitutional proscription against the impairment of
the obligation of contracts.16

Alleging that great and irreparable loss and injury would befall them as a consequence of the imposition of taxes on alcohol and tobacco products brought into the
SBF, private respondents prayed for the issuance of a writ of preliminary injunction and/or Temporary Restraining Order (TRO) and preliminary mandatory
injunction to enjoin the directives of herein petitioners.

Petitioners duly opposed the private respondents’ prayer for the issuance of a writ of preliminary injunction and/or TRO, arguing that (1) tax exemptions are not
presumed and even when granted, are strictly construed against the grantee; (2) an increase in business expense is not the injury contemplated by law, it being a
case of damnum absque injuria; and (3) the drawback mechanism established in the law clearly negates the possibility of the feared injury. 17

Petitioners moreover pointed out that courts are enjoined from issuing a writ of injunction and/or TRO on the grounds of an alleged nullity of a law, ordinance or
administrative regulation or circular or in a manner that would effectively dispose of the main case. Taxes, they stressed, are the lifeblood of the government and
their prompt and certain availability is an imperious need. They maintained that greater injury would be inflicted on the public should the writ be granted.

On May 4, 2005, the court a quo granted private respondents’ application for the issuance of a writ of preliminary injunction, after it found that the essential
requisites for the issuance of a preliminary injunction were present.

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As investors duly licensed to operate inside the SBF, the trial court declared that private respondents were entitled to enjoy the benefits of tax incentives under
R.A. No. 7227, particularly the exemption from local and national taxes under Section 12(c); the aforecited provision of R.A. No. 7227, coupled with private
respondents’ Certificates of Registration and Tax Exemption from the SBMA, vested in them a clear and unmistakable right or right in esse that would be violated
should R.A. No. 9334 be implemented; and the invasion of such right is substantial and material as private respondents would be compelled to pay more than what
they should by way of taxes to the national government.

The trial court thereafter ruled that the prima facie presumption of validity of R.A. No. 9334 had been overcome by private respondents, it holding that as a partial
amendment of the National Internal Revenue Code (NIRC) of 1997, 18 as amended, R.A. No. 9334 is a general law that could not prevail over a special statute like
R.A. No. 7227 notwithstanding the fact that the assailed law is of later effectivity.

The trial court went on to hold that the repealing provision of Section 10 of R.A. No. 9334 does not expressly mention the repeal of R. A. No. 7227, hence, its
repeal can only be an implied repeal, which is not favored; and since R.A. No. 9334 imposes new tax burdens, whatever doubts arising therefrom should be
resolved against the taxing authority and in favor of the taxpayer.

The trial court furthermore held that R.A. No. 9334 violates the terms and conditions of private respondents’ subsisting contracts with SBMA, which are embodied
in their Certificates of Registration and Exemptions in contravention of the constitutional guarantee against the impairment of contractual obligations; that greater
damage would be inflicted on private respondents if the writ of injunction is not issued as compared to the injury that the government and the general public would
suffer from its issuance; and that the damage that private respondents are bound to suffer once the assailed statute is implemented – including the loss of
confidence of their foreign principals, loss of business opportunity and unrealized income, and the danger of closing down their businesses due to uncertainty of
continued viability – cannot be measured accurately by any standard.

With regard to the rule that injunction is improper to restrain the collection of taxes under Section 218 19 of the NIRC, the trial court held that what is sought to be
enjoined is not per se the collection of taxes, but the implementation of a statute that has been found preliminarily to be unconstitutional.

Additionally, the trial court pointed out that private respondents’ taxes have not yet been assessed, as they have not filed consumption entries on all their imported
tobacco and alcohol products, hence, their duty to pay the corresponding excise taxes and the concomitant right of the government to collect the same have not yet
materialized.

On May 11, 2005, the trial court issued a Writ of Preliminary Injunction directing petitioners and the SBMA Administrator as well as all persons assisting or acting
for and in their behalf "1) to allow the operations of [private respondents] in accordance with R.A. No. 7227; 2) to allow [them] to file warehousing entries instead
of consumption entries as regards their importation of tobacco and alcohol products; and 3) to cease and desist from implementing the pertinent provisions of R.A.
No. 9334 by not compelling [private respondents] to immediately pay duties and taxes on said alcohol and tobacco products as a condition to their removal from
the port area for transfer to the warehouses of [private respondents]." 20

The injunction bond was approved at One Million pesos (P1,000,000).21

Without moving for reconsideration, petitioners have come directly to this Court to question the May 4, 2005 Order and the Writ of Preliminary Injunction which,
they submit, were issued by public respondent with grave abuse of discretion amounting to lack or excess of jurisdiction.

In particular, petitioners contend that public respondent peremptorily and unjustly issued the injunctive writ despite the absence of the legal requisites for its
issuance, resulting in heavy government revenue losses. 22 They emphatically argue that since the tax exemption previously enjoyed by private respondents has

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clearly been withdrawn by R.A. No. 9334, private respondents do not have any right in esse nor can they invoke legal injury to stymie the enforcement of R.A. No.
9334.

Furthermore, petitioners maintain that in issuing the injunctive writ, public respondent showed manifest bias and prejudice and prejudged the merits of the case in
utter disregard of the caveat issued by this Court in Searth Commodities Corporation, et al. v. Court of Appeals23 and Vera v. Arca.24

Regarding the P1 million injunction bond fixed by public respondent, petitioners argue that the same is grossly disproportionate to the damages that have been and
continue to be sustained by the Republic.

In their Reply25 to private respondents’ Comment, petitioners additionally plead public respondent’s bias and partiality in allowing the motions for intervention of a
number of corporations26 without notice to them and in disregard of their present pending petition for certiorari and prohibition before this Court. The injunction
bond filed by private respondent Indigo Distribution Corporation, they stress, is not even sufficient to cover all the original private respondents, much less,
intervenor-corporations.

The petition is partly meritorious.

At the outset, it bears emphasis that only questions relating to the propriety of the issuance of the May 4, 2005 Order and the Writ of Preliminary Injunction are
properly within the scope of the present petition and shall be so addressed in order to determine if public respondent committed grave abuse of discretion. The
arguments raised by private respondents which pertain to the constitutionality

Sec. 131 of NIRC before R.A. No. 9334 Sec. 131, as amended by R.A. No. 9334

Sec. 131. Payment of Excise Taxes on Imported Articles. –

The provision of any special or general law to the contrary notwithstanding,
the importation of cigars and cigarettes, distilled spirits, fermented liquors and
wines into the Philippines, even if destined for tax and duty free shops, shall
be subject to all applicable taxes, duties, charges, including excise taxes due
thereon. Provided, however, That this shall not apply to cigars and
cigarettes, fermented spirits and wines brought directly into the duly
chartered or legislated freeports of the Subic Economic Freeport Zone,
created under Republic Act No. 7227; the Cagayan Special Economic
Zone and Freeport, created under Republic Act No. 7922; and the
Zamboanga City Special Economic Zone, created under Republic Act No.
7903, and are not transshipped to any other port in the Philippines: Provided,
further, That importations of cigars and cigarettes, distilled spirits, fermented
liquors and wines made directly by a government-owned and operated duty-
free shop, like the Duty Free Philippines (DFP), shall be exempted from all
(A) Persons Liable. – Excise taxes on imported articles shall be paid by the
owner or importer to the Customs Officers, conformably with the regulations of
the Department of Finance and before the release of such articles from the
customs house or by the person who is found in possession of articles which are
exempt from excise taxes other than those legally entitled to exemption.
In the case of tax-free articles brought or imported into the Philippines by
persons, entities or agencies exempt from tax which are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or entities, the
purchasers or recipients shall be considered the importers thereof, and shall be
liable for the duty and internal revenue tax due on such importation.
The provision of any special or general law to the contrary notwithstanding,
the importation of cigars and cigarettes, distilled spirits, fermented liquors
and wines into the Philippines, even if destined for tax and duty free shops,

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applicable duties, charges, including excise tax due thereon; Provided still
further, That such articles directly imported by a government-owned and
operated duty-free shop, like the Duty-Free Philippines, shall be labeled "tax
and duty-free" and "not for resale": Provided, still further, That if such articles
brought into the duly chartered or legislated freeports under Republic Acts
Nos. 7227, 7922 and 7903 are subsequently introduced into the Philippine
customs territory, then such articles shall, upon such introduction, be deemed
imported into the Philippines and shall be subject to all imposts and excise
taxes provided herein and other statutes: Provided, finally, That the removal
and transfer of tax and duty-free goods, products, machinery, equipment and
other similar articles, from one freeport to another freeport, shall not be
deemed an introduction into the Philippine customs territory.
x x x x.
shall be subject to all applicable taxes, duties, charges, including excise taxes
due thereon. This shall apply to cigars and cigarettes, distilled spirits,
fermented liquors and wines brought directly into the duly chartered or
legislated freeports of the Subic Economic Freeport Zone, created under
Republic Act No. 7227; the Cagayan Special Economic Zone and Freeport,
created under Republic Act No. 7922; and the Zamboanga City Special
Economic Zone, created under Republic Act No. 7903, and such other freeports
as may hereafter be established or created by law: Provided, further, That
importations of cigars and cigarettes, distilled spirits, fermented liquors and
wines made directly by a government-owned and operated duty-free shop, like
the Duty Free Philippines (DFP), shall be exempted from all applicable duties
only: Provided still further, That such articles directly imported by a
government-owned and operated duty-free shop, like the Duty-Free Philippines,
shall be labeled "tax and duty-free" and "not for resale": Provided, finally, That
the removal and transfer of tax and duty-free goods, products, machinery,
equipment and other similar articles other than cigars and cigarettes, distilled
spirits, fermented liquors and wines, from one Freeport to another Freeport, shall
not be deemed an introduction into the Philippine customs territory.

x x x x.

of R.A. No. 9334 subject matter of the case pending litigation before the trial court have no bearing in resolving the present petition.

Section 3 of Rule 58 of the Revised Rules of Court provides:

SEC. 3. Grounds for issuance of preliminary injunction. – A preliminary injunction may be granted when it is established.

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act
or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during the litigation would probably work injustice to the
applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in
violation of the rights of the applicant respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.

For a writ of preliminary injunction to issue, the plaintiff must be able to establish that (1) there is a clear and unmistakable right to be protected, (2) the invasion
of the right sought to be protected is material and substantial, and (3) there is an urgent and paramount necessity for the writ to prevent serious damage. 27

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Conversely, failure to establish either the existence of a clear and positive right which should be judicially protected through the writ of injunction, or of the acts or
attempts to commit any act which endangers or tends to endanger the existence of said right, or of the urgent need to prevent serious damage, is a sufficient ground
for denying the preliminary injunction.28

It is beyond cavil that R.A. No. 7227 granted private respondents exemption from local and national taxes, including excise taxes, on their importations of general
merchandise, for which reason they enjoyed tax-exempt status until the effectivity of R.A. No. 9334.

By subsequently enacting R.A. No. 9334, however, Congress expressed its intention to withdraw private respondents’ tax exemption privilege on their
importations of cigars, cigarettes, distilled spirits, fermented liquors and wines. Juxtaposed to show this intention are the respective provisions of Section 131 of
the NIRC before and after its amendment by R.A. No. 9334:

x x x
x.

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To note, the old Section 131 of the NIRC expressly provided that all taxes, duties, charges, including excise taxes shall not apply to importations of cigars,
cigarettes, fermented spirits and wines brought directly into the duly chartered or legislated freeports of the SBF.

On the other hand, Section 131, as amended by R.A. No. 9334, now provides that such taxes, duties and charges, including excise taxes, shall  apply to importation
of cigars and cigarettes, distilled spirits, fermented liquors and wines into the SBF.

Without necessarily passing upon the validity of the withdrawal of the tax exemption privileges of private respondents, it behooves this Court to state certain basic
principles and observations that should throw light on the propriety of the issuance of the writ of preliminary injunction in this case.

First. Every presumption must be indulged in favor of the constitutionality of a statute. 29 The burden of proving the unconstitutionality of a law rests on the party
assailing the law.30 In passing upon the validity of an act of a co-equal and coordinate branch of the government, courts must ever be mindful of the time-honored
principle that a statute is presumed to be valid.

Second. There is no vested right in a tax exemption, more so when the latest expression of legislative intent renders its continuance doubtful. Being a mere
statutory privilege,31 a tax exemption may be modified or withdrawn at will by the granting authority. 32

To state otherwise is to limit the taxing power of the State, which is unlimited, plenary, comprehensive and supreme. The power to impose taxes is one so
unlimited in force and so searching in extent, it is subject only to restrictions which rest on the discretion of the authority exercising it. 33

Third. As a general rule, tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. 34 The burden of proof
rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. 35 In case of doubt, non-exemption is favored.36

Fourth. A tax exemption cannot be grounded upon the continued existence of a statute which precludes its change or repeal. 37 Flowing from the basic precept of
constitutional law that no law is irrepealable, Congress, in the legitimate exercise of its lawmaking powers, can enact a law withdrawing a tax exemption just as
efficaciously as it may grant the same under Section 28(4) of Article VI 38 of the Constitution. There is no gainsaying therefore that Congress can amend Section
131 of the NIRC in a manner it sees fit, as it did when it passed R.A. No. 9334.

Fifth. The rights granted under the Certificates of Registration and Tax Exemption of private respondents are not absolute and unconditional as to constitute rights
in esse – those clearly founded on or granted by law or is enforceable as a matter of law. 39

These certificates granting private respondents a "permit to operate" their respective businesses are in the nature of licenses, which the bulk of jurisprudence
considers as neither a property nor a property right. 40 The licensee takes his license subject to such conditions as the grantor sees fit to impose, including its
revocation at pleasure.41 A license can thus be revoked at any time since it does not confer an absolute right. 42

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While the tax exemption contained in the Certificates of Registration of private respondents may have been part of the inducement for carrying on their businesses
in the SBF, this exemption, nevertheless, is far from being contractual in nature in the sense that the non-impairment clause of the Constitution can rightly be
invoked.43

Sixth. Whatever right may have been acquired on the basis of the Certificates of Registration and Tax Exemption must yield to the State’s valid exercise of police
power.44 It is well to remember that taxes may be made the implement of the police power. 45

It is not difficult to recognize that public welfare and necessity underlie the enactment of R.A. No. 9334. As petitioners point out, the now assailed provision was
passed to curb the pernicious practice of some unscrupulous business enterprises inside the SBF of using their tax exemption privileges for smuggling purposes.
Smuggling in whatever form is bad enough; it is worse when the same is allegedly perpetrated, condoned or facilitated by enterprises hiding behind the cloak of
their tax exemption privileges.

Seventh. As a rule, courts should avoid issuing a writ of preliminary injunction which would in effect dispose of the main case without trial. 46 This rule is intended
to preclude a prejudgment of the main case and a reversal of the rule on the burden of proof since by issuing the injunctive writ, the court would assume the
proposition that petitioners are inceptively duty bound to prove. 47

Eighth. A court may issue a writ of preliminary injunction only when the petitioner assailing a statute has made out a case of unconstitutionality or invalidity
strong enough, in the mind of the judge, to overcome the presumption of validity, in addition to a showing of a clear legal right to the remedy sought. 48

Thus, it is not enough that petitioners make out a case of unconstitutionality or invalidity to overcome the prima facie presumption of validity of a statute; they
must also be able to show a clear legal right that ought to be protected by the court. The issuance of the writ is therefore not proper when the complainant’s right is
doubtful or disputed.49

Ninth. The feared injurious effects of the imposition of duties, charges and taxes on imported cigars, cigarettes, distilled spirits, fermented liquors and wines on
private respondents’ businesses cannot possibly outweigh the dire consequences that the non-collection of taxes, not to mention the unabated smuggling inside the
SBF, would wreak on the government. Whatever damage would befall private respondents must perforce take a back seat to the pressing need to curb smuggling
and raise revenues for governmental functions.

All told, while the grant or denial of an injunction generally rests on the sound discretion of the lower court, this Court may and should intervene in a clear case of
abuse.50

One such case of grave abuse obtained in this case when public respondent issued his Order of May 4, 2005 and the Writ of Preliminary Injunction on May 11,
200551 despite the absence of a clear and unquestioned legal right of private respondents.

In holding that the presumption of constitutionality and validity of R.A. No. 9334 was overcome by private respondents for the reasons public respondent cited in
his May 4, 2005 Order, he disregarded the fact that as a condition sine qua non to the issuance of a writ of preliminary injunction, private respondents needed also
to show a clear legal right that ought to be protected. That requirement is not satisfied in this case.

To stress, the possibility of irreparable damage without proof of an actual existing right would not justify an injunctive relief.52
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Besides, private respondents are not altogether lacking an appropriate relief under the law. As petitioners point out in their Petition 53 before this Court, private
respondents may avail themselves of a tax refund or tax credit should R.A. No. 9334 be finally declared invalid.

Indeed, Sections 20454 and 22955 of the NIRC provide for the recovery of erroneously or illegally collected taxes which would be the nature of the excise taxes paid
by private respondents should Section 6 of R.A. No. 9334 be declared unconstitutional or invalid.

It may not be amiss to add that private respondents can also opt not to import, or to import less of, those items which no longer enjoy tax exemption under R.A.
No. 9334 to avoid the payment of taxes thereon.

The Court finds that public respondent had also ventured into the delicate area which courts are cautioned from taking when deciding applications for the issuance
of the writ of preliminary injunction. Having ruled preliminarily against the prima facie validity of R.A. No. 9334, he assumed in effect the proposition that private
respondents in their petition for declaratory relief were duty bound to prove, thereby shifting to petitioners the burden of proving that R.A. No. 9334 is not
unconstitutional or invalid.

In the same vein, the Court finds public respondent to have overstepped his discretion when he arbitrarily fixed the injunction bond of the SBF enterprises at
only P1million.

The alleged sparseness of the testimony of Indigo Corporation’s representative 56 on the injury to be suffered by private respondents may be excused because
evidence for a preliminary injunction need not be conclusive or complete. Nonetheless, considering the number of private respondent enterprises and the volume of
their businesses, the injunction bond is undoubtedly not sufficient to answer for the damages that the government was bound to suffer as a consequence of the
suspension of the implementation of the assailed provisions of R.A. No. 9334.

Rule 58, Section 4(b) provides that a bond is executed in favor of the party enjoined to answer for all damages which it may sustain by reason of the injunction.
The purpose of the injunction bond is to protect the defendant against loss or damage by reason of the injunction in case the court finally decides that the plaintiff
was not entitled to it, and the bond is usually conditioned accordingly. 57

Recalling this Court’s pronouncements in Olalia v. Hizon58 that:

x x x [T]here is no power the exercise of which is more delicate, which requires greater caution, deliberation and sound discretion, or more dangerous in a
doubtful case, than the issuance of an injunction. It is the strong arm of equity that should never be extended unless to cases of great injury, where courts
of law cannot afford an adequate or commensurate remedy in damages.

Every court should remember that an injunction is a limitation upon the freedom of action of the defendant and should not be granted lightly or
precipitately. It should be granted only when the court is fully satisfied that the law permits it and the emergency demands it,

it cannot be overemphasized that any injunction that restrains the collection of taxes, which is the inevitable result of the suspension of the implementation of the
assailed Section 6 of R.A. No. 9334, is a limitation upon the right of the government to its lifeline and wherewithal.

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The power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the
people.59 That the enforcement of tax laws and the collection of taxes are of paramount importance for the sustenance of government has been repeatedly observed.
Taxes being the lifeblood of the government that should be collected without unnecessary hindrance, 60 every precaution must be taken not to unduly suppress it.

Whether this Court must issue the writ of prohibition, suffice it to stress that being possessed of the power to act on the petition for declaratory relief, public
respondent can proceed to determine the merits of the main case. To halt the proceedings at this point may be acting too prematurely and would not be in keeping
with the policy that courts must decide controversies on the merits.

Moreover, lacking the requisite proof of public respondent’s alleged partiality, this Court has no ground to prohibit him from proceeding with the case for
declaratory relief. For these reasons, prohibition does not lie.

WHEREFORE, the Petition is PARTLY GRANTED. The writ of certiorari to nullify and set aside the Order of May 4, 2005 as well as the Writ of Preliminary
Injunction issued by respondent Judge Caguioa on May 11, 2005 is GRANTED. The assailed Order and Writ of Preliminary Injunction are hereby
declared NULL AND VOID and accordingly SET ASIDE. The writ of prohibition prayed for is, however, DENIED.

SO ORDERED.

Abacada Guro Party List vs. Ermita

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more
he ought to hold himself honored in contributing to those expenses.

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health workers, and wider coverage for full
value-added tax benefits … these are the reasons why Republic Act No. 9337 (R.A. No. 9337) 1 was enacted. Reasons, the wisdom of which, the Court even with
its extensive constitutional power of review, cannot probe. The petitioners in these cases, however, question not only the wisdom of the law, but also perceived
constitutional infirmities in its passage. Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to
justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways and Means approved the bill, in substitution of House
Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate
enactment. On January 27, 2005, the House of Representatives approved the bill on second and third reading.

House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep.
Jacinto V. Paras. Its "mother bill" is House Bill No. 3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President also
certified it as urgent on February 8, 2005. The House of Representatives approved the bill on second and third reading on February 28, 2005.

Page 14 of 164
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and
1873, taking into consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873
were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11, 2005, and was
approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee conference on the disagreeing provisions of the
proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, "after having met
and discussed in full free and conference," recommended the approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives
agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President, who signed the same into law on May 24,
2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337. 5 When said date came, the Court issued a temporary restraining order, effective immediately and continuing
until further orders, enjoining respondents from enforcing and implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale
for its issuance of the temporary restraining order on July 1, 2005, to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You know when the law took effect on July 1,
2005, the Court issued a TRO at about 5 o’clock in the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a
gas station were complaining that the gas prices went up by 10%. Some people were complaining that their electric bill will go up by 10%. Other times people
riding in domestic air carrier were complaining that the prices that they’ll have to pay would have to go up by 10%. While all that was being aired, per your
presentation and per our own understanding of the law, that’s not true. It’s not true that the e-vat law necessarily increased prices by 10% uniformly isn’t it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the Petroleum companies some subsidy . . . interrupted

J. PANGANIBAN : That’s correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

Page 15 of 164
ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax and the import duties. That is why, it is not
correct to say that the VAT as to petroleum dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax. If you consider the excise tax and the
import duties, the Net Tax would probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different
industries, different products, different services are hit differently. So it’s not correct to say that all prices must go up by 10%.

ATTY. BANIQUED : You’re right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of 3%. When this E-Vat law took effect the
Sales Tax was also removed as a mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increased arbitrarily by 10%. And that’s one reason
among many others this Court had to issue TRO because of the confusion in the implementation. That’s why we added as an issue in this case, even if it’s
tangentially taken up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were subjected to the mercy of that confusion of
an across the board increase of 10%, which you yourself now admit and I think even the Government will admit is incorrect. In some cases, it should be 3% only,
in some cases it should be 6% depending on these mitigating measures and the location and situation of each product, of each service, of each company, isn’t it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the clarification of all these and we wish the government will take time to
clarify all these by means of a more detailed implementing rules, in case the law is upheld by this Court. . . . 6

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005. They question the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale
of services and use or lease of properties. These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary
of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

Page 16 of 164
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of taxes under Article VI,
Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground that it amounts to an undue delegation of
legislative power, petitioners also contend that the increase in the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due process
clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12% increase is
ambiguous because it does not state if the rate would be returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to
the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference Committee is a violation of the "no-
amendment rule" upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al., assailing the following provisions of
R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be amortized over a 60-month period, if the
acquisition, excluding the VAT components, exceeds One Million Pesos (₱1, 000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions, instrumentalities or agencies, including
GOCCs, to deduct a 5% final withholding tax on gross payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and
properties) and 108 (sale of services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.
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Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or property without due process of law under Article III, Section 1 of
the Constitution. According to petitioners, the contested sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue that the
input tax partakes the nature of a property that may not be confiscated, appropriated, or limited without due process of law. Petitioners further contend that like any
other property or property right, the input tax credit may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-
added even if there is no profit or value-added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III, Section 1 of the Constitution, as
the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the
government, is not based on real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller
businesses with higher input tax to output tax ratio that will suffer the consequences thereof for it wipes out whatever meager margins the petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition for  certiorari on June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI, Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in Senate Bill No. 1950 and House Bill No. 3705;
and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125, 7 148, 151, 236, 237 and 288, which were present in Senate
Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the
House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005, alleging unconstitutionality of the law on the
ground that the limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the
principle that tax collection and revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia further claims that allowing these
establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section 28(1) of the Constitution.

RESPONDENTS’ COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the
presumption of constitutionality and petitioners failed to cast doubt on its validity.

Page 18 of 164
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral proceedings, exclusive origination of revenue measures
and the power of the Senate concomitant thereto, have already been settled. With regard to the issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no discretion to the President but to increase the rate to 12% once any of the two conditions provided
therein arise.

Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70% limitation on the creditable input tax, the 60-month amortization on the
purchase or importation of capital goods exceeding ₱1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform agenda. A reform in the value-added system of taxation is the
core revenue measure that will tilt the balance towards a sustainable macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the
NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the confusion and inevitably, litigation, breeds
from a fallacious notion of its nature.

Page 19 of 164
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and services. 8 Being an indirect tax on
expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, 9 with the seller acting merely as a tax collector. 10 The burden of VAT
is intended to fall on the immediate buyers and ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring the burden to someone
else.11 Examples are individual and corporate income taxes, transfer taxes, and residence taxes. 12

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax
computed under the "cost deduction method" and was payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of
the "cost deduction method" and "tax credit method" was used to determine the value-added tax payable. 13 Under the "tax credit method," an entity can credit
against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. 14

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was rationalized by imposing a multi-stage tax rate
of 0% or 10% on all sales using the "tax credit method." 15

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or the Improved VAT Law, 17 R.A. No. 8424 or the Tax Reform Act of
1997,18 and finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.

The Court will now discuss the issues in logical sequence.

Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either house of Congress, not to the conference
committee report.32 (Emphasis supplied)

The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by each house of Congress with regard to bills initiated
in each of said respective houses, before said bill is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in a
way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as this would mean that the other house of Congress would
be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the
introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing provisions in bills that have been acted upon by both
houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income taxes and percentage, excise taxes. Petitioners
refer to the following provisions, to wit:

Section 27 Rates of Income Tax on Domestic Corporation

28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends

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34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver that House Bill No. 3555 proposed
amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108,
109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments were not found in the House bills are not
intended to be amended by the House of Representatives. Hence, they argue that since the proposed amendments did not originate from the House, such
amendments are a violation of Article VI, Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively
in the House of Representatives but the Senate may propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for amending provisions of the NIRC dealing
mainly with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not
only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions
not dealing directly with the value- added tax, which is the only kind of tax being amended in the House bills, still within the purview of the constitutional
provision authorizing the Senate to propose or concur with amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to "originate exclusively" in the House of Representatives. It is
important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the
whole. . . . At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute – and
not only the bill which initiated the legislative process culminating in the enactment of the law – must substantially be the same as the House bill would be
to deny the Senate’s power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative
power of the two houses of Congress and in fact make the House superior to the Senate.
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…Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by
the Constitution to originate in the House.

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills
and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts,  the members of the House
can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach
the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to
introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be introduced by
the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are still in furtherance of the intent of
the House in initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the country’s serious financial problems. To do this,
government expenditures must be strictly monitored and controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact, several measures that will result to significant
expenditure savings have been identified by the administration. It is supported with a credible package of revenue measures that include measures to
improve tax administration and control the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our agenda must be the restoration of the health of
our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by the year 2009,  we need to seize windows of
opportunities which might seem poignant in the beginning, but in the long run prove effective and beneficial to the overall status of our economy. One
such opportunity is a review of existing tax rates, evaluating the relevance given our present conditions.34 (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the government to supplement
our country’s serious financial problems, and improve tax administration and control of the leakages in revenues from income taxes and value-added taxes. As
these house bills were transmitted to the Senate, the latter, approaching the measures from the point of national perspective, can introduce amendments within the
purposes of those bills. It can provide for ways that would soften the impact of the VAT measure on the consumer, i.e., by distributing the burden across all sectors
instead of putting it entirely on the shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation
were included is worth quoting:

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All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in additional revenues annually even while by mitigating prices of
power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the VAT on twelve goods and services. The rest of the tab – ₱10.5
billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the latter bear all the pain? Why should the fiscal
salvation be only on the burden of the consumer?

The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to 2008 only. This will raise ₱10.5 billion a year.
After that, the rate will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will be in effect for 1,200 days, while we put our
fiscal house in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief. We would like to assure them that not because
there is a light at the end of the tunnel, this government will keep on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share the burden. 35

As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of corporations are germane to
the purpose of the house bills which is to raise revenues for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT system, as these sections would cushion
the effects of VAT on consumers. Considering that certain goods and services which were subject to percentage tax and excise tax would no longer be VAT-
exempt, the consumer would be burdened more as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften
the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we will however bring down the excise tax on
socially sensitive products such as diesel, bunker, fuel and kerosene.

What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the right. Rather, these sprang from our concern of
softening the impact of VAT, so that the people can cushion the blow of higher prices they will have to pay as a result of VAT. 36

The other sections amended by the Senate pertained to matters of tax administration which are necessary for the implementation of the changes in the VAT system.
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To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to supplement our country’s fiscal
deficit, among others. Thus, the Senate acted within its power to propose those amendments.

SUBSTANTIVE ISSUES

I. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition
is met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to
ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods. –

(A) In General. – There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total
value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by

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the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: provided, further, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the
following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale
or exchange of services: provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress of its exclusive power to tax
because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates, import and export quotas, tonnage and wharfage
dues, and other duties or imposts within the framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services, which cannot be
included within the purview of tariffs under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the
government and usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power to tax is contrary to republicanism. They
insist that accountability, responsibility and transparency should dictate the actions of Congress and they should not pass to the President the decision to impose
taxes. They also argue that the law also effectively nullified the President’s power of control, which includes the authority to set aside and nullify the acts of her
subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions provided by the law to bring about either or both
the conditions precedent.

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On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12% rate would be subject to the whim of the
Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation without representation. They submit that the Secretary of Finance is not
mandated to give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that no guiding standards are provided in the
law on what basis and as to how he will make his recommendation. They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be
brushed aside by the President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the
increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is supreme in matters falling
within its own constitutionally allocated sphere. 37 A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim:  potestas delegata non
delegari potest which means "what has been delegated, cannot be delegated." 38 This doctrine is based on the ethical principle that such as delegated power
constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of
another.39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that " the Legislative power shall be vested in the Congress of the Philippines
which shall consist of a Senate and a House of Representatives." The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the  authority to make a complete law –
complete as to the time when it shall take effect and as to whom it shall be applicable – and to determine the expediency of its enactmen t.40 Thus, the rule is
that in order that a court may be justified in holding a statute unconstitutional as a delegation of legislative power, it must appear that the power involved is purely
legislative in nature – that is, one appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its use or the manner
of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is complete in itself, setting forth
therein the policy to be executed, carried out, or implemented by the delegate; 41 and (b) fixes a standard — the limits of which are sufficiently determinate and
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determinable — to which the delegate must conform in the performance of his functions. 42 A sufficient standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be
effected.43 Both tests are intended to prevent a total transference of legislative authority to the delegate, who is not allowed to step into the shoes of the legislature
and exercise a power essentially legislative. 44

In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire whether the statute was complete in all its terms and
provisions when it left the hands of the legislature so that nothing was left to the judgment of any other appointee or delegate of the legislature.

‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law, which necessarily involves a discretion as to what it shall
be, and conferring an authority or discretion as to its execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter
no valid objection can be made.’

It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the legislature. It is true that laws may be made effective
on certain contingencies, as by proclamation of the executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme
Court of the United States ruled that the legislature may delegate a power not legislative which it may itself rightfully exercise.  The power to ascertain facts is
such a power which may be delegated. There is nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the taking
into effect of a law. That is a mental process common to all branches of the government.  Notwithstanding the apparent tendency, however, to relax the rule
prohibiting delegation of legislative authority on account of the complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the
United States in the following language — speaking of declaration of legislative power to administrative agencies:  The principle which permits the legislature
to provide that the administrative agent may determine when the circumstances are such as require the application of a law is defended upon the ground
that at the time this authority is granted, the rule of public policy, which is the essence of the legislative act, is determined by the legislature. In other
words, the legislature, as it is its duty to do, determines that, under given circumstances, certain executive or administrative action is to be taken, and
that, under other circumstances, different or no action at all is to be taken. What is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the ascertainment of what the facts of the case require to be done according to the terms of the
law by which he is governed. The efficiency of an Act as a declaration of legislative will must, of course, come from Congress, but the ascertainment of the
contingency upon which the Act shall take effect may be left to such agencies as it may designate. The legislature, then, may provide that a law shall take
effect upon the happening of future specified contingencies leaving to some other person or body the power to determine when the specified contingency
has arisen. (Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test is the completeness of the statute in all its
terms and provisions when it leaves the hands of the legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be
directed to the scope and definiteness of the measure enacted. The legislative does not abdicate its functions when it describes what job must be done, who is
to do it, and what is the scope of his authority. For a complex economy, that may be the only way in which the legislative process can go forward.  A distinction
has rightfully been made between delegation of power to make the laws which necessarily involves a discretion as to what it shall be, which

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constitutionally may not be done, and delegation of authority or discretion as to its execution to be exercised under and in pursuance of the law, to which
no valid objection can be made. The Constitution is thus not to be regarded as denying the legislature the necessary resources of flexibility and practicability.
(Emphasis supplied).48

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the happening of contingencies, on which
the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority. 49 While
the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration of an exercise of such power may be left to them,
including the power to determine the existence of facts on which its operation depends. 50

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative function, but is simply
ancillary to legislation. Thus, the duty of correlating information and making recommendations is the kind of subsidiary activity which the legislature may perform
through its members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of modern society is impossible in the
absence of accurate information on the part of the legislators, and any reasonable method of securing such information is proper. 51 The Constitution as a
continuously operative charter of government does not require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite to application of
legislative policy to particular facts and circumstances impossible for Congress itself properly to investigate. 52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which enforcement and administration of
the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No discretion would be
exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the common proviso. The use of the word shall connotes
a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. 53 Where the law is clear and unambiguous, it
must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed. 54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions specified by Congress. This is a
duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by the President does not come into
play. It is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking into effect of the 12% VAT rate is based on
the happening of a certain specified contingency, or upon the ascertainment of certain facts or conditions by a person or body other than the legislature itself.

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The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified the President’s power of control over
the Secretary of Finance by mandating the fixing of the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also
subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the recommendation of the Secretary of Finance." Neither does
the Court find persuasive the submission of petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of Finance he is the assistant and
agent of the Chief Executive. The multifarious executive and administrative functions of the Chief Executive are performed by and through the executive
departments, and the acts of the secretaries of such departments, such as the Department of Finance, performed and promulgated in the regular course of business,
are, unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political
position and holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language
of Attorney-General Cushing, is "subject to the direction of the President." 55

In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of Finance is not acting as the
alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and direction of the President. He is acting as the agent
of the legislative department, to determine and declare the event upon which its expressed will is to take effect. 56 The Secretary of Finance becomes the means or
tool by which legislative policy is determined and implemented, considering that he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and verify if any of the two
conditions laid out by Congress is present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and
not of the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of the
former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by
legislative mandate, must submit such information to the President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006.  There is
no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible .57 Congress does not
abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward. 58

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power to tax is contrary to the principle of
republicanism, the same deserves scant consideration. Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to
increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the legislative policy. That Congress chose to do so in such a
manner is not within the province of the Court to inquire into, its task being to interpret the law. 59

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring about either or both the
conditions precedent does not deserve any merit as this argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as

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these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the Court acts on appearances instead of realities, justice and
law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people. Petitioners also argue that the
12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned
to the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the applicable
VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are satisfied, the President shall increase the
VAT rate to 12%. The provisions of the law are clear. It does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the
rate is increased to 12%, the VAT collection goes below the 2 4/5 of the GDP of the previous year or that the national government deficit as a percentage of GDP of
the previous year does not exceed 1½%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is provided for. Rewriting the law
is a forbidden ground that only Congress may tread upon.60

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none, petitioners’ argument is, at best, purely
speculative. There is no basis for petitioners’ fear of a fluctuating VAT rate because the law itself does not provide that the rate should go back to 10% if the
conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and unambiguous, so that there is no
occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction. 61

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT collection to at least 2  4/5 of the GDP
of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has weak or no
capability of implementing the VAT or that VAT is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because
such action will also be ineffectual.

2. Nat’l Gov’t Deficit/GDP >1.5%

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The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government has reached a relatively sound position or is
towards the direction of a balanced budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position.
Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate. 62

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so long as there is a public
purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the
public treasury of the state.63

It simply means that sources of revenues must be adequate to meet government expenditures and their variations. 64

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral Conference Committee hearing, then Finance
Secretary Purisima bluntly depicted the country’s gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90 percent of our revenue is used for debt service. So, for
every peso of revenue that we currently raise, 90 goes to debt service. That’s interest plus amortization of our debt. So clearly, this is not a sustainable situation.
That’s the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow money from that international financial markets. Our
debt to GDP is approximately equal to our GDP. Again, that shows you that this is not a sustainable situation.

The third thing that I’d like to point out is the environment that we are presently operating in is not as benign as what it used to be the past five years.

What do I mean by that?

In the past five years, we’ve been lucky because we were operating in a period of basically global growth and low interest rates. The past few months, we have
seen an inching up, in fact, a rapid increase in the interest rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is
going to be challenged. In fact, ultimately, the question is our ability to access the financial markets.

When the President made her speech in July last year, the environment was not as bad as it is now, at least based on the forecast of most financial institutions. So,
we were assuming that raising 80 billion would put us in a position where we can then convince them to improve our ability to borrow at lower rates. But
conditions have changed on us because the interest rates have gone up. In fact, just within this room, we tried to access the market for a billion dollars because for
this year alone, the Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7
percent cost. We were trying to access last week and the market was not as favorable and up to now we have not accessed and we might pull back because the
conditions are not very good.

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So given this situation, we at the Department of Finance believe that we really need to front-end our deficit reduction. Because it is deficit that is causing the
increase of the debt and we are in what we call a debt spiral. The more debt you have, the more deficit you have because interest and debt service eats and eats
more of your revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in
our revenue base.65

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether the law is indeed sufficient to answer the
state’s economic dilemma is not for the Court to judge. In the Fariñas case, the Court refused to consider the various arguments raised therein that dwelt on the
wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the political branches of the government. It is not for
this Court to look into the wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound
economic theory, whether it is the best means to achieve the desired results, whether, in short, the legislative discretion within its prescribed limits should be
exercised in a particular manner are matters for the judgment of the legislature, and the serious conflict of opinions does not suffice to bring them within the range
of judicial cognizance.66

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given that it is not for the judiciary to "pass upon
questions of wisdom, justice or expediency of legislation." 67

II. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the
NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of
R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right
against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 68

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be credited against the output tax. It
states, in part: "[P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter that may be credited in every quarter shall not
exceed seventy percent (70%) of the output VAT: …"
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Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered person on the importation of
goods or local purchase of good and services, including lease or use of property, in the course of trade or business, from a VAT-registered person, and  Output
Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of the input tax that has already
been paid cannot now be credited against the output tax.

Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains uncredited.
However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a business’s books of accounts and remains creditable in the succeeding quarter/s. This is explicitly
allowed by Section 110(B), which provides that "if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In
addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent that
such input taxes have not been applied against the output taxes. Such unused input tax may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the 70%
limitation is incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed further to
the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or that it may
later on be refunded through a tax credit certificate under Section 112(B).

Therefore, petitioners’ argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the input tax. According to petitioner, the
limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which violates the principle that
tax collection and revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is the tax due to the person
when he sells goods. In computing the VAT payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by the suppliers, then no
payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of Internal Revenue (BIR); 69 and

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated
or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at
the taxpayer’s option.70

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Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the extent of 70% of the output
tax. In layman’s term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added taxes
that is due to him on a taxable transaction. There is no retention of any tax collection because the person/taxpayer has already previously paid the input tax to a
seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for the payment of the tax is the seller. 71 What only needs to be
done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not be confiscated,
appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered person’s entitlement to the
creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory privileges. The state may change
or take away rights, which were created by the law of the state, although it may not take away property, which was vested by virtue of such rights. 72

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable, although it becomes part of
the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that the
crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was introduced. 73 This was
adopted by the Expanded VAT Law (R.A. No. 7716), 74 and The Tax Reform Act of 1997 (R.A. No. 8424). 75 The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:

SEC. 110. Tax Credits. –

(A) Creditable Input Tax. – …

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which deduction for depreciation is allowed under
this Code, shall be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds One million pesos (₱1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase
of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of capital goods with acquisition
cost of ₱1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input tax. Petitioners’ argument is without
basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interest-free loan to the
government.76 In the same breath, Congress also justified its move by saying that the provision was designed to raise an annual revenue of 22.6 billion. 77 The
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legislature also dispelled the fear that the provision will fend off foreign investments, saying that foreign investors have other tax incentives provided by law, and
citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were not deterred. 78 Again, for whatever is the purpose of the 60-month
amortization, this involves executive economic policy and legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 12 of R.A. No. 9337, which
amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided,
That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of
payment. For purposes of this Section, the payor or person in control of the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. The government in this case is
constituted as a withholding agent with respect to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on gross payments for purchases of goods; 6% on
gross payments for services supplied by contractors other than by public works contractors; 8.5% on gross payments for services supplied by public work
contractors; or 10% on payment for the lease or use of properties or property rights to nonresident owners. Under the present Section 114(C), these different rates,
except for the 10% on lease or property rights payment to nonresidents, were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable, means full. Thus, it is provided in Section 114(C):
"final value-added tax at the rate of five percent (5%)."

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final withholding tax on income was explained, to
wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as full and final
payment of the income tax due from the payee on the said income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus,
in case of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent. …

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(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least
approximate the tax due of the payee on said income. … Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2
of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate, which constitutes as full payment of the tax
payable on the transaction. This represents the net VAT payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT),
in lieu of the actual input VAT directly or attributable to the taxable transaction. 79

The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable transactions with the government. 80 This
is supported by the fact that under the old provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller or contractor,
to wit:

SEC. 114. Return and Payment of Value-added Tax. –

(C) Withholding of Creditable Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors
which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent
(3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment
payment which shall be creditable against the value-added tax liability of the seller or contractor: Provided, however, That in the case of government public
works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property
rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made. (Emphasis
supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s intention to treat transactions with the government differently.
Since it has not been shown that the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision.
Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax
Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should
the actual input tax be less than 5%, the difference is treated as income. 81

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or value-added even if there is no profit or value-
added.

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Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust where premises are what ifs, arguments,
theoretical and facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare describes life in Macbeth,82 "full of sound and fury,
signifying nothing."

What’s more, petitioners’ contention assumes the proposition that there is no profit or value-added. It need not take an astute businessman to know that it is a
matter of exception that a business will sell goods or services without profit or value-added. It cannot be overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by
other persons or other classes in the same place and in like circumstances." 83

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled
to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness. 84

Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in capital equipment, or has several
transactions with the government, is not based on real and substantial differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the kind of property, the rates to be levied or
the amounts to be raised, the methods of assessment, valuation and collection. Petitioners’ alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield varying end results depending on one’s profit margin and value-added, the Court cannot go beyond
what the legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This might in fact sometimes result
in unequal protection. What the clause requires is equality among equals as determined according to a valid classification. By classification is meant the grouping
of persons or things similar to each other in certain particulars and different from all others in these same particulars. 85

Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmeña III and Ma. Ana Consuelo A.S. – Madrigal on June 6,
2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This,
according to petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say that these are still proposed
legislations. Until Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different articles may be taxed at
different amounts provided that the rate is uniform on the same class everywhere with all people at all times. 86
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In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of
services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input tax, 5-year amortization of
input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed that the rule of uniform taxation does not
deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the particular class. 87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services
with gross annual sales or receipts not exceeding ₱1,500,000.00.88 Also, basic marine and agricultural food products in their original state are still not subject to the
tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.
Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in business with an aggregate gross annual sales
exceeding ₱200,000.00. Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the
reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit margins. Congress was not
oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under
Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding ₱1.5 Million. This acts as a equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously exempt. Excise taxes on petroleum
products91 and natural gas92 were reduced. Percentage tax on domestic carriers was removed. 93 Power producers are now exempt from paying franchise tax. 94

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation. Domestic, foreign, and non-resident
corporations are now subject to a 35% income tax rate, from a previous 32%. 95 Intercorporate dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the corporation’s domicile was increased to 20%. 96 The Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes anymore. 97 Even the sale by an artist of his works or services performed for the production of such works was not
spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the consumers. It cannot therefore be gainsaid
that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with higher input tax-output tax ratio
that will suffer the consequences.
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Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also lifted from Adam Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in
proportion to the revenue which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected. 98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no relation with the VAT system
inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by a person or profit margin marked
by a business, such that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by VAT.  A converso, the lower the
income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income group or businesses with low-profit
margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is that Congress shall
‘evolve a progressive system of taxation.’ The constitutional provision has been interpreted to mean simply that ‘direct taxes are . . . to be preferred [and] as much
as possible, indirect taxes should be minimized.’ (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate
to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have
been prohibited with the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales taxes are also
regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to
the taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain transactions
(R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC) 99

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to resuscitate an economy in distress. The Court
is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other
cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should stand ready to afford relief. There are undoubtedly
many wrongs the judicature may not correct, for instance, those involving political questions. . . .

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Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political or social ills; We should not forget that the
Constitution has judiciously allocated the powers of government to three distinct and separate compartments; and that judicial interpretation has tended to the
preservation of the independence of the three, and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian of the others and that,
for official wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box. 100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things considered, there is no raison d'être for the unconstitutionality of
R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are
hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary restraining order issued by the Court on
July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.

CIR vs. SC Johnson and Son, Inc.. G.R. No. 127105, 25 June 1999

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the Court of Appeals dated November 7, 1996 in
CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States
of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents
and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.

The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under
Certificate of Registration No. 8064 (Exh. "A").

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected
the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of
P1,603,443.00 (Exhs. "B" to "L" and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties
arguing that, "the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said  MacGeorge and Gillete rulings were
issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We therefore
submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of
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the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the
Court of Appeals], par. 12). [Respondent's] claim for there fund of P963,266.00 was computed as follows:

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the
Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from
July 1992 to May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision subject of this appeal on November
7, 1996 finding no merit in the petition and affirming in toto the CTA ruling.3

This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE
OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine
tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of
the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided under
Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the
RP-West Germany Tax Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as held by the
Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the
payment of a tax, or royalty remittances for that matter, these must necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C.
Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties,
the provisions of the treaty must be construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it contains a defective certification against forum
shopping as required under SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most
favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the
phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored
nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of
such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax
treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also
contends that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar circumstances" refers to the manner in which
the tax is paid, for the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the
Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are subject

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only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given
retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's counsel is not a fatal defect as to warrant the
dismissal of this petition since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the
certification should be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory counsel.
Petitioner reiterates that even if the phrase "paid under similar circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers to the
payment of royalties and not taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the said clause's application.1âwphi1.nêt

We address first the objection raised by private respondent that the certification against forum shopping was not executed by the petitioner herself but by her
counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT OF APPEALS TO PREVENT
FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in the Supreme Court, the Court of
Appeals or other tribunals or agencies, with the result that said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner aside from complying with pertinent
provisions of the Rules of Court and existing circulars, must certify under oath to all of the following facts or undertakings: (a) he has not theretofore
commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the summary dismissal of the multiple petitions or
complaints; . . .

The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before this Court and the Court of Appeals. Petitioner's
allegation that Circular No. 28-91 applies only to original actions and not to appeals as in the instant case is not supported by the text nor by the obvious intent of
the Circular which is to prevent multiple petitions that will result in the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other action involving the same issues in this Court or
the Court of Appeals or any other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner,
which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be represented only by the Solicitor
General, the certification executed by the OSG in this case constitutes substantial compliance with Circular No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty
regarding the rate of tax to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinent
that —

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 1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting
States.

2) However, the tax imposed by that Contracting State shall not exceed.

a) In the case of the United States, 15 percent of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; and

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a
third State.

x x x           x x x          x x x

(emphasis supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional tax rate of 10 percent on royalties based
on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged
shall not exceed:

x x x           x x x          x x x

b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or
process, or from the use of or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or
scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under b) shall, in the case of
royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent
authorities.

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Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and
corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-
Germany Tax Treaty states —

1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows:

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and
corporation tax payable in respect of the following items of income arising in the Republic of the Philippines, the tax paid under the laws of the
Philippines in accordance with this Agreement on:

dd) royalties, as defined in paragraph 3 of Article 12;

c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed to be

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20 percent of
the gross amount of such royalties.

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax
Treaty since there is no provision for a 20 percent matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the
strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within the Philippines is allowed as a
credit against German income and corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according
to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty
income of a German resident from sources within the Philippines arising from the use of, or the right to use, any patent, trade mark, design or model, plan,
secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German
taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften
the impact of double taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under
the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most favored
nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. 5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the phrase "paid under similar circumstances in
Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the
phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are to be understood in
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the context in which they are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision in
question should refer to royalties of the same kind paid under similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to take into account the purpose animating the treaty provisions in point. To
begin with, we are not aware of any law or rule pertinent to the payment of royalties, and none has been brought to our attention, which provides for the payment
of royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties
and there is no disparity based on nationality in the circumstances of such payment. 6 On the other hand, a cursory reading of the various tax treaties will show that
there is no similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the contracting parties. 8 As will be
shown later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. 9 The purpose of
these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in
two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which
is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.  11 The
apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation is crucial in creating such a climate. 13

Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and
both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights
to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is
conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may
be imposed by the state of source is limited. 14

The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief
— the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital.
On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in
the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income
or capital itself, whereas the credit method focuses upon the tax. 15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given
up for this particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax
Treaty necessarily contemplated "circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights,  i.e. trademarks, patents and technology,
located within the Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US

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Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of
source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three rates — 25 percent of the gross amount of
the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of
activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-
Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect
of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty,  supra, expressly
allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand,
Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of
the gross amount of royalties paid. Said Article 23 reads:

Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without
changing the general principle thereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax
the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting
stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such
appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose
of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided
by United States law for the taxable year. . . .

The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored
upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax
and at the same time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important
aid to the meaning of a law than any rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be
remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose.  21 The Vienna
Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the

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treaty in their context and in the light of its object and
purpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a crucial economic goal for
developing countries. 23 The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax
credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to
the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the
royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in
light of the purpose behind the most favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the
"most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of equality of international treatment by providing
that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation.  26 The essence of the
principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is
also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both
Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark,
patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design
behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The
similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality
of treatment.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on
royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for
the reason that there is no payment of taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming the exemption. 27 The burden of proof is upon him who claims the exemption in his favor and he
must be able to justify his claim by the clearest grant of organic or statute law.  28 Private respondent is claiming for a refund of the alleged overpayment of tax on
royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax
on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated
November 7, 1996 of the Court of Appeals are hereby SET ASIDE.

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SO ORDERED.

BDO vs. Republic G. R. No. 198756, Jan. 13, 2015

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion worth of 10-year zero-coupon treasury bonds issued by
the Bureau of Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-2011 1 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus 2 filed by petitioners under Rule 65 of the Rules of Court seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued by BIR of similar tenor and import, for being
unconstitutional and for having been issued without jurisdiction or with grave abuse of discretion amounting to lack or· excess of jurisdiction ... ;

b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT from the payment of the face value of the Government
Bonds upon their maturity;

c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government Bonds upon maturity ... ; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining Respondents, particularly the BIR and the
BTr, from withholding or collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well
asother related rulings issued by the BIR of similar tenor and import, pending the resolution by [the court] of the merits of [the] Petition. 3

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates (T-
notes).6 The T-notes would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as the
PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund (Hanapbuhay® Fund) to finance meritorious activities and
projects of accredited non-government organizations (NGOs) throughout the country." 8

Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds were also presented by banks and financial
institutions, such as First Metro Investment Corporation (proposal dated March 1, 2001), 9 International Exchange Bank (proposal dated July 27, 2000), 10 Security
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Bank Corporation and SB Capital Investment Corporation (proposal dated July 25, 2001), 11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or discount earned on the
proposed zerocoupon bonds would be subject to the prevailing withholding tax." 13

A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep discount), with the face value repaid at the time of maturity. 14 It
does not make periodic interest payments, or have socalled "coupons," hence the term zero-coupon bond. 15 However, the discount to face value constitutes the
return to the bondholder.16

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-2001 17 on the tax
treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue René G. Bañez confirmed that the PEACe
Bonds would not be classified as deposit substitutes and would not be subject to the corresponding withholding tax:

Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20) or more individuals or corporate lenders at any one time.
In the light of your representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as "deposit
substitutes" falling within the purview of the above definition. Hence, the withholding tax on deposit substitutes will not apply. 18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR Ruling No. 035-2001 19 dated August 16, 2001
and BIR Ruling No. DA-175-01 20 dated September 29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or corporate lenders" rule must apply.
Moreover, the determination of the phrase "at any one time" for purposes of determining the "20 or more lenders" is to be determined at the time of the original
issuance. Such being the case, the PEACe Bonds were not to be treated as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing the
bonds directly to a special purpose vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED). 22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the ADAPS" 23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds 25 (Public Offering) dated October 9, 2001, the Bureau of Treasury announced
that "₱30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]" 26 The notice stated that the Bonds "shall be issued to not
morethan 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue." 27 It also required the GSEDs to submit their bids not later than 12 noon
on auction date and to disclose in their bid submissions the names of the institutions bidding through them to ensure strict compliance with the 19 lender
limit.28 Lastly, it stated that "the issue being limitedto 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]." 29

On October 12, 2001, the Bureau of Treasury released a memo 30 on the "Formula for the Zero-Coupon Bond." The memo stated inpart that the formula (in
determining the purchase price and settlement amount) "is only applicable to the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender
limit."31

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001" (Auction Guidelines). 32 The Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding tax as

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the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001)." 33 The Auction Guidelines, for
the first time, also stated that the Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]" 34

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds. 35 Also on the same date, the Bureau of Treasury issued another
memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final withholding tax and the
opinion of the Monetary Board on reserve eligibility. 37

During the auction, there were 45 bids from 15 GSEDs. 38 The bidding range was very wide, from as low as 12.248% to as high as 18.000%. 39 Nonetheless, the
Bureau of Treasury accepted the auction results. 40 The cut-off was at 12.75%.41

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having tendered the lowest bids. 42 Accordingly, on
October 18, 2001, the Bureau of Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately ₱10.17 billion,43 resulting
in a discount of approximately ₱24.83 billion.

Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement 44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds. 45 RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of
the 35 billion Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll income derived from
the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all forms of taxation as confirmed by Bureau of Internal
Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively." 48

RCBC Capital sold the Government Bonds in the secondary market for an issue price of ₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.49

BIR rulings

On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and directing the BTr to withhold said final
tax at the maturity thereof, [allegedly without] consultation with Petitioners as bond holders, and without conducting any hearing." 50

"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the proper tax treatment of the discount or interest
income derived from the Government Bonds."51 The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.
007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value of the bond) is treated as interest
income of the purchaser/holder. Thus, the Php 24.3 interest income should have been properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the
Tax Code of 1997. . . .

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However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final tax on the discount/interest income realized by RCBC
as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by
stating that the [1997] Tax Code is clear that the "term public means borrowing from twenty (20) or more individual or corporate lenders at any one time." The
word "any" plainly indicates that the period contemplated is the entire term of the bond, and not merely the point of origination or issuance. . . . Thus, by taking the
PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created
when no such exemption is found in the law.55

On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS
Group"). The Memo provides that in view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no
transfer of the same shall be allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12 October 2011 until the redemption payment date on
18 October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall be treated by the BTr as the
beneficial owners of such securities for the relevant [tax] payments to be imposed thereon." 56

On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-2011 57 clarifying
that the final withholding tax due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO but
also [on] ‘all subsequent holders of the Bonds.’"58

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order (TRO) 60 "enjoining the implementation of BIR Ruling No. 370-2011 against the [PEACe
Bonds,] . . . subject to the condition that the 20% final withholding tax on interest income there from shall be withheld by the petitioner banks and placed in escrow
pending resolution of [the] petition."61

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-intervention 62 dated October 27, 2011, which
was granted by this court on November 15, 2011.63

Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO." 64 They
alleged that on the same day that the temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income, and that the Bureau of
Treasury refused to release the amounts corresponding to the 20% final withholding tax. 65 On November 15, 2011, this court directed respondents to: "(1) SHOW
CAUSE why they failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition." 66

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention with comment on the petition in-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November 22, 2011.68

On December 1, 2011, public respondents filed their compliance. 69 They explained that: 1) "the implementation of [BIR Ruling No. 370-2011], which has already
been performed on October 18, 2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already fait accompli . . .

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when the Resolution and TRO were served to and received by respondents BTr and National Treasurer [on October 19, 2011]"; 70 and 2) the withheld amount has
ipso facto become public funds and cannot be disbursed or released to petitioners without congressional appropriation. 71 Respondents further aver that"[i]nasmuch
as the . . . TRO has already become moot . . . the condition attached to it, i.e., ‘that the 20% final withholding tax on interest income therefrom shall be withheld by
the banks and placed in escrow . . .’has also been rendered moot[.]" 72

On December 6, 2011, this court noted respondents' compliance. 73

On February 22, 2012, respondents filed their consolidated comment 74 on the petitions-in-intervention filed by RCBC and RCBC Capital and On November 27,
2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the Temporary Restraining Order)." 75

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to direct respondents to comply with the temporary
restraining order); and (b) required respondents to comment thereon. 76

Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply 78 on June 5, 2013.

Issues

The main issues to be resolved are:

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under the 1997 National Internal Revenue Code. Related to
this question is the interpretation of the phrase "borrowing from twenty (20) or more individual or corporate lenders at any one time" under Section 22(Y) of the
1997 National Internal Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the Bureau of Internal Revenue is estopped from imposing and/or
collecting the 20% final withholding tax from the face value of these Bonds

a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of rulings?

Arguments of petitioners, RCBC and RCBC Capital, and CODE-NGO

Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is obligated . . . to pay the face value amount of Ph ₱35
Billion upon maturity without any deduction whatsoever." 79 They add that "the Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating due process" 80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that they would receive the full face value of the Bonds upon
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maturity, in view of the 2001 BIR Rulings. 82 "[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon."83

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the 1997 National Internal Revenue Code
because there was only one lender (RCBC) to whom the Bureau of Treasury issued the Bonds. 84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that participate in the ‘secondary market’ is the determining factor in reckoning the existence or non-
existence of twenty (20) or more individual or corporate lenders." 85 Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the definition
of deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of ‘deposit substitutes[.]’" 86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of
administrative legislation[.]"87

Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from income tax. 88 They insist that "[t]hey are not lenders whose
income is considered as ‘interest income or yield’ subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]" 89 because they
"acquired the Government Bonds in the secondary or tertiary market." 90

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the collection of the final tax was barred by
prescription.91 They point out that under Section 7 of DOF Department Order No. 141-95, 92 the final withholding tax "should have been withheld at the time of
their issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue Code, "internal revenue taxes, such as the final tax, [should] be assessed within
three (3) years after the last day prescribed by law for the filing of the return." 94

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was in violation of their property rights, 95 their
constitutional right to due process 96 as well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings. 97 Allegedly, it would also
have "an adverse effect of colossal magnitude on the investors, both local and foreign, the Philippine capital market, and most importantly, the country’s standing
in the international commercial community." 98 Petitioners explained that "unless enjoined, the government’s threatened refusal to pay the full value of the
Government Bonds will negatively impact on the image of the country in terms of protection for property rights (including financial assets), degree of legal
protection for lender’s rights, and strength of investor protection." 99 They cited the country’s ranking in the World Economic Forum: 75th in the world in its 2011–
2012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among ASEAN countries in terms of Strength of Investor
Protection, and 105th worldwide and last among ASEAN countries in terms of Property Rights Index and Legal Rights Index. 100 It would also allegedly "send a
reverberating message to the whole world that there is no certainty, predictability, and stability of financial transactions in the capital markets[.]" 101 "[T]he integrity
of Government-issued bonds and notes will be greatly shattered and the credit of the Philippine Government will suffer" 102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce "investors’ perception that the level of regulatory risk for contracts entered into by the Philippine Government
is high,"104 thus resulting in higher interest rate for government-issued debt instruments and lowered credit rating. 105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue "gravely and seriously abused her discretion in the
exercise of her rule-making power" 106 when she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are ‘deposit substitutes’ regardless of the
number of lenders, in clear disregard of the requirement of twenty (20)or more lenders mandated under the NIRC." 107 They argue that "[b]y her blanket and
arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC, but effectively imposed a new tax on
privately-placed treasury bonds."108 Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause substantial impairment of
their vested rights109 under the Bonds since the ruling imposes new conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax

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notwithstanding the fact that the terms and conditions thereof as previously represented by the Government, through respondents BTr and BIR, expressly state that
it is not subject to final withholding tax upon their maturity." 110 They added that "[t]he exemption from the twenty percent (20%) final withholding tax [was] the
primary inducement and principal consideration for [their] participat[ion] in the auction and underwriting of the PEACe Bonds." 111

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of Internal Revenue violated their rights to due
process when she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling deprived them of the
opportunity to challenge the same.112

Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau of
Treasury and CODE-NGO should be held liable "as [these] parties explicitly represented . . . that the said bonds are exempt from the final withholding tax." 113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will
have pernicious effects on the integrity of existing securities, which is contrary to the State policies of stabilizing the financial system and of developing capital
markets."114

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are "invalid because they contravene Section 22(Y) of the 1997
[NIRC] when the said rulings disregarded the applicability of the ‘20 or more lender’ rule to government debt instruments"[;] 115 (b) "when [it] sold the PEACe
Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income, which [are] exempt . . . under
Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and material consideration [i.e., the issue price paid and savings in borrowing cost derived by the
Government,] thus protected by the non-impairment clause of the 1987 Constitution"[;] 117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke
the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR
administrative guidance issued and published[.]" 118 CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper because: (a) it involves
determination of a factual question;119 and (b) it is premature and states no cause of action as it amounts to an anticipatory third-party claim. 120

Arguments of respondents

Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies and
hierarchy of courts, resulting in a lack of cause of action that justifies the dismissal of the petition. 121 According to them, "the jurisdiction to review the rulings of
the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative remedies, pertains to the Court of Tax Appeals." 122 They point out
that "a case similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal
Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al.’" 123

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention. 124 They argue that under the guise of mainly assailing the
2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks
to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4. 125

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but interest income subject to income tax. 126 They
explain that "[w]ith the payment of the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about

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Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners considering that the same is a flow of wealth and not merely a return
of capital – the capital initially invested in the Bonds being approximately Ph₱10.2 Billion[.]"127

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a
material term of the Bonds"[;]128 "[t]here has been no change in the laws governing the taxability of interest income from deposit substitutes and said laws are read
into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term "deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds."132

Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe Bonds does not amount to a deprivation of property without
due process of law."133 Their imposition of the 20% final withholding tax is not arbitrary because they were only performing a duty imposed by law; 134 "[t]he 2011
BIR Ruling is an interpretative rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier construction given to the term by the 2004
and 2005 BIR Rulings."135 Hence, respondents argue that "there was no need to observe the requirements of notice, hearing, and publication[.]" 136

Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major financial institutions equipped with both internal and external
accounting and compliance departments as well as access to both internal and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development Council; all actively taking part in the regular and special debt issuances of the BTr
and indeed regularly proposing products for issue by BTr — had actual notice of the 2004 and 2005 BIR Rulings." 137 Allegedly, "the sudden and drastic drop —
including virtually zero trading for extended periods of six months to almost a year — in the trading volume of the PEACe Bonds after the release of BIR Ruling
No. 007-04 on July 16, 2004 tend to indicate that market participants, including the Petitioners herein, were aware of the ruling and its consequences for the
PEACe Bonds."138

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal Revenue’s rule-making power; 139 that it and the 2004
and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes by creating an unwarranted exception to the requirement of having 20 or more
lenders/purchasers;140 and the word "any" in Section 22(Y) of the National Internal Revenue Code plainly indicates that the period contemplated is the entire term
of the bond and not merely the point of origination or issuance. 141

Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice petitioners. 142 "[W]ith or without the 2011 BIR
Ruling, Petitioners would be liable to pay a 20% final withholding tax just the same because the PEACe Bonds in their possession are legally in the nature of
deposit substitutes subject to a 20% final withholding tax under the NIRC." 143 Section 7 of DOF Department Order No. 141-95 also provides that income derived
from Treasury bonds is subject to the 20% final withholding tax. 144 "[W]hile revenue regulations as a general rule have no retroactive effect, if the revocation is
due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be invoked by a taxpayer." 145

Finally, respondents submit that "there are a number of variables and factors affecting a capital market." 146 "[C]apital market itself is inherently unstable." 147 Thus,
"[p]etitioners’ argument that the 20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition that is not a
justiciable issue."148

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On the prayer for the temporary restraining order, respondents argue that this order "could no longer be implemented [because] the acts sought to be enjoined are
already fait accompli."149 They add that "to disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting ‘money being paid out of the Treasury except in pursuance of an appropriation made by law[.]’" 150 "The remedy of petitioners is to claim a tax refund
under Section 204(c) of the Tax Code should their position be upheld by the Honorable Court." 151

Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as
amended by Section 9 of Republic Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection of
any national internal revenue tax imposed by the Tax Code." 152

Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when it declared that all government debt instruments are
deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented by the government as an inducement and important
consideration for the purchase of the Bonds;
b) It constitutes deprivation of property without due process because there was no prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal Revenue’s power to interpret the provisions of
the 1997 National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in previously issued BIR Ruling Nos. 007-2004, DA-491-
04,and 008-05, which have already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially when the latter’s rulings are not in harmony with the law;
and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can be
given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy of filing a claim for refund of the 20% final withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.

Court’s ruling

Procedural Issues: Non-exhaustion of administrative remedies proper

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Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary of Finance.

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)

Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions are generally not entertained." 153 The remedy
within the administrative machinery must be resorted to first and pursued to its appropriate conclusion before the court’s judicial power can be sought. 154

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a legal question, 155 (3)
when the administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of the administrative agency
concerned,(5) when there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego of the President bears the implied and
assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be unreasonable, (8) when it would amount to a nullification of a
claim, (9) when the subject matter is a private land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy, (11) when
there are circumstances indicating the urgency of judicial intervention. 156 (Emphasis supplied, citations omitted)

The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely: (a) the interpretation of the 20-lender rule in the definition
of the terms public and deposit substitutes under the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the
PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and due process. Judicial intervention is likewise urgent with
the impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an exercise in futility. 157

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise because it was upon the request of the Secretary
of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of Internal
Revenue’s opinions as his own.158 This position was in fact confirmed in the letter 159 dated October 10, 2011 where he ordered the Bureau of Treasury to withhold
the amount corresponding to the 20% final withholding tax on the interest or discounts allegedly due from the bondholders on the strength of the 2011 BIR Ruling.
Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on the
taxability of the interest income from zero-coupon bonds issued by the government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, 160 such rulings of the Commissioner of Internal
Revenue are appealable to that court, thus:

SEC. 7.Jurisdiction.- The CTA shall exercise:

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a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal
Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or rulingor after the
expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA
and disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal, 161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals over rulings of
the Bureau of Internal Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.. . .

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of Finance, upon recommendation of the Commissioner,
shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category enumerated in
Section 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with
the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of sales and similar purposes." (Emphasis in the
original)

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to nullify General Circular No. V-148,
which does not adjudicate or settle any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.

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We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and license fees to adhere strictly to the
interpretation given by the defendant to the statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the
Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the administration of which is entrusted
by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax
Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising under the
National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal Revenue.’" 163

In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare and the advancement of public policy, or demanded by
the broader interest of justice, or the orders complained of were found to be patent nullities, or the appeal was considered as clearly an inappropriate remedy." 164

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and Local Government, 165 this court noted that
the petition for prohibition was filed directly before it "in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction
over the . . . petition and decide the same on its merits in view of the significant constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the matter." 166

Here, the nature and importance of the issues raised 167 to the investment and banking industry with regard to a definitive declaration of whether government debt
instruments are deposit substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court
in the first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or product that may be issued and traded in the
market. Due to the changing positions of the Bureau of Internal Revenue on this issue, there isa need for a final ruling from this court to stabilize the expectations
in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been rendered moot by this court’s issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling. The temporary restraining order effectively recognized the urgency and
necessity of direct resort to this court.

Substantive issues: Tax treatment of deposit substitutes

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholdingtax at the rate of 20% is imposed on interest on
any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements. These provisions read:

SEC. 24. Income Tax Rates.

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any
currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management
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accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall
be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:

SEC. 27. Rates of Income Tax on Domestic Corporations.

(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax
at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977 National Internal Revenue Code through
Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:

(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance
of debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or
the needs of their agent or dealer. These promissory notes, repurchase agreements, certificates of assignment or participation and similar instrument with recourse
as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and Exchange Commission of
the Philippines for commercial, industrial, finance companies and either non-financial companies: Provided, however, that only debt instruments issued for inter-
bank call loans to cover deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks shall not be considered as
deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same definition and specifically identified the following
borrowings as "deposit substitutes":

SECTION 2. Definitions of Terms. . . .

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(h) "Deposit substitutes" shall mean –

(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasi-banking functions evidenced by deposit
substitutes instruments, except interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or
repayment transfer tickets.

(b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt
instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust companies, including the trust department
of banks and investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the addition of the qualifying phrase for public –
borrowing from 20 or more individual or corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When
used in this Title:

(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public(the term 'public' means borrowing from twenty (20) or more
individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to, bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements
entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover
deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt
instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at any one
time." Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently subject to the 20%
final withholding tax.

20-lender rule

Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the Government Bonds." 169 On the other hand, respondents theorize that
the word "any" "indicates that the period contemplated is the entire term of the bond and not merely the point of origination or issuance[,]" 170 such that if the debt
instruments "were subsequently sold in secondary markets and so on, insuch a way that twenty (20) or more buyers eventually own the instruments, then it
becomes indubitable that funds would be obtained from the "public" as defined in Section 22(Y) of the NIRC." 171 Indeed, in the context of the financial market, the
words "at any one time" create an ambiguity.

Financial markets

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Financial markets provide the channel through which funds from the surplus units (households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund suppliers earn a return on their investment; the return is necessary to
ensure that funds are supplied to the financial markets. 172

"The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the securities[,]" 173 namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174

Whether referring to money market securities or capital market securities, transactions occur either in the primary market or in the secondary market. 175 "Primary
markets facilitate the issuance of new securities. Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership of the
securities."176 The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors. 177

"Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial transactions." 178 Still, all systems perform one
basic function: the quick mobilization of money from the lenders/investors to the borrowers. 179

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect finance. 180

With direct financing, the "borrower and lender meet each other and exchange funds in return for financial assets" 181 (e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a) "both borrower and lender must desire to exchange the same amount of funds at the
same time"[;]182 and (b) "both lender and borrower must frequently incur substantial information costs simply to find each other." 183

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing information costs. 184 A Broker185 is "an individual or
financial institution who provides information concerning possible purchases and sales of securities. Either a buyer or a seller of securities may contact a broker,
whose job is simply to bring buyers and sellers together." 186 A dealer187 "also serves as a middleman between buyers and sellers, but the dealer actually acquires the
seller’s securities in the hope of selling them at a later time at a more favorable price." 188 Frequently, "a dealer will split up a large issue of primary securities into
smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into investment." 189 In semi direct financing, "[t]he ultimate lender still winds up
holding the borrower’s securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity characteristics of the borrower’s [debt
security]. There still must be a fundamental coincidence of wants and needs between [lenders and borrowers] for semidirect financial transactions to take place." 190

"The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions, carried out with the help of financial
intermediaries"191 or financial institutions, like banks, investment banks, finance companies, insurance companies, and mutual funds. 192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit units. 193 "Depository institutions [such as banks] accept deposits from surplus units and provide
credit to deficit units through loans and purchase of [debt] securities." 194 Nondepository institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the same time purchase debt securities of deficit units. 195 "By pooling the resources of[small savers, a
financial intermediary] can service the credit needs of large firms simultaneously." 196

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The financial market, therefore, is an agglomeration of financial transactions in securities performed by market participants that works to transfer the funds from
the surplus units (or investors/lenders) to those who need them (deficit units or borrowers).

Meaning of "at any one time"

Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining the "20 or more lenders" would mean every
transaction executed in the primary or secondary market in connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning of "20 or more lenders/investors" is made at any transaction
in connection with the purchase or sale of the Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate lenders in the secondary market.

When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or morelenders/investors, there is deemed to be a public borrowing
and the bonds at that point intime are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed
interest income from the bonds.

For debt instruments that are not deposit substitutes, regular income tax applies

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997 National Internal Revenue Code are subject to the
regular income tax.

The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income, Section 32(A) of the 1997 National Internal Revenue Code
discloses a legislative policy to include all income not expressly exempted as within the class of taxable income under our laws.

"The definition of gross income is broad enough to include all passive incomes subject to specific tax rates or final taxes." 197 Hence, interest income from deposit
substitutes are necessarily part of taxable income. "However, since these passive incomes are already subject to different rates and taxed finally at source, they are
no longer included in the computation of gross income, which determines taxable income." 198 "Stated otherwise . . . if there were no withholding tax system in
place in this country, this 20 percent portion of the ‘passive’ income of [creditors/lenders] would actually be paid to the [creditors/lenders] and then remitted by
them to the government in payment of their income tax."199

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, 200 explained the rationale behind the withholding tax system:

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The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and
third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and remedies. 201 (Citations omitted)

"The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source." 202

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller isrequired to withhold the 20% final income tax on the
imputed interest income from the bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the "gains" contemplated under Section 32(B)(7)(g) 203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of long-term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of money. Gains from sale or exchange or
retirement of bonds orother certificate of indebtedness fall within the general category of "gainsderived from dealings in property" under Section 32(A)(3), while
interest from bonds or other certificate of indebtedness falls within the category of "interests" under Section 32(A)(4). 204 The use of the term "gains from sale" in
Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under Sections 24, 25, 27, and 28 in the exemption. 205

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds before their maturity date, which is the difference
between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by the last
holder of the bonds when the bonds are redeemed at maturity, which is the difference between the proceeds from the retirement of the bonds and the price atwhich
such last holder acquired the bonds. For discounted instruments,like the zero-coupon bonds, the trading gain shall be the excess of the selling price over the book
value or accreted value (original issue price plus accumulated discount from the time of purchase up to the time of sale) of the instruments. 206

The Bureau of Internal Revenue rulings

The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not consistent with law. 207 Its interpretation of "at any one time" to
mean at the point of origination alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardless of the
number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes." 208 Being the subject of this petition, it is, thus, declared void
because it completely disregarded the 20 or more lender rule added by Congress in the 1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations when there was none in the law. Tax statutes must be reasonably construed as to give
effect to the whole act. Their constituent provisions must be read together, endeavoring to make every part effective, harmonious, and sensible. 209 That construction
which will leave every word operative will be favored over one that leaves some word, clause, or sentence meaningless and insignificant. 210

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It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction of great weight, but the principle is not absolute and may be overcome by strong reasons to the contrary. If through a misapprehension of
law an officer has issued an erroneous interpretation, the error must be corrected when the true construction is ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue, 211 this court upheld the nullification of Revenue Memorandum Circular (RMC) No.
7-85 issued by the Acting Commissioner of Internal Revenue because it was contrary to the express provision of Section 230 of the 1977 National Internal
Revenue Code and, hence, "[cannot] be given weight for to do so would, in effect, amend the statute." 212 Thus:

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the
law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax
laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.213 (Citations omitted)

This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action [because] there are
no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same." 214 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops. 216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars not consistent with the law sought to be applied.
Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress
can repeal or amend the law."217

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, 218 this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors,219 but, to the contrary, the overruling of decisions is inherent in the interpretation of laws:

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated authority of the administrative agency; (ii)
whether itis reasonable; and (iii) whether it was issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the desirability or
wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a matter of power a
court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)
give some intermediate degree of authoritative weight to the interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an "agricultural food product" within the meaning
of § 103(b) of the NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody eats
copra for food." That previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal

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Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws. 220 (Emphasis supplied,
citations omitted)

Tax treatment of income derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2 billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to undisclosed investors at ₱11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds were issued at the time of origination. However, a
reading of the underwriting agreement 221 and RCBC term sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for
CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately ₱11.996 would fall on the same day, October 18, 2001,
when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing received by the Bureau of
Treasury in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC Capital/CODE-
NGO distributed the PEACe Bonds — all at the time of origination or issuance. At this point, however, we do not know as to how many investors the PEACe
Bonds were sold to by RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y)
of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or
discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be
required of any lender/investor had the latter turned around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or
investors.

We note, however, that under Section 24 223 of the 1997 National Internal Revenue Code, interest income received by individuals from long term deposits or
investments with a holding period of not less than five (5) years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case, as the withholding agents.

The collection of tax is not barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and collect internal revenue taxes is extended to 10
years in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, to be computed from the time of discovery of the
falsity, fraud, or omission. Section 203 states:

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SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun
after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted
from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed
on such last day. (Emphasis supplied)

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection
of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the Bureau of Internal Revenue may still collect
the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-intervenors.

Reiterative motion on the temporary restraining order

Respondents’ withholding of the 20% final withholding tax on October 18, 2011 was justified

Under the Rules of Court, court orders are required to be "served upon the parties affected." 224 Moreover, service may be made personally or by mail. 225 And,
"[p]ersonal service is complete upon actual delivery [of the order.]" 226 This court’s temporary restraining order was received only on October 19, 2011, or a day
after the PEACe Bonds had matured and the 20% final withholding tax on the interest income from the same was withheld.

Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of service of pleadings, court orders, or processes.
Moreover, the news reports227 cited by petitioners were posted minutes before the close of office hours or late in the evening of October 18, 2011, and they did not
give the exact contents of the temporary restraining order.

"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that such injunction or order was served on him personally or
that he had notice of the issuance or making of such injunction or order." 228

At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax due" 229 and return the amount of the tax withheld
should it be finally determined that the income paid is not subject to withholding. 230 Hence, respondent Bureau of Treasury was justified in withholding the amount
corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received this court’s temporary restraining order only on October 19,
2011, or the day after this tax had been withheld.

Respondents’ retention of the amounts withheld is a defiance of the temporary restraining order

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Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20% final withholding tax in order that it may be placed in
escrow as directed by this court constitutes a defiance of this court’s temporary restraining order. 231

The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act to be considered fait accompli, the act must have
already been fully accomplished and consummated. 232 It must be irreversible, e.g., demolition of properties, 233 service of the penalty of imprisonment, 234 and
hearings on cases.235 When the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in nature, 236 the defense of fait accompli cannot
prosper.

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final withholding tax 237 when it received the
temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes it withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following month after the said taxes had been withheld. 240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury, 241 which shall be the basis for recording the remittance of the tax
collection.242 The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by
government agencies based on its copies of the TRA. 243 Respondents did not submit any withholding tax return or TRA to provethat the 20% final withholding tax
was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395 244 dated October 18, 2011 submitted to this court shows:

The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, was
disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies corresponding to 20% final
withholding tax was set aside for remittance to the Bureau of Internal Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause why they failed to comply with the [TRO]; and [to] comply
with the [TRO] in order that petitioners may place the corresponding funds in escrow pending resolution of the petition." 245 The 20% final withholding tax was
effectively placed in custodia legis when this court ordered the deposit of the amount in escrow. The Bureau of Treasury could still release the money withheld to
petitioners for the latter to place in escrow pursuant to this court’s directive. There was no legal obstacle to the release of the 20% final withholding tax to
petitioners. Congressional appropriation is not required for the servicing of public debts in view of the automatic appropriations clause embodied in Presidential
Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government guarantees of obligations which are drawn upon, are automatically appropriated:

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provided, that no obligations shall be incurred or payments made from funds thus automatically appropriated except as issued in the form of regular budgetary
allotments.

Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such amounts as may be necessary to effect
payments on foreign or domestic loans, or foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of the Republic of the
Philippines, obtained by:

a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled corporations and/or government financial
institutions;

b. government-owned or controlled corporations and/or government financial institutions the proceeds of which were relent to public or private
institutions;

c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic of the Philippines;

d. other public or private institutions and guaranteed by government owned or controlled corporations and/or government financial institutions.

The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a lawful and valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to be the subject of another appropriation legislation: SEC. 2. The Secretary of
Finance shall cause to be paid out of any moneys in the National Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by law,
any interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of any such money, or from any such
sinking funds the principal amount of any obligations which have matured, or which have been called for redemption or for which redemption has been demanded
in accordance with terms prescribed by him prior to date of issue. . . In the case of interest-bearing obligations, he shall pay not less than their face value; in the
case of obligations issued at a discount he shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face value as is prescribed by
the terms and conditions under which such obligations were originally issued. There are hereby appropriated as a continuing appropriation out of any moneys in
the National Treasury not otherwise appropriated, such sums as may be necessary from time to time to carry out the provisions of this section. The Secretary of
Finance shall transmit to Congress during the first month of each regular session a detailed statement of all expenditures made under this section during the
calendar year immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be made through the National Treasury’s account
with the Bangko Sentral ng Pilipinas, to wit:

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Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all
proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.1âwphi1

Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution, which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.

Debt service is not included in the General Appropriation Act, since authorization therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, but largely with annual levels and approval thereof upon due deliberations as part of the whole obligation program for the year.
Upon such approval, Congress has spoken and cannot be said to have delegated its wisdom to the Executive, on whose part lies the implementation or execution of
the legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is reprehensible. 247

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding to the 20% final withholding tax despite
this court's directive in the temporary restraining order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow
pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the bondholders the amount corresponding-to the 20% final withholding
tax that it withheld on October 18, 2011.

Planters Committee vs. Arroyo, G.R. No. 79310, 14 July 1989

In ancient mythology, Antaeus was a terrible giant who blocked and challenged Hercules for his life on his way to Mycenae after performing his eleventh labor.
The two wrestled mightily and Hercules flung his adversary to the ground thinking him dead, but Antaeus rose even stronger to resume their struggle. This
happened several times to Hercules' increasing amazement. Finally, as they continued grappling, it dawned on Hercules that Antaeus was the son of Gaea and
could never die as long as any part of his body was touching his Mother Earth. Thus forewarned, Hercules then held Antaeus up in the air, beyond the reach of the
sustaining soil, and crushed him to death.

Mother Earth. The sustaining soil. The giver of life, without whose invigorating touch even the powerful Antaeus weakened and died.

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The cases before us are not as fanciful as the foregoing tale. But they also tell of the elemental forces of life and death, of men and women who, like Antaeus need
the sustaining strength of the precious earth to stay alive.

"Land for the Landless" is a slogan that underscores the acute imbalance in the distribution of this precious resource among our people. But it is more than a
slogan. Through the brooding centuries, it has become a battle-cry dramatizing the increasingly urgent demand of the dispossessed among us for a plot of earth as
their place in the sun.

Recognizing this need, the Constitution in 1935 mandated the policy of social justice to "insure the well-being and economic security of all the
people," 1 especially the less privileged. In 1973, the new Constitution affirmed this goal adding specifically that "the State shall regulate the acquisition,
ownership, use, enjoyment and disposition of private property and equitably diffuse property ownership and profits." 2 Significantly, there was also the specific
injunction to "formulate and implement an agrarian reform program aimed at emancipating the tenant from the bondage of the soil." 3

The Constitution of 1987 was not to be outdone. Besides echoing these sentiments, it also adopted one whole and separate Article XIII on Social Justice and
Human Rights, containing grandiose but undoubtedly sincere provisions for the uplift of the common people. These include a call in the following words for the
adoption by the State of an agrarian reform program:

SEC. 4. The State shall, by law, undertake an agrarian reform program founded on the right of farmers and regular farmworkers, who are landless, to own directly
or collectively the lands they till or, in the case of other farmworkers, to receive a just share of the fruits thereof. To this end, the State shall encourage and
undertake the just distribution of all agricultural lands, subject to such priorities and reasonable retention limits as the Congress may prescribe, taking into account
ecological, developmental, or equity considerations and subject to the payment of just compensation. In determining retention limits, the State shall respect the
right of small landowners. The State shall further provide incentives for voluntary land-sharing.

Earlier, in fact, R.A. No. 3844, otherwise known as the Agricultural Land Reform Code, had already been enacted by the Congress of the Philippines on August 8,
1963, in line with the above-stated principles. This was substantially superseded almost a decade later by P.D. No. 27, which was promulgated on October 21,
1972, along with martial law, to provide for the compulsory acquisition of private lands for distribution among tenant-farmers and to specify maximum retention
limits for landowners.

The people power revolution of 1986 did not change and indeed even energized the thrust for agrarian reform. Thus, on July 17, 1987, President Corazon C.
Aquino issued E.O. No. 228, declaring full land ownership in favor of the beneficiaries of P.D. No. 27 and providing for the valuation of still unvalued lands
covered by the decree as well as the manner of their payment. This was followed on July 22, 1987 by Presidential Proclamation No. 131, instituting a
comprehensive agrarian reform program (CARP), and E.O. No. 229, providing the mechanics for its implementation.

Subsequently, with its formal organization, the revived Congress of the Philippines took over legislative power from the President and started its own
deliberations, including extensive public hearings, on the improvement of the interests of farmers. The result, after almost a year of spirited debate, was the
enactment of R.A. No. 6657, otherwise known as the Comprehensive Agrarian Reform Law of 1988, which President Aquino signed on June 10, 1988. This law,
while considerably changing the earlier mentioned enactments, nevertheless gives them suppletory effect insofar as they are not inconsistent with its provisions. 4

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The above-captioned cases have been consolidated because they involve common legal questions, including serious challenges to the constitutionality of the
several measures mentioned above. They will be the subject of one common discussion and resolution, The different antecedents of each case will require separate
treatment, however, and will first be explained hereunder.

G.R. No. 79777

Squarely raised in this petition is the constitutionality of P.D. No. 27, E.O. Nos. 228 and 229, and R.A. No. 6657.

The subjects of this petition are a 9-hectare rice land worked by four tenants and owned by petitioner Nicolas Manaay and his wife and a 5-hectare rice land
worked by four tenants and owned by petitioner Augustin Hermano, Jr. The tenants were declared full owners of these lands by E.O. No. 228 as qualified farmers
under P.D. No. 27.

The petitioners are questioning P.D. No. 27 and E.O. Nos. 228 and 229 on grounds inter alia of separation of powers, due process, equal protection and the
constitutional limitation that no private property shall be taken for public use without just compensation.

They contend that President Aquino usurped legislative power when she promulgated E.O. No. 228. The said measure is invalid also for violation of Article XIII,
Section 4, of the Constitution, for failure to provide for retention limits for small landowners. Moreover, it does not conform to Article VI, Section 25(4) and the
other requisites of a valid appropriation.

In connection with the determination of just compensation, the petitioners argue that the same may be made only by a court of justice and not by the President of
the Philippines. They invoke the recent cases of EPZA v. Dulay  5 and Manotok v. National Food Authority. 6 Moreover, the just compensation contemplated by the
Bill of Rights is payable in money or in cash and not in the form of bonds or other things of value.

In considering the rentals as advance payment on the land, the executive order also deprives the petitioners of their property rights as protected by due process. The
equal protection clause is also violated because the order places the burden of solving the agrarian problems on the owners only of agricultural lands. No similar
obligation is imposed on the owners of other properties.

The petitioners also maintain that in declaring the beneficiaries under P.D. No. 27 to be the owners of the lands occupied by them, E.O. No. 228 ignored judicial
prerogatives and so violated due process. Worse, the measure would not solve the agrarian problem because even the small farmers are deprived of their lands and
the retention rights guaranteed by the Constitution.

In his Comment, the Solicitor General stresses that P.D. No. 27 has already been upheld in the earlier cases of  Chavez v. Zobel,  7 Gonzales v. Estrella,  8 and
Association of Rice and Corn Producers of the Philippines, Inc. v. The National Land Reform Council.  9 The determination of just compensation by the executive
authorities conformably to the formula prescribed under the questioned order is at best initial or preliminary only. It does not foreclose judicial intervention
whenever sought or warranted. At any rate, the challenge to the order is premature because no valuation of their property has as yet been made by the Department
of Agrarian Reform. The petitioners are also not proper parties because the lands owned by them do not exceed the maximum retention limit of 7 hectares.

Replying, the petitioners insist they are proper parties because P.D. No. 27 does not provide for retention limits on tenanted lands and that in any event their
petition is a class suit brought in behalf of landowners with landholdings below 24 hectares. They maintain that the determination of just compensation by the
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administrative authorities is a final ascertainment. As for the cases invoked by the public respondent, the constitutionality of P.D. No. 27 was merely assumed
in Chavez, while what was decided in Gonzales was the validity of the imposition of martial law.

In the amended petition dated November 22, 1588, it is contended that P.D. No. 27, E.O. Nos. 228 and 229 (except Sections 20 and 21) have been impliedly
repealed by R.A. No. 6657. Nevertheless, this statute should itself also be declared unconstitutional because it suffers from substantially the same infirmities as the
earlier measures.

A petition for intervention was filed with leave of court on June 1, 1988 by Vicente Cruz, owner of a 1. 83- hectare land, who complained that the DAR was
insisting on the implementation of P.D. No. 27 and E.O. No. 228 despite a compromise agreement he had reached with his tenant on the payment of rentals. In a
subsequent motion dated April 10, 1989, he adopted the allegations in the basic amended petition that the above- mentioned enactments have been impliedly
repealed by R.A. No. 6657.

G.R. No. 79310

The petitioners herein are landowners and sugar planters in the Victorias Mill District, Victorias, Negros Occidental. Co-petitioner Planters' Committee, Inc. is an
organization composed of 1,400 planter-members. This petition seeks to prohibit the implementation of Proc. No. 131 and E.O. No. 229.

The petitioners claim that the power to provide for a Comprehensive Agrarian Reform Program as decreed by the Constitution belongs to Congress and not the
President. Although they agree that the President could exercise legislative power until the Congress was convened, she could do so only to enact emergency
measures during the transition period. At that, even assuming that the interim legislative power of the President was properly exercised, Proc. No. 131 and E.O.
No. 229 would still have to be annulled for violating the constitutional provisions on just compensation, due process, and equal protection.

They also argue that under Section 2 of Proc. No. 131 which provides:

Agrarian Reform Fund.-There is hereby created a special fund, to be known as the Agrarian Reform Fund, an initial amount of FIFTY BILLION PESOS
(P50,000,000,000.00) to cover the estimated cost of the Comprehensive Agrarian Reform Program from 1987 to 1992 which shall be sourced from the receipts of
the sale of the assets of the Asset Privatization Trust and Receipts of sale of ill-gotten wealth received through the Presidential Commission on Good Government
and such other sources as government may deem appropriate. The amounts collected and accruing to this special fund shall be considered automatically
appropriated for the purpose authorized in this Proclamation the amount appropriated is in futuro, not in esse. The money needed to cover the cost of the
contemplated expropriation has yet to be raised and cannot be appropriated at this time.

Furthermore, they contend that taking must be simultaneous with payment of just compensation as it is traditionally understood, i.e., with money and in full, but no
such payment is contemplated in Section 5 of the E.O. No. 229. On the contrary, Section 6, thereof provides that the Land Bank of the Philippines "shall
compensate the landowner in an amount to be established by the government, which shall be based on the owner's declaration of current fair market value as
provided in Section 4 hereof, but subject to certain controls to be defined and promulgated by the Presidential Agrarian Reform Council." This compensation may
not be paid fully in money but in any of several modes that may consist of part cash and part bond, with interest, maturing periodically, or direct payment in cash
or bond as may be mutually agreed upon by the beneficiary and the landowner or as may be prescribed or approved by the PARC.

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The petitioners also argue that in the issuance of the two measures, no effort was made to make a careful study of the sugar planters' situation. There is no tenancy
problem in the sugar areas that can justify the application of the CARP to them. To the extent that the sugar planters have been lumped in the same legislation with
other farmers, although they are a separate group with problems exclusively their own, their right to equal protection has been violated.

A motion for intervention was filed on August 27,1987 by the National Federation of Sugarcane Planters (NASP) which claims a membership of at least 20,000
individual sugar planters all over the country. On September 10, 1987, another motion for intervention was filed, this time by Manuel Barcelona, et al.,
representing coconut and rice land owners. Both motions were granted by the Court.

NASP alleges that President Aquino had no authority to fund the Agrarian Reform Program and that, in any event, the appropriation is invalid because of
uncertainty in the amount appropriated. Section 2 of Proc. No. 131 and Sections 20 and 21 of E.O. No. 229 provide for an initial appropriation of fifty billion pesos
and thus specifies the minimum rather than the maximum authorized amount. This is not allowed. Furthermore, the stated initial amount has not been certified to
by the National Treasurer as actually available.

Two additional arguments are made by Barcelona, to wit, the failure to establish by clear and convincing evidence the necessity for the exercise of the powers of
eminent domain, and the violation of the fundamental right to own property.

The petitioners also decry the penalty for non-registration of the lands, which is the expropriation of the said land for an amount equal to the government assessor's
valuation of the land for tax purposes. On the other hand, if the landowner declares his own valuation he is unjustly required to immediately pay the corresponding
taxes on the land, in violation of the uniformity rule.

In his consolidated Comment, the Solicitor General first invokes the presumption of constitutionality in favor of Proc. No. 131 and E.O. No. 229. He also justifies
the necessity for the expropriation as explained in the "whereas" clauses of the Proclamation and submits that, contrary to the petitioner's contention, a pilot project
to determine the feasibility of CARP and a general survey on the people's opinion thereon are not indispensable prerequisites to its promulgation.

On the alleged violation of the equal protection clause, the sugar planters have failed to show that they belong to a different class and should be differently treated.
The Comment also suggests the possibility of Congress first distributing public agricultural lands and scheduling the expropriation of private agricultural lands
later. From this viewpoint, the petition for prohibition would be premature.

The public respondent also points out that the constitutional prohibition is against the payment of public money without the corresponding appropriation. There is
no rule that only money already in existence can be the subject of an appropriation law. Finally, the earmarking of fifty billion pesos as Agrarian Reform Fund,
although denominated as an initial amount, is actually the maximum sum appropriated. The word "initial" simply means that additional amounts may be
appropriated later when necessary.

On April 11, 1988, Prudencio Serrano, a coconut planter, filed a petition on his own behalf, assailing the constitutionality of E.O. No. 229. In addition to the
arguments already raised, Serrano contends that the measure is unconstitutional because:

(1) Only public lands should be included in the CARP;

(2) E.O. No. 229 embraces more than one subject which is not expressed in the title;
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(3) The power of the President to legislate was terminated on July 2, 1987; and

(4) The appropriation of a P50 billion special fund from the National Treasury did not originate from the House of Representatives.

G.R. No. 79744

The petitioner alleges that the then Secretary of Department of Agrarian Reform, in violation of due process and the requirement for just compensation, placed his
landholding under the coverage of Operation Land Transfer. Certificates of Land Transfer were subsequently issued to the private respondents, who then refused
payment of lease rentals to him.

On September 3, 1986, the petitioner protested the erroneous inclusion of his small landholding under Operation Land transfer and asked for the recall and
cancellation of the Certificates of Land Transfer in the name of the private respondents. He claims that on December 24, 1986, his petition was denied without
hearing. On February 17, 1987, he filed a motion for reconsideration, which had not been acted upon when E.O. Nos. 228 and 229 were issued. These orders
rendered his motion moot and academic because they directly effected the transfer of his land to the private respondents.

The petitioner now argues that:

(1) E.O. Nos. 228 and 229 were invalidly issued by the President of the Philippines.

(2) The said executive orders are violative of the constitutional provision that no private property shall be taken without due process or just
compensation.

(3) The petitioner is denied the right of maximum retention provided for under the 1987 Constitution.

The petitioner contends that the issuance of E.0. Nos. 228 and 229 shortly before Congress convened is anomalous and arbitrary, besides violating the doctrine of
separation of powers. The legislative power granted to the President under the Transitory Provisions refers only to emergency measures that may be promulgated
in the proper exercise of the police power.

The petitioner also invokes his rights not to be deprived of his property without due process of law and to the retention of his small parcels of riceholding as
guaranteed under Article XIII, Section 4 of the Constitution. He likewise argues that, besides denying him just compensation for his land, the provisions of E.O.
No. 228 declaring that:

Lease rentals paid to the landowner by the farmer-beneficiary after October 21, 1972 shall be considered as advance payment for the land.

is an unconstitutional taking of a vested property right. It is also his contention that the inclusion of even small landowners in the program along with other
landowners with lands consisting of seven hectares or more is undemocratic.

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In his Comment, the Solicitor General submits that the petition is premature because the motion for reconsideration filed with the Minister of Agrarian Reform is
still unresolved. As for the validity of the issuance of E.O. Nos. 228 and 229, he argues that they were enacted pursuant to Section 6, Article XVIII of the
Transitory Provisions of the 1987 Constitution which reads:

The incumbent president shall continue to exercise legislative powers until the first Congress is convened.

On the issue of just compensation, his position is that when P.D. No. 27 was promulgated on October 21. 1972, the tenant-farmer of agricultural land was deemed
the owner of the land he was tilling. The leasehold rentals paid after that date should therefore be considered amortization payments.

In his Reply to the public respondents, the petitioner maintains that the motion he filed was resolved on December 14, 1987. An appeal to the Office of the
President would be useless with the promulgation of E.O. Nos. 228 and 229, which in effect sanctioned the validity of the public respondent's acts.

G.R. No. 78742

The petitioners in this case invoke the right of retention granted by P.D. No. 27 to owners of rice and corn lands not exceeding seven hectares as long as they are
cultivating or intend to cultivate the same. Their respective lands do not exceed the statutory limit but are occupied by tenants who are actually cultivating such
lands.

According to P.D. No. 316, which was promulgated in implementation of P.D. No. 27:

No tenant-farmer in agricultural lands primarily devoted to rice and corn shall be ejected or removed from his farmholding until such time as the
respective rights of the tenant- farmers and the landowner shall have been determined in accordance with the rules and regulations implementing
P.D. No. 27.

The petitioners claim they cannot eject their tenants and so are unable to enjoy their right of retention because the Department of Agrarian Reform has so far not
issued the implementing rules required under the above-quoted decree. They therefore ask the Court for a writ of mandamus to compel the respondent to issue the
said rules.

In his Comment, the public respondent argues that P.D. No. 27 has been amended by LOI 474 removing any right of retention from persons who own other
agricultural lands of more than 7 hectares in aggregate area or lands used for residential, commercial, industrial or other purposes from which they derive adequate
income for their family. And even assuming that the petitioners do not fall under its terms, the regulations implementing P.D. No. 27 have already been issued, to
wit, the Memorandum dated July 10, 1975 (Interim Guidelines on Retention by Small Landowners, with an accompanying Retention Guide Table), Memorandum
Circular No. 11 dated April 21, 1978, (Implementation Guidelines of LOI No. 474), Memorandum Circular No. 18-81 dated December 29,1981 (Clarificatory
Guidelines on Coverage of P.D. No. 27 and Retention by Small Landowners), and DAR Administrative Order No. 1, series of 1985 (Providing for a Cut-off Date
for Landowners to Apply for Retention and/or to Protest the Coverage of their Landholdings under Operation Land Transfer pursuant to P.D. No. 27). For failure
to file the corresponding applications for retention under these measures, the petitioners are now barred from invoking this right.

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The public respondent also stresses that the petitioners have prematurely initiated this case notwithstanding the pendency of their appeal to the President of the
Philippines. Moreover, the issuance of the implementing rules, assuming this has not yet been done, involves the exercise of discretion which cannot be controlled
through the writ of mandamus. This is especially true if this function is entrusted, as in this case, to a separate department of the government.

In their Reply, the petitioners insist that the above-cited measures are not applicable to them because they do not own more than seven hectares of agricultural
land. Moreover, assuming arguendo that the rules were intended to cover them also, the said measures are nevertheless not in force because they have not been
published as required by law and the ruling of this Court in Tanada v. Tuvera.10 As for LOI 474, the same is ineffective for the additional reason that a mere letter
of instruction could not have repealed the presidential decree.

I. Although holding neither purse nor sword and so regarded as the weakest of the three departments of the government, the judiciary is nonetheless
vested with the power to annul the acts of either the legislative or the executive or of both when not conformable to the fundamental law. This is the
reason for what some quarters call the doctrine of judicial supremacy. Even so, this power is not lightly assumed or readily exercised. The doctrine of
separation of powers imposes upon the courts a proper restraint, born of the nature of their functions and of their respect for the other departments, in
striking down the acts of the legislative and the executive as unconstitutional. The policy, indeed, is a blend of courtesy and caution. To doubt is to
sustain. The theory is that before the act was done or the law was enacted, earnest studies were made by Congress or the President, or both, to insure
that the Constitution would not be breached.

In addition, the Constitution itself lays down stringent conditions for a declaration of unconstitutionality, requiring therefor the concurrence of a majority of the
members of the Supreme Court who took part in the deliberations and voted on the issue during their session en banc. 11 And as established by judge made doctrine,
the Court will assume jurisdiction over a constitutional question only if it is shown that the essential requisites of a judicial inquiry into such a question are first
satisfied. Thus, there must be an actual case or controversy involving a conflict of legal rights susceptible of judicial determination, the constitutional question
must have been opportunely raised by the proper party, and the resolution of the question is unavoidably necessary to the decision of the case itself. 12

With particular regard to the requirement of proper party as applied in the cases before us, we hold that the same is satisfied by the petitioners and intervenors
because each of them has sustained or is in danger of sustaining an immediate injury as a result of the acts or measures complained of.  13 And even if, strictly
speaking, they are not covered by the definition, it is still within the wide discretion of the Court to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions raised.

In the first Emergency Powers Cases, 14 ordinary citizens and taxpayers were allowed to question the constitutionality of several executive orders issued by
President Quirino although they were invoking only an indirect and general interest shared in common with the public. The Court dismissed the objection that they
were not proper parties and ruled that "the transcendental importance to the public of these cases demands that they be settled promptly and definitely, brushing
aside, if we must, technicalities of procedure." We have since then applied this exception in many other cases. 15

The other above-mentioned requisites have also been met in the present petitions.

In must be stressed that despite the inhibitions pressing upon the Court when confronted with constitutional issues like the ones now before it, it will not hesitate to
declare a law or act invalid when it is convinced that this must be done. In arriving at this conclusion, its only criterion will be the Constitution as God and its
conscience give it the light to probe its meaning and discover its purpose. Personal motives and political considerations are irrelevancies that cannot influence its
decision. Blandishment is as ineffectual as intimidation.

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For all the awesome power of the Congress and the Executive, the Court will not hesitate to "make the hammer fall, and heavily," to use Justice Laurel's pithy
language, where the acts of these departments, or of any public official, betray the people's will as expressed in the Constitution.

It need only be added, to borrow again the words of Justice Laurel, that —

... when the judiciary mediates to allocate constitutional boundaries, it does not assert any superiority over the other departments; it does not in
reality nullify or invalidate an act of the Legislature, but only asserts the solemn and sacred obligation assigned to it by the Constitution to
determine conflicting claims of authority under the Constitution and to establish for the parties in an actual controversy the rights which that
instrument secures and guarantees to them. This is in truth all that is involved in what is termed "judicial supremacy" which properly is the power
of judicial review under the Constitution. 16

The cases before us categorically raise constitutional questions that this Court must categorically resolve. And so we shall.

II. We proceed first to the examination of the preliminary issues before resolving the more serious challenges to the constitutionality of the several
measures involved in these petitions.

The promulgation of P.D. No. 27 by President Marcos in the exercise of his powers under martial law has already been sustained in  Gonzales v. Estrella and we
find no reason to modify or reverse it on that issue. As for the power of President Aquino to promulgate Proc. No. 131 and E.O. Nos. 228 and 229, the same was
authorized under Section 6 of the Transitory Provisions of the 1987 Constitution, quoted above.

The said measures were issued by President Aquino before July 27, 1987, when the Congress of the Philippines was formally convened and took over legislative
power from her. They are not "midnight" enactments intended to pre-empt the legislature because E.O. No. 228 was issued on July 17, 1987, and the other
measures, i.e., Proc. No. 131 and E.O. No. 229, were both issued on July 22, 1987. Neither is it correct to say that these measures ceased to be valid when she lost
her legislative power for, like any statute, they continue to be in force unless modified or repealed by subsequent law or declared invalid by the courts. A statute
does not ipso facto become inoperative simply because of the dissolution of the legislature that enacted it. By the same token, President Aquino's loss of legislative
power did not have the effect of invalidating all the measures enacted by her when and as long as she possessed it.

Significantly, the Congress she is alleged to have undercut has not rejected but in fact substantially affirmed the challenged measures and has specifically provided
that they shall be suppletory to R.A. No. 6657 whenever not inconsistent with its provisions. 17 Indeed, some portions of the said measures, like the creation of the
P50 billion fund in Section 2 of Proc. No. 131, and Sections 20 and 21 of E.O. No. 229, have been incorporated by reference in the CARP Law. 18

That fund, as earlier noted, is itself being questioned on the ground that it does not conform to the requirements of a valid appropriation as specified in the
Constitution. Clearly, however, Proc. No. 131 is not an appropriation measure even if it does provide for the creation of said fund, for that is not its principal
purpose. An appropriation law is one the primary and specific purpose of which is to authorize the release of public funds from the treasury. 19 The creation of the
fund is only incidental to the main objective of the proclamation, which is agrarian reform.

It should follow that the specific constitutional provisions invoked, to wit, Section 24 and Section 25(4) of Article VI, are not applicable. With particular reference
to Section 24, this obviously could not have been complied with for the simple reason that the House of Representatives, which now has the exclusive power to

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initiate appropriation measures, had not yet been convened when the proclamation was issued. The legislative power was then solely vested in the President of the
Philippines, who embodied, as it were, both houses of Congress.

The argument of some of the petitioners that Proc. No. 131 and E.O. No. 229 should be invalidated because they do not provide for retention limits as required by
Article XIII, Section 4 of the Constitution is no longer tenable. R.A. No. 6657 does provide for such limits now in Section 6 of the law, which in fact is one of its
most controversial provisions. This section declares:

Retention Limits. — Except as otherwise provided in this Act, no person may own or retain, directly or indirectly, any public or private agricultural land, the size
of which shall vary according to factors governing a viable family-sized farm, such as commodity produced, terrain, infrastructure, and soil fertility as determined
by the Presidential Agrarian Reform Council (PARC) created hereunder, but in no case shall retention by the landowner exceed five (5) hectares. Three (3)
hectares may be awarded to each child of the landowner, subject to the following qualifications: (1) that he is at least fifteen (15) years of age; and (2) that he is
actually tilling the land or directly managing the farm; Provided, That landowners whose lands have been covered by Presidential Decree No. 27 shall be allowed
to keep the area originally retained by them thereunder, further, That original homestead grantees or direct compulsory heirs who still own the original homestead
at the time of the approval of this Act shall retain the same areas as long as they continue to cultivate said homestead.

The argument that E.O. No. 229 violates the constitutional requirement that a bill shall have only one subject, to be expressed in its title, deserves only short
attention. It is settled that the title of the bill does not have to be a catalogue of its contents and will suffice if the matters embodied in the text are relevant to each
other and may be inferred from the title. 20

The Court wryly observes that during the past dictatorship, every presidential issuance, by whatever name it was called, had the force and effect of law because it
came from President Marcos. Such are the ways of despots. Hence, it is futile to argue, as the petitioners do in G.R. No. 79744, that LOI 474 could not have
repealed P.D. No. 27 because the former was only a letter of instruction. The important thing is that it was issued by President Marcos, whose word was law during
that time.

But for all their peremptoriness, these issuances from the President Marcos still had to comply with the requirement for publication as this Court held in  Tanada v.
Tuvera. 21 Hence, unless published in the Official Gazette in accordance with Article 2 of the Civil Code, they could not have any force and effect if they were
among those enactments successfully challenged in that case. LOI 474 was published, though, in the Official Gazette dated November 29,1976.)

Finally, there is the contention of the public respondent in G.R. No. 78742 that the writ of mandamus cannot issue to compel the performance of a discretionary
act, especially by a specific department of the government. That is true as a general proposition but is subject to one important qualification. Correctly and
categorically stated, the rule is that mandamus will lie to compel the discharge of the discretionary duty itself but not to control the discretion to be exercised. In
other words, mandamus can issue to require action only but not specific action.

Whenever a duty is imposed upon a public official and an unnecessary and unreasonable delay in the exercise of such duty occurs, if it is a clear duty imposed by
law, the courts will intervene by the extraordinary legal remedy of mandamus to compel action. If the duty is purely ministerial, the courts will require specific
action. If the duty is purely discretionary, the courts by mandamus will require action only. For example, if an inferior court, public official, or board should, for an
unreasonable length of time, fail to decide a particular question to the great detriment of all parties concerned, or a court should refuse to take jurisdiction of a
cause when the law clearly gave it jurisdiction mandamus will issue, in the first case to require a decision, and in the second to require that jurisdiction be taken of
the cause. 22

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And while it is true that as a rule the writ will not be proper as long as there is still a plain, speedy and adequate remedy available from the administrative
authorities, resort to the courts may still be permitted if the issue raised is a question of law. 23

III. There are traditional distinctions between the police power and the power of eminent domain that logically preclude the application of both powers at the
same time on the same subject. In the case of City of Baguio v. NAWASA, 24 for example, where a law required the transfer of all municipal waterworks
systems to the NAWASA in exchange for its assets of equivalent value, the Court held that the power being exercised was eminent domain because the
property involved was wholesome and intended for a public use. Property condemned under the police power is noxious or intended for a noxious purpose,
such as a building on the verge of collapse, which should be demolished for the public safety, or obscene materials, which should be destroyed in the
interest of public morals. The confiscation of such property is not compensable, unlike the taking of property under the power of expropriation, which
requires the payment of just compensation to the owner.

In the case of Pennsylvania Coal Co. v. Mahon, 25 Justice Holmes laid down the limits of the police power in a famous aphorism: "The general rule at least is that
while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking." The regulation that went "too far" was a law
prohibiting mining which might cause the subsidence of structures for human habitation constructed on the land surface. This was resisted by a coal company
which had earlier granted a deed to the land over its mine but reserved all mining rights thereunder, with the grantee assuming all risks and waiving any damage
claim. The Court held the law could not be sustained without compensating the grantor. Justice Brandeis filed a lone dissent in which he argued that there was a
valid exercise of the police power. He said:

Every restriction upon the use of property imposed in the exercise of the police power deprives the owner of some right theretofore enjoyed, and is, in that sense,
an abridgment by the State of rights in property without making compensation. But restriction imposed to protect the public health, safety or morals from dangers
threatened is not a taking. The restriction here in question is merely the prohibition of a noxious use. The property so restricted remains in the possession of its
owner. The state does not appropriate it or make any use of it. The state merely prevents the owner from making a use which interferes with paramount rights of
the public. Whenever the use prohibited ceases to be noxious — as it may because of further changes in local or social conditions — the restriction will have to be
removed and the owner will again be free to enjoy his property as heretofore.

Recent trends, however, would indicate not a polarization but a mingling of the police power and the power of eminent domain, with the latter being used as an
implement of the former like the power of taxation. The employment of the taxing power to achieve a police purpose has long been accepted.  26 As for the power
of expropriation, Prof. John J. Costonis of the University of Illinois College of Law (referring to the earlier case of Euclid v. Ambler Realty Co., 272 US 365,
which sustained a zoning law under the police power) makes the following significant remarks:

Euclid, moreover, was decided in an era when judges located the Police and eminent domain powers on different planets. Generally speaking, they viewed eminent
domain as encompassing public acquisition of private property for improvements that would be available for public use," literally construed. To the police power,
on the other hand, they assigned the less intrusive task of preventing harmful externalities a point reflected in the Euclid opinion's reliance on an analogy to
nuisance law to bolster its support of zoning. So long as suppression of a privately authored harm bore a plausible relation to some legitimate "public purpose," the
pertinent measure need have afforded no compensation whatever. With the progressive growth of government's involvement in land use, the distance between the
two powers has contracted considerably. Today government often employs eminent domain interchangeably with or as a useful complement to the police power--
a trend expressly approved in the Supreme Court's 1954 decision in Berman v. Parker, which broadened the reach of eminent domain's "public use" test to match
that of the police power's standard of "public purpose." 27

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The Berman case sustained a redevelopment project and the improvement of blighted areas in the District of Columbia as a proper exercise of the police power. On
the role of eminent domain in the attainment of this purpose, Justice Douglas declared:

If those who govern the District of Columbia decide that the Nation's Capital should be beautiful as well as sanitary, there is nothing in the Fifth Amendment that
stands in the way.
Once the object is within the authority of Congress, the right to realize it through the exercise of eminent domain is clear.
For the power of eminent domain is merely the means to the end. 28

In Penn Central Transportation Co. v. New York City,  29 decided by a 6-3 vote in 1978, the U.S Supreme Court sustained the respondent's Landmarks Preservation
Law under which the owners of the Grand Central Terminal had not been allowed to construct a multi-story office building over the Terminal, which had been
designated a historic landmark. Preservation of the landmark was held to be a valid objective of the police power. The problem, however, was that the owners of
the Terminal would be deprived of the right to use the airspace above it although other landowners in the area could do so over their respective properties. While
insisting that there was here no taking, the Court nonetheless recognized certain compensatory rights accruing to Grand Central Terminal which it said would
"undoubtedly mitigate" the loss caused by the regulation. This "fair compensation," as he called it, was explained by Prof. Costonis in this wise:

In return for retaining the Terminal site in its pristine landmark status, Penn Central was authorized to transfer to neighboring properties the authorized but unused
rights accruing to the site prior to the Terminal's designation as a landmark — the rights which would have been exhausted by the 59-story building that the city
refused to countenance atop the Terminal. Prevailing bulk restrictions on neighboring sites were proportionately relaxed, theoretically enabling Penn Central to
recoup its losses at the Terminal site by constructing or selling to others the right to construct larger, hence more profitable buildings on the transferee sites. 30

The cases before us present no knotty complication insofar as the question of compensable taking is concerned. To the extent that the measures under challenge
merely prescribe retention limits for landowners, there is an exercise of the police power for the regulation of private property in accordance with the Constitution.
But where, to carry out such regulation, it becomes necessary to deprive such owners of whatever lands they may own in excess of the maximum area allowed,
there is definitely a taking under the power of eminent domain for which payment of just compensation is imperative. The taking contemplated is not a mere
limitation of the use of the land. What is required is the surrender of the title to and the physical possession of the said excess and all beneficial rights accruing to
the owner in favor of the farmer-beneficiary. This is definitely an exercise not of the police power but of the power of eminent domain.

Whether as an exercise of the police power or of the power of eminent domain, the several measures before us are challenged as violative of the due process and
equal protection clauses.

The challenge to Proc. No. 131 and E.O. Nos. 228 and 299 on the ground that no retention limits are prescribed has already been discussed and dismissed. It is
noted that although they excited many bitter exchanges during the deliberation of the CARP Law in Congress, the retention limits finally agreed upon are,
curiously enough, not being questioned in these petitions. We therefore do not discuss them here. The Court will come to the other claimed violations of due
process in connection with our examination of the adequacy of just compensation as required under the power of expropriation.

The argument of the small farmers that they have been denied equal protection because of the absence of retention limits has also become academic under Section
6 of R.A. No. 6657. Significantly, they too have not questioned the area of such limits. There is also the complaint that they should not be made to share the burden
of agrarian reform, an objection also made by the sugar planters on the ground that they belong to a particular class with particular interests of their own. However,
no evidence has been submitted to the Court that the requisites of a valid classification have been violated.

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Classification has been defined as the grouping of persons or things similar to each other in certain particulars and different from each other in these same
particulars. 31 To be valid, it must conform to the following requirements: (1) it must be based on substantial distinctions; (2) it must be germane to the purposes of
the law; (3) it must not be limited to existing conditions only; and (4) it must apply equally to all the members of the class. 32 The Court finds that all these
requisites have been met by the measures here challenged as arbitrary and discriminatory.

Equal protection simply means that all persons or things similarly situated must be treated alike both as to the rights conferred and the liabilities imposed.  33 The
petitioners have not shown that they belong to a different class and entitled to a different treatment. The argument that not only landowners but also owners of
other properties must be made to share the burden of implementing land reform must be rejected. There is a substantial distinction between these two classes of
owners that is clearly visible except to those who will not see. There is no need to elaborate on this matter. In any event, the Congress is allowed a wide leeway in
providing for a valid classification. Its decision is accorded recognition and respect by the courts of justice except only where its discretion is abused to the
detriment of the Bill of Rights.

It is worth remarking at this juncture that a statute may be sustained under the police power only if there is a concurrence of the lawful subject and the lawful
method. Put otherwise, the interests of the public generally as distinguished from those of a particular class require the interference of the State and, no less
important, the means employed are reasonably necessary for the attainment of the purpose sought to be achieved and not unduly oppressive upon individuals. 34 As
the subject and purpose of agrarian reform have been laid down by the Constitution itself, we may say that the first requirement has been satisfied. What remains
to be examined is the validity of the method employed to achieve the constitutional goal.

One of the basic principles of the democratic system is that where the rights of the individual are concerned, the end does not justify the means. It is not enough
that there be a valid objective; it is also necessary that the means employed to pursue it be in keeping with the Constitution. Mere expediency will not excuse
constitutional shortcuts. There is no question that not even the strongest moral conviction or the most urgent public need, subject only to a few notable exceptions,
will excuse the bypassing of an individual's rights. It is no exaggeration to say that a, person invoking a right guaranteed under Article III of the Constitution is a
majority of one even as against the rest of the nation who would deny him that right.

That right covers the person's life, his liberty and his property under Section 1 of Article III of the Constitution. With regard to his property, the owner enjoys the
added protection of Section 9, which reaffirms the familiar rule that private property shall not be taken for public use without just compensation.

This brings us now to the power of eminent domain.

IV. Eminent domain is an inherent power of the State that enables it to forcibly acquire private lands intended for public use upon payment of just
compensation to the owner. Obviously, there is no need to expropriate where the owner is willing to sell under terms also acceptable to the purchaser,
in which case an ordinary deed of sale may be agreed upon by the parties. 35 It is only where the owner is unwilling to sell, or cannot accept the price
or other conditions offered by the vendee, that the power of eminent domain will come into play to assert the paramount authority of the State over the
interests of the property owner. Private rights must then yield to the irresistible demands of the public interest on the time-honored justification, as in
the case of the police power, that the welfare of the people is the supreme law.

But for all its primacy and urgency, the power of expropriation is by no means absolute (as indeed no power is absolute). The limitation is found in the
constitutional injunction that "private property shall not be taken for public use without just compensation" and in the abundant jurisprudence that has evolved
from the interpretation of this principle. Basically, the requirements for a proper exercise of the power are: (1) public use and (2) just compensation.

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Let us dispose first of the argument raised by the petitioners in G.R. No. 79310 that the State should first distribute public agricultural lands in the pursuit of
agrarian reform instead of immediately disturbing property rights by forcibly acquiring private agricultural lands. Parenthetically, it is not correct to say that only
public agricultural lands may be covered by the CARP as the Constitution calls for "the just distribution of all agricultural lands." In any event, the decision to
redistribute private agricultural lands in the manner prescribed by the CARP was made by the legislative and executive departments in the exercise of their
discretion. We are not justified in reviewing that discretion in the absence of a clear showing that it has been abused.

A becoming courtesy admonishes us to respect the decisions of the political departments when they decide what is known as the political question. As explained
by Chief Justice Concepcion in the case of Tañada v. Cuenco: 36

The term "political question" connotes what it means in ordinary parlance, namely, a question of policy. It refers to "those questions which, under the Constitution,
are to be decided by the people in their sovereign capacity; or in regard to which full discretionary authority has been delegated to the legislative or executive
branch of the government." It is concerned with issues dependent upon the wisdom, not legality, of a particular measure.

It is true that the concept of the political question has been constricted with the enlargement of judicial power, which now includes the authority of the courts "to
determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government." 37 Even so, this should not be construed as a license for us to reverse the other departments simply because their views may not coincide with ours.

The legislature and the executive have been seen fit, in their wisdom, to include in the CARP the redistribution of private landholdings (even as the distribution of
public agricultural lands is first provided for, while also continuing apace under the Public Land Act and other cognate laws). The Court sees no justification to
interpose its authority, which we may assert only if we believe that the political decision is not unwise, but illegal. We do not find it to be so.

In U.S. v. Chandler-Dunbar Water Power Company,38 it was held:

Congress having determined, as it did by the Act of March 3,1909 that the entire St. Mary's river between the American bank and the international line, as well as
all of the upland north of the present ship canal, throughout its entire length, was "necessary for the purpose of navigation of said waters, and the waters connected
therewith," that determination is conclusive in condemnation proceedings instituted by the United States under that Act, and there is no room for judicial review of
the judgment of Congress ... .

As earlier observed, the requirement for public use has already been settled for us by the Constitution itself No less than the 1987 Charter calls for agrarian reform,
which is the reason why private agricultural lands are to be taken from their owners, subject to the prescribed maximum retention limits. The purposes specified in
P.D. No. 27, Proc. No. 131 and R.A. No. 6657 are only an elaboration of the constitutional injunction that the State adopt the necessary measures "to encourage
and undertake the just distribution of all agricultural lands to enable farmers who are landless to own directly or collectively the lands they till." That public use, as
pronounced by the fundamental law itself, must be binding on us.

The second requirement, i.e., the payment of just compensation, needs a longer and more thoughtful examination.

Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. 39 It has been repeatedly stressed by this Court
that the measure is not the taker's gain but the owner's loss. 40 The word "just" is used to intensify the meaning of the word "compensation" to convey the idea that
the equivalent to be rendered for the property to be taken shall be real, substantial, full, ample. 41
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It bears repeating that the measures challenged in these petitions contemplate more than a mere regulation of the use of private lands under the police power. We
deal here with an actual taking of private agricultural lands that has dispossessed the owners of their property and deprived them of all its beneficial use and
enjoyment, to entitle them to the just compensation mandated by the Constitution.

As held in Republic of the Philippines v. Castellvi, 42 there is compensable taking when the following conditions concur: (1) the expropriator must enter a private
property; (2) the entry must be for more than a momentary period; (3) the entry must be under warrant or color of legal authority; (4) the property must be devoted
to public use or otherwise informally appropriated or injuriously affected; and (5) the utilization of the property for public use must be in such a way as to oust the
owner and deprive him of beneficial enjoyment of the property. All these requisites are envisioned in the measures before us.

Where the State itself is the expropriator, it is not necessary for it to make a deposit upon its taking possession of the condemned property, as "the compensation is
a public charge, the good faith of the public is pledged for its payment, and all the resources of taxation may be employed in raising the amount."  43 Nevertheless,
Section 16(e) of the CARP Law provides that:

Upon receipt by the landowner of the corresponding payment or, in case of rejection or no response from the landowner, upon the deposit with an accessible bank
designated by the DAR of the compensation in cash or in LBP bonds in accordance with this Act, the DAR shall take immediate possession of the land and shall
request the proper Register of Deeds to issue a Transfer Certificate of Title (TCT) in the name of the Republic of the Philippines. The DAR shall thereafter proceed
with the redistribution of the land to the qualified beneficiaries.

Objection is raised, however, to the manner of fixing the just compensation, which it is claimed is entrusted to the administrative authorities in violation of judicial
prerogatives. Specific reference is made to Section 16(d), which provides that in case of the rejection or disregard by the owner of the offer of the government to
buy his land-

... the DAR shall conduct summary administrative proceedings to determine the compensation for the land by requiring the landowner, the LBP and other
interested parties to submit evidence as to the just compensation for the land, within fifteen (15) days from the receipt of the notice. After the expiration of the
above period, the matter is deemed submitted for decision. The DAR shall decide the case within thirty (30) days after it is submitted for decision.

To be sure, the determination of just compensation is a function addressed to the courts of justice and may not be usurped by any other branch or official of the
government. EPZA v. Dulay 44 resolved a challenge to several decrees promulgated by President Marcos providing that the just compensation for property under
expropriation should be either the assessment of the property by the government or the sworn valuation thereof by the owner, whichever was lower. In declaring
these decrees unconstitutional, the Court held through Mr. Justice Hugo E. Gutierrez, Jr.:

The method of ascertaining just compensation under the aforecited decrees constitutes impermissible encroachment on judicial prerogatives. It tends to render this
Court inutile in a matter which under this Constitution is reserved to it for final determination.

Thus, although in an expropriation proceeding the court technically would still have the power to determine the just compensation for the property, following the
applicable decrees, its task would be relegated to simply stating the lower value of the property as declared either by the owner or the assessor. As a necessary
consequence, it would be useless for the court to appoint commissioners under Rule 67 of the Rules of Court. Moreover, the need to satisfy the due process clause
in the taking of private property is seemingly fulfilled since it cannot be said that a judicial proceeding was not had before the actual taking. However, the strict
application of the decrees during the proceedings would be nothing short of a mere formality or charade as the court has only to choose between the valuation of

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the owner and that of the assessor, and its choice is always limited to the lower of the two. The court cannot exercise its discretion or independence in determining
what is just or fair. Even a grade school pupil could substitute for the judge insofar as the determination of constitutional just compensation is concerned.

In the present petition, we are once again confronted with the same question of whether the courts under P.D. No. 1533, which contains the same provision on just
compensation as its predecessor decrees, still have the power and authority to determine just compensation, independent of what is stated by the decree and to this
effect, to appoint commissioners for such purpose.

This time, we answer in the affirmative.

It is violative of due process to deny the owner the opportunity to prove that the valuation in the tax documents is unfair or wrong. And it is repulsive to the basic
concepts of justice and fairness to allow the haphazard work of a minor bureaucrat or clerk to absolutely prevail over the judgment of a court promulgated only
after expert commissioners have actually viewed the property, after evidence and arguments pro and con have been presented, and after all factors and
considerations essential to a fair and just determination have been judiciously evaluated.

A reading of the aforecited Section 16(d) will r4eadily show that it does not suffer from the arbitrariness that rendered the challenged decrees constitutionally
objectionable. Although the proceedings are described as summary, the landowner and other interested parties are nevertheless allowed an opportunity to submit
evidence on the real value of the property. But more importantly, the determination of the just compensation by the DAR is not by any means final and conclusive
upon the landowner or any other interested party, for Section 16(f) clearly provides:

Any party who disagrees with the decision may bring the matter to the court of proper jurisdiction for final determination of just compensation.

The determination made by the DAR is only preliminary unless accepted by all parties concerned. Otherwise, the courts of justice will still have the right to review
with finality the said determination in the exercise of what is admittedly a judicial function.

The second and more serious objection to the provisions on just compensation is not as easily resolved.

This refers to Section 18 of the CARP Law providing in full as follows:

SEC. 18. Valuation and Mode of Compensation. — The LBP shall compensate the landowner in such amount as may be agreed upon by the landowner and the
DAR and the LBP, in accordance with the criteria provided for in Sections 16 and 17, and other pertinent provisions hereof, or as may be finally determined by the
court, as the just compensation for the land.

The compensation shall be paid in one of the following modes, at the option of the landowner:

(1) Cash payment, under the following terms and conditions:

(a) For lands above fifty (50) hectares, insofar as the excess hectarage is concerned — Twenty-five percent (25%) cash, the balance to be paid in government
financial instruments negotiable at any time.
(b) For lands above twenty-four (24) hectares and up to fifty (50) hectares — Thirty percent (30%) cash, the balance to be paid in government financial
instruments negotiable at any time.
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(c) For lands twenty-four (24) hectares and below — Thirty-five percent (35%) cash, the balance to be paid in government financial instruments negotiable at any
time.
(2) Shares of stock in government-owned or controlled corporations, LBP preferred shares, physical assets or other qualified investments in accordance with
guidelines set by the PARC;
(3) Tax credits which can be used against any tax liability;
(4) LBP bonds, which shall have the following features:
(a) Market interest rates aligned with 91-day treasury bill rates. Ten percent (10%) of the face value of the bonds shall mature every year from the date of issuance
until the tenth (10th) year: Provided, That should the landowner choose to forego the cash portion, whether in full or in part, he shall be paid correspondingly in
LBP bonds;
(b) Transferability and negotiability. Such LBP bonds may be used by the landowner, his successors-in- interest or his assigns, up to the amount of their face value,
for any of the following:
(i) Acquisition of land or other real properties of the government, including assets under the Asset Privatization Program and other assets foreclosed by
government financial institutions in the same province or region where the lands for which the bonds were paid are situated;
(ii) Acquisition of shares of stock of government-owned or controlled corporations or shares of stock owned by the government in private corporations;
(iii) Substitution for surety or bail bonds for the provisional release of accused persons, or for performance bonds;
(iv) Security for loans with any government financial institution, provided the proceeds of the loans shall be invested in an economic enterprise, preferably in a
small and medium- scale industry, in the same province or region as the land for which the bonds are paid;
(v) Payment for various taxes and fees to government: Provided, That the use of these bonds for these purposes will be limited to a certain percentage of the
outstanding balance of the financial instruments; Provided, further, That the PARC shall determine the percentages mentioned above;
(vi) Payment for tuition fees of the immediate family of the original bondholder in government universities, colleges, trade schools, and other institutions;
(vii) Payment for fees of the immediate family of the original bondholder in government hospitals; and
(viii) Such other uses as the PARC may from time to time allow.

The contention of the petitioners in G.R. No. 79777 is that the above provision is unconstitutional insofar as it requires the owners of the expropriated properties to
accept just compensation therefor in less than money, which is the only medium of payment allowed. In support of this contention, they cite jurisprudence holding
that:

The fundamental rule in expropriation matters is that the owner of the property expropriated is entitled to a just compensation, which should be neither more nor
less, whenever it is possible to make the assessment, than the money equivalent of said property. Just compensation has always been understood to be the just and
complete equivalent of the loss which the owner of the thing expropriated has to suffer by reason of the expropriation . 45 (Emphasis supplied.)

In J.M. Tuazon Co. v. Land Tenure Administration, 46 this Court held:

It is well-settled that just compensation means the equivalent for the value of the property at the time of its taking. Anything beyond that is more, and anything
short of that is less, than just compensation. It means a fair and full equivalent for the loss sustained, which is the measure of the indemnity, not whatever gain
would accrue to the expropriating entity. The market value of the land taken is the just compensation to which the owner of condemned property is entitled, the
market value being that sum of money which a person desirous, but not compelled to buy, and an owner, willing, but not compelled to sell, would agree on as a
price to be given and received for such property. (Emphasis supplied.)

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In the United States, where much of our jurisprudence on the subject has been derived, the weight of authority is also to the effect that just compensation for
property expropriated is payable only in money and not otherwise. Thus —

The medium of payment of compensation is ready money or cash. The condemnor cannot compel the owner to accept anything but money, nor can the owner
compel or require the condemnor to pay him on any other basis than the value of the property in money at the time and in the manner prescribed by the
Constitution and the statutes. When the power of eminent domain is resorted to, there must be a standard medium of payment, binding upon both parties, and the
law has fixed that standard as money in cash. 47 (Emphasis supplied.)

Part cash and deferred payments are not and cannot, in the nature of things, be regarded as a reliable and constant standard of compensation. 48

"Just compensation" for property taken by condemnation means a fair equivalent in money, which must be paid at least within a reasonable time after the taking,
and it is not within the power of the Legislature to substitute for such payment future obligations, bonds, or other valuable advantage. 49 (Emphasis supplied.)

It cannot be denied from these cases that the traditional medium for the payment of just compensation is money and no other. And so, conformably, has just
compensation been paid in the past solely in that medium. However, we do not deal here with the traditional exercise of the power of eminent domain. This is not
an ordinary expropriation where only a specific property of relatively limited area is sought to be taken by the State from its owner for a specific and perhaps local
purpose.

What we deal with here is a revolutionary kind of expropriation.

The expropriation before us affects all private agricultural lands whenever found and of whatever kind as long as they are in excess of the maximum retention
limits allowed their owners. This kind of expropriation is intended for the benefit not only of a particular community or of a small segment of the population but of
the entire Filipino nation, from all levels of our society, from the impoverished farmer to the land-glutted owner. Its purpose does not cover only the whole
territory of this country but goes beyond in time to the foreseeable future, which it hopes to secure and edify with the vision and the sacrifice of the present
generation of Filipinos. Generations yet to come are as involved in this program as we are today, although hopefully only as beneficiaries of a richer and more
fulfilling life we will guarantee to them tomorrow through our thoughtfulness today. And, finally, let it not be forgotten that it is no less than the Constitution itself
that has ordained this revolution in the farms, calling for "a just distribution" among the farmers of lands that have heretofore been the prison of their dreams but
can now become the key at least to their deliverance.

Such a program will involve not mere millions of pesos. The cost will be tremendous. Considering the vast areas of land subject to expropriation under the laws
before us, we estimate that hundreds of billions of pesos will be needed, far more indeed than the amount of P50 billion initially appropriated, which is already
staggering as it is by our present standards. Such amount is in fact not even fully available at this time.

We assume that the framers of the Constitution were aware of this difficulty when they called for agrarian reform as a top priority project of the government. It is a
part of this assumption that when they envisioned the expropriation that would be needed, they also intended that the just compensation would have to be paid not
in the orthodox way but a less conventional if more practical method. There can be no doubt that they were aware of the financial limitations of the government
and had no illusions that there would be enough money to pay in cash and in full for the lands they wanted to be distributed among the farmers. We may therefore
assume that their intention was to allow such manner of payment as is now provided for by the CARP Law, particularly the payment of the balance (if the owner
cannot be paid fully with money), or indeed of the entire amount of the just compensation, with other things of value. We may also suppose that what they had in

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mind was a similar scheme of payment as that prescribed in P.D. No. 27, which was the law in force at the time they deliberated on the new Charter and with
which they presumably agreed in principle.

The Court has not found in the records of the Constitutional Commission any categorical agreement among the members regarding the meaning to be given the
concept of just compensation as applied to the comprehensive agrarian reform program being contemplated. There was the suggestion to "fine tune" the
requirement to suit the demands of the project even as it was also felt that they should "leave it to Congress" to determine how payment should be made to the
landowner and reimbursement required from the farmer-beneficiaries. Such innovations as "progressive compensation" and "State-subsidized compensation" were
also proposed. In the end, however, no special definition of the just compensation for the lands to be expropriated was reached by the Commission. 50

On the other hand, there is nothing in the records either that militates against the assumptions we are making of the general sentiments and intention of the
members on the content and manner of the payment to be made to the landowner in the light of the magnitude of the expenditure and the limitations of the
expropriator.

With these assumptions, the Court hereby declares that the content and manner of the just compensation provided for in the afore- quoted Section 18 of the CARP
Law is not violative of the Constitution. We do not mind admitting that a certain degree of pragmatism has influenced our decision on this issue, but after all this
Court is not a cloistered institution removed from the realities and demands of society or oblivious to the need for its enhancement. The Court is as acutely anxious
as the rest of our people to see the goal of agrarian reform achieved at last after the frustrations and deprivations of our peasant masses during all these
disappointing decades. We are aware that invalidation of the said section will result in the nullification of the entire program, killing the farmer's hopes even as
they approach realization and resurrecting the spectre of discontent and dissent in the restless countryside. That is not in our view the intention of the Constitution,
and that is not what we shall decree today.

Accepting the theory that payment of the just compensation is not always required to be made fully in money, we find further that the proportion of cash payment
to the other things of value constituting the total payment, as determined on the basis of the areas of the lands expropriated, is not unduly oppressive upon the
landowner. It is noted that the smaller the land, the bigger the payment in money, primarily because the small landowner will be needing it more than the big
landowners, who can afford a bigger balance in bonds and other things of value. No less importantly, the government financial instruments making up the balance
of the payment are "negotiable at any time." The other modes, which are likewise available to the landowner at his option, are also not unreasonable because
payment is made in shares of stock, LBP bonds, other properties or assets, tax credits, and other things of value equivalent to the amount of just compensation.

Admittedly, the compensation contemplated in the law will cause the landowners, big and small, not a little inconvenience. As already remarked, this cannot be
avoided. Nevertheless, it is devoutly hoped that these countrymen of ours, conscious as we know they are of the need for their forebearance and even sacrifice, will
not begrudge us their indispensable share in the attainment of the ideal of agrarian reform. Otherwise, our pursuit of this elusive goal will be like the quest for the
Holy Grail.

The complaint against the effects of non-registration of the land under E.O. No. 229 does not seem to be viable any more as it appears that Section 4 of the said
Order has been superseded by Section 14 of the CARP Law. This repeats the requisites of registration as embodied in the earlier measure but does not provide, as
the latter did, that in case of failure or refusal to register the land, the valuation thereof shall be that given by the provincial or city assessor for tax purposes. On the
contrary, the CARP Law says that the just compensation shall be ascertained on the basis of the factors mentioned in its Section 17 and in the manner provided for
in Section 16.

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The last major challenge to CARP is that the landowner is divested of his property even before actual payment to him in full of just compensation, in contravention
of a well- accepted principle of eminent domain. The recognized rule, indeed, is that title to the property expropriated shall pass from the owner to the expropriator
only upon full payment of the just compensation. Jurisprudence on this settled principle is consistent both here and in other democratic jurisdictions. Thus:

Title to property which is the subject of condemnation proceedings does not vest the condemnor until the judgment fixing just compensation is entered and paid,
but the condemnor's title relates back to the date on which the petition under the Eminent Domain Act, or the commissioner's report under the Local Improvement
Act, is filed. 51

... although the right to appropriate and use land taken for a canal is complete at the time of entry, title to the property taken remains in the owner until payment is
actually made. 52 (Emphasis supplied.)

In Kennedy v. Indianapolis, 53 the US Supreme Court cited several cases holding that title to property does not pass to the condemnor until just compensation had
actually been made. In fact, the decisions appear to be uniformly to this effect. As early as 1838, in  Rubottom v. McLure, 54 it was held that "actual payment to the
owner of the condemned property was a condition precedent to the investment of the title to the property in the State" albeit "not to the appropriation of it to public
use." In Rexford v. Knight, 55 the Court of Appeals of New York said that the construction upon the statutes was that the fee did not vest in the State until the
payment of the compensation although the authority to enter upon and appropriate the land was complete prior to the payment. Kennedy further said that "both on
principle and authority the rule is ... that the right to enter on and use the property is complete, as soon as the property is actually appropriated under the authority
of law for a public use, but that the title does not pass from the owner without his consent, until just compensation has been made to him."

Our own Supreme Court has held in Visayan Refining Co. v. Camus and Paredes,  56 that:

If the laws which we have exhibited or cited in the preceding discussion are attentively examined it will be apparent that the method of expropriation adopted in
this jurisdiction is such as to afford absolute reassurance that no piece of land can be finally and irrevocably taken from an unwilling owner until compensation is
paid ... . (Emphasis supplied.)

It is true that P.D. No. 27 expressly ordered the emancipation of tenant-farmer as October 21, 1972 and declared that he shall "be deemed the owner" of a portion
of land consisting of a family-sized farm except that "no title to the land owned by him was to be actually issued to him unless and until he had become a full-
fledged member of a duly recognized farmers' cooperative." It was understood, however, that full payment of the just compensation also had to be made first,
conformably to the constitutional requirement.

When E.O. No. 228, categorically stated in its Section 1 that:

All qualified farmer-beneficiaries are now deemed full owners as of October 21, 1972 of the land they acquired by virtue of Presidential Decree No. 27. (Emphasis
supplied.)

it was obviously referring to lands already validly acquired under the said decree, after proof of full-fledged membership in the farmers' cooperatives and full
payment of just compensation. Hence, it was also perfectly proper for the Order to also provide in its Section 2 that the "lease rentals paid to the landowner by the
farmer- beneficiary after October 21, 1972 (pending transfer of ownership after full payment of just compensation), shall be considered as advance payment for the
land."
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The CARP Law, for its part, conditions the transfer of possession and ownership of the land to the government on receipt by the landowner of the corresponding
payment or the deposit by the DAR of the compensation in cash or LBP bonds with an accessible bank. Until then, title also remains with the landowner.  57 No
outright change of ownership is contemplated either.

Hence, the argument that the assailed measures violate due process by arbitrarily transferring title before the land is fully paid for must also be rejected.

It is worth stressing at this point that all rights acquired by the tenant-farmer under P.D. No. 27, as recognized under E.O. No. 228, are retained by him even now
under R.A. No. 6657. This should counter-balance the express provision in Section 6 of the said law that "the landowners whose lands have been covered by
Presidential Decree No. 27 shall be allowed to keep the area originally retained by them thereunder, further, That original homestead grantees or direct compulsory
heirs who still own the original homestead at the time of the approval of this Act shall retain the same areas as long as they continue to cultivate said homestead."

In connection with these retained rights, it does not appear in G.R. No. 78742 that the appeal filed by the petitioners with the Office of the President has already
been resolved. Although we have said that the doctrine of exhaustion of administrative remedies need not preclude immediate resort to judicial action, there are
factual issues that have yet to be examined on the administrative level, especially the claim that the petitioners are not covered by LOI 474 because they do not
own other agricultural lands than the subjects of their petition.

Obviously, the Court cannot resolve these issues. In any event, assuming that the petitioners have not yet exercised their retention rights, if any, under P.D. No. 27,
the Court holds that they are entitled to the new retention rights provided for by R.A. No. 6657, which in fact are on the whole more liberal than those granted by
the decree.

V. The CARP Law and the other enactments also involved in these cases have been the subject of bitter attack from those who point to the shortcomings
of these measures and ask that they be scrapped entirely. To be sure, these enactments are less than perfect; indeed, they should be continuously re-
examined and rehoned, that they may be sharper instruments for the better protection of the farmer's rights. But we have to start somewhere. In the
pursuit of agrarian reform, we do not tread on familiar ground but grope on terrain fraught with pitfalls and expected difficulties. This is inevitable.
The CARP Law is not a tried and tested project. On the contrary, to use Justice Holmes's words, "it is an experiment, as all life is an experiment," and
so we learn as we venture forward, and, if necessary, by our own mistakes. We cannot expect perfection although we should strive for it by all means.
Meantime, we struggle as best we can in freeing the farmer from the iron shackles that have unconscionably, and for so long, fettered his soul to the
soil.

By the decision we reach today, all major legal obstacles to the comprehensive agrarian reform program are removed, to clear the way for the true freedom of the
farmer. We may now glimpse the day he will be released not only from want but also from the exploitation and disdain of the past and from his own feelings of
inadequacy and helplessness. At last his servitude will be ended forever. At last the farm on which he toils will be his farm. It will be his portion of the Mother
Earth that will give him not only the staff of life but also the joy of living. And where once it bred for him only deep despair, now can he see in it the fruition of his
hopes for a more fulfilling future. Now at last can he banish from his small plot of earth his insecurities and dark resentments and "rebuild in it the music and the
dream."

WHEREFORE, the Court holds as follows:

1. R.A. No. 6657, P.D. No. 27, Proc. No. 131, and E.O. Nos. 228 and 229 are SUSTAINED against all the constitutional objections raised in the herein petitions.
2. Title to all expropriated properties shall be transferred to the State only upon full payment of compensation to their respective owners.

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3. All rights previously acquired by the tenant- farmers under P.D. No. 27 are retained and recognized.
4. Landowners who were unable to exercise their rights of retention under P.D. No. 27 shall enjoy the retention rights granted by R.A. No. 6657 under the
conditions therein prescribed.
5. Subject to the above-mentioned rulings all the petitions are DISMISSED, without pronouncement as to costs.
SO ORDERED.

Caltex Phil. Inc. Vs. COA, G.R. No. 92385, 8 May 1992

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

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

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings of the administrator of the fund itself and in
disallowing a claim which is still pending resolution at the OEA level, and (b) "grave abuse of discretion and completely without jurisdiction"  5 in declaring that
petitioner cannot avail of the right to offset any amount that it may be required under the law to remit to the OPSF against any amount that it may receive by way
of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court, and, considering further the importance of the issues raised,
the error in the designation of the remedy pursued will, in this instance, be excused. The issues raised revolve around the OPSF created under Section 8 of
Presidential Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

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

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

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

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

Page 91 of 164
d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and petroleum products is less than the
peso costs computed using the reference foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

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

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

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

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

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

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

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

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

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

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

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

Page 92 of 164
In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF and repeated its earlier
directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement claims. 9

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

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF.
(3) The COA audit will commence immediately and will be conducted expeditiously.
(4) The review of current claims (1989) will be conducted expeditiously to preclude further accumulation of reimbursement from OPSF.

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

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

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

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

Page 93 of 164
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

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

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

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND
ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY COURTS
OR REPEALED BY LEGISLATION.

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

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

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

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

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

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

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is believed that export sales (product sales) are entitled to claim
refund from the OPSF.
Page 94 of 164
As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of this Commission that the OPSF is not liable to refund such
surtax on inventory losses because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . . .

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

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

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

I. RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES FROM THE OPSF.
II. RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.
III. RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.
IV. RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES
AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.
V. RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA
AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10) days from notice. 18
On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of the Solicitor General, filed their Comment. 19
This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their respective Memoranda within twenty (20) days from
notice. 20
In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6 September 1990 be considered as the Memorandum
for respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

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

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

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

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the
possession of the oil companies at the time of the price change;
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 ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary government expenditures and as the monetary claims of
petitioner are not allowed by law, the COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the OPSF pursuant to E.O. No. 137 can only include
"factors which are of the same nature or analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137;
and
5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow reimbursement of financing charges. 29

We find no merit in the first assigned error.

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

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

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional
bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary
or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of the Government and, for such period
as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto.

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 (2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of government funds and properties.

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

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues, and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities including
government-owned or controlled corporations, keep the general accounts of the Government and, for such period as may be  provided by law, preserve the
vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations including those for the prevention of irregular, unnecessary,
excessive, or extravagant expenditures or uses of funds and property. 31

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Both views are unacceptable to this Court.

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

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

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

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

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

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

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

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported crude oil and finished petroleum products
resulting from foreign exchange rate adjustments and/or increases in world market prices of crude oil; (b) cost underrecovery incurred as a result

Page 100 of 164

 of fuel oil sales to the National Power Corporation (NPC); and (c) other cost underrecoveries incurred as may be finally decided by the Supreme
Court; . . .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no offsetting of taxes against the claims that a taxpayer may
have against the government, as taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that
petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because "while this provision empowers the COA to
withhold payment of a government indebtedness to a person who is also indebted to the government and apply the government indebtedness to the satisfaction of
the obligation of the person to the government, like authority or right to make compensation is not given to the private person."  54 The reason for this, as stated
in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government, either in the form of taxes or other dues, is its lifeblood and should be
collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the respondents'
duty to collect petitioner's indebtedness to the OPSF. Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of
taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special fund . . .," 56 and that the OPSF contributions do not go to
the general fund of the state and are not used for public purpose, i.e., not for the support of the government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is inapplicable.

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

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

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

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

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increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may
properly address.

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

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

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act as agents for the Government in the latter's collection
since the taxes are, in reality, passed unto the end-users –– the consuming public. In that capacity, the petitioner, as one of such companies, has the primary
obligation to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary relationship between the two; petitioner
certainly cannot be considered merely as a debtor. In respect, therefore, to its collection for the OPSF  vis-a-vis its claims for reimbursement, no compensation is
likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is no proof
that petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

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

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

CIR vs. Central Luzon Drug Corporation

This is a petition for review under Rule 45 of the Rules of Court seeking the nullification of the Decision, dated May 31, 2001, of the Court of Appeals (CA) in
CA-G.R. SP No. 60057, entitled "Central Luzon Drug Corporation v. Commissioner of Internal Revenue," granting herein respondent Central Luzon Drug
Corporation’s claim for tax credit equal to the amount of the 20% discount that it extended to senior citizens on the latter’s purchase of medicines pursuant to
Section 4(a) of Republic Act (R.A.) No. 7432, entitled "An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special
Privileges and for other Purposes" otherwise known as the Senior Citizens Act.

The antecedents are as follows:

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Central Luzon Drug Corporation has been a retailer of medicines and other pharmaceutical products since December 19, 1994. In 1995, it opened three (3)
drugstores as a franchisee under the business name and style of "Mercury Drug."
For the period January 1995 to December 1995, in conformity to the mandate of Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount on the sale of
medicines to qualified senior citizens amounting to P219,778.
Pursuant to Revenue Regulations No. 2-941 implementing R.A. No. 7432, which states that the discount given to senior citizens shall be deducted by the
establishment from its gross sales for value-added tax and other percentage tax purposes, respondent deducted the total amount of  P219,778 from its gross income
for the taxable year 1995. For said taxable period, respondent reported a net loss of P20,963 in its corporate income tax return. As a consequence, respondent did
not pay income tax for 1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of R.A. No. 7432, the amount of P219,778 should be applied as a tax credit, respondent
filed a claim for refund in the amount of P150,193, thus:
As shown above, the amount of P150,193 claimed as a refund represents the tax credit allegedly due to respondent under R.A. No. 7432. Since the Commissioner
of Internal Revenue "was not able to decide the claim for refund on time," 2 respondent filed a Petition for Review with the Court of Tax Appeals (CTA) on March
18, 1998.
On April 24, 2000, the CTA dismissed the petition, declaring that even if the law treats the 20% sales discounts granted to senior citizens as a tax credit, the same
cannot apply when there is no tax liability or the amount of the tax credit is greater than the tax due. In the latter case, the tax credit will only be to the extent of the
tax liability.3 Also, no refund can be granted as no tax was erroneously, illegally and actually collected based on the provisions of Section 230, now Section 229, of
the Tax Code. Furthermore, the law does not state that a refund can be claimed by the private establishment concerned as an alternative to the tax credit.
Thus, respondent filed with the CA a Petition for Review on August 3, 2000.
On May 31, 2001, the CA rendered a Decision stating that Section 229 of the Tax Code does not apply in this case. It concluded that the 20% discount given to
senior citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. No. 7432 is considered just compensation and, as such, may be carried over to the next
taxable period if there is no current tax liability. In view of this, the CA held:
WHEREFORE, the instant petition is hereby GRANTED and the decision of the CTA dated 24 April 2000 and its resolution dated 06 July 2000 are SET ASIDE.
A new one is entered granting petitioner’s claim for tax credit in the amount of Php: 150,193.00. No costs.
SO ORDERED.4

Hence, this petition raising the sole issue of whether the 20% sales discount granted by respondent to qualified senior citizens pursuant to Sec. 4(a) of R.A. No.
7432 may be claimed as a tax credit or as a deduction from gross sales in accordance with Sec. 2(1) of Revenue Regulations No. 2-94.

Sec. 4(a) of R.A. No. 7432 provides:

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

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

The CA and the CTA correctly ruled that based on the plain wording of the law discounts given under R.A. No. 7432 should be treated as tax credits, not
deductions from income.

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It is a fundamental rule in statutory construction that the legislative intent must be determined from the language of the statute itself especially when the words and
phrases therein are clear and unequivocal. The statute in such a case must be taken to mean exactly what it says. 5 Its literal meaning should be followed; 6 to depart
from the meaning expressed by the words is to alter the statute. 7

The above provision explicitly employed the word "tax credit." Nothing in the provision suggests for it to mean a "deduction" from gross sales. To construe it
otherwise would be a departure from the clear mandate of the law.

Thus, the 20% discount required by the Act to be given to senior citizens is a tax credit, not a deduction from the gross sales of the establishment concerned. As a
corollary to this, the definition of ‘tax credit’ found in Section 2(1) of Revenue Regulations No. 2-94 is erroneous as it refers to tax credit as the amount
representing the 20% discount that "shall be deducted by the said establishment from their gross sales for value added tax and other percentage tax purposes." This
definition is contrary to what our lawmakers had envisioned with regard to the treatment of the discount granted to senior citizens.

Accordingly, when the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when claimed – shall be treated as a
reduction from any tax liability. 8 The law cannot be amended by a mere regulation. The administrative agencies issuing these regulations may not enlarge, alter or
restrict the provisions of the law they administer. 9 In fact, a regulation that "operates to create a rule out of harmony with the statute is a mere nullity." 10

Finally, for purposes of clarity, Sec. 229 11 of the Tax Code does not apply to cases that fall under Sec. 4 of R.A. No. 7432 because the former provision governs
exclusively all kinds of refund or credit of internal revenue taxes that were erroneously or illegally imposed and collected pursuant to the Tax Code while the latter
extends the tax credit benefit to the private establishments concerned even before tax payments have been made. The tax credit that is contemplated under the Act
is a form of just compensation, not a remedy for taxes that were erroneously or illegally assessed and collected. In the same vein, prior payment of any tax liability
is not a precondition before a taxable entity can benefit from the tax credit. The credit may be availed of upon payment of the tax due, if any. Where there is no tax
liability or where a private establishment reports a net loss for the period, the tax credit can be availed of and carried over to the next taxable year.

It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the remedy of refund is available to the taxpayer, Sec. 4 of the law speaks only of a tax
credit, not a refund. As earlier mentioned, the tax credit benefit granted to the establishments can be deemed as their just compensation for private property taken
by the State for public use. The privilege enjoyed by the senior citizens does not come directly from the State, but rather from the private establishments
concerned.12

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 60057, dated May 31, 2001, is AFFIRMED.

Asia Pacific Planters vs. City of Urdaneta,

The instant petition seeks to set aside the Resolutions1 dated April 15, 2003 and February 4, 2004 of the Court of Appeals in CA-G.R. SP No. 76170.

This case stemmed from a Complaint 2 for annulment of contracts with prayer for preliminary prohibitory injunction and temporary restraining order filed by
respondent Waldo C. Del Castillo, in his capacity as taxpayer, against respondents City of Urdaneta and Ceferino J. Capalad doing business under the name
JJEFWA Builders, and petitioners Asean Pacific Planners (APP) represented by Ronilo G. Goco and Asean Pacific Planners Construction and Development
Corporation (APPCDC) represented by Cesar D. Goco.

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Del Castillo alleged that then Urdaneta City Mayor Rodolfo E. Parayno entered into five contracts for the preliminary design, construction and management of a
four-storey twin cinema commercial center and hotel involving a massive expenditure of public funds amounting to P250 million, funded by a loan from the
Philippine National Bank (PNB). For minimal work, the contractor was allegedly paid P95 million. Del Castillo also claimed that all the contracts are void because
the object is outside the commerce of men. The object is a piece of land belonging to the public domain and which remains devoted to a public purpose as a public
elementary school. Additionally, he claimed that the contracts, from the feasibility study to management and lease of the future building, are also void because
they were all awarded solely to the Goco family.

In their Answer,3 APP and APPCDC claimed that the contracts are valid. Urdaneta City Mayor Amadeo R. Perez, Jr., who filed the city's Answer, 4 joined in the
defense and asserted that the contracts were properly executed by then Mayor Parayno with prior authority from the Sangguniang Panlungsod. Mayor Perez also
stated that Del Castillo has no legal capacity to sue and that the complaint states no cause of action. For respondent Ceferino J. Capalad, Atty. Oscar C. Sahagun
filed an Answer5 with compulsory counterclaim and motion to dismiss on the ground that Del Castillo has no legal standing to sue.

Respondents Norberto M. Del Prado, Jesus A. Ordono and Aquilino Maguisa became parties to the case when they jointly filed, also in their capacity as taxpayers,
a Complaint-in-Intervention6 adopting the allegations of Del Castillo.

After pre-trial, the Lazaro Law Firm entered its appearance as counsel for Urdaneta City and filed an Omnibus Motion 7 with prayer to (1) withdraw Urdaneta
City's Answer; (2) drop Urdaneta City as defendant and be joined as plaintiff; (3) admit Urdaneta City's complaint; and (4) conduct a new pre-trial. Urdaneta City
allegedly wanted to rectify its position and claimed that inadequate legal representation caused its inability to file the necessary pleadings in representation of its
interests.

In its Order8 dated September 11, 2002, the Regional Trial Court (RTC) of Urdaneta City, Pangasinan, Branch 45, admitted the entry of appearance of the Lazaro
Law Firm and granted the withdrawal of appearance of the City Prosecutor. It also granted the prayer to drop the city as defendant and admitted its complaint for
consolidation with Del Castillo's complaint, and directed the defendants to answer the city's complaint.

In its February 14, 2003 Order,9 the RTC denied reconsideration of the September 11, 2002 Order. It also granted Capalad's motion to expunge all pleadings filed
by Atty. Sahagun in his behalf. Capalad was dropped as defendant, and his complaint filed by Atty. Jorito C. Peralta was admitted and consolidated with the
complaints of Del Castillo and Urdaneta City. The RTC also directed APP and APPCDC to answer Capalad's complaint.

Aggrieved, APP and APPCDC filed a petition for certiorari before the Court of Appeals. In its April 15, 2003 Resolution, the Court of Appeals dismissed the
petition on the following grounds: (1) defective verification and certification of non-forum shopping, (2) failure of the petitioners to submit certified true copies of
the RTC's assailed orders as mere photocopies were submitted, and (3) lack of written explanation why service of the petition to adverse parties was not
personal.10 The Court of Appeals also denied APP and APPCDC's motion for reconsideration in its February 4, 2004 Resolution. 11

Hence, this petition, which we treat as one for review on certiorari under Rule 45, the proper remedy to assail the resolutions of the Court of Appeals. 12

Petitioners argue that:

I. THE APPELLATE COURT PALPABLY ERRED AND GRAVELY ABUSED ITS JUDICIAL PREROGATIVES BY SUMMARILY DISMISSING
THE PETITION ON THE BASIS OF PROCEDURAL TECHNICALITIES DESPITE SUBSTANTIAL COMPLIANCE [THEREWITH]…
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 II. THE TRIAL COURT PALPABLY ERRED AND GRAVELY ABUSED ITS JUDICIAL PREROGATIVES BY CAPRICIOUSLY

(a.) Entertaining the taxpayers' suits of private respondents del Castillo, del Prado, Ordono and Maguisa despite their clear lack of legal standing to file the same.

(b.) Allowing the entry of appearance of a private law firm to represent the City of Urdaneta despite the clear statutory and jurisprudential prohibitions thereto.

(c.) Allowing Ceferino J. Capalad and the City of Urdaneta to switch sides, by permitting the withdrawal of their respective answers and admitting their complaints
as well as allowing the appearance of Atty. Jorito C. Peralta to represent Capalad although Atty. Oscar C. Sahagun, his counsel of record, had not withdrawn from
the case, in gross violation of well settled rules and case law on the matter. 13

We first resolve whether the Court of Appeals erred in denying reconsideration of its April 15, 2003 Resolution despite APP and APPCDC's subsequent
compliance.

Petitioners argue that the Court of Appeals should not have dismissed the petition on mere technicalities since they have attached the proper documents in their
motion for reconsideration and substantially complied with the rules.

Respondent Urdaneta City maintains that the Court of Appeals correctly dismissed the petition because Cesar Goco had no proof he was authorized to sign the
certification of non-forum shopping in behalf of APPCDC.

Indeed, Cesar Goco had no proof of his authority to sign the verification and certification of non-forum shopping of the petition for certiorari filed with the Court
of Appeals.14 Thus, the Court of Appeals is allowed by the rules the discretion to dismiss the petition since only individuals vested with authority by a valid board
resolution may sign the certificate of non-forum shopping in behalf of a corporation. Proof of said authority must be attached; otherwise, the petition is subject to
dismissal.15

However, it must be pointed out that in several cases, 16 this Court had considered as substantial compliance with the procedural requirements the submission in the
motion for reconsideration of the authority to sign the verification and certification, as in this case. The Court notes that the attachments in the motion for
reconsideration show that on March 5, 2003, the Board of Directors of APPCDC authorized Cesar Goco to institute the petition before the Court of
Appeals.17 On March 22, 2003, Ronilo Goco doing business under the name APP, also appointed his father, Cesar Goco, as his attorney-in-fact to file the
petition.18 When the petition was filed on March 26, 200319 before the Court of Appeals, Cesar Goco was duly authorized to sign the verification and certification
except that the proof of his authority was not submitted together with the petition.

Similarly, petitioners submitted in the motion for reconsideration certified true copies of the assailed RTC orders and we may also consider the same as substantial
compliance.20 Petitioners also included in the motion for reconsideration their explanation 21 that copies of the petition were personally served on the Lazaro Law
Firm and mailed to the RTC and Atty. Peralta because of distance. The affidavit of service 22 supported the explanation. Considering the substantial issues involved,
it was thus error for the appellate court to deny reinstatement of the petition.

Having discussed the procedural issues, we shall now proceed to address the substantive issues raised by petitioners, rather than remand this case to the Court of
Appeals. In our view, the issue, simply put, is: Did the RTC err and commit grave abuse of discretion in (a) entertaining the taxpayers' suits; (b) allowing a private

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law firm to represent Urdaneta City; (c) allowing respondents Capalad and Urdaneta City to switch from being defendants to becoming complainants; and (d)
allowing Capalad's change of attorneys?

On the first point at issue, petitioners argue that a taxpayer may only sue where the act complained of directly involves illegal disbursement of public funds derived
from taxation. The allegation of respondents Del Castillo, Del Prado, Ordono and Maguisa that the construction of the project is funded by the PNB loan
contradicts the claim regarding illegal disbursement since the funds are not directly derived from taxation.

Respondents Del Castillo, Del Prado, Ordono and Maguisa counter that their personality to sue was not raised by petitioners APP and APPCDC in their Answer
and that this issue was not even discussed in the RTC's assailed orders.

Petitioners' contentions lack merit. The RTC properly allowed the taxpayers' suits. In Public Interest Center, Inc. v. Roxas, 23 we held:

In the case of taxpayers' suits, the party suing as a taxpayer must prove that he has sufficient interest in preventing the illegal expenditure of money raised by
taxation. Thus, taxpayers have been allowed to sue where there is a claim that public funds are illegally disbursed or that public money is being deflected to any
improper purpose, or that public funds are wasted through the enforcement of an invalid or unconstitutional law. Petitioners' allegations in their Amended
Complaint that the loan contracts entered into by the Republic and NPC are serviced or paid through a disbursement of public funds are not disputed by
respondents, hence, they are invested with personality to institute the same. 24

Here, the allegation of taxpayers Del Castillo, Del Prado, Ordono and Maguisa that P95 million of the P250 million PNB loan had already been paid for minimal
work is sufficient allegation of overpayment, of illegal disbursement, that invests them with personality to sue. Petitioners do not dispute the allegation as they
merely insist, albeit erroneously, that public funds are not involved. Under Article 1953 25 of the Civil Code, the city acquired ownership of the money loaned from
PNB, making the money public fund. The city will have to pay the loan by revenues raised from local taxation or by its internal revenue allotment.

In addition, APP and APPCDC's lack of objection in their Answer on the personality to sue of the four complainants constitutes waiver to raise the objection under
Section 1, Rule 9 of the Rules of Court.26

On the second point, petitioners contend that only the City Prosecutor can represent Urdaneta City and that law and jurisprudence prohibit the appearance of the
Lazaro Law Firm as the city's counsel.

The Lazaro Law Firm, as the city's counsel, counters that the city was inutile defending its cause before the RTC for lack of needed legal advice. The city has no
legal officer and both City Prosecutor and Provincial Legal Officer are busy. Practical considerations also dictate that the city and Mayor Perez must have the same
counsel since he faces related criminal cases. Citing Mancenido v. Court of Appeals, 27 the law firm states that hiring private counsel is proper where rigid
adherence to the law on representation would deprive a party of his right to redress a valid grievance. 28

We cannot agree with the Lazaro Law Firm. Its appearance as Urdaneta City's counsel is against the law as it provides expressly who should represent it. The City
Prosecutor should continue to represent the city.

Section 481(a)29 of the Local Government Code (LGC) of 199130 mandates the appointment of a city legal officer. Under Section 481(b)(3)(i) 31 of the LGC, the
city legal officer is supposed to represent the city in all civil actions, as in this case, and special proceedings wherein the city or any of its officials is a party. In
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Ramos v. Court of Appeals,32 we cited that under Section 19 33 of Republic Act No. 5185,34 city governments may already create the position of city legal officer to
whom the function of the city fiscal (now prosecutor) as legal adviser and officer for civil cases of the city shall be transferred. 35 In the case of Urdaneta City,
however, the position of city legal officer is still vacant, although its charter 36 was enacted way back in 1998.

Because of such vacancy, the City Prosecutor's appearance as counsel of Urdaneta City is proper. The City Prosecutor remains as the city's legal adviser and
officer for civil cases, a function that could not yet be transferred to the city legal officer. Under the circumstances, the RTC should not have allowed the entry of
appearance of the Lazaro Law Firm vice the City Prosecutor. Notably, the city's Answer was sworn to before the City Prosecutor by Mayor Perez. The City
Prosecutor prepared the city's pre-trial brief and represented the city in the pre-trial conference. No question was raised against the City Prosecutor's actions until
the Lazaro Law Firm entered its appearance and claimed that the city lacked adequate legal representation.

Moreover, the appearance of the Lazaro Law Firm as counsel for Urdaneta City is against the law. Section 481(b)(3)(i) of the LGC provides when a special legal
officer may be employed, that is, in actions or proceedings where a component city or municipality is a party adverse to the provincial government. But this case is
not between Urdaneta City and the Province of Pangasinan. And we have consistently held that a local government unit cannot be represented by private
counsel37 as only public officers may act for and in behalf of public entities and public funds should not be spent to hire private lawyers. 38 Pro bono representation
in collaboration with the municipal attorney and prosecutor has not even been allowed. 39 Neither is the law firm's appearance justified under the instances listed in
Mancenido when local government officials can be represented by private counsel, such as when a claim for damages could result in personal liability. No such
claim against said officials was made in this case. Note that before it joined the complainants, the city was the one sued, not its officials. That the firm represents
Mayor Perez in criminal cases, suits in his personal capacity, 40 is of no moment.

On the third point, petitioners claim that Urdaneta City is estopped to reverse admissions in its Answer that the contracts are valid and, in its pre-trial brief, that the
execution of the contracts was in good faith.

We disagree. The court may allow amendment of pleadings.

Section 5,41 Rule 10 of the Rules of Court pertinently provides that if evidence is objected to at the trial on the ground that it is not within the issues raised by the
pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial
justice will be subserved thereby. Objections need not even arise in this case since the Pre-trial Order 42 dated April 1, 2002 already defined as an issue whether the
contracts are valid. Thus, what is needed is presentation of the parties' evidence on the issue. Any evidence of the city for or against the validity of the contracts
will be relevant and admissible. Note also that under Section 5, Rule 10, necessary amendments to pleadings may be made to cause them to conform to the
evidence.

In addition, despite Urdaneta City's judicial admissions, the trial court is still given leeway to consider other evidence to be presented for said admissions may not
necessarily prevail over documentary evidence, 43 e.g., the contracts assailed. A party's testimony in open court may also override admissions in the Answer. 44

As regards the RTC's order admitting Capalad's complaint and dropping him as defendant, we find the same in order. Capalad insists that Atty. Sahagun has no
authority to represent him. Atty. Sahagun claims otherwise. We note, however, that Atty. Sahagun represents petitioners who claim that the contracts are valid. On
the other hand, Capalad filed a complaint for annulment of the contracts. Certainly, Atty. Sahagun cannot represent totally conflicting interests. Thus, we should
expunge all pleadings filed by Atty. Sahagun in behalf of Capalad.

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Relatedly, we affirm the order of the RTC in allowing Capalad's change of attorneys, if we can properly call it as such, considering Capalad's claim that Atty.
Sahagun was never his attorney.

Before we close, notice is taken of the offensive language used by Attys. Oscar C. Sahagun and Antonio B. Escalante in their pleadings before us and the Court of
Appeals. They unfairly called the Court of Appeals a "court of technicalities" 45 for validly dismissing their defectively prepared petition. They also accused the
Court of Appeals of protecting, in their view, "an incompetent judge." 46 In explaining the "concededly strong language," Atty. Sahagun further indicted himself. He
said that the Court of Appeals' dismissal of the case shows its "impatience and readiness to punish petitioners for a perceived slight on its dignity" and such
dismissal "smacks of retaliation and does not augur for the cold neutrality and impartiality demanded of the appellate court." 47

Accordingly, we impose upon Attys. Oscar C. Sahagun and Antonio B. Escalante a fine of  P2,00048 each payable to this Court within ten days from notice and we
remind them that they should observe and maintain the respect due to the Court of Appeals and judicial officers; 49 abstain from offensive language before the
courts;50 and not attribute to a Judge motives not supported by the record. 51 Similar acts in the future will be dealt with more severely.

WHEREFORE, we (1) GRANT the petition; (2) SET ASIDE the Resolutions dated April 15, 2003 and February 4, 2004 of the Court of Appeals in CA-G.R. SP
No. 76170; (3) DENY the entry of appearance of the Lazaro Law Firm in Civil Case No. U-7388 and EXPUNGE all pleadings it filed as counsel of Urdaneta City;
(4) ORDER the City Prosecutor to represent Urdaneta City in Civil Case No. U-7388; (5) AFFIRM the RTC in admitting the complaint of Capalad; and (6)
PROHIBIT Atty. Oscar C. Sahagun from representing Capalad and EXPUNGE all pleadings that he filed in behalf of Capalad.

Jumamil vs. Café

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Vivencio V. Jumamil seeks to reverse the decision of the Court of Appeals
dated July 24, 20001 in CA-G.R. CV No. 35082, the dispositive portion of which read:

With the foregoing, the assailed Decision of Branch 4, Regional Trial Court of Panabo Davao dated 26 November 1990 in Sp. Civil Action No. 89-1 is hereby
AFFIRMED.2

The Regional Trial Court dismissed petitioner’s petition for declaratory relief with prayer for preliminary injunction and writ of restraining order, and ordered the
petitioner to pay attorney’s fees in the amount of ₱1,000 to each of the 57 private respondents.3

The factual antecedents follow: In 1989, petitioner Jumamil 4 filed before the Regional Trial Court (RTC) of Panabo, Davao del Norte a petition for declaratory
relief with prayer for preliminary injunction and writ of restraining order against public respondents Mayor Jose J. Cafe and the members of the  Sangguniang
Bayan of Panabo, Davao del Norte. He questioned the constitutionality of Municipal Resolution No. 7, Series of 1989 (Resolution No. 7).

Resolution No. 7, enacting Appropriation Ordinance No. 111, provided for an initial appropriation of ₱765,000 for the construction of stalls around a proposed
terminal fronting the Panabo Public Market5 which was destroyed by fire.

Subsequently, the petition was amended due to the passage of Resolution No. 49, series of 1989 (Resolution No. 49), denominated as Ordinance No. 10,
appropriating a further amount of ₱1,515,000 for the construction of additional stalls in the same public market. 6

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Prior to the passage of these resolutions, respondent Mayor Cafe had already entered into contracts with those who advanced and deposited (with the municipal
treasurer) from their personal funds the sum of ₱40,000 each. Some of the parties were close friends and/or relatives of the public respondents. 7 The construction
of the stalls which petitioner sought to stop through the preliminary injunction in the RTC was nevertheless finished, rendering the prayer therefor moot and
academic. The leases of the stalls were then awarded by public raffle which, however, was limited to those who had deposited ₱40,000 each.8 Thus, the petition
was amended anew to include the 57 awardees of the stalls as private respondents. 9

Petitioner alleges that Resolution Nos. 7 and 49 were unconstitutional because they were: …passed for the business, occupation, enjoyment and benefit of private
respondents who deposited the amount of ₱40,000.00 for each stall, and with whom also the mayor had a prior contract to award the would be constructed stalls to
all private respondents.… As admitted by public respondents some of the private respondents are close friends and/or relatives of some of the public respondents
which makes the questioned acts discriminatory. The questioned resolutions and ordinances did not provide for any notice of publication that the special privilege
and unwarranted benefits conferred on the private respondents maybe (sic) availed of by anybody who can deposit the amount of ₱40,000.00.10

Neither was there any prior notice or publication pertaining to contracts entered into by public and private respondents for the construction of stalls to be awarded
to private respondents that the same can be availed of by anybody willing to deposit ₱40,000.00.11

In this petition, petitioner prays for the reversal of the decision of the Court of Appeals (CA) and a declaration of the unconstitutionality, illegality and nullity of
the questioned resolutions/ordinances and lease contracts entered into by the public and private respondents; for the declaration of the illegality of the award of the
stalls during the pendency of this action and for the re-raffling and award of the stalls in a manner that is fair and just to all interested applicants; 12 for the issuance
of an order to the local government to admit any and all interested persons who can deposit the amount of ₱40,000 for a stall and to order a re-raffling for the
award of the stalls to the winners of the re-raffle; for the nullification of the award of attorney’s fees to private respondents on the ground that it was erroneous and
unmeritorious; and for the award of damages in favor of petitioner in the form of attorney’s fees. 13

At the outset, we must point out that the issue of the constitutionality of the questioned resolutions was never ruled upon by both the RTC and the CA.

It appears that on May 21, 1990, both parties agreed 14 to await the decision in CA G.R. SP No. 20424, 15 which involved similar facts, issues and parties. The RTC,
consequently, deferred the resolution of the pending petition. The appellate court eventually rendered its decision in that case finding that the petitioners were not
entitled to the declaratory relief prayed for as they had no legal interest in the controversy. Upon elevation to the Supreme Court as UDK Case No. 9948, the
petition for review on certiorari was denied for being insufficient in form and substance. 16

The RTC, after receipt of the entry of the SC judgment, 17 dismissed the pending petition on November 26, 1990. It adopted the ruling in CA G.R. SP No. 20424:

We find petitioners’ aforesaid submission utterly devoid of merit. It is, to say the least, questionable whether or not a special civil action for declaratory relief can
be filed in relation to a contract by persons who are not parties thereto. Under Sec. 1 of Rule 64 of the Rules of Court, any person interested under a deed, will,
contract, or other written instruments may bring an action to determine any question of the contract, or validly arising under the instrument for a declaratory ( sic)
of his rights or duties thereunder. Since contracts take effect only between the parties (Art. 1311) it is quite plain that one who is not a party to a contract can not
have the interest in it that the rule requires as a basis for declaratory reliefs (PLUM vs. Santos, 45 SCRA 147).

Following this ruling, the petitioners were not parties in the agreement for the award of the market stalls by the public respondents, in the public market of Panabo,
Davao, and since the petitioners were not parties to the award of the market stalls and whose rights are never affected by merely stating that they are taxpayers,

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they have no legal interest in the controversy and they are not, therefore, entitled to bring an action for declaratory relief. 18 WHEREFORE, the petition of the
petitioners as taxpayers being without merit and not in consonance with law, is hereby ordered DISMISSED.

As to the counterclaim for damages, the same not having been actually and fully proven, the Court gives no award as to the same. It is not amiss to state here that
the petitioners agreed to be bound by the outcome of Special Civil Case No. 89-10.

However, for unnecessarily dragging into Court the fifty-seven (57) private respondents who are bonafide businessmen and stall holders in the public market of
Panabo, it is fitting and proper for the petitioners to be ordered payment of attorney’s fees.

Accordingly, the herein petitioners are ordered to pay ONE THOUSAND (₱1,000.00) PESOS EACH to the 57 private respondents, as attorney’s fees, jointly and
severally, and for them to pay the costs of this suit.

SO ORDERED.19

From this adverse decision, petitioner again appealed to the Court of Appeals in CA-G.R. CV No. 35082 which is now before us for review.

The appellate court, yet again, affirmed the RTC decision and held that:

Res judicata does not set in a case dismissed for lack of capacity to sue, because there has been no determination on the merits. Neither does the law of the case
apply. However, the court a quo took judicial notice of the fact that petitioners agreed to be bound by the outcome of Special Civil Case No. 89-10. Allegans
contraria non est audiendus. (He is not to be heard who alleges things contradictory to each other.) It must be here observed that petitioners-appellants were the
ones who manifested that it would be practical to await the decision of the Supreme Court in their petition for certiorari, for after all the facts, circumstances and
issues in that case, are exactly the same as in the case that is here appealed. Granting that they may evade such assumption, a careful evaluation of the case would
lead Us to the same conclusion: that the case for declaratory relief is dismissible. As enumerated by Justice Regalado in his "Remedial Law Compendium", the
requisites of an action for declaratory relief are:

(a) The subject matter of the controversy must be a deed, will, contract or other written instrument, statute, executive order or regulation, or ordinance;
(b) The terms of said documents and the validity thereof are doubtful and require judicial construction;
(c) There must have been no breach of the documents in question;
(d) There must be an actual justiciable controversy or the "ripening seeds" of one between persons whose interests are adverse;
(e) The issue must be ripe for judicial determination; and
(f) Adequate relief is not available through other means or other forms of action or proceeding.

In Tolentino vs. Board of Accountancy, et al, 90 Phil. 83, 88, the Supreme Court ratiocinated the requisites of justiciability of an action for declaratory relief by
saying that the court must be "satisfied that an actual controversy, or the ripening seeds of one, exists between parties, all of whom are  sui juris and before the
court, and that the declaration sought will be a practical help in ending the controversy."

The petition must show "an active antagonistic assertion of a legal right on one side and a denial thereof on the other concerning a real, and not a mere theoretical
question or issue. The question is whether the facts alleged a substantial controversy between parties having adverse legal interests, of sufficient immediacy and
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reality to warrant the issuance of a declaratory relief. In GSISEA and GSISSU vs. Hon. Alvendia etc. and GSIS, 108 Phil. 505, the Supreme Court ruled a
declaratory relief improper or unnecessary when it appears to be a moot case, since it seeks to get a judgment on a pretended controversy, when in reality there is
none. In Kawasaki Port Service Corporation vs. Amores, 199 SCRA 230, citing Dy Poco vs. Commissioner of Immigration, et al., 16 SCRA 618, the rule was
stated: "where a declaratory judgment as to a disputed fact would be determinative of issues rather than a construction of definite stated rights, statuses and other
relations, commonly expressed in a written instrument, the case is not one for declaratory judgment."

Indeed, in its true light, the present petition for declaratory relief seems to be no more than a request for an advisory opinion to which courts in this and other
jurisdiction have cast a definite aversion. The ordinances being assailed are appropriation ordinances. The passage of the ordinances were pursuant to the public
purpose of constructing market stalls. For the exercise of judicial review, the governmental act being challenged must have had an adverse effect on the person
challenging it, and the person challenging the act, must have "standing" to challenge, i.e., in the categorical and succinct language of Justice Laurel, he must have a
"personal and substantial interest in the case such that he has sustained, or will sustain, direct injury as a result of its enforcement." Standing is a special concern in
constitutional law because in some cases suits are brought not by parties who have been personally injured by the operation of a law or by official action taken, but
by concerned citizens, taxpayers or voters who actually sue in the public interest. Hence the question in standing is whether such parties have "alleged such a
personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court largely
depends for illumination of difficult constitutional questions.

A careful analysis of the records of the case at bar would disclose that petitioners-appellants have suffered no wrong under the terms of the ordinances being
assailed – and, naturally need no relief in the form they now seek to obtain. Judicial exercise cannot be exercised  in vacuo. The policy of the courts is to avoid
ruling on a constitutional question and to presume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to the
contrary. To doubt is to sustain. The issue is not the ordinances themselves, but the award of the market stalls to the private respondents on the strength of the
contracts individually executed by them with Mayor Cafe. To reiterate, a person who is not a party to a contract cannot file a petition for declaratory relief and seek
judicial interpretation of such contract (Atlas Consolidated Mining Corp. vs. Court of Appeals, 182 SCRA 166). Not having established their  locus standi, we see
no error committed by the court a quo warranting reversal of the appealed decision.

With the foregoing, the assailed Decision of Branch 4, Regional Trial Court of Panabo Davao dated 26 November 1990 in Sp. Civil Action No. 89-1 is hereby
AFFIRMED.

SO ORDERED.20

Thus, both the RTC and the CA dismissed the case on the ground of petitioner’s lack of legal standing and the parties’ agreement to be bound by the decision in
CA G.R. SP. No. 20424.

The issues to be resolved are the following:

(1) whether the parties were bound by the outcome in CA G.R. SP. No. 20424;
(2) whether petitioner had the legal standing to bring the petition for declaratory relief;
(3) whether Resolution Nos. 7 and 49 were unconstitutional; and
(4) whether petitioner should be held liable for damages.

Locus Standi and the Constitutionality Issue

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We will first consider the second issue. The petition for declaratory relief challenged the constitutionality of the subject resolutions. There is an unbending rule that
courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the Court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to
do so; (4) the question of constitutionality must have been raised at the earliest opportunity, and (5) the issue of constitutionality must be the very  lis mota of the
case.21

Legal standing or locus standi is a party’s personal and substantial interest in a case such that he has sustained or will sustain direct injury as a result of the
governmental act being challenged. It calls for more than just a generalized grievance. The term "interest" means a material interest, an interest in issue affected by
the decree, as distinguished from mere interest in the question involved, or a mere incidental interest. 22 Unless a person’s constitutional rights are adversely
affected by the statute or ordinance, he has no legal standing.

The CA held that petitioner had no standing to challenge the two resolutions/ordinances because he suffered no wrong under their terms. It also concluded that "the
issue (was) not the ordinances themselves but the award of the market stalls to the private respondents on the strength of the contracts individually executed by
them with Mayor Cafe." Consequently, it ruled that petitioner, who was not a party to the lease contracts, had no standing to file the petition for declaratory relief
and seek judicial interpretation of the agreements.

We do not agree. Petitioner brought the petition in his capacity as taxpayer of the Municipality of Panabo, Davao del Norte 23 and not in his personal capacity. He
was questioning the official acts of the public respondents in passing the ordinances and entering into the lease contracts with private respondents. A taxpayer need
not be a party to the contract to challenge its validity. 24 Atlas Consolidated Mining & Development Corporation v. Court of Appeals25 cited by the CA does not
apply because it involved contracts between two private parties.

Parties suing as taxpayers must specifically prove sufficient interest in preventing the illegal expenditure of

money raised by taxation.26 The expenditure of public funds by an officer of the State for the purpose of executing an unconstitutional act constitutes a
misapplication of such funds. 27 The resolutions being assailed were appropriations ordinances. Petitioner alleged that these ordinances were "passed for the
business, occupation, enjoyment and benefit of private respondents" 28 (that is, allegedly for the private benefit of respondents) because even before they were
passed, respondent Mayor Cafe and private respondents had already entered into lease contracts for the construction and award of the market stalls. 29 Private
respondents admitted they deposited ₱40,000 each with the municipal treasurer, which amounts were made available to the municipality during the construction of
the stalls. The deposits, however, were needed to ensure the speedy completion of the stalls after the public market was gutted by a series of fires. 30 Thus, the
award of the stalls was necessarily limited only to those who advanced their personal funds for their construction. 31

Petitioner did not seasonably allege his interest in preventing the illegal expenditure of public funds or the specific injury to him as a result of the enforcement of
the questioned resolutions and contracts. It was only in the "Remark to Comment" he filed in this Court did he first assert that "he (was) willing to engage in
business and (was) interested to occupy a market stall." 32 Such claim was obviously an afterthought.

Be that as it may, we have on several occasions relaxed the application of these rules on legal standing: In not a few cases, the Court has liberalized the locus
standi requirement when a petition raises an issue of transcendental significance or paramount importance to the people. Recently, after holding that the IBP had
no locus standi to bring the suit, the Court in IBP v. Zamora nevertheless entertained the Petition therein. It noted that "the IBP has advanced constitutional issues
which deserve the attention of this Court in view of their seriousness, novelty and weight as precedents." 33

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Objections to a taxpayer's suit for lack of sufficient personality, standing or interest are procedural matters. Considering the importance to the public of a suit
assailing the constitutionality of a tax law, and in keeping with the Court's duty, specially explicated in the 1987 Constitution, to determine whether or not the other
branches of the 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
Supreme Court may brush aside technicalities of procedure and take cognizance of the suit. 34

There being no doctrinal definition of transcendental importance, the following determinants formulated by former Supreme Court Justice Florentino P. Feliciano
are instructive: (1) the character of the funds or other assets involved in the case; (2) the presence of a clear case of disregard of a constitutional or statutory
prohibition by the public respondent agency or instrumentality of the government; and (3) the lack of any other party with a more direct and specific interest in
raising the questions being raised.35

But, even if we disregard petitioner’s lack of legal standing, this petition must still fail. The subject resolutions/ordinances appropriated a total of ₱2,280,000 for
the construction of the public market stalls. Petitioner alleges that these ordinances were discriminatory because, even prior to their enactment, a decision had
already been made to award the market stalls to the private respondents who deposited ₱40,000 each and who were either friends or relatives of the public
respondents. Petitioner asserts that "there (was) no publication or invitation to the public that this contract (was) available to all who (were) interested to own a
stall and (were) willing to deposit ₱40,000."36 Respondents, however, counter that the "public respondents’ act of entering into this agreement was authorized by
the Sangguniang Bayan of Panabo per Resolution No. 180 dated October 10, 1988" 37 and that "all the people interested were invited to participate in investing their
savings."38

We note that the foregoing was a disputed fact which the courts below did not resolve because the case was dismissed on the basis of petitioner’s lack of legal
standing. Nevertheless, petitioner failed to prove the subject ordinances and agreements to be discriminatory. Considering that he was asking this Court to nullify
the acts of the local political department of Panabo, Davao del Norte, he should have clearly established that such ordinances operated unfairly against those who
were not notified and who were thus not given the opportunity to make their deposits. His unsubstantiated allegation that the public was not notified did not
suffice. Furthermore, there was the time-honored presumption of regularity of official duty, absent any showing to the contrary. 39 And this is not to mention that:

The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid, absent a clear and
unmistakable showing to the contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers. This means that the measure had
first been carefully studied by the legislative and executive departments and found to be in accord with the Constitution before it was finally enacted and
approved.40

Therefore, since petitioner had no locus standi to question the ordinances, there is no need for us to discuss the constitutionality of said enactments.

Were the Parties Bound by the Outcome in CA G.R. SP. No. 20424? Adverting to the first issue, we observe that petitioner was the one who wanted the parties
to await the decision of the Supreme Court in UDK Case No. 9948 since the facts and issues in that case were similar to this. Petitioner, having expressly agreed to
be bound by our decision in the aforementioned case, should be reined in by the dismissal order we issued, now final and executory. In addition to the fact that
nothing prohibits parties from committing to be bound by the results of another case, courts may take judicial notice of a judgment in another case as long as the
parties give their consent or do not object. 41 As opined by Justice Edgardo L. Paras:

A court will take judicial notice of its own acts and records in the same case, of facts established in prior proceedings in the same case, of the authenticity of its
own records of another case between the same parties, of the files of related cases in the same court, and of public records on file in the same court. In addition,

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judicial notice will be taken of the record, pleadings or judgment of a case in another court between the same parties or involving one of the same parties, as well
as of the record of another case between different parties in the same court. 42

Damages

Finally, on the issue of damages, petitioner asserts that he impleaded the 57 respondents in good faith since the award of the stalls to them was made during the
pendency of the action.43 Private respondents refute this assertion and argue that petitioner filed this action in bad faith and with the intention of harassing them
inasmuch as he had already filed CA G.R. SP. No. 20424 even before then. 44 The RTC, affirmed by the CA, held that petitioner should pay attorney’s fees "for
unnecessarily dragging into Court the 57 private respondents who (were) bonafide businessmen and stall holders in the public market of Panabo." 45

We do not agree that petitioner should be held liable for damages. It is not sound public policy to put a premium on the right to litigate where such right is
exercised in good faith, albeit erroneously. 46 The alleged bad faith of petitioner was never established. The special circumstances in Article 2208 of the Civil Code
justifying the award of attorney’s fees are not present in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 35082 is hereby AFFIRMED with the MODIFICATION that the award of attorney's
fees to private respondents is deleted.

E. Rodriguez, Inc. vs. Collector

This is a petition for review of the decision of the Court of Tax Appeals in its CTA Case No. 849, affirming the decision of the respondent Collector (now
Commissioner) of Internal Revenue holding petitioner E. Rodriguez, Inc. liable for deficiency income tax in the sum of P63,880.00 for the year 1950.

The records of the case show that on July 17, 1948, Congress enacted Republic Act No. 333, 1 pursuant to which the Republic of the Philippines sued the
petitioner, among four other defendants, in Civil Case No. Q-54 of the Court of First Instance of Quezon City, for the expropriation of about 1,360,000 square
meters of land owned by it and situated within the area delimited for the new capital city site. After due trial, the said court rendered a decision in the case, dated
February 21, 1950, with the following dispositive portion:

WHEREFORE, judgment is hereby rendered, declaring plaintiff entitled to retain and appropriate the property involved in this proceeding, as site for the
development and establishment of the new capital city of the Philippines in accordance with our condemnation order dated September 19, 1949; and ordering
plaintiff to pay defendants, as just compensation for the lands to be taken from them, the following amounts, to wit: to defendant Eulogio Rodriguez, Sr., the sum
of THIRTY-NINE THOUSAND SEVEN HUNDRED SEVENTY-SIX PESOS (P39,776.00); to defendant E. Rodriguez, Inc., the sum of ONE MILLION FOUR
HUNDRED EIGHTEEN THOUSAND SIX HUNDRED FOUR (P1,418,604.00) PESOS; to defendant Luzon Investment & Development Co., the sum of FIVE
THOUSAND TWO HUNDRED EIGHTY (P5,280.00) PESOS; and to defendants Enrique Manaloto and Canuto G. Manuel, the sum of SIXTEEN THOUSAND
SEVEN HUNDRED TWENTY (P16,720.00) PESOS, with interest at the rate of 6% per annum on the said amounts from September 19, 1949, the date the
plaintiff entered upon the possession of the lands in question until payment, plus the costs.

Following the issuance of the above-mentioned decision, however, a series of negotiations were had between petitioner and the Government, represented by the
Capital City Planning Commission, after which, the said parties entered into a compromise agreement under date of May 11, 1950, providing,  inter alia, as
follows:
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(1) That the parties will accept the decision laid down in said case by the Court of First Instance of Rizal (Quezon City Branch) with the following stipulations:

a. That the defendants mentioned above hereby waive all interest due on the adjudged value of the expropriated properties;

b. That the defendants above-named hereby donate 207,006 square meters out of Lots Nos. 41-C-3 and 39, object of expropriation in Civil Case No. Q-54;

c. That defendant Eulogio Rodriguez, Inc. obligates itself to donate as it hereby donates the land object of expropriation in Civil Case No. Q-90, in favor of
the Republic of the Philippines, containing an area of 15,200 square meters, which is a portion of Lot No. 41-C-3 as indicated in the plan attached to the
complaint therein; said defendant Eulogio Rodriguez, Inc. binding itself to execute the necessary deed of donation thereof;

d. That defendants named above agree to the payment of the price awarded by the Court subject to the foregoing stipulations in the total sum of ONE
MILLION TWO HUNDRED FIFTY THOUSAND SIX HUNDRED THIRTY-ONE PESOS and EIGHTY CENTAVOS (P1,250,631.80) payable in the
following manner:

1) SIX HUNDRED TWENTY-FIVE THOUSAND THREE HUNDRED FIFTEEN PESOS AND NINETY CENTAVOS (P625,315.90) in
government bonds in favor of Eulogio Rodriguez, Sr. and E. Rodriguez, Inc., payable within five (5) years at not less than three percent (3%) per
annum;

2) THREE HUNDRED THOUSAND PESOS (P300,000.00) to be given to the Philippine National Bank in payment of the mortgage indebtedness
of defendants E. Rodriguez, Sr. and E. Rodriguez, Inc.; and

3) the balance of THREE HUNDRED TWENTY-FIVE THOUSAND TWO HUNDRED FIFTEEN PESOS AND NINETY CENTAVOS
(P325,215.90) in cash to be paid to all defendants abovenamed, through Eulogio Rodriguez, Sr., within a reasonable time.

(2) That after approval of this compromise by the Court, the parties herein agree not to interpose an approval from the judgment of the Court of First
Instance of Rizal (Quezon City Branch) which shall be considered final and executory under the Rules of Court;

(3) And, finally, that the said parties will submit this compromise agreement to the Court for its approval and/or its consideration in the decision rendered
in this case.

This compromise agreement was duly approved by the Court of First Instance of Rizal (Quezon City Branch) on May 12, 1950, and pursuant to the terms thereof,
the Government paid to petitioner the sum of P1,238,204.00, of which P625,315.90 were in Government Bonds.

On March 1, 1951, petitioner filed its income tax return for the year 1950, showing on the face thereof a loss of P17,982.06. In said return, petitioner did not
include the sum of P625,315.90 received by it from the government in the form of bonds in payment of its expropriated properties, in the belief that the said
amount was free or exempt from taxation. When this return was later examined by an agent of the Bureau of Internal Revenue, the Collector of said bureau
assessed against petitioner a deficiency income tax of P63,880.00, computed as follows:

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A series of communications between petitioner and respondent Collector of Internal Revenue followed the foregoing assessment, with the former protesting
against and requesting the cancellation of the deficiency income tax assessed against it, and the latter maintaining its accuracy and demanding payment thereof. As
petitioner, did not past, on July 6, 1959, the Collector of Internal Revenue sought the collection of said deficiency income tax of P63,880.00, plus 5% surcharge
and 1% monthly interest thereon from, March 11, 1956, by means of an action in the Court of First Instance of Manila.

On June 8,k 1960, petitioner offered by way of compromise to pay the amount of P30,676.25 in full settlement of its disputed deficiency income tax liability for
1950. This offer was rejected by the Collector of Internal Revenue; whereupon, under date of June 24, 1960, petitioner filed a petition for review of the assessment
in question before the respondent Court of Tax Appeals which, after trial on the merits, rendered its decision affirming the assessment in question. Hence, this
appeal by petitioner thru the instant petition for review of the said decision of respondent of Court of Tax Appeals, with the following assigned errors:

I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE EXEMPTION CONTEMPLATED BY THE BONDS IN QUESTION APPLIES
ONLY TO DOCUMENTARY STAMP TAX AND TAX ON INTEREST DERIVED FROM SUCH BONDS, AND THAT SUCH EXEMPTION
CONSTITUTES SUFFICIENT INDUCEMENT FOR PETITIONER TO ACCEPT SAID BONDS.

II. THE RESPONDENT COURT ERRED IN AFFIRMING THE ORDER OF THE RESPONDENT COLLECTOR HOLDING PETITIONER LIABLE
FOR INCOME TAX ON THE EXCHANGE OF ITS PROPERTIES FOR GOVERNMENT TAX-EXEMPT BONDS UNDER REPUBLIC ACT NO. 333.

As petitioner correctly puts it, the only question to decide here is whether or not in determining the profit realized from the payment of the purchase price of its
(petitioner's) expropriated property, for income tax purposes portion of the purchase price paid in the form of tax-exempt bonds issued under Republic Act No. 333
should be included.

The pertinent provisions of law involved are found in Section 9 of the Act abovementioned which reads as follows:

SEC. 9. The President of the Philippines is authorized to issue, in the name and behalf of the Republic of the Philippines, bonds in an amount of twenty
million pesos, the proceeds of which shall be used as a revolving fund for the acquisition of private estates, the subdivision of the area, and the
construction of streets, bridges, waterworks, sewerage and other municipal improvements in the Capital City of the Philippines.

The bonds so authorized to be issued shall bear such date and in such form as the President of the Philippines may determine and shall bear such rate of
interest and run for such length of time as may be determined by the President. Both principal and interest shall be payable in Philippine currency or its
equivalent in the United States currency, in the discretion of the Secretary of Finance, at the Treasury of the Philippines, and the interest shall be payable at
such periods as the President of the Philippines may determine.

Said bonds shall be exempt from taxation by the Government of the Republic of the Philippines or by any political or municipal subdivisions thereof,
which fact shall be stated upon their face, in accordance with this Act, under which the said bonds are issued. [Emphasis supplied]

Petitioner maintains that the portion (paid in tax-exempt Government Bonds) of the profit it derived from the expropriation of its property should not be made
subject to income tax, for the reasons that: (1) the Republic of the Philippines gave no concession to petitioner in the compromise agreement involved in this case
except that, as testified to by the lawyer who represented petitioner in the negotiations which led to the compromise agreement in question, it was understood
between the parties, and it was precisely the only inducement, according to the witness, that made petitioner accept payment of P625,315.90 in Government Bonds
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instead of cash, that said bonds would be "tax-free"; now, it is argued that by "tax-free" is meant that by acceptance of the bonds rather than cash, petitioner would
not also have to pay income tax on the exchange gain from said bonds;  2 (2) that the third paragraph of Section 9 of the Act granting tax exemption on bonds issued
thereunder was inserted in the law as a further inducement to private land owners within the new capital site to part away with their properties in favor of the
Government other than for cash, which legislative history of the law allegedly sustains the position of petitioner; and (3) Congress must have really intended such
income tax exemption under Republic Act No. 333, since, similar provisions in Republic Act No. 1400,  3 likewise involving the expropriation of private estates,
expressly declare that the price paid by the Government for the lands acquired for resale to tenants under the authority of said Act (Republic Act No. 1400) shall
not be considered as income of the landowner for purposes of the income tax. This reasoning was brushed aside by the respondent Court of Tax Appeals in its
decision under review, on the following rationale:

Petitioner contends that since the Government bonds which it received as part payment of the price of its lot were exempt from taxation, the deficiency
assessment made by respondent against it is not in order. On the other hand, respondent claims that the exemption of Government bonds refers only the
documentary stamps on the bonds and does not include income tax on the income derived by petitioner which was paid to him in the form of bonds.

The pertinent portion of Section 9 of Republic Act No. 333, which is the sole basis of petitioner's claim for exemption, provides:

Said bonds shall be exempt from taxation by the Government of the Republic of the Philippines or by any political or municipal subdivision
thereof, which fact shall be stated upon their face, in accordance with this Act, under which the said bonds are issued.

There can be no question that petitioner is taxable on its income derived from the sale of its property to the Government. The fact that a portion of the
purchase price of the property was paid by the Government in the form of tax exempt bonds does not operate to exempt said income from income tax. The
income from the sale of the land in question and the bond are two different and distinct taxable items so that the exemption of one does not operate to
exempt the other, unless the law expressly so provides.

It is alleged that to deny exemption from income tax on the amount represented by the said bonds would be to nullify the purpose of the law in granting
exemption. The question has been asked: If income or gain derived from the acceptance of such bonds in exchange for private estates would be taxed,
what inducement did such provision of Republic Act No. 333 give to landowners to accept payment in bonds for their properties in the proposed site of the
Capital City? To our mind, there is sufficient inducement, and that is, the exemption not only of the bonds from documentary stamp tax but also of the
interest derived from such bonds. Section 29(b) (4) of the National Internal Revenue Code exempts interest derived from such bonds from income tax to
the extent provided in the law authorizing the issue thereof.

Counsel for petitioner also alleged that the prevailing rule obtaining in the United States before removal of exemptions of government obligations was to
exempt such bonds from income tax both as to principal and interest. To quote from the memorandum of counsel:

... Actually, most of the Federal Treasury Bonds issued by the U.S. Government from 1921 to 1941, or before the Public Debt Acts of 1941 and
1942, that removed tax exemptions on obligations issued by the United States and its agencies and its instrumentalities, were —

'exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any States, or any of the possessions of
the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, known as
surtaxes and excess profits and war profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals,

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 partnerships, associations, or corporations. (I Mertens, Law of Federal Income Taxation, pp. 297-313).' [See page 12, Memorandum of counsel for
petitioner, March 20, 1963.]

Apparently the import of the ruling quoted above from the book of Mertens has not been clearly understood. We think that the exemption referred to
therein of both principal and interest has reference to the exemption from income tax of the income derived from the sale or exchange of the bonds and the
interest paid by the U.S. Government on such bonds. The opinion quoted from Mertens is inapplicable to the instant case because it does not refer to any
income derived by petitioner from the sale or exchange of bonds received by petitioner from the Government under Republic Act No. 333. The tax here
involved is on the income derived from the sale of petitioner's property to the Government, not the income derived from the sale or exchange of the bonds.

Mention has been made of Republic Act No. 1400, Section 22 of which provides that 'the purchase price paid by the Government for any agricultural land
acquired for resale to tenants under the authority of this Act, whether by negotiation or expropriation, shall not be considered as income of the landowner
concerned for purposes of the income tax.' It is argued that since Republic Acts Nos. 333 and 1400 are in pari materia both should be construed together,
and since Republic Act No. 1400 exempts income derived from the sale of property to the Government under said Act, the same exemption should also
apply to income derived from the sale of property to the Government under Republic Act No. 333. It is precisely because Republic Act No. 1400 contains
an express exemption from income tax of the income derived by property owners from the sale of their lands under said Act and the absence of a similarly
provision in Republic Act No. 333 which indicates plainly that Congress intended not to grant such exemption to landowners under Republic Act No. 333.
If Congress had intended to grant exemption from income tax with respect to income derived by a person from the sale of his property under Republic Act
No. 333, it should have expressly made an express provision to that effect as it did in Republic Act No. 1400; that it did not, is a clear indication that its
purpose was to withhold such exemption.

We find no cogent reasons to disturb the above holding of the Court of Tax Appeals. It has been the constant and uniform holding of this Court that exemption
from taxation is not favored and is never presumed; in fact, if it is granted, the grant must be strictly construed against the taxpayer.  4 Affirmatively put, the law
requires courts to frown on alleged exemptions from taxation, hence, an exempting provision in a legislative enactment should be construed in  strictissimi
juris 5 against the taxpayer and liberally in favor of the taxing authority.  6 This Court has been most consistent in this holding. In Asiatic Petroleum Co. vs.
Llanes, 7 it was explained beyond any possibility of miscomprehension that: .

... Exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious to the law. He who claims an exemption must be
able to point to some positive provision of law creating the right. It cannot be allowed to exist upon a vague implication ... The books are full of very
strong expressions on this point. As was said by the Supreme Court of Tennessee in Memphis vs. U & P. Bank (91 Tenn. 546, 550), 'The right of taxation
is inherent in the State. It is a prerogative essential to the perpetuity of the government; and he who claims an exemption from the common burden, must
justify his claim by the clearest grant of organic or statute law.' Other utterances equally or more emphatic come readily to hand from the highest authority.
In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard 416), it was said by Chief Justice Taney, that the right of taxation will not be held to have been
surrendered, 'unless the intention to surrender is manifested by words too plain to be mistaken.' In the case of the Delaware Railroad Tax (18 Wallace 206,
226), the Supreme Court of the United States said that the surrender, when claimed, must be shown by clear, unambiguous language, which will admit of
no reasonable construction consistent with the reservation of the power. If a doubt arises as to the intent of the legislature, that doubt must be resolved in
favor of the State. In Erie Railway Company vs. Commonwealth of Pennsylvania (21 Wallace 492, 499), Mr. Justice Hunt, speaking of exemptions,
observed that the State cannot strip itself of the most essential power of taxation by doubtful words. 'It cannot by ambiguous language, be deprived of this
highest attribute of sovereignty.' In Tennessee vs. Whitworth (117 U.S. 129, 136), it was said: 'In all cases of this kind the question is as to the intent of the
legislature, the presumption always being against any surrender of the taxing power.' In Farrington vs. Tennessee and County of Shelby (95 U.S. 679,
686), Mr. Justice Swayne said: '... When exemption is claimed it must be shown indubitably to exist. At the outset every presumption is against it. A well-
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 founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition
can be supported.'

The above rules should be applied to the case at bar where the law invoked (Section 9 of Republic Act No. 333) does not make any reference whatsoever to
exemption of income derived from sale of expropriated property thereunder unlike under Republic Act No. 1400 where relative to the price paid by the
Government for any agricultural land acquired for resale to tenants there is an express declaration that the same "shall not be considered as income of the
landowner concerned for purposes of the income tax." Nor are We convinced by the argument that the particular provision of Republic Act No. 333 relied upon
which grants exemption on bonds issued thereunder for purposes of inducement to private landowners within the new capital site to part away with their properties
in favor of the Government other than for cash should be taken to mean that said property owners need not pay income tax on their income derived from the sale of
such properties. The pertinent Congressional Record of the proceedings held during the consideration of the bill which later became Republic Act No. 333,  8 does
not show that Congress had intended to exempt said property owners from the payment of income tax on the proceeds of the sale of their properties when the same
is paid in government bonds issued under the said law. Likewise even were We to assume for the sake of argument, that the Capital City Planning Commission and
other officials of the government did make some assurance or promise to herein petitioner that the portion of the price of its expropriated property paid in tax-
exempt government bonds would not be made subject to income tax payment, such assurance or promise, made without statutory sanction, cannot bind the
Government. The same amounts to a surrender of the State's power to require payment of income tax, which in this case is not explicitly granted by Republic Act
No. 333. It is a well-known rule that erroneous application and enforcement of the law by public officers do not block subsequent correct application of the
statute, 9 and that the Government is never estopped by mistake or error on the part of its agents. 10 In the present circumstances, the Collector of Internal Revenue is
right in assessing against petitioner the deficiency income tax in question, consonant with the proposition that income from expropriation proceedings is income
from sales or exchange and therefore taxable. 11

FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals under review is affirmed, with costs against herein petitioner.

CIR vs. Manila Bankers Life Ins. Co., G.R. No. 169103. March 16, 2011
This is a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue (CIR) of the April 29, 2005 Decision 2 and July 27, 2005 Resolution3 of
the Court of Appeals in CA-G.R. SP No. 70600, which upheld the April 4, 2002 Decision 4 of the Court of Tax Appeals (CTA) in CTA Case No. 6189.

The facts as found by the CTA and Court of Appeals are undisputed.

Respondent Manila Bankers’ Life Insurance Corporation is a duly organized domestic corporation primarily engaged in the life insurance business. 5

On May 28, 1999, petitioner Commissioner of Internal Revenue issued Letter of Authority No. 000020705 6 authorizing a special team of Revenue Officers to
examine the books of accounts and other accounting records of respondent for taxable year "1997 & unverified prior years." 7

On December 14, 1999, based on the findings of the Revenue Officers, the petitioner issued a Preliminary Assessment Notice 8 against the respondent for its
deficiency internal revenue taxes for the year 1997. The respondent agreed to all the assessments issued against it except to the amount of ₱2,351,680.90
representing deficiency documentary stamp taxes on its policy premiums and penalties. 9

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Thus, on January 4, 2000, the petitioner issued against the respondent a Formal Letter of Demand 10 with the corresponding Assessment Notices attached, 11 one of
which was Assessment Notice No. ST-DST2-97-0054-2000 12 pertaining to the documentary stamp taxes due on respondent’s policy premiums: The tax deficiency
was computed by including the increases in the life insurance coverage or the sum assured by some of respondent’s life insurance plans 14: The amount of
₱818,919,000.00 comprises the increases in the sum assured for the respondent’s ordinary insurance – the "Money Plus Plan" ( ₱74,755,000.00), and group
insurance (₱744,164,000.00).16

On February 3, 2000, the respondent filed its Letter of Protest 17 with the Bureau of Internal Revenue (BIR) contesting the assessment for deficiency documentary
stamp tax on its insurance policy premiums. Despite submission of documents on April 3, 2000, 18 as required by the BIR in its March 20, 2000 19 letter, the
respondent’s Protest was not acted upon by the BIR within the 180-day period given to it by Section 228 of the 1997 National Internal Revenue Code (NIRC)
within which to rule on the protest. Hence, on October 26, 2000, the respondent filed a Petition for Review with the CTA for the cancellation of Assessment
Notice No. ST-DST2-97-0054-2000. The respondent invoked the CTA’s March 30, 1993 ruling in the similar case of Lincoln Philippine Life Insurance Company,
Inc. (now Jardine-CMA Life Insurance Company, Inc.) v. Commissioner of Internal Revenue, 20 wherein the CTA held that the tax base to be used in computing
the documentary stamp tax is the value at the time the instrument is issued because the documentary stamp tax is levied and paid only once, which is at the time
the taxable document is issued.

On April 4, 2002, the CTA granted the respondents’ Petition with the dispositive portion as follows:

WHEREFORE, in the light of all the foregoing, respondent Commissioner of Internal Revenue is hereby ORDERED to CANCEL and WITHDRAW Assessment
Notice No. ST-DST2-97-0054-2000 dated January 4, 2000 in the amount of ₱2,351,680.90 representing deficiency documentary stamp taxes for the taxable year
1997.21

The CTA, applying the Tax Code Provisions then in force, held that:

[T]he documentary stamp tax on life insurance policies is imposed only once based on the amount insured at the time of actual issuance of such policies. The
documentary stamp tax which is in the nature of an excise tax is imposed on the document as originally issued. Therefore, any subsequent increase in the insurance
coverage resulting from policies which have been subjected to the documentary stamp tax at the time of their issuance, is no longer subject to the documentary
stamp tax.22

Aggrieved by the decision, the petitioner went to the Court of Appeals on a Petition for Review 23 docketed as CA-G.R. SP No. 70600 on the ground that:

THE TAX COURT ERRED IN RULING THAT INCREASES IN THE COVERAGE OR THE SUM ASSURED BY AN EXISTING INSURANCE POLICY IS
NOT SUBJECT TO THE DOCUMENTARY STAMP TAX. (DST).24

On April 29, 2005, the Court of Appeals sustained the cancellation of Assessment Notice No. ST-DST2-97-0054-2000 in its Decision, the decretal portion of
which reads:

WHEREFORE, all considered and finding no merit in the herein appeal, judgment is hereby rendered upholding the April 4, 2002, CTA Decision in CTA Case
No. 6189 entitled "Manila Bankers’ Life Insurance Corporation, Petitioner, versus Commissioner of Internal Revenue, Respondent. 25 The Court of Appeals, in
upholding the decision of the CTA, said that the subject of the documentary stamp tax is the issuance of the instrument representing the creation, change or
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cessation of a legal relationship. 26 It further held that because the legal status or nature of the relationship embodied in the document has no bearing at all on the
tax, the fulfillment of suspensive conditions incorporated in the respondent’s policies, as claimed by the petitioner, would still not give rise to new documentary
stamp tax payments.27

The petitioner asked for reconsideration of the above Decision and cited this Court’s March 19, 2002 Decision in Commissioner of Internal Revenue v. Lincoln
Philippine Life Insurance Company, Inc., 28 the very same case the respondent invoked before the CTA. The petitioner argued that in Lincoln, this Court reversed
both the CTA and the Court of Appeals and sustained the validity of the deficiency documentary stamp tax imposed on the increase in the sum insured even
though no new policy was issued because the increase, by reason of the "Automatic Increase Clause," was already definite at the time the policy was issued.

On July 27, 2005, the Court of Appeals sustained its ruling, and stated that the Lincoln Case was not applicable because the increase in the sum assured in
Lincoln’s insurance policy was definite and determinable at the time such policy was issued as the automatic increase clause, which allowed for the increase,
formed an integral part of the policy; whereas in the respondent’s case, "the tax base of the disputed deficiency assessment was not [a] definite or determinable
increase in the sum assured."29

The petitioner is now before us praying for the nullification of the Court of Appeals’ April 29, 2005 Decision and July 27, 2005 Resolution and to have the
assessment for deficiency documentary stamp tax on respondent’s policy premiums, plus 25% surcharge for late payment and 20% annual interest, sustained 30 on
the following arguments:

A. THE APPLICABLE PROVISIONS OF THE NIRC AT THE TIME THE ASSESSMENT FOR DEFICIENCY DOCUMENTARY STAMP TAX WAS
ISSUED PROVIDE THAT DOCUMENTARY STAMP TAX IS COLLECTIBLE NOT ONLY ON THE ORIGINAL POLICY BUT ALSO UPON RENEWAL
OR CONTINUANCE THEREOF.
B. THE AMOUNT INSURED BY THE POLICY AT THE TIME OF ITS ISSUANCE NECESSARILY INCLUDED THE ADDITIONAL SUM AS A RESULT
OF THE EXERCISE OF THE OPTION UNDER THE "GUARANTEED CONTINUITY" CLAUSE IN RESPONDENT’S INSURANCE POLICIES.
C. THE "GUARANTEED CONTINUITY" CLAUSE OFFERS TO THE INSURED AN OPTION TO AVAIL OF THE RIGHT TO RENEW OR CONTINUE
THE POLICY. IF AND WHEN THE INSURED AVAILS OF SUCH OPTION AND SUCH GUARANTEED CONTINUITY CLAUSE TAKES EFFECT, THE
INSURER IS LIABLE FOR DEFICIENCY DOCUMENTARY STAMP TAX CORRESPONDING TO THE INCREASE OF THE INSURANCE COVERAGE.
D. SECTION 198 OF THE 1997 NIRC CLEARLY STATES THAT THE DOCUMENTARY STAMP TAX IS IMPOSABLE UPON RENEWAL OR
CONTINUANCE OF ANY POLICY OF INSURANCE OR THE RENEWAL OR CONTINUANCE OF ANY CONTRACT BY ALTERING OR OTHERWISE,
AT THE SAME RATE AS THAT IMPOSED ON THE ORIGINAL INSTRUMENT. 31

As can be gleaned from the facts, the deficiency documentary stamp tax was assessed on the increases in the life insurance coverage of two kinds of policies: the
"Money Plus Plan," which is an ordinary term life insurance policy; and the group life insurance policy. The increases in the coverage of the life insurance policies
were brought about by the premium payments made subsequent to the issuance of the policies. The Money Plus Plan is a 20-year term ordinary life insurance plan
with a "Guaranteed Continuity Clause" which allowed the policy holder to continue the policy after the 20-year term subject to certain conditions. Under the plan,
the policy holders paid their premiums in five separate periods, with the premium payments, after the first period premiums, to be made only upon reaching a
certain age. The succeeding premium payments translated to increases in the sum assured. Thus, the petitioner believed that since the documentary stamp tax was
affixed on the policy based only on the first period premiums, then the succeeding premium payments should likewise be subject to documentary stamp tax. In the
case of respondent’s group insurance, the deficiency documentary stamp tax was imposed on the premiums for the additional members to already existing and

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effective master policies. The petitioner concluded that any additional member to the group of employees, who were already insured under the existing mother
policy, should similarly be subjected to documentary stamp tax. 32

The resolution of this case hinges on the validity of the imposition of documentary stamp tax on increases in the coverage or sum assured by existing life insurance
policies, even without the issuance of new policies.

In view of the fact that the assessment for deficiency documentary stamp tax covered the taxable year 1997, the relevant and applicable legal provisions are those
found in the 1977 National Internal Revenue Code (Tax Code) as amended, 33 to wit:

Section 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. — Upon documents, instruments, loan agreements and papers, and
upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect
of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making,
signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises
from Philippine sources or the property is situated in the Philippines, and the same time such act is done or transaction had: Provided, That whenever one party to
the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax. 34

Section 183. Stamp Tax on Life Insurance Policies. — On all policies of insurance or other instruments by whatever name the same may be called, whereby any
insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of fifty centavos on each two hundred pesos or
fractional part thereof, of the amount insured by any such policy. 35 (Emphases ours.)

Documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation,
right or property incident thereto. 36 It is in the nature of an excise tax because it is imposed upon the privilege, opportunity or facility offered at exchanges for the
transaction of the business. It is an excise upon the facilities used in the transaction of the business distinct and separate from the business itself. 37

To elucidate, documentary stamp tax is levied on the exercise of certain privileges granted by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments. Examples of these privileges, the exercise of which are subject to documentary stamp tax, are leases of
lands, mortgages, pledges, trusts and conveyances of real property. Documentary stamp tax is thus imposed on the exercise of these privileges through the
execution of specific instruments, independently of the legal status of the transactions giving rise thereto. The documentary stamp tax must be paid upon the
issuance of these instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or unenforceable. 38

Accordingly, the documentary stamp tax on insurance policies, though imposed on the document itself, is actually levied on the privilege to conduct insurance
business. Under Section 173, the documentary stamp tax becomes due and payable at the time the insurance policy is issued, with the tax based on the amount
insured by the policy as provided for in Section 183.

Documentary Stamp Tax on the "Money Plus Plan" The petitioner would have us reverse both the CTA and the Court of Appeals based on our decision in
Commissioner of Internal Revenue v. Lincoln Philippine Life Insurance Company, Inc. 39

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The Lincoln case has been invoked by both parties in different stages of this case. The respondent relied on the CTA’s ruling in the Lincoln case when it elevated
its protest there; and when we reversed the CTA’s ruling therein, the petitioner called the Court of Appeals’ attention to it, and prayed for a decision upholding the
assessment for deficiency documentary stamp tax just like in the Lincoln case.

It is therefore necessary to briefly discuss the Lincoln case to determine its applicability, if any, to the case now before us. Prior to 1984,  Lincoln Philippine Life
Insurance Company, Inc. (Lincoln) had been issuing its "Junior Estate Builder Policy," a special kind of life insurance policy because of a clause which provided
for an automatic increase in the amount of life insurance coverage upon attainment of a certain age by the insured without the need of a new policy.
As Lincoln paid documentary stamp taxes only on the initial sum assured, the CIR issued a deficiency documentary stamp tax assessment for the year 1984, the
year the clause took effect. Both the CTA and the Court of Appeals found no basis for the deficiency assessment. As discussed above, however, this Court reversed
both lower courts and sustained the CIR’s assessment.

This Court ruled that the increase in the sum assured brought about by the "automatic increase" clause incorporated in Lincoln’s Junior Estate Builder Policy was
still subject to documentary stamp tax, notwithstanding that no new policy was issued, because the date of the effectivity of the increase, as well as its amount,
were already definite and determinable at the time the policy was issued. As such, the tax base under Section 183, which is "the amount fixed in the policy," is "the
figure written on its face and whatever increases will take effect in the future by reason of the ‘automatic increase clause.’"  40 This Court added that the automatic
increase clause was "in the nature of a conditional obligation under Article 1181, 41 by which the increase of the insurance coverage shall depend upon the
happening of the event which constitutes the obligation." 42

Since the Lincoln case, wherein the then CIR’s arguments for the BIR are very similar to the petitioner’s arguments herein, was decided in favor of the BIR, the
petitioner is now relying on our ruling therein to support his position in this case. Although the two cases are similar in many ways, they must be distinguished by
the nature of the respective "clauses" in the life insurance policies involved, where we note a major difference. In Lincoln, the relevant clause is the "Automatic
Increase Clause" which provided for the automatic increase in the amount of life insurance coverage upon the attainment of a certain age by the insured, without
any need for another contract. In the case at bar, the clause in contention is the "Guaranteed Continuity Clause" in respondent’s Money Plus Plan, which reads:

GUARANTEED CONTINUITY

We guarantee the continuity of this Policy until the Expiry Date stated in the Schedule provided that the effective premium is consecutively paid when due or
within the 31-day Grace Period.

We shall not have the right to change premiums on your Policy during the 20-year Policy term.

At the end of each twenty-year period, and provided that you have not attained age 55, you may renew your Policy for a further twenty-year period. To renew, you
must submit proof of insurability acceptable to MBLIC and pay the premium due based on attained age according to the rates prevailing at the time of renewal. 43

A simple reading of respondent’s guaranteed continuity clause will show that it is significantly different from the "automatic increase clause" in Lincoln. The only
things guaranteed in the respondent’s continuity clause were: the continuity of the policy until the stated expiry date as long as the premiums were paid within the
allowed time; the non-change in premiums for the duration of the 20-year policy term; and the option to continue such policy after the 20-year period, subject to
certain requirements. In fact, even the continuity of the policy after its term was not guaranteed as the decision to renew it belonged to the insured, subject to
certain conditions. Any increase in the sum assured, as a result of the clause, had to survive a new agreement between the respondent and the insured. The increase

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in the life insurance coverage was only corollary to the new premium rate imposed based upon the insured’s age at the time the continuity clause was availed of. It
was not automatic, was never guaranteed, and was certainly neither definite nor determinable at the time the policy was issued.

Therefore, the increases in the sum assured brought about by the guaranteed continuity clause cannot be subject to documentary stamp tax under Section 183 as
insurance made upon the lives of the insured.

However, it is clear from the text of the guaranteed continuity clause that what the respondent was actually offering in its Money Plus Plan was the option to renew
the policy, after the expiration of its original term. Consequently, the acceptance of this offer would give rise to the renewal of the original policy.

The petitioner avers that these life insurance policy renewals make the respondent liable for deficiency documentary stamp tax under Section 198.

Section 198 of the old Tax Code reads:

Section 198. Stamp Tax on Assignments and Renewals of Certain Instruments. – Upon each and every assignment or transfer of any mortgage, lease or policy
of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by altering or otherwise, there shall
be levied, collected and paid a documentary stamp tax, at the same rate as that imposed on the original instrument. 44

Section 198 speaks of assignments and renewals. In the case of insurance policies, this section applies only when such policy was assigned or transferred. The
provision which specifically applies to renewals of life insurance policies is Section 183:

Section 183. Stamp Tax on Life Insurance Policies. — On all policies of insurance or other instruments by whatever name the same may be called, whereby any
insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of fifty centavos on each two hundred pesos or
fractional part thereof, of the amount insured by any such policy. (Emphasis ours.)

Section 183 is a substantial reproduction of the earlier documentary stamp tax provision, Section 1449(j) of the Administrative Code of 1917. Regulations No. 26,
or The Revised Documentary Stamp Tax Regulations, 45 provided the implementing rules to the provisions on documentary stamp tax under the Administrative
Code of 1917. Section 54 of the Regulations, in reference to what is now Section 183, explicitly stated that the documentary stamp tax imposed under that section
is also collectible upon renewals of life insurance policies, viz:

Section 54. Tax also due on renewals. – The tax under this section is collectible not only on the original policy or contract of insurance but also upon the renewal
of the policy or contract of insurance. To argue that there was no new legal relationship created by the availment of the guaranteed continuity clause would mean
that any option to renew, integrated in the original agreement or contract, would not in reality be a renewal but only a discharge of a pre-existing obligation. The
truth of the matter is that the guaranteed continuity clause only gave the insured the right to renew his life insurance policy which had a fixed term of twenty years.
And although the policy would still continue with essentially the same terms and conditions, the fact is, its maturity date, coverage, and premium rate would have
changed. We cannot agree with the CTA in its holding that "the renewal, is in effect treated as an increase in the sum assured since no new insurance policy was
issued."46 The renewal was not meant to restore the original terms of an old agreement, but instead it was meant to extend the life of an existing agreement, with
some of the contract’s terms modified. This renewal was still subject to the acceptance and to the conditions of both the insured and the respondent. This is entirely
different from a simple mutual agreement between the insurer and the insured, to increase the coverage of an existing and effective life insurance policy.

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It is clear that the availment of the option in the guaranteed continuity clause will effectively renew the Money Plus Plan policy, which is indisputably subject to
the imposition of documentary stamp tax under Section 183 as an insurance renewed upon the life of the insured.

Documentary Stamp Tax on Group Life Insurance

The petitioner is also asking this Court to sustain his deficiency documentary stamp tax assessment on the additional premiums earned by the respondent in its
group life insurance policies.

This Court, in Pineda v. Court of Appeals47 has had the chance to discuss the concept of "group insurance," to wit:

In its original and most common form, group insurance provides life or health insurance coverage for the employees of one employer.

The coverage terms for group insurance are usually stated in a master agreement or policy that is issued by the insurer to a representative of the group or to an
administrator of the insurance program, such as an employer. The employer acts as a functionary in the collection and payment of premiums and in performing
related duties. Likewise falling within the ambit of administration of a group policy is the disbursement of insurance payments by the employer to the employees.
Most policies, such as the one in this case, require an employee to pay a portion of the premium, which the employer deducts from wages while the remainder is
paid by the employer. This is known as a contributory plan as compared to a non-contributory plan where the premiums are solely paid by the employer.

Although the employer may be the titular or named insured, the insurance is actually related to the life and health of the employee. Indeed, the employee is in the
position of a real party to the master policy, and even in a non-contributory plan, the payment by the employer of the entire premium is a part of the total
compensation paid for the services of the employee. Put differently, the labor of the employees is the true source of the benefits, which are a form of additional
compensation to them.48 (Emphasis ours.)

When a group insurance plan is taken out, a group master policy is issued with the coverage and premium rate based on the number of the members covered at that
time. In the case of a company group insurance plan, the premiums paid on the issuance of the master policy cover only those employees enrolled at the time such
master policy was issued. When the employer hires additional employees during the life of the policy, the additional employees may be covered by the same group
insurance already taken out without any need for the issuance of a new policy. The respondent claims that since the additional premiums represented the additional
members of the same existing group insurance policy, then under our tax laws, no additional documentary stamp tax should be imposed since the appropriate
documentary stamp tax had already been paid upon the issuance of the master policy. The respondent asserts that since the documentary stamp tax, by its nature, is
paid at the time of the issuance of the policy, "then there can be no other imposition on the same, regardless of any change in the number of employees covered by
the existing group insurance."49

To resolve this issue, it would be instructive to take another look at Section 183: On all policies of insurance or other instruments by whatever name the same may
be called, whereby any insurance shall be made or renewed upon any life or lives.

The phrase "other instruments" as also found in the earlier version of Section 183, i.e., Section 1449(j) of the Administrative Code of 1917, was explained in
Regulations No. 26, to wit:

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Section 52. "Other instruments" defined. – The term "other instruments" includes any instrument by whatever name the same is called whereby insurance is made
or renewed, i.e., by which the relationship of insurer and insured is created or evidenced, whether it be a letter of acceptance, cablegrams, letters, binders, covering
notes, or memoranda. (Emphasis ours.)

Whenever a master policy admits of another member, another life is insured and covered. This means that the respondent, by approving the addition of another
member to its existing master policy, is once more exercising its privilege to conduct the business of insurance, because it is yet again insuring a life. It does not
matter that it did not issue another policy to effect this change, the fact remains that insurance on another life is made and the relationship of insurer and insured is
created between the respondent and the additional member of that master policy. In the respondent’s case, its group insurance plan is embodied in a contract which
includes not only the master policy, but all documents subsequently attached to the master policy. 50 Among these documents are the Enrollment Cards
accomplished by the employees when they applied for membership in the group insurance plan. The Enrollment Card of a new employee, once registered in the
Schedule of Benefits and attached to the master policy, becomes evidence of such employee’s membership in the group insurance plan, and his right to receive the
benefits therein. Everytime the respondent registers and attaches an Enrollment Card to an existing master policy, it exercises its privilege to conduct its business
of insurance and this is patently subject to documentary stamp tax as insurance made upon a life under Section 183.

The respondent would like this Court to ignore the petitioner’s argument that renewals of insurance policies are also subject to documentary stamp tax for being
raised for the first time. This Court was faced with the same dilemma in Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation,51 when the petitioner also raised an issue therein for the first time in the Supreme Court. In addressing the procedural lapse, we said:

As clearly ruled by Us "To allow a litigant to assume a different posture when he comes before the court and challenges the position he had accepted at the
administrative level," would be to sanction a procedure whereby the Court - which is supposed to review administrative determinations - would not review, but
determine and decide for the first time, a question not raised at the administrative forum. Thus it is well settled that under the same underlying principle of prior
exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal. x x x. 52

However, in the same case, we also held that:

Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain administrative
officers should never be allowed to jeopardize the government's financial position. 53 (Emphasis ours.)

Along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. 54 Taxes are the lifeblood of the
government and their prompt and certain availability is an imperious need. It is through taxes that government agencies are able to operate and with which the
State executes its functions for the welfare of its constituents. 55 It is for this reason that we cannot let the petitioner’s oversight bar the government’s rightful
claim.1avvphi1

This Court would like to make it clear that the assessment for deficiency documentary stamp tax is being upheld not because the additional premium payments or
an agreement to change the sum assured during the effectivity of an insurance plan are subject to documentary stamp tax, but because documentary stamp tax is
levied on every document which establishes that insurance was made or renewed upon a life.

WHEREFORE, the petition is GRANTED. The April 29, 2005 Decision and the July 27, 2005 Resolution of the Court of Appeals in CA-G.R. SP No. 70600 are
hereby SET ASIDE. Respondent Manila Bankers’ Life Insurance Corp. is hereby ordered to pay petitioner Commissioner of Internal Revenue the deficiency

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documentary stamp tax in the amount of ₱1,646,449.26, plus the delinquency penalties of 25% surcharge on the amount due and 20% annual interest from January
5, 2000 until fully paid.

PART IV – VAT LAW

Malayan Ins. Co., Inc. vs. St. Francis Square Realty Corp.

This resolves the Petition for Partial Review on Certiorari under Rule 45 of the Rules of Court filed by Malayan Insurance Company, Inc. and the Petition for
Review filed by St. Francis Square Realty Corporation, both seeking to reverse and/or modify the Court of Appeals Decision 1 dated January 27, 2011 in CA-G.R.
SP Nos. 109286 and 109298, which affirmed with modifications the Award 2 dated March 27, 2009 of the Construction Industry Arbitration Commission (CIAC) in
CIAC CASE No. 33-2008 entitled "ST. FRANCIS SQUARE REALTY CORPORATION, Claimant, - versus- MALAYAN INSURANCE COMPANY, INC.,
Respondent."

Malayan Insurance Company, Inc. (Malayan) is a duly-organized domestic corporation engaged in insurance business. Formerly known as ASB Realty
Corporation (ASB), St. Francis Square Realty Corporation (St. Francis) is a duly-organized domestic corporation engaged in real estate development.

The admitted facts are as follows:

1. The parties’ respective juridical existence;
1.1 The ASB Group of Companies, which include the ASB Realty Corporation (now St. Francis Square Realty Corp.), is under rehabilitation with the
Securities and Exchange Commission (SEC) pursuant to a petition dated May 2, 2000;
2. [Malayan], as Owner, and [St. Francis], as Developer, executed a Joint Project Development Agreement (JPDA) on 09 November 1995 for the construction,
development and completion of what was then known as "ASB Malayan Tower" ("the Project"), originally a 50-storey office/residential condominium located at
the ADB Avenue cor. Opal St., Ortigas Center, Pasig City.
3. [Malayan] is the absolute and registered owner of the parcel of land (the Lot) in Pasig City where the Project is located, as evidenced by Transfer Certificate of
Title No. PT-78585 xxx;
4. The Certificate of Registration No. 96-04-2701 issued by the Housing Land Use and Regulatory Board (HLURB) on 12 April 1996 shows that [Malayan] is the
Owner and [St. Francis] is the developer xxx;
5. The License to Sell No. 96-05-2844 issued by the HLURB also refers to [Malayan] as the Owner and [St. Francis] as Developer xxx;
6. The Master Deed with Declaration of Restrictions of the ASB-Malayan Tower dated 13 May 1996 approved by the HLURB and registered with the Register of
Deeds of Pasig City, sets forth Malayan as "the Developer (absolute and registered owner) x x x ;
7. ASB Realty Corporation [now, St. Francis] was not able to complete the Project;
7.1 The parties executed a Memorandum of Agreement (MOA) on 30 April 2002, under which [Malayan] undertook to complete the
condominium project then known as "ASB Malayan Project" that later became "Malayan Plaza Tower" xxx;
8. The MOA was approved by the SEC;
9. The Lot was the subject of a Contract to Sell between [Malayan] as seller and [St. Francis] as buyer, but [St. Francis] was unable to completely perform its
obligation under the Contract to Sell;
10. Under Sec. 2 of the MOA, [Malayan] "shall invest the amount necessary to complete the Project", among other obligations;
11. The basis for the distribution and disposition of the condominium units is the parties’ respective capital investments in the Project as provided in Sec. 4 of the
MOA;

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 11.1 [St. Francis] represented and warranted to Malayan that Malayan can complete the Project at a cost not exceeding Php452,424,849.00 (the
Remaining Construction Cost [RCC]) [Sec. 9 of MOA].
12. The net saleable area included in Schedule 4 of the 30 April 2002 MOA ("Reserved Units") originally covered fifty-three (53) units with thirty-eight (38)
parking spaces. The aforesaid 53 Reserved Units became only thirty-nine (39) units after a reconfiguration was done;
13. The aggregate monetary value of the Reserved Units as fixed by [St. Francis], is One Hundred Seventy-Five Million Eight Hundred Fifty-Six Thousand Three
Hundred Twenty-Three Pesos and 05/100 (P175,856,323.05);
14. Under the MOA, [Malayan] assumed vast powers and revoked all authorities previously granted to [St. Francis] (Section 8 of the MOA, xxx), with the
exception of including [St. Francis] in the bidding committee for bidding of material and services requirements of the Project (Section 9, paragraph v of the MOA,
xxx). The general supervision, management and control of the day-to-day operations were undertaken by [Malayan] (Section 5, paragraph b of the MOA, xxx) but
under Sec. 9 of the MOA, "Malayan shall allow one (1) representative of [St. Francis] to observe the development and completion of the Project";
15. On 24 August 2006, [St. Francis] sent a letter to [Malayan] seeking to reconcile several items amounting to P133.64 million xxx;
16. There was a change in the specification of the floor finish from Narra Parque[t] to Kendall Laminated Flooring;
17. [Malayan] made interest expense, amounting to P37,705,346.62 as of August 2006, as part of its actual construction cost on that date;
18. [St. Francis] filed a case against the Register of Deeds of Pasig City and Atty. Francis Serrano docketed as OMB-C-C-06-0583-J before the Office of the
Ombudsman due to alleged alterations on the Condominium Certificates of Title over the units comprising the net saleable area in Schedule 4 of the MOA;
19. [Malayan] has included some of the units under Schedule 4 of the MOA in the condotel pool managed by Quantum Hotels and Resorts from which it derives
income;
20. Despite the completion of the Project and the turnover of the units to [St. Francis], [Malayan], and other buyers of units, the issue of actual cost of construction
has not been resolved to the mutual satisfaction of the parties; and
21. The parties agreed to submit a list of documents that they admitted the authenticity and due execution thereof. 3

On November 7, 2008, St. Francis filed with the CIAC a Complaint with Prayer for Interim Relief against Malayan. St. Francis alleged that in August 2006, it
secured a copy of a document entitled "cost to complete" from Malayan which fixed the Actual Remaining Construction Cost ( ARCC) at P614,593,565.96. It
disputed several cost items in the ARCC, amounting to P145,487,496.42, and argued that their exclusion would entitle it to some reserved units.

On December 8, 2008, Malayan filed a Verified Answer (With Grounds for Immediate Dismissal), claiming that St. Francis failed to state a cause of action
because the ARCC had already reached P635,018,369.05 as of November 30, 2008, thereby exceeding the Remaining Construction Cost ( RCC) [P452,424,849.00]
by more than the aggregate value of the reserved units [P175,856,323.05]; hence, St. Francis is no longer entitled to any of such units.

On January 20, 2009, a preliminary conference was held where the parties stipulated on facts, formulated issues, and drafted and signed the Terms of Reference
(TOR) which would govern the proceedings of the case. Aside from the above-stated admitted facts, the TOR, which was later amended, listed the following issues
to be determined by the CIAC:

2. What is the meaning or scope of the term Remaining Construction Cost (RCC) as used in the MOA as stated in Par. 11.1 of the Admitted Facts?

2.1. What is the meaning or scope of the term "actual remaining construction cost" as used in the MOA?
2.2. Specifically, were the following costs and expenses part of the actual remaining construction cost incurred by [Malayan] and questioned by [St. Francis] to
wit:

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 2.2.1. Awarded contracts, specifically those pertaining to Narra Parquet Works, Interior Design Works, Sanitary/Plumbing and Fire Protection Works,
Additional Consultant’s Fees and Audio Intercom and Paging System;
2.2.2. Change Orders, pursuant to the reconfiguration done on several of the units;
2.2.3. Interest Expense from loans incurred to finance the construction, development and completion of the Project;
2.2.4. Input Value Added Taxes ("VAT") paid to the government for goods and services utilized from the Project;
2.2.5. Attendance Fees;
2.2.6. Alleged Prolongation Costs and Extended Overhead;
2.2.7. Judgment Award in CIAC Case No. 27-2007 (TVI v MICO); [Additional issue from TOR Amendment]
2.2.8. Contractor’s All Risk Insurance;
2.2.9. Contingency Costs.
2.2.10 Other costs as mentioned in Exhibit "R-24" [Additional issue from TOR Amendment]

5.1. If so, is [St. Francis] entitled to the income therefrom?

On March 2, 2009, St. Francis submitted the Joint Affidavit of Witnesses of Claimant, while Malayan submitted the Joint Affidavit of Respondent’s
Witnesses. Thereafter, both parties submitted their respective Joint Reply-Affidavits. Malayan also filed a Joint Affidavit of Respondent’s Witnesses by Way of (1)
Evidence for New Issue No. 3 Defined under the Amended Terms of Reference; (2) Sur-Rejoinder Affidavit of Claimant’s Witnesses; and (3) Redirect Examination.

Trial ensued during which the witnesses of St. Francis and Malayan testified. Both parties likewise submitted Lists of Exhibits. After trial, the parties
simultaneously filed on April 27, 2009 their respective Memoranda in the form of Draft Decisions.

On May 27, 2009, the CIAC rendered its Award, the dispositive portion of which states:

WHEREFORE, AWARD is hereby made as follows:

FOR THE CLAIMANT[St. Francis]:

GRANT[S] its claims for DISALLOWANCES amounting to ₱52,864,385.00 from the ARCC of P614,593.565.96 under Exhibit C-3;
ALLOCATES 37.8% ownership over the Reserved Units (P66,551,993.09/P175,856,325.05);
As a consequence of these awards, Respondent [Malayan] is hereby DIRECTED to deliver possession and transfer title over the Reserved Units in the proportion
hereby stated.
GRANTS 37.8% proportionate share of the income realized from rentals of the Reserved Units up to the present date.
As a consequence of these awards, Respondent [Malayan] is hereby DIRECTED to pay the Claimant [St. Francis] its proportionate share in the income from the
Reserved Units.
FOR THE RESPONDENT [Malayan]:
ALLOCATES 62.2% proportionate share of the income realized from rentals of the Reserved Units up to the present date (P109,304,331.96/P175,856,325.05);
GRANTS 62.2% proportionate share of the income realized from rentals of the Reserved Units up to the present date.
FOR BOTH CLAIMANT [St. Francis] and RESPONDENT [Malayan], all their Claims and Counterclaims for Attorney’s Fees are DENIED. Arbitration costs are
maintained according to the pro rata sharing that they had initially shared.

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SO ORDERED.5

Dissatisfied with the CIAC Award, both parties filed with the Court of Appeals (CA) their respective Petitions for Review under Rule 43 of the Rules of Court. On
January 27, 2011, the CA affirmed with modifications the CIAC Award, the dispositive portion of the decision reads:

WHEREFORE, premises considered, the CIAC’s Award is hereby AFFIRMED subject to the following modifications:

1) The total amount of deductions should be P15,135,166.51 and this is, in turn, shall be deducted from the Total Actual Remaining Construction Cost
of P615,880,672.47 to arrive at the Net amount of P600,745,505.96 as computed above;

2) St. Francis should be entitled to 16% ownership over the reserved units (P27,535,668.09/P175,856,325.05) ownership of the reserved units to be done
by drawing of lots with the corresponding interest thereon;

3) As a consequence of the above awards, Malayan is hereby DIRECTED to deliver possession and transfer title over the reserved units in accordance and
in the proportion above-stated and to pay St. Francis its proportionate share in the income from the reserved units reckoned from the date of completion of
the Project, that is from June 7, 2006 up to the finality of this decision, and to render full accounting of all the rentals and such other income derived from
said reserved units so awarded to St. Francis;

4) Arbitration Costs shall be maintained pro rata in accordance with their respective shares in the reserved units.

5) Malayan and all others claiming rights under it, are enjoined from exercising acts of ownership over the reserved units relative to the proportionate
share awarded to St. Francis hereunder;

6) The concerned Register of Deeds is directed to immediately reinstate the name of St. Francis Square Realty Corporation (formerly ASB Realty
Corporation) as the registered owner in the corresponding Condominium Certificates of Title Covering the reserved units herein awarded to St. Francis;
and

7) All other awards granted by CIAC in its Award dated 27 May 2009 not affected by the above modifications are affirmed. No costs.

SO ORDERED.6

Aggrieved by the CA decision, both parties filed their respective motions for reconsideration, which were denied in the Resolution dated October 4, 2011. Hence,
the present petitions of both parties.

St. Francis raises the following issues:

I. The Court of Appeals gravely erred in ruling that interest [expenses] should be part of the actual remaining construction cost. The ruling is contrary to
law and the evidence on record.

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 II. The Court of Appeals committed serious error in finding that the actual construction cost is P554,583,160.20. The ruling is contrary to law and the
evidence on record.
III. The Court of Appeals erred in considering VAT as part of the ARCC. This is contrary to the facts and records of the case.
IV. The Court of Appeals committed grave error in allowing the inclusion of the alleged cost of the Contractor’s All Risk Insurance as part of the ARCC.
This is contrary to law and the records of the case.
V. The Court of Appeals committed grave and serious error on its allocation of the reserved units. This is contrary to law and the records of the case. 7

On the other hand, Malayan raises the following issues:

A. THE COURT OF APPEALS COMMITTED SERIOUS LEGAL ERROR IN PLACING THE BURDEN ON MALAYAN TO PROVE THAT IT HAD
ACTUALLY INCURRED THE ARCC, DESPITE THE FACT THAT DURING THE ARBITRAL PROCEEDINGS, ST. FRANCIS HAD NEVER DISPUTED,
AND THEREFORE, ADMITTED, THAT MALAYAN HAD INCURRED THE ARCC. THE COURT OF APPEALS THUS DECIDED A QUESTION OF
SUBSTANCE DEFINITELY NOT IN ACCORD WITH THE BASIC LEGAL PRINCIPLE THAT A PARTY NEED NOT PROVE WHAT HAS NOT BEEN
RAISED, DISPUTED OR PUT IN ISSUE.

B. THE COURT OF APPEALS SERIOUSLY ERRED IN ALLOWING ST. FRANCIS TO BELATEDLY CHANGE ITS THEORY IN ITS DRAFT DECISION
FILED WITH THE CIAC AND ITS APPEAL. THE COURT OF APPEALS THUS DECIDED A QUESTION OF SUBSTANCE IN DISREGARD OF THE
BASIC DUE PROCESS TENET THAT A PARTY CANNOT CHANGE ITS THEORY AFTER TRIAL OR ON APPEAL BECAUSE IN BOTH CASES THE
OTHER PARTY IS DEPRIVED OF THE OPPORTUNITY TO MEET THE NEW ISSUES.

The Court finds partial merit in both the petition for review of St. Francis and the petition for partial review on  certiorari of Malayan. In resolving in seriatim all
the issues raised by both parties, the Court is guided by the rule that findings of fact of quasi-judicial bodies, which have acquired expertise because their
jurisdiction is confined to specific matters, are generally accorded not only respect, but also finality, especially when affirmed by the CA. In particular, factual
findings of construction arbitrators are final and conclusive and not reviewable by this Court on appeal. 9

As exceptions, however, factual findings of construction arbitrators may be reviewed by the Court when the petitioner proves affirmatively that: (1) the award was
procured by corruption, fraud or other undue means; (2) there was evident partiality or corruption of the arbitrators or any of them; (3) the arbitrators were guilty of
misconduct in refusing to hear evidence pertinent and material to the controversy; (4) one or more of the arbitrators were disqualified to act as such under Section
Nine of Republic Act No. 876 and willfully refrained from disclosing such disqualifications or of any other misbehavior by which the rights of any party have been
materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter
submitted to them was not made; (6) when there is a very clear showing of grave abuse of discretion resulting in lack or loss of jurisdiction as when a party was
deprived of a fair opportunity to present its position before the Arbitral Tribunal or when an award is obtained through fraud or the corruption of arbitrators; (7)
when the findings of the CA are contrary to those of the CIAC, and (8) when a party is deprived of administrative due process. 10 Apart from conflicting findings of
fact of the CA and the CIAC as to the propriety of some arbitral awards, mathematical computations, and entitlement to claim certain costs as part of the amount
necessary to complete the project, none of the other exceptions above was shown to obtain in this case. Hence, the Court will not disturb those findings where the
CA and the CIAC are consistent with each other, but will review their findings which are inconsistent and cannot be reconciled.

The Court will discuss first the issues raised by St. Francis.

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III. Input VAT

St. Francis contends that Input VAT should not be treated as part of construction cost, because it is not part of the costs of goods and services purchased or
engaged under Section 11038 of the National Internal Revenue Code (NIRC). According to St. Francis, VAT Ruling No. 053-94, February 9, 1994, states that VAT
paid by a VAT-registered person on his purchases (or input tax) is an asset account in the Balance Sheet and not to be treated as an expense, unless he is exempt
from VAT in which case the VAT paid would form part of the cost to acquire what was purchased. In fact, per Malayan’s own documentary evidence, cash
vouchers in Exhibit"R-48-series," input VAT is indicated as an account separate from the actual cost of services or materials. Also, in Malayan’s audited financial
statements, input VAT is treated as a separate item and was, in fact, claimed as an asset under the heading "Other Assets."

St. Francis further points out that Malayan’s counsel admitted that input VAT is not part of cost when he stated that VAT and interest expense are actually
financial cost and part of its capital contribution in the construction, but, strictly speaking, not directly related construction cost. St. Francis claims that even from
an accounting standpoint, input tax is not entered into the books as part of cost. While contract prices for contractors or suppliers are VAT inclusive, it does not
mean that input VAT is considered part of cost; input VAT is treated as account in a different account, either under "Other assets" or "Input Tax", which is an asset
account. Besides, the input VAT claimed by Malayan as part of its construction cost in the usual course of business as a VAT-able entity is offset or credited
against output VAT to determine the net VAT due or payable to the government. Since Malayan also has output VAT from its sales of condo units in the project
and from sales of insurance policies, it should be able to credit such input VAT and not charge it as part of the construction cost.

St. Francis finally notes that Malayan admitted that it can apply for refund or issuance of tax credit for excess input tax, and will thus benefit twice from charging
input VAT as part of the construction cost. Since input VAT had already been claimed by Malayan, and its audited financial statements show the offsetting of
input VAT against output VAT, then justice and equity dictate that it should not be allowed to claim it as part of the ARCC.

The Court finds no compelling reason to disturb the consistent findings of the CA and the CIAC that Input VAT should be allowed to remain in the ARCC. As
aptly pointed out by the CA and the CIAC, ARCC refers to the actual expenditures made by Malayan to complete the project. The Court thus agrees with Malayan
that in determining whether input VAT should be included as ARCC, the issue is not the technical classification of taxes under accounting rules, but whether such
tax was incurred and paid as part of the construction cost. Given that input VAT is, strictly speaking, a financial cost and not a direct construction cost, it cannot be
denied that Malayan had to pay input VAT as part of the contract price of goods and properties purchased, and services procured in order to complete the project.
Moreover, that the burden of such tax was shifted to Malayan by its suppliers and contractors is evident from the photocopies of cash vouchers and official receipts
on record,39 which separately indicated the VAT component in accordance with Section 113(B) 40 of the Tax Code.41

Anent the claim that it would be unjust and inequitable if Malayan would be allowed to include its input VAT in the ARCC, as well as to offset such tax against its
output tax, the Court finds that such coincidence does not result in unjust enrichment at the expense of St. Francis. Unjust enrichment claims do not lie simply
because one party benefits from the efforts or obligations of others, but instead it must be shown that a party was unjustly enriched in the sense that the term
unjustly could mean illegally or unlawfully. 42 In offsetting its input VAT against output VAT, Malayan is merely availing of the benefits of the tax credit
provisions of the law, and it cannot be said to have benefitted at the expense or to the damage of St. Francis. After all, Malayan is justified in including in the
ARCC the input VAT it had paid as part of the contract price of the goods, properties and services it had procured to complete the project.

At any rate, St. Francis would also be entitled to avail of the same tax credit provisions upon the eventual sale of its proportionate share of the reserved units
allocated and transferred to it by Malayan. It bears emphasis that the allocation of and transfer of such units to St. Francis is subject to output VAT which Malayan
could offset against its input VAT. In turn, St. Francis would incur input VAT which it may later offset against its output VAT upon the sale of the said units. This

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is in accordance with the tax credit method of computing the VAT of a taxpayer whereby the input tax shifted by the seller to the buyer is credited against the
buyer’s output taxes when it in turn sells the taxable goods, properties or services. 43

The Court will now discuss jointly the first three interrelated issues raised by Malayan.

A. Whether St. Francis had never disputed and therefore admitted that Malayan had incurred the ARCC.

B. Whether the CA erred in allowing St. Francis’ to belatedly change its theory in its Draft Decision and in its Appeal.

C. Whether the CA erred in disregarding the uncontroverted testimonial evidence, and focusing solely on documentary evidence.

According to Malayan, the CA overlooked the fact that St. Francis objected only to the perceived impropriety of including certain costs in the ARCC. That
Malayan incurred these costs was never in issue during the arbitral proceedings. In view of the rule that all facts not in issue are admitted, and that all facts
judicially admitted do not require proof, Malayan claims that it should not bear the burden to prove that it had actually incurred its ARCC.

Malayan also notes that St. Francis’ CIAC complaint contained no allegation that Malayan had not actually incurred the costs in its ARCC, nor was there any
claim that specific costs items in the ARCC lacked evidentiary basis, or were otherwise fictitious or fabricated. Malayan argues that if its alleged failure to
substantiate the ARCC was enough basis to question costs included therein, it follows that St. Francis would already have disputed in its complaint the entire
amount of the ARCC. Yet, St. Francis only chose to object to selected items in the ARCC, and not because of the alleged lack of substantiation.

Malayan adds that from the time St. Francis filed its complaint, up to the conclusion of trial, it had the same theory,  i.e., although Malayan had indeed spent for its
ARCC, some costs items ought to be excluded as they could not be considered part of the ARCC. It was only belatedly in its Draft Decision and its Petition before
the CA that St. Francis argued for the first time that new cost items should also be deducted from the ARCC because they were allegedly unsubstantiated or not
fully supported by official receipts. In light of the rule that a party cannot change his theory on appeal when a party adopts a certain theory in the court below,
Malayan faults the CA for excluding new cost items from the ARCC due to lack of substantiation. Besides, Malayan claims that its entire ARCC as of February
29, 2009 was expressly affirmed by its witnesses who are competent to testify due to their involvement in the preparation and monitoring of the project’s budget.

Stating that it did not have the burden of proving that it incurred the costs in its ARCC because this was never in issue, Malayan concludes that the CA should have
held St. Francis to its original theory that Malayan had actually incurred all the items in its ARCC of P647,319,513.96, instead of examining each item included
therein and accepting only P615,880,672.47 as supported by documentary evidence. Finally, Malayan insists that there can be no dispute that it incurred the ARCC
of P647,319,513.96 based on the unrebutted testimony of its witnesses and the voluminous documents it introduced at trial.

Malayan’s contentions are misplaced.

Contrary to the claim that St. Francis admitted that Malayan had incurred the ARCC of P647,319,513.96, the allegations in St. Francis complaint and the Amended
Terms of Reference would show that the substantiation of the cost items included in the ARCC and the exact amount thereof arethe core issues of the construction
arbitration before the CIAC.

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For one, the contention that St. Francis’ complaint contained no allegation that Malayan had not actually incurred the costs in its ARCC, nor was there any claim
that specific costs items in the ARCC lacked evidentiary basis, is belied by the following allegations in same complaint:

2.9 Sometime in August of 2006, [Malayan] presented a cost to complete construction of the Project in the amount of SIX HUNDRED FOURTEEN MILLION
FIVE HUNDRED NINETY THREE THOUSAND FIVE HUNDRED SIXTY FIVE PESOS and 96/100 (P614,593,565.96). Said cost to complete however was
a mere tabulation with a listing of items and appurtenant costs.There was no independent proof or basis as well as evidence that claimant incurred these
costs, much less, if these costs conform with the actual construction cost as the same is understood under the MOA. xxx53

For another, one of the admitted facts in the Amended Terms of Reference states that "[d]espite the completion of the Project and the turnover of the units to [St.
Francis], [Malayan], and other buyers of units, the issue of actual cost of construction has not been resolved to the mutual satisfaction of the parties." 54 Not to
mention, one of the issues raised before the CIAC is "[w]hat is the actual remaining construction cost to complete the Project spent by [Malayan] as of today in
excess of [St. Francis’] estimate RCC?" 55 Clearly, there is no merit in the claim that St. Francis admitted that Malayan had incurred the ARCC of P647,319,513.96
as of October 2008. It can be gathered from the complaint that, as early as August 2006 when the ARCC was just P614,593,565.96, St. Francis already disputed
such amountfor lack of independent proof or evidence that Malayan incurred these costs

Anent Malayan’s claim that St. Francis argued belatedly in its Draft Decision and its petition before the CA that new cost items should also be deducted from the
ARCC because they were allegedly unsubstantiated or not fully supported by official receipts, suffice it to state that whether such cost items should be excluded
from the ARCC is impliedly included in the issue of "[w]hat is the actual remaining construction cost to complete the Project spent by [Malayan] as of today in
excess of [St. Francis’] estimate RCC?" 56

Moreover, in an action arising out of cost overruns on a construction project, the builder who has exclusive control of the project and is in a better position to know
what other factors, if any, caused the increases, has the burden of segregating the overruns attributable to its own conduct from overruns due to other causes. 57 As
the co-owner and developer who assumed the general supervision, management and control over the project, and the one in possession of all the checks, vouchers,
official receipts and other relevant documents, Malayan bears the burden of proving that it incurred ARCC in excess of the RCC and the total aggregate value of
the reserved units, in which case St. Francis would no longer be entitled to a proportionate share in the reserved units pursuant to the MOA.

In view of the foregoing discussion, the Court finds no merit in Malayan’s contentions (1) that it did not have the burden of proving that it incurred the costs in its
ARCC because this was never in issue; and (2) that there can be no dispute that it had incurred the ARCC of P647,319,513.96 based on the unrebutted testimony
of its witnesses and the voluminous documents it introduced at trial.

WHEREFORE, premises considered, the Court of Appeals Decision dated January 27, 2011 in CA-G.R. SP Nos. 109286 and 109298, is AFFIRMED with the
following MODIFICATIONS:

1) The total amount of P57,474,561.39 should be deducted and excluded from the gross Actual Remaining Construction Cost ( ARCC) of P562,866,135.02
to arrive at the net ARCC of P505,391,573.63;

2) Malayan is entitled to 30% ownership over the reserved units (P52,966,724.63/P175,856,325.05), together with the corresponding interest in the income
realized thereon in the same proportion; while St. Francis is entitled to 70% (P122,889,598.42/P175,856,325.05) ownership of the said units, as well as to
its corresponding share in the said income. The distribution of the parties’ proportionate share in the units shall be made by drawing of lots;

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 3) Malayan is directed to deliver possession and transfer title over the reserved units in the proportion above stated, to pay St. Francis its proportionate
share of the income from the reserved units reckoned from the date of the completion of the project on June 7, 2006 up to the finality of this decision, and
to render full accounting of all the upkeep expenses, rentals and such other income derived from the reserved units so awarded to St. Francis;

4) Arbitration costs are maintained pursuant to the pro rata sharing that the parties had initially shared in accordance with the amounts claimed and
counterclaimed by them, namely, St. Francis: P936,775.29; and Malayan: P127,742.09;

5) Malayan and all others claiming rights under it, are enjoined from exercising acts of ownership over the reserved units relative to the proportionate
share awarded to St. Francis;

6) The Register of Deeds of Pasig City is directed to immediately reinstate the name of St. Francis Square Realty Corporation (formerly ASB Realty
Corporation) as the registered owner in the corresponding Condominium Certificates of Title covering the reserved units awarded to St. Francis; and

7) All other awards granted by CIAC in its Award dated May 27, 2009 which are not affected by the above modifications are affirmed. No costs.

CIR vs. Sec. of Justice

Petitioner Commissioner of Internal Revenue (CIR) commenced this special civil action for certiorari to annul the December 22, 2006 resolution1 and the March
12, 2007 resolution,2 both issued by the Secretary of Justice in OSJ Case No. 2004-1, alleging that respondent Secretary of Justice acted without or in excess of his
jurisdiction, or in grave abuse of discretion amounting to lack or excess of jurisdiction.

The dispositive portion of the assailed December 22, 2006 resolution states:

WHEREFORE, premises considered, PAGCOR is declared exempt from payment [oil all taxes, save for the franchise tax as provided for under Section 13 of PD
1869, as amended, the presidential issuance not having been expressly repealed by RA 7716. 3

while the March 12, 2007 resolution denied the CIR’s motion for reconsideration of the December 22, 2006 resolution.

Antecedents

Respondent Philippine Amusement and Gaming Corporation (PAGCOR) has operated under a legislative franchise granted by Presidential Decree No. 1869 (P.O.
No. 1869), its Charter,4 whose Section 13(2) provides that:

(2) Income and other Taxes - (a) Franchise Holder:

No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall he assessed and
collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a
Franchise Tax of five percent (S(X1) of the gross revenue or earnings derived by the Corporation from its operation under this Franchise . Such tax shall

Page 138 of 164

be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial or national government authority. (bold emphasis supplied)

Notwithstanding the aforesaid 5% franchise tax imposed, the Bureau of Internal Revenue (BIR) issued several assessments against PAGCOR for alleged
deficiency value-added tax (VAT), final withholding tax on fringe benefits, and expanded withholding tax, as follows:

On December 18, 2002, PAGCOR filed a letter-protest with the BIR against Assessment Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99. 8

On March 31, 2003, PAGCOR filed a letter-protest against Assessment Notice No. 33-2000, in which it reiterated the asse1iions made in its December 18, 2002
letter-protest.9

In reply to both letters-protest, the BIR requested PAGCOR to submit additional documents to enable the conduct of the reinvestigation. 10

The CIR did not act on PAGCOR’s letter-protest against Assessment Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99 within the 180-day period
from the latter's submission of additional documents. 11 Hence, PAGCOR filed an appeal with the Secretary of Justice on January 5, 2004 relative to Assessment
Notice No. 33-1996/1997 /1998 and Assessment Notice No. 33-99. 12

Meanwhile, in response to PAGCOR’s letter-protest dated March 31, 2003, BIR Regional Director Teodorica Arcega issued a letter dated December 15, 2003
reiterating the assessment for deficiency VAT for taxable year 2000, 13 stating thusly:

In a memorandum to the Regional Director dated December 15, 2003 the Chief Legal Division, this Region, confirmed the taxability of PAGCOR under Section
108(A) of the 1997 Tax Code, as amended, effective Jan. 1, 1996 (VAT Review Committee Ruling No. 041-2001 )

In view of the confirmation of the Legal Division we hereby reiterate the assessments forwarded to your office under Final Assessment No. 33-2000 dated March
18, 2003 amounting to ₱2,097,426,943.00.

However, the BIR only recomputed the deficiency final withholding tax on fringe benefits and expanded withholding tax, and reduced the assessments to ₱l2,212,
199.85 and ₱6,959,525. l0, respectively.14

PAGCOR elevated its protest against Assessment Notice No. 33-2000 to the CIR, but the 180-day period prescribed by law also lapsed without any action on the
part of the CIR.15 Consequently, on August 4, 2004, PAGCOR brought another appeal to the Secretary of Justice covering Assessment Notice No. 33-2000. 16

The Secretary of Justice consolidated PAGCOR's two appeals.

After the parties traded pleadings, the Secretary of Justice summoned them to a preliminary conference to discuss,  inter alia, any possible settlement or
compromise.17 When no amicable settlement was reached, the consolidated appeals were considered submitted for resolution. 18

On December 22, 2006, Secretary of Justice Raul M. Gonzales rendered the first assailed resolution declaring PAGCOR exempt from the payment of all taxes
except the 5% franchise tax provided in its Charter. 19
Page 139 of 164
On March 12, 2007, Secretary Gonzales issued the second assailed resolution denying the CIR's motion for reconsideration. 20

Hence, this special civil action for certiorari.

Issues

The grounds for the petition for certiorari are as follows:

I. RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS JURISDICTION AND GRAVELY ABUSED HIS
DISCRETION IN HOLDING THAT R.A. NO. 7716 (VAT LAW) DID NOT REPEAL P.D. NO. 1869 (CHARTER OF PAGCOR); HENCE,
PAGCOR HAS NOT BECOME LIABLE FOR THE PAYMENT OF THE 10% VAT IN LIEU OF THE 5% FRANCHISE TAX.
II. RESPONDENT SECRETARY OF JUSTICE ACTED WITHOUT OR IN EXCESS OF HIS JURISDICTION AND GRAVELY ABUSED HIS
DISCRETION IN ABSOLVING PAGCOR OF ITS DUTY AND RESPONSIBILITY AS WITHHOLDING AGENT TO WITHHOLD AND REMIT
FRINGE BENEFITS TAX, FINAL WITHHOLDING TAX AND EXPANDED WITHHOLDING TAX. 21

Otherwise put, the issues to be resolved are: (1) whether or not the Secretary of Justice has jurisdiction to review the disputed assessments; (2) whether or not
PAGCOR is liable for the payment of VAT; and (3) whether or not P AGCOR is liable for the payment of withholding taxes.

Ruling

The petition for certiorari is partly granted.

2. PAGCOR is exempt from payment of VAT

The CIR insists that under VAT Ruling No. 04-96 (dated May 14, 1996), VAT Ruling No. 030-99 (dated March 18, 1999), and VAT Ruling No. 067-01 (dated
October 8, 2001), R.A. No. 771631 has expressly repealed, amended, or withdrawn the 5% franchise tax provision in PAGCOR's Charter; hence, PAGCOR was
liable for the 10% VAT.32

The relevant provisions of R.A. No. 7716 on which the insistence has been anchored are the following:

SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"SEC. l 02. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected, a value-
added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties.

"The phrase 'sale or exchange of services' means the performance of all kinds of service in the Philippines for others for a fee, remuneration or consideration,
including x x x service of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under
Section 117 of this Code; x x x"

Page 140 of 164

SEC. 12. Section 117 of the National Internal revenue Code, as amended, is hereby further amended further to read as follows:

"SEC.117. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding, there shall be levied, assessed and collected in respect to
all franchises on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the
franchise. x x x" The CIR argues that PAGCOR' s gambling operations are embraced under the phrase sale or exchange of services, including the use or lease of
properties; that such operations are not among those expressly exempted from the 10% VAT under Section 3 of R.A. No. 7716; and that the legislative purpose to
withdraw PAGCOR's 5% franchise tax was manifested by the language used in Section 20 of R.A. No.7716.

The CIR' s arguments lack merit.

Firstly, a basic rule in statutory construction is that a special law cannot be repealed or modified by a subsequently enacted general law in the absence of any
express provision in the latter law to that effect. A special law must be interpreted to constitute an exception to the general law in the absence of special
circumstances warranting a contrary conclusion. 33 R.A. No. 7716, a general law, did not provide for the express repeal of PAGCOR's Charter, which is a special
law; hence, the general repealing clause under Section 20 of R.A. No. 7716 must pertain only to franchises of electric, gas, and water utilities, while the term  other
franchises in Section 102 of the NIRC should refer only to transport, communications and utilities, exclusive of PAGCOR's casino operations.

Secondly, R.A. No. 7716 indicates that Congress has not intended to repeal PAGCOR's privilege to enjoy the 5% franchise tax in lieu of all other taxes. A contrary
construction would be unwarranted and myopic nitpicking. In this regard, we should follow the following apt reminder uttered in Fort Bonifacio Development
Corporation v. Commissioner of Internal Revenue:34

A law must not be read in truncated parts: its provisions must be read in relation to the whole law. It is the cardinal rule in statutory construction that a statute’s
clauses and phrases must not be taken as detached and isolated expressions but the whole and every part thereof must be considered in fixing the meaning of any of
its parts in order to produce a harmonious whole. Every part of the statute must be interpreted with reference to the context,  i.e., that every part of the statute must
be considered together with other parts of the statute and kept subservient to the general intent of the whole enactment.

In constructing a statute courts have to take the thought conveyed by the statute as a whole: construe the constituent parts together; ascertain the legislative intent
from the whole act; consider each and every provision thereof in the light of the general purpose of the statute; and endeavor to make every part effective,
harmonious and sensible.

Although Section 3 of R.A. No. 7716 imposes 10% VAT on the sale or exchange of services, including the use or lease of properties, the provision also considers
transactions that are subject to 0% VAT. 35 On the other hand, Section 4 of R.A. No. 7716 enumerates the transactions exempt from VAT, viz.:

SEC. 4. Section 103 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"SEC.103. Exempt transactions. - The following shall he exempt from the value-added tax:

"(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, and 1590, and nonelectric
cooperatives under republic Act No. 6938, or international agreements to which the Philippines is a signatory;

Page 141 of 164

Anent the effect of R.A. No. 7716 on franchises, the Court has observed in Tolentino v. The Secretary of Finance36 that:

Among the provisions of the NIRC amended is §103, which originally read:

§103. Exempt transactions.-The following shall be exempt from the value-added tax:

(q) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory.

Among the transactions exempted from the VAT were those of PAL because it was exempted under its franchise (P.D. No. 1590) from the payment of all "other
taxes ... now or in the near future," in consideration of the payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, §103 of the NIRC now provides:

§103. Exempt transactions.-The following shall be exempt from the value-added tax:

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590 .....

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.

x x x Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by specifically excepting from the grant of exemptions from the VAT PAL's
exemption under P.D. No. 1590. This is within the power of Congress to do under Art. XII, § 11 of the Constitution, which provides that the grant of a franchise
for the operation of a public utility is subject to amendment, alteration or repeal by Congress when the common good so requires. 37

Unlike the case of PAL, however, R.A. No. 7716 does not specifically exclude PAGCOR's exemption under P.D. No. 1869 from the grant of exemptions from
VAT; hence, the petitioner's contention that R.A. No. 7716 expressly amended PAGCOR's franchise has no leg to stand on.

Moreover, PAGCOR's exemption from VAT, whether under R.A. No. 7716 or its amendments, has been settled in Philippine Amusement and Gaming
Corporation (PAGCOR) v. The Bureau of Internal Revenue,38 whereby the Court, citing Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation,39 has declared:

Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.

Page 142 of 164

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale
or exchange of services, including the use or lease of properties: x x x

(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate;

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero percent (0%) rate;

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously
covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or entities
whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed in  Commissioner of Internal Revenue
v. Acesite (Philippines) Hotel Corporation. x x x The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating P AGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.O. 1869 pertinently
provides:

Sec. 13. Exemptions.

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

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

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes, like the VAT.

We disagree.

Page 143 of 164

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes arc direct or
indirect. We arc one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.O. 1869], the term "Corporation" or operator refers to PAGCOR. Although the law does not specifically
mention PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or
entities contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it
goes one step further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is
not liable for the ₱30, 152,892.02 VAT and neither is Acesitc as the latter is effectively subject to zero percent rate under Sec. 108 B (3 ), R.A. 8424. (Emphasis
supplied.)

Indeed, by extending the exemption to entitles or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be
noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or individuals dealing with P AGCOR in casino operations, it is exempting P AGCOR from being
liable to indirect taxes.

The manner of charging VAT docs not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which case it is computed as 1/11 of such value, or
charged as an additional 10% to the value. Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the instant case,
Acesite followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, the use of either method, and in particular,
the first method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Aeesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within the fo1mer Section 102 (b) (3) of the 1977 Tax Code, as amended  (now Sec.
108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of
gross receipts derived by any person engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by VAT registered
persons shall be subject to 0%.

(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.O. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR
in casino operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption
of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate
Page 144 of 164
the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor's tax may be shifted to
the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is
clearly to proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal Revenue v. Acesite (Philippines)Hotel
Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424, it is still applicable to
this case, since the provision relied upon has been retained in R.A. No. 9337. 40

Clearly, the assessments for deficiency VAT issued against PAGCOR should be cancelled for lack of legal basis.

The Court also deems it warranted to cancel the assessments for deficiency withholding VAT pertaining to the payments made by PAGCOR to its catering service
contractor.

In two separate letters dated December 12, 2003 41 and December 15, 2003,42 the BIR conceded that the unmonetized meal allowances of PAGCOR's employees
were not subject to fringe benefits tax (FBT). However, the BIR held PAGCOR liable for expanded withholding VAT for the payments made to its catering
service contractor who provided the meals for its employees. Accordingly, the BIR assessed PAGCOR with deficiency withholding VAT for taxable year 1999 in
the amount of ₱4,077 ,667.40, inclusive of interest and compromise penalty; and for taxable year 2000 in the amount of ₱l2,212, 199.85, exclusive of interest and
penalties.

The payments made by PAGCOR to its catering service contractor are subject to zero-rated (0%) VAT in accordance with Section 13(2) of P.D. No. 1869 in
relation to Section 3 of R.A. No. 7716, viz.:

SEC. 13. Exemptions.-

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

SEC. 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"SEC.102. Value-added tax on sale of service and use or lease of properties. - x x x

"(b) Transaction subject to zero-rate. - The following services performed in the Philippines by Vat-registered persons shall be subject to 0%:

"(3) Services rendered to persons or entities whose exemptions under special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero rate.

Page 145 of 164

As such, the catering service contractor, who is presumably a VAT-registered person, shall impose a zero rate (0%) output tax on its sale or lease of goods,
services or properties to PAGCOR. Consequently, no withholding tax is due on such transaction.

3. PAGCOR is liable for the payment of withholding taxes

Through the letters dated December 12, 200343 and December 15, 2003,44 the BIRrecomputed the assessments for deficiency final withholding taxes on fringe
benefits under Assessment No. 33-99 and Assessment No. 33-2000, respectively, as follows:

The amount of the assessment for deficiency expanded withholding tax under Assessment No. 33-99 remained at ₱3,790,916,809.16.

We now resolve the validity of the foregoing assessments.

a. Final Withholding Tax on Fringe Benefits

The recomputed assessment for deficiency final withholding taxes related to the car plan granted to PAGCOR's employees and for its payment of membership
dues and fees.

Under Section 33 of the NIRC, FBT is imposed as:

A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective
January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file
employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the
trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable
by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code.

FBT is treated as a final income tax on the employee that shall be withheld and paid by the employer on a calendar quarterly basis. 45 As such, PAGCOR is a mere
withholding agent inasmuch as the FBT is imposed on PAGCOR's employees who receive the fringe benefit. PAGCOR's liability as a withholding agent is not
covered by the tax exemptions under its Charter.

The car plan extended by PAGCOR to its qualified officers is evidently considered a fringe benefit 46 as defined under Section 33 of the NIRC. To avoid the
imposition of the FBT on the benefit received by the employee, and, consequently, to avoid the withholding of the payment thereof by the employer, PAGCOR
must sufficiently establish that the fringe benefit is required by the nature of, or is necessary to the trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer.

PAGCOR asserted that the car plan was granted "not only because it was necessary to the nature of the trade of PAGCOR but it was also granted for its
convenience."47 The records are lacking in proof as to whether such benefit granted to PAGCOR's officers were, in fact, necessary for PAGCOR's business or for
its convenience and advantage. Accordingly, PAGCOR should have withheld the FBT from the officers who have availed themselves of the benefits of the car
plan and remitted the same to the BIR.

Page 146 of 164

As for the payment of the membership dues and fees, the Court finds that this is not considered a fringe benefit that is subject to FBT and which holds PAGCOR
liable for final withholding tax. According to PAGCOR, the membership dues and fees are:

57. x x x expenses borne by [respondent] to cover various memberships in social, athletic clubs and similar organizations. x x x

58. Respondent's nature of business is casino operations and it derives business from its customers who play at the casinos. In furtherance of its business,
PAGCOR usually attends its VIP customers, amenities such as playing rights to golf clubs. The membership of PAGCOR to these golf clubs and other
organizations are intended to benefit respondent's customers and not its employees. Aside from this, the membership is under the name of PAGCOR, and as such,
cannot be considered as fringe benefits because it is the customers and not the employees of PAGCOR who benefit from such memberships. 48

Considering that the payments of membership dues and fees are not borne by PAGCOR for its employees, they cannot be considered as fringe benefits which are
subject to FBT under Section 33 of the NIRC. Hence, PAGCOR is not liable to withhold FBT from its employees.

b. Expanded Withholding Tax

The BIR assessed PAGCOR with deficiency expanded withholding tax for the year 1999 under Assessment No. 33-99 amounting to ₱3,790,916,809.16, inclusive
of surcharge and interest, which was computed as follows: 49

Later, BIR issued a letter dated December 12, 2003 showing therein a recomputation of the assessment, to wit: 50

PAGCOR submits that the BIR erroneously assessed it for thedeficiency expanded withholding taxes, explaining thusly:

44. The computation made by the revenue officers for the year 1999 for expanded withholding taxes against respondent arc also not correct because it included
payments amounting to ₱682,120,262 which should not be subjected to withholding tax;

45. Of the said amount, ₱194,999,366 cover importations or various items for the sole and exclusive use of the casinos

46. The breakdown of respondent's payments which were assessed expanded withholding tax by the BIR but which should not have been made subject thereto arc
as follows:

a) Taxable Compensation Income amounting to ₱7l,6ll,563.60, representing salaries of contractuals and casuals, clerical and messengerial and other services, cost
of COA services and unclaimed salaries and other benefits recognized as income but subsequently claimed  (attached as Annexes "10" to "18" and made
integral parts hereof);

b) Prizes and other promo items amounting to ₱16,185,936.61 which were already subjected to 20% final withholding tax. Pursuant to Revenue Regulations 2-98,
prizes and promo items shall be subject only to 20% final tax (attached as Annexes "19" to "51" and made integral parts hereof);

c) Reimbursements amounting to ₱18,246,090.35 which were paid directly by agents/employees as over the counter purchases subsequently liquidated/reimbursed
by PAGCOR pursuant to BIR rulings 129-92 and 345-88;
Page 147 of 164
d) Taxes amounting to ₱6,679,807.53, the amount of which should not be subjected to expanded withholding tax for obvious reasons;

e) Security Deposit amounting to ₱3,450,000.00 which was written off after the Regional Trial Court, Branch 226 of Quezon City through Presiding Judge, Leah
S. Domingo-Regala, rendered a decision based on a compromise agreement in Civil Case No. 097-31299 entitled 'Felina Rodriguez-Luna, et al vs. Philippine
Amusement and Gaming Corporation" (attached as Annex "52" and made an integral part hereof);51

PAGCOR' s submission is partly meritorious. The Court finds that PAGCOR is not liable for deficiency expanded withholding tax on its payment for: (1) audit
services rendered by the Commission on Audit (COA), amounting to ₱4,243,977.96,52 and (2) prizes and other promo items amounting to ₱16,185,936.61.53

PAGCOR's payment to the COA for its audit services is exempted from withholding tax pursuant to Sec. 2.57.5 (A) of Revenue Regulation (RR) 2-98, which
states:

SEC. 2.57.5. Exemption from Withholding Tax –The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income
payments made to the following:

(A) National government and its instrumentalities, including provincial, city or municipal governments;

On the other hand, the prizes and other promo items amounting to ₱16,185,936.61 were already subjected to the 20% final withholding tax 54 pursuant to Section
24(B)(l) of the NIRC.55 To impose another tax on these items would amount to obnoxious or prohibited double taxation because the taxpayer would be taxed twice
by the same jurisdiction for the same purpose.56

Hence, except for the foregoing, the Court upholds the validity of the assessment against PAGCOR for deficiency expanded withholding tax.

We explain.

Other than the ₱4,243,977.96 payments made to COA, the remainder of the ₱71,61 l,563.60 compensation income that PAGCOR paid for the services of its
contractual, casual, clerical and messengerial employees are clearly subject to expanded withholding tax by virtue of Section 79 (A) of the NIRC which reads:

Sec. 79 Income Tax Collected at Source.-

(A) Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the
rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax
shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or Five thousand pesos (₱5,000) per month,
whichever is higher.

In addition, Section 2.57.3(C) of RR 2-98 states that:

SEC. 2.57.3 Persons Required to Deduct and Withhold. - The following persons are hereby constituted as withholding agents for purposes of the creditable tax
required to be withheld on income payments enumerated in Section 2.57.2:
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(c) All government offices including government-owned or controlled corporations, as well as provincial, city and municipal governments.

As for the rest of the assessment for deficiency expanded withholding tax arising from PAGCOR's (1) reimbursement for over-the-counter purchases by its agents
amounting to ₱18,246,090.34; (2) tax payments of ₱6,679,807.53; (3) security deposit totalling ₱3,450,000.00; and (4) importations w01ih ₱194,999,366.00, the
Court observes that PAGCOR did not present sufficient and convincing proof to establish its non-liability.

With regard to the reimbursement for over-the-counter purchases by its agents, PAGCOR merely relied on BIR Ruling Nos. 129-92 and 345-88 to support its
claim that it should not be liable to withhold taxes on these payments without submitting any proof to show that there were really actual payments made. 57 There is
also nothing in the records to show that the amount of ₱6,679,807.53 really represented PAGCOR's tax payments, 58 or that the amount of ₱194,999,366.00 were, in
fact, paid for PAGCOR's importations of various items in furtherance of its business.

Even the ₱3,450,000.00 security deposit that it claims to have been written-off based on the compromise agreement in Civil Case No. 097-31299 was not
sufficiently proved to be tax exempt. The only document presented by PAGCOR to support its contention was a copy of the trial court's decision in the civil case.
However, nowhere in the decision mentioned the security deposit.

It is settled that all presumptions are in favor of the correctness of tax assessments.1âwphi1 The good faith of the tax assessors and the validity of their actions are
thus presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. 59 Hence, it is incumbent upon the taxpayer
to credibly show that the assessment was erroneous in order to relieve himself from the liability it imposes. PAGCOR failed in this regard. Hence, except for the
assessment for deficiency expanded withholding taxes pertaining to the payments made to the COA for its audit services and for the prizes and other promo items,
the Court upholds the BIR's assessment for deficiency expanded withholding taxes.

WHEREFORE, the Court PARTIALLY GRANTS the petition for certiorari; ANNULS and SETS ASIDE the Resolutions dated December 22, 2006 and
March 12, 2007 of the Secretary of Justice in OSJ Case No. 2004-1 FOR LACK OF JURISDICTION; DECLARES that Republic Act No. 7716 did not repeal
Section 13(2) of Presidential Decree 1869, and, ACCORDINGLY, the PHILIPPINE AMUSEMENT AND GAMING CORPORATION is EXEMPT from
value-added tax.

The Court FURTHER RESOLVES to:

(1) CANCEL Assessment No. 33-1996/1997 /1998 dated November 14, 2002, which assessed PHILIPPINE AMUSEMENT AND GAMING
CORPORATION for deficiency value-added tax;
(2) CANCEL Assessment No. 33-99 dated November 25, 2002, insofar as it assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for
deficiency -
(a) value-added tax;
(b) expanded withholding value-added tax on payments made by PHILIPPINE AMUSEMENT AND GAMING CORPORATION to its catering
service contractor;
(c) final withholding tax on fringe benefits relating to the membership fees and dues paid by PHILIPPINE AMUSEMENT AND GAMING
CORPORATION for the benefit of its clients and customers; and
(d) expanded withholding tax on compensation income paid by PHILIPPINE AMUSEMENT AND GAMING CORPORATION to the Commission on
Audit for its audit services, and expanded withholding tax on the prizes and other promo items, which were already subjected to the 20% final withholding
tax;

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(3) CANCEL Assessment No. 33-2000 dated March 18, 2003, insofar as it assessed PHILIPPINE AMUSEMENT AND GAMING CORPORATION for
deficiency –
(a) value-added tax;
(b)expanded withholding value-added tax on payments made by PHILIPPINE AMUSEMENT AND GAMING CORPORATION to its catering
service contractor; and
(c) final withholding tax on fringe benefits relating to the membership fees and dues paid by PHILIPPINE AMUSEMENT AND GAMING
CORPORATION for the benefit of its clients and customers;
Respondent PHILIPPINE AMUSEMENT AND GAMING CORPORATION is DIRECTED TO PAY to the Bureau of Internal Revenue:
(l) its deficiency final withholding tax on fringe benefits arising from the car plan it granted to its qualified officers and employees under Assessment No. 33-99
and Assessment No. 33-2000; and
(2) its deficiency expanded withholding tax under Assessment No. 33-99, except on compensation income paid to the Commission on Audit for its audit services
and on prizes and other promo items.
Upon receipt of respondent PHILIPPINE AMUSEMENT AND GAMING COH.PORA TIO N's payment for the foregoing tax deficiencies, the Bureau of
Internal Revenue is DIRECTED TO WITHHOLD 5% thereof and TO REMIT the same to the Office of the Solicitor General pursuant to Section 11(1) 60 of
Republic Act No. 9417 (An Act to Strengthen the Office of the Solicitor General, by Expanding and Streamlining its Bureaucracy, Upgrading Employee Skills and
Augmenting Benefits, and Appropriating Funds Therefor and for Other Purposes).

CIR vs. United Cadiz Sugar Farmens Ass. Multi Purpose Coop.

Before us is the petition for review on certiorari1 (under Rule 45 of the Rules of Court) filed by the Commissioner of Internal Revenue (CIR) to assail the June 5,
2013 decision2 and the October 30, 2013 resolution3 of the Court of Tax Appeals (CTA) en banc in CTA EB No. 846 (CTA Case No. 7995).

In the assailed decision and resolution, the CTA en banc affirmed the decision4 and resolution5 of the CTA Second Division (CTA division).

The Facts

By law, the CIR is empowered, among others, to act on and approve claims for tax refunds or credits.
The respondent United Cadiz Sugar Farmers Association Multi-purpose Cooperative (UCSFA-MPC) is a multi-purpose cooperative with a Certificate of
Registration issued by the Cooperative Development Authority (CDA) dated January 14, 2004.6
In accordance with Revenue Regulations (RR) No. 20-2001, the Bureau of Internal Revenue (BIR) issued BIR Ruling No. RR12-08-2004, 7 otherwise known as the
"Certificate of Tax Exemption" in favor of UCSFA-MPC.
In November 2007, BIR Regional Director Rodita B. Galanto of BIR Region 12 - Bacolod City required UCSFA-MPC to pay in advance the value-added tax
(VAT) before her office could issue the Authorization Allowing Release of Refined Sugar (AARRS) from the sugar refinery/mill. This was the first instance that the
Cooperative was required to do so. This prompted the cooperative to confirm with the BIR 8 whether it is exempt from the payment of VAT pursuant to Section
109(1) of the National Internal Revenue Code (NIRC).9
The BIR responded favorably to UCSFA-MPC's query. In BIR Ruling No. ECCP-015-08, 10 the CIR11 ruled that the cooperative "is considered as the actual
producer of the members' sugarcane production, because it primarily provided the various inputs (fertilizers), capital, technology transfer, and farm management."
(emphasis supplied) The CIR thus confirmed that UCSFA-MPC's sale of produce to members and non-members is exempt from the payment of VAT.

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As a result, Regional Director Galanto no longer required the advance payment of VAT from UCSFA-MPC and began issuing AARRS in its favor, thereby
allowing the cooperative to withdraw its refined sugar from the refinery. But, in November 2008, the administrative legal opinion notwithstanding, Regional
Director Galanto, again demanded the payment of advance VAT from UCSFA-MPC. Unable to withdraw its refined sugar from the refinery/mill for its operations,
UCSFA-MPC was forced to pay advance VAT under protest.
On November 11, 2009, UCSFA-MPC filed an administrative claim for refund with the BIR, asserting that it had been granted tax exemption under Article 61 of
Republic Act No. (RA) 6938, otherwise known as the Cooperative Code of the Philippines (Cooperative Code), 12 and Section 109(1) of the NIRC.13
On November 16, 2009, it likewise filed a judicial claim for refund before the CTA division. During the trial, UCSFA-MPC presented, among other documents, its
Certificates of Registration14 and Good Standing15 issued by the CDA; Certificate of Tax Exemption, 16 and BIR Ruling No. ECCP-015-08 issued by the BIR,17 as
well as its Summary of VAT Payments Under Protest, Certificates of Advance Payment, official receipts, and payment forms to substantiate its claim.
The CTA division ruled in UCSFA-MPC's favor, 18 thus upholding the cooperative's exemption from the payment of VAT; the division held that the amount of
P3,469,734.00 representing advance VAT on 34,017 LKG bags of refined sugar withdrawn from the refinery, was illegally or erroneously collected by the BIR.
The CIR moved but failed to obtain reconsideration of the CTA division ruling.
The CIR then sought recourse before the CTA en banc. In its assailed decision,19 the CTA en banc affirmed the CTA division's ruling and ruled that UCSFA-MPC
successfully proved its entitlement to tax exemption through its Certificate of Tax Exemption and BIR Ruling No. ECCP-015-08 (which confirmed its status as a
tax-exempt cooperative). The CTA en banc also held that both its administrative and judicial claims for refund were timely filed, having been filed within the two-
year prescriptive period,20 in accordance with the requirements of Sections 204(C) and 229 of the NIRC.
In denying the CIR's motion for reconsideration, 21 the CTA en banc further ruled that the payment of VAT on sales necessarily includes the exemption from the
payment of advance VAT. It also struck down the argument questioning the validity of UCSFA-MPC's Certificate of Good Standing for having been raised
belatedly and thus considered waived.
Finally, it also held that as a tax-exempt cooperative, UCSFA-MPC is not required to file monthly VAT declarations. The presentation of these documents is
therefore not essential in proving its claim for refund.
These developments gave rise to the present petition.
The Court's Ruling
We find the petition unmeritorious.
We have consistently ruled that claims for tax refunds, when based on statutes granting tax exemption, partake of the nature of an exemption. 22 Tax refunds and
exemptions are exceptions rather than the rule and for this reason are highly disfavored. 23 Hence, in evaluating a claim for refund, the rule of strict interpretation
applies.
This rule requires the claimant to prove not only his entitlement to a refund, but also his due observance of the reglementary periods within which he must file his
administrative and judicial claims for refund. 24 Non-compliance with these substantive and procedural due process requirements results in the denial of the
claim.25cralawred It is then essential for us to discuss each requirement and evaluate whether these have been duly complied with in the present case.
Procedural requirements: Present claim for refund was timely filed.
UCSFA-MPC s claim for refund - grounded as it is on payments of advance VAT alleged to have been  illegally and erroneously collected from November 15,
2007 to February 13, 2009 - is governed by Sections 204(C) 26 and 22927 of the NIRC. These provisions are clear: within two years from the date of payment of tax,
the claimant must first file an administrative claim with the CIR28 before filing its judicial claim with the courts of law.29 Both claims must be filed within a two-
year reglementary period.30 Timeliness of the filing of the claim is mandatory and jurisdictional. The court 31 cannot take cognizance of a judicial claim for refund
filed either prematurely or out of time.
In the present case, the court a quo found that while the judicial claim was filed merely five days after filing the administrative claim, both claims were filed
within the two-year reglementary period. Thus, the CTA correctly exercised jurisdiction over the judicial claim filed by UCSFA-MPC.
Substantive requirements: UCSFA MPC proved its entitlement to refund

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As mentioned, the rule on strict interpretation requires the claimant to sufficiently establish his entitlement to a tax refund. If the claimant asserts that he should be
refunded the amount of tax he has previously paid because he is exempted from paying the tax, 32 he must point to the specific legal provision of law granting him
the exemption. His right cannot be based on mere implication. 33
In this case, the cooperative claims that it is exempted — based on Section 61 of R.A. 6938 and Section 109(1) of the NIRC — from paying advance VAT when it
withdraws refined sugar from the refinery/mill as required by RR. No. 6-2007. UCSFA-MPC thus alleges that the amounts of advance VAT it paid under protest
from November 15, 2007 to February 13, 2009, were illegally arid erroneously collected.
UCSFA-MPC 's sale of refined sugar is VAT-exempt.
As a general rule under the NIRC, a seller shall be liable for VAT 34 on the sale of goods or properties based on the gross selling price or gross value in money of
the thing sold.35 However, certain transactions are exempted from the imposition of VAT. 36 One exempted transaction is the sale of agricultural food products in
their original state.37 Agricultural food products that have undergone simple processes of preparation or preservation for the market are nevertheless considered to
be in their original state.38
Sugar is an agricultural food product. Notably, tax regulations differentiate between raw sugar and refined sugar.39
For internal revenue purposes, the sale of raw cane sugar is exempt from VAT40 because it is considered to be in its original state. 41 On the other hand, refined
sugar is an agricultural product that can no longer be considered to be in its original state because it has undergone the refining process; its sale is thus subject to
VAT.
Although the sale of refined sugar is generally subject to VAT, such transaction may nevertheless qualify as a VAT-exempt transaction if the sale is made by a
cooperative. Under Section 109(1) of the NIRC, 42sales by agricultural cooperatives are exempt from VAT provided the following conditions concur, viz:
First, the seller must be an agricultural cooperative duly registered with the CDA. 43 An agricultural cooperative is "duly registered" when it has been issued
a certificate of registration by the CDA. This certificate is conclusive evidence of its registration. 44
Second, the cooperative must sell either:
1) exclusively to its members; or
2) to both members and non-members, its produce, whether in its original state or processed form. 45
The second requisite differentiates cooperatives according to its customers. If the cooperative transacts only with members, all its sales are VAT-exempt,
regardless of what it sells. On the other hand, if it transacts with both members and non-members, the product sold must be the cooperative's own produce in order
to be VAT-exempt. Stated differently, if the cooperative only sells its produce or goods that it manufactures on its own, its entire sales is VAT-exempt. 46
A cooperative is the producer of the sugar if it owns or leases the land tilled, incurs the cost of agricultural production of the sugar, and produces the sugar cane to
be refined.47 It should not have merely purchased the sugar cane from its planters-members. 48
UCSFA-MPC satisfies these requisites in the present case.
First, UCSFA-MPC presented its Certificate of Registration issued by the CDA. It does not appear in the records that the CIR ever objected to the authenticity or
validity of this certificate. Thus, the certificate is conclusive proof that the cooperative is duly registered with the CDA. 49
While its certificate of registration is sufficient to establish the cooperative's due registration, we note that it also presented the Certificate of Good Standing that
the CDA issued. This further corroborates its claim that it is duly registered with the CDA.
Second, the cooperative also presented BIR Ruling No. ECCP-015-08, which states that UCSFA-MPC "is considered as the  actual producer of the members'
sugar cane production because it primarily provided the various productions inputs (fertilizers), capital, technology transfer, and farm management." It concluded
that the cooperative "has direct participation in the sugar cane production of its farmers-members."
Thus, the BIR itself acknowledged and confirmed that UCSFA-MPC is the producer of the refined sugar it sells. Under the principle of equitable estoppel, 50 the
petitioner is now precluded from unilaterally revoking its own pronouncement and unduly depriving the cooperative of an exemption clearly granted by law.
With the UCSFA-MPC established as a duly registered cooperative and the producer of sugar cane, its sale of refined sugar is exempt from VAT, whether the sale
is made to members or to non-members.

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The VAT-exempt nature of the sales made by agricultural cooperatives under the NIRC is consistent with the tax exemptions granted to qualified cooperatives
under the Cooperative Code which grants cooperatives exemption from sales tax 51 on transactions with members and non-members.52
These conclusions reduce the issue in the case to whether the granted exemption also covers the payment of advance VAT upon withdrawal of refined sugar from
the refinery or mill.
Exemption from VAT on sale of refined sugar by an agricultural cooperative includes the exemption from the requirement of advance payment thereof.
The CTA en banc ruled that the cooperative is exempted from the payment of advance VAT.53 It also ruled that the exemption from the payment of VAT on sales
necessarily includes the exemption from the payment of advance VAT. 54
The CIR argues that the exemption granted by the Cooperative Code and NIRC, on which the Certificate of Tax Exemption and BIR Ruling No. ECC-015-08
issued in favor of UCSFA-MPC were based, only covers VAT on the sale of produced sugar. It does not include the exemption from the payment of advance
VAT in the withdrawal of refined sugar from the sugar mill.55
The CIR's argument fails to persuade us.
As we discussed above, the sale of refined sugar by an agricultural cooperative is exempt from VAT. To fully understand the difference between VAT on the sale
of refined sugar and the advance VAT upon withdrawal of refined sugar, we distinguish between the tax liability that arises from the imposition of VAT and
the obligation of the taxpayer to pay the same.
Persons liable for VAT on the sale of goods shall pay the VAT due, in general, on a monthly basis. VAT accruing from the sale of goods in the current month shall
be payable the following month.56 However, there are instances where VAT is required to be paid in advance, 57 such as in the sale of refined sugar.58
To specifically address the policies and procedures governing the advance payment of VAT on the sale of refined sugar, RR Nos. 6-2007 and 13-2008 were issued.
Under these regulations, VAT on the sale of refined sugar that, under regular circumstances, is payable within the month following the actual sale of refined sugar,
shall nonetheless be paid in advance before the refined sugar can even be withdrawn from the sugar refinery/mill by the sugar owner. Any advance VAT paid by
sellers of refined sugar shall be allowed as credit against their output tax on the actual gross selling price of refined sugar. 59
Recall in this regard that VAT is a transaction tax imposed at every stage of the distribution process: on the sale, barter, exchange, or lease of goods or
services.60 Simply stated, VAT generally arises because an actual sale, barter, or exchange has been consummated.
In the sugar industry, raw sugar is processed in a refinery/mill which thereafter transforms the raw sugar into refined sugar. The refined sugar is then withdrawn or
taken out of the refinery/mill and sold to customers. 61 Under this flow, the withdrawal of refined sugar evidently takes place prior to its sale.
The VAT implications of the withdrawal of refined sugar from the sugar refinery/mill and the actual sale of refined sugar are different. While the sale is the actual
transaction upon which VAT is imposed, the withdrawal gives rise to the obligation to pay the VAT due, albeit in advance. Therefore, the requirement for the
advance payment of VAT for refined sugar creates a special situation: While the transaction giving rise to the imposition of VAT — the actual sale of refined
sugar — has not yet taken place, the VAT that would be due from the subsequent sale is, nonetheless, already required to be paid earlier, which is before the
withdrawal of the goods from the sugar refinery/mill.
To be clear, the transaction subject to VAT is still the sale of refined sugar. The withdrawal of sugar is not a separate transaction subject to VAT. It is only the
payment thereof that is required to be made in advance.
While the payment of advance VAT on the sale of refined sugar is, in general, required before these goods may be withdrawn from the refinery/mill, cooperatives
are exempt from this requirement because they are cooperatives.
Revenue regulations specifically provide that such withdrawal shall not be subject to the payment of advance VAT if the following requisites are present, viz:
First, the withdrawal is made by a duly accredited and registered agricultural cooperative in good standing.62 It was later clarified that a cooperative is in good
standing if it is a holder of a certificate of good standing issued by the CDA.63
Second, the cooperative should also the producer of the sugar being withdrawn.64
Third, the cooperative withdrawing the refined sugar should subsequently sell the same to either its members or another agricultural cooperative. 65

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In sum, the sale of refined sugar by an agricultural cooperative duly registered with the CDA is exempt from VAT. A qualified cooperative also enjoys exemption
from the requirement of advance payment of VAT upon withdrawal from the refinery/mill. The agricultural cooperative's exemption from the requirement of
advance payment is a logical consequence of the exemption from VAT of its sales of refined sugar. We elaborate on this point as follows:
First, the VAT required to be paid in advance (upon withdrawal) is the same VAT to be imposed on the subsequent sale of refined sugar. If the very transaction
(sale of refined sugar) is VAT-exempt, there is no VAT to be paid in advance because, simply, there is no transaction upon which VAT is to be imposed.
Second, any advance VAT paid upon withdrawal shall be allowed as credit against its output tax arising from its sales of refined sugar. If all sales by a cooperative
are VAT-exempt, no output tax shall materialize. It is simply absurd to require a cooperative to make advance VAT payments if it will not have any output tax
against which it can use/credit its advance payments.
Thus, we sustain the CTA en banc's ruling that if the taxpayer is exempt from VAT on the sale of refined sugar, necessarily, it is also exempt from the advance
payment of such tax.
Tax regulations cannot impose additional requirements other than what is required under the law as a condition for tax exemption.
Insisting that UCSFA-MPC does not enjoy exemption from the payment of advance VAT, the CIR questions the cooperative's compliance with tax regulations that
require cooperatives to make additional documentary submissions to the BIR prior to the issuance of a certificate of tax exemption.
According to the CIR, RR No. 13-2008 requires an agricultural producer cooperative duly registered with the CDA to be in good standing before it can avail of the
exemption from the advance payment of VAT. It claims that the cooperative failed to present any certificate of good standing. While it did present a certificate of
good standing, the cooperative only acquired this certificate on August 25, 2009. Hence, it was not exempt from advance payment of VAT during the period
subject of its refund, or between November 15, 2007 to February 15, 2009. 66
We disagree with this CIR submission.

First, the CTA observed that the petitioner questioned the cooperative's certificate of good standing for the first time in its motion for reconsideration filed before
the CTA en banc. Thus, the CTA en banc was correct in ruling that under the Rules of Court the argument is deemed waived, having been belatedly raised. No
new issue in a case can be raised in a pleading, which issue, by due diligence, could have been raised in previous pleadings. 67

Second, the certificate of good standing is one of the requirements for the issuance of a certificate of tax exemption under RR No. 20-2001.

Article 2(d) of the Cooperative Code defines a certificate of tax exemption as "the ruling granting exemption to the cooperative" issued by the BIR. In turn, under
RR No. 20-2001, the cooperative shall file a letter-application for the issuance of certificate of tax exemption, attaching thereto its certificates of registration and
good standing duly issued by the CDA. 68 The certificate of tax exemption shall remain valid so long as the cooperative is "in good standing" as ascertained by the
CDA.69

In line with the presumption of regularity in the performance of duties of public officers, the issuance of the certificate of tax exemption in favor of UCSFA-MPC
presupposes that the cooperative submitted to the BIR the complete documentary requirements for application, including its certificate of good standing. Simply
stated, when the cooperative's certificate of tax exemption was issued in 2004, it had already obtained its certificate of good standing from the CDA.

The fact that its certificate of good standing was dated August 25, 2009, should not be detrimental to UCSFA-MPC's case. As it correctly points out, a certificate
of good standing is renewed and issued annually by the CDA. Its renewal simply shows that it has remained to be in good standing with the CDA since its original
registration. More importantly, no evidence was presented to show that either the certificate of registration or certificate of good standing had been previously
revoked.

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Third, as discussed earlier, the exemption from VAT on the sale of refined sugar carries with it the exemption from the payment of advance VAT before the
withdrawal of refined sugar from the refinery/mill.

Section 109(1) of the NIRC clearly sets forth only two requisites for the exemption of the sale of refined sugar from VAT. Tax regulations implementing Sections
61 and 62 of the Cooperative Code as well as Section 109(1) of the NIRC must be read together, and read as well to be consistent with the laws from which they
have been derived. Thus, RR 20-2001 must be understood to implement the same principle as the Cooperative Code and the NIRC and not add to the existing
requirements provided by these laws.

We must remember that regulations may not enlarge, alter, or restrict the provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature. 70 A taxpayer-claimant should not be required to submit additional documents beyond what is required by the law; the taxpayer-
claimant should enjoy the exemption it has, by law, always been entitled to.

Hence, once the cooperative has sufficiently shown that it has satisfied the requirements under Section 109(1) of the NIRC for the exemption from VAT on its sale
of refined sugar (i.e., that it is duly registered with the CDA and it is the producer of the sugar cane from which refined sugar is derived), its exemption from the
advance payment of VAT should automatically be granted and recognized.

On these bases, we reject the CIR's insistence that RR No. 13-2008 requires the submission of a certificate of good standing as a condition to a cooperative's
exemption from the requirement of advance payment of VAT. In the same vein, the petitioner's argument that the submission of monthly VAT declarations and
quarterly VAT returns is essential to a claim for tax refund must also fail.

The Certificate of Tax Exemption and BIR Ruling No. ECCP-015-2008 have not been revoked.

Finally, the CIR questions the validity of the certificate of exemption and BIR Ruling No. ECCP-015-08 used by UCSFA-MPC to prove its exemption from tax.
Citing Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.,71 the CIR insists that the BIR rulings on which the
cooperative anchors its exemption were, in the first place, deemed revoked when it filed an Answer to the cooperative's judicial claim for refund before the CTA
Division.72

On the other hand, UCSFA-MPC points out that, while the case cited held that the filing of an answer by the CIR is a revocation of prior rulings issued in favor of
the taxpayer-claimant, it has a recognized exception: the principle of non-retroactivity of rulings under Section 246 of the NIRC. 73

We agree with UCSFA-MPC.

The basic rule is that if any BIR ruling or issuance promulgated by the CIR is subsequently revoked or nullified by the CIR herself or by the court, the
revocation/nullification cannot be applied retroactively to the prejudice of the taxpayers. Hence, even if we consider that the CIR had revoked the rulings
previously issued in favor of UCSFA-MPC upon the filing of her answer, it cannot effectively deprive UCSFA-MPC of its rights under the rulings prior to their
revocation.

We note that, as pointed out by UCSFA-MPC, this principle was recognized as an exception in the very case the CIR cited, although the CIR opted to omit this
portion of the cited case.
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Being exempt from VAT on the sale of refined sugar and the requirement of advance payment of VAT, the amounts that UCSFA-MPC had paid from November
15, 2007 to February 13, 2009, were illegally and erroneously collected. Accordingly, a refund is in order.

WHEREFORE, we DENY the petition and accordingly AFFIRM the June 5, 2013 decision and the October 30, 2013 resolution of the CTA en banc in CTA EB
No. 846.

Western Mindanao Power Corp. v. CIR

This is a Petition for Review under Rule 45 seeking the reversal of the 15 November 2007 Decision and 9 January 2008 Resolution of the Court of Tax Appeals
(CTA) En Banc in C.T.A. EB No. 272, 1 which upheld the Court of Tax Appeals Second Division’s denial of the Petition for refund of unutilized input Value
Added Tax (VAT) on the ground that the Official Receipts of petitioner Western Mindanao Power Corporation (WMPC) did not contain the phrase "zero-rated,"
as required under Revenue Regulations No. 7-95 (RR 7-95).

Petitioner WMPC is a domestic corporation engaged in the production and sale of electricity. It is registered with the Bureau of Internal Revenue (BIR) as a VAT
taxpayer. Petitioner alleges that it sells electricity solely to the National Power Corporation (NPC), which is in turn exempt from the payment of all forms of taxes,
duties, fees and imposts, pursuant to Section 13 2 of Republic Act (R.A.) No. 6395 (An Act Revising the Charter of the National Power Corporation). In view
thereof and pursuant to Section 108(B) (3) of the National Internal Revenue Code (NIRC), 3 petitioner’s power generation services to NPC is zero-rated.

Under Section 112(A) of the NIRC,4 a VAT-registered taxpayer may, within two years after the close of the taxable quarter, apply for the issuance of a tax credit or
refund of creditable input tax due or paid and attributable to zero-rated or effectively zero-rated sales. Hence, on 20 June 2000 and 13 June 2001, WMPC filed with
the Commissioner of Internal Revenue (CIR) applications for a tax credit certificate of its input VAT covering the taxable

Noting that the CIR was not acting on its application, and fearing that its claim would soon be barred by prescription, WMPC on 28 September 2001 filed with the
Court of Tax Appeals (CTA) in Division a Petition for Review docketed as C.T.A. Case No. 6335, seeking refund/tax credit certificates for the total amount of ₱
9,324,283.30.

The CIR filed its Comment on the CTA Petition, arguing that WMPC was not entitled to the latter’s claim for a tax refund in view of its failure to comply with the
invoicing requirements under Section 113 of the NIRC in relation to Section 4.108-1 of RR 7-95, which provides:

SECTION 4.108-1. Invoicing Requirements — All VAT-registered persons shall, for every sale or lease of goods or properties or services, issue duly registered
receipts or sales or commercial invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser, customer or client;
5. the word "zero rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.

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In the case of sale of real property subject to VAT and where the zonal or market value is higher than the actual consideration, the VAT shall be separately
indicated in the invoice or receipt.

Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or receipts and this shall be considered as a "VAT
Invoice." All purchases covered by invoices other than "VAT" Invoice" shall not give rise to any input tax.

If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A "VAT Invoice"
shall be issued only for sales of goods, properties or services subject to VAT imposed in Sections 100 and 102 of the Code.

The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his
accounting records. (Underscoring supplied.)

WMPC countered that the invoicing and accounting requirements laid down in RR 7-95 were merely "compliance requirements," which were not indispensable to
establish the claim for refund of excess and unutilized input VAT. Also, Section 113 of the NIRC prevailing at the time the sales transactions were made did not
expressly state that failure to comply with all the invoicing requirements would result in the disallowance of a tax credit refund.  7 The express requirement – that
"the term ‘zero-rated sale’ shall be written or printed prominently" on the VAT invoice or official receipt for sales subject to zero percent (0%) VAT – appeared
in Section 113 of the NIRC only after it was amended by Section 11 of R.A. 9337. 8 This amendment cannot be applied retroactively, considering that it took effect
only on 1 July 2005, or long after petitioner filed its claim for a tax refund, and considering further that the RR 7-95 is punitive in nature. Further, since there was
no statutory requirement for imprinting the phrase "zero-rated" on official receipts prior to 1 July 2005, the RR 7-95 constituted undue expansion of the scope of
the legislation it sought to implement.

CTA Second Division Decision

On 1 September 2006, the CTA Second Division dismissed 9 the Petition. It held that while petitioner submitted in evidence its Quarterly VAT Returns for the
periods applied for, "the same do not reflect any zero-rated or effectively zero-rated sales allegedly incurred during said periods. The spaces provided for such
amounts were left blank, which only shows that there existed no zero-rated or effectively zero-rated sales for the 3rd and 4th quarters of 1999 and the four quarters
of 2000."10 Moreover, it found that petitioner’s VAT Invoices and Official Receipts did not contain on their face the phrase "zero-rated," contrary to Section 4.108-
1 of RR 7-95.

Petitioner moved for reconsideration, but the motion was denied by the CTA in Division in its Resolution dated 30 January 2007. 11

CTA En Banc Decision

On 13 March 2007, WMPC appealed to the CTA En Banc, which on 15 November 2007 issued a Decision dismissing the appeal and affirming the CTA ruling.
The CTA En Banc held that the receipts and evidence presented by petitioner failed to fully substantiate the existence of the latter’s effectively zero-rated sales to
NPC for the 3rd and 4th quarters of taxable year 1999 and the four quarters of taxable year 2000. The CTA En Banc quoted the CTA Second Division finding that
the Quarterly VAT Returns that petitioner adduced in evidence did not reflect any zero-rated or effectively zero-rated sales allegedly incurred during the said
period, to wit:

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Petitioner submitted in evidence its Quarterly Value Added Tax Returns for the 3rd and 4th quarters of 1999 and the four quarters of 2000 to prove that it had duly
reported the input taxes paid on its domestic purchases of goods and services (Exhibits ‘E’ to ‘J’). However, a closer examination of the returns clearly shows that
the same do not reflect any zero-rated or effectively zero-rated sales allegedly incurred during the said periods. The spaces provided for such amounts were left
blank, which only shows that there existed no zero-rated or effectively zero-rated sales for the 3rd and 4th quarters of 1999 and the four quarters of 2000.

In addition, the CTA En Banc noted that petitioner’s Official Receipts and VAT Invoices did not have the word "zero-rated" imprinted/stamped thereon, contrary
to the clear mandate of Section 4.108-1 of RR 7-95.

CTA Presiding Justice Ernesto Acosta filed a Concurring and Dissenting Opinion. Justice Acosta disagreed with the majority’s view regarding the supposed
mandatory requirement of imprinting the term "zero-rated" on official receipts or invoices. He opined that Section 113 in relation to Section 237 12 of the NIRC
does not require the imprinting of the phrase "zero-rated" on an invoice or official receipt for the document to be considered valid for the purpose of claiming a
refund or an issuance of a tax credit certificate. Hence, the absence of the term "zero-rated" in an invoice or official receipt does not affect its admissibility or
competency as evidence in support of a refund claim. Also, assuming that stamping the term "zero-rated" on an invoice or official receipt is a requirement of the
current NIRC, the denial of a refund claim is not the imposable penalty for failure to comply with that requirement.

Nevertheless, Justice Acosta agreed with the "decision to deny the claim due to petitioner’s failure to prove the input taxes it paid on its domestic purchases of
goods and services during the period involved."

WMPC filed a Motion for Reconsideration, which was denied by the CTA En Banc in a Resolution dated 9 January 2008. 13

Hence, the present Petition.

Issue
Whether the CTA En Banc seriously erred in dismissing the claim of petitioner for a refund or tax credit on input tax on the ground that the latter’s Official
Receipts do not contain the phrase "zero-rated"

Our Ruling

We deny the Petition.

Being a derogation of the sovereign authority, a statute granting tax exemption is strictly construed against the person or entity claiming the exemption. When
based on such statute, a claim for tax refund partakes of the nature of an exemption. Hence, the same rule of strict interpretation against the taxpayer-claimant
applies to the claim.14

In the present case, petitioner’s claim for a refund or tax credit of input VAT is anchored on Section 112(A) of the NIRC, viz:

Section 112. Refunds or Tax Credits of Input Tax. -

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(A) Zero-rated or Effectively Zero-rated Sales. - any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after
the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable
to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-
rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot
be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

Thus, a taxpayer engaged in zero-rated or effectively zero-rated sale may apply for the issuance of a tax credit certificate, or refund of creditable input tax due or
paid, attributable to the sale.

In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim under substantive law. It must also show satisfaction
of all the documentary and evidentiary requirements for an administrative claim for a refund or tax credit. 15 Hence, the mere fact that petitioner’s application for
zero-rating has been approved by the CIR does not, by itself, justify the grant of a refund or tax credit. The taxpayer claiming the refund must further comply with
the invoicing and accounting requirements mandated by the NIRC, as well as by revenue regulations implementing them. 16

Under the NIRC, a creditable input tax should be evidenced by a VAT invoice or official receipt, 17 which may only be considered as such when it complies with
the requirements of RR 7-95, particularly Section 4.108-1. This section requires, among others, that "(i)f the sale is subject to zero percent (0%) value-added tax,
the term ‘zero-rated sale’ shall be written or printed prominently on the invoice or receipt."

We are not persuaded by petitioner’s argument that RR 7-95 constitutes undue expansion of the scope of the legislation it seeks to implement on the ground that
the statutory requirement for imprinting the phrase "zero-rated" on VAT official receipts appears only in Republic Act No. 9337. This law took effect on 1 July
2005, or long after petitioner had filed its claim for a refund.1âwphi1

RR 7-95, which took effect on 1 January 1996, proceeds from the rule-making authority granted to the Secretary of Finance by the NIRC for the efficient
enforcement of the same Tax Code and its amendments. In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal
Revenue,18 we ruled that this provision is "reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services."
Moreover, we have held in Kepco Philippines Corporation v. Commissioner of Internal Revenue 19 that the subsequent incorporation of Section 4.108-1 of RR 7-95
in Section 113 (B) (2) (c) of R.A. 9337 actually confirmed the validity of the imprinting requirement on VAT invoices or official receipts – a case falling under the
principle of legislative approval of administrative interpretation by reenactment.

In fact, this Court has consistently held as fatal the failure to print the word "zero-rated" on the VAT invoices or official receipts in claims for a refund or credit of
input VAT on zero-rated sales, even if the claims were made prior to the effectivity of R.A. 9337. 20 Clearly then, the present Petition must be denied.

In addition, it is notable that the CTA Second Division and the CTA En Banc, including Presiding Justice Acosta in his Concurring and Dissenting Opinion, both
found that petitioner failed to sufficiently substantiate the existence of its effectively zero-rated sales to NPC for the 3rd and 4th quarters of taxable year 1999, as
well as all four quarters of taxable year 2000. It must also be noted that the CTA is a highly specialized court dedicated exclusively to the study and consideration
of revenue-related problems, in which it has necessarily developed an expertise. 21 Hence, its factual findings, when supported by substantial evidence, will not be
disturbed on appeal.22 We find no sufficient reason to exempt the present case from this general rule.

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WHEREFORE, premises considered, we DENY the Petition and AFFIRM the Decision dated 15 November 2007 and Resolution dated 9 January 2008 of the
Court of Tax Appeals En Banc in CTA EB No. 272.

SILKAIR (SINGAPORE) PTE. LTD., vs. CIR, GR. No. 166482, Jan 25, 2012
Assailed in this Rule 45 Petition is the Decision1 dated September 13, 2004 and Resolution2 dated December 21, 2004 of the Court of Appeals (CA) in CA-G.R. SP
No. 82902.

Petitioner Silkair (Singapore) Pte. Ltd. is a foreign corporation duly licensed by the Securities and Exchange Commission (SEC) to do business in the Philippines
as an on-line international carrier operating the Cebu-Singapore-Cebu and Davao-Singapore-Davao routes. In the course of its international flight operations,
petitioner purchased aviation fuel from Petron Corporation (Petron) from July 1, 1998 to December 31, 1998, paying the excise taxes thereon in the sum of
₱5,007,043.39. The payment was advanced by Singapore Airlines, Ltd. on behalf of petitioner.

On October 20, 1999, petitioner filed an administrative claim for refund in the amount of ₱5,007,043.39 representing excise taxes on the purchase of jet fuel from
Petron, which it alleged to have been erroneously paid. The claim is based on Section 135 (a) and (b) of the 1997 Tax Code, which provides:

SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. – Petroleum products sold to the following are exempt from excise
tax:

(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products
sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner;

(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided,
however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to
Philippine carriers, entities or agencies; and

x x x x (Emphasis supplied.)

Petitioner also invoked Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the
Republic of Singapore3 (Air Transport Agreement between RP and Singapore) which reads:

ART. 4

2. Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting Party by, or on
behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges
corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first
Contracting Party, even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are
introduced into or taken on board. The materials referred to above may be required to be kept under customs supervision and control. 4
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Due to the inaction by respondent Commissioner of Internal Revenue, petitioner filed a petition for review with the Court of Tax Appeals (CTA) on June 30, 2000.

On July 28, 2003, the CTA rendered its decision 5 denying petitioner’s claim for refund. Said court ruled that while petitioner’s country indeed exempts from
similar taxes petroleum products sold to Philippine carriers, petitioner nevertheless failed to comply with the second requirement under Section 135 (a) of the  1997
Tax Code as it failed to prove that the jet fuel delivered by Petron came from the latter’s bonded storage tank. Presiding Justice Ernesto D. Acosta dissented from
the majority view that petitioner’s claim should be denied, stating that even if the bonded storage tank is required under Section 135 (a), the claim can still be
justified under Section 135 (b) in view of our country’s existing Air Transport Agreement with the Republic of Singapore which shows the reciprocal enjoyment of
the privilege of the designated airline of the contracting parties.

Its motion for reconsideration having been denied by the CTA, petitioner elevated the case to the CA. Petitioner assailed the CTA in not holding that there are
distinct and separate instances of exemptions provided in paragraphs (a), (b) and (c) of Section 135, and therefore the proviso found in paragraph (a) should not
have been applied to the exemption granted under paragraph (b).

The CA affirmed the denial of the claim for tax refund and dismissed the petition. It ruled that while petitioner is exempt from paying excise taxes on petroleum
products purchased in the Philippines by virtue of Section 135 (b), petitioner is not the proper party to seek for the refund of the excise taxes paid. Petitioner’s
motion for reconsideration was likewise denied by the appellate court.

In this appeal, petitioner argues that it is the proper party to file the claim for refund, being the entity granted the tax exemption under the Air Transport Agreement
between RP and Singapore. It disagrees with respondent’s reasoning that since excise tax is an indirect tax it is the direct liability of the manufacturer, Petron, and
not the petitioner, because this puts to naught whatever exemption was granted to petitioner by Article 4 of the Air Transport Agreement.

Petitioner further contends that respondent is estopped from questioning the right of petitioner to claim a refund of the excise taxes paid after issuing BIR Ruling
No. 339-92 which already settled the matter. It further points out that the CTA has consistently ruled in a number of decisions involving the same parties that
petitioner is the proper party to seek the refund of excise taxes paid on its purchases of petroleum products. Finally, it emphasizes that respondent never raised in
issue petitioner’s legal personality to seek a tax refund in the administrative level. Citing this Court’s ruling in the case of  Commissioner of Internal Revenue v.
Court of Tax Appeals, et al.6 petitioner asserts that respondent is in estoppel to question petitioner’s standing to file the claim for refund for its failure to timely
raise the issue in the administrative level, as well as before the CTA.

On the other hand, the Solicitor General on behalf of respondent, maintains that the excise tax passed on to the petitioner by Petron being in the nature of an
indirect tax, it cannot be the subject matter of an administrative claim for refund/tax credit, following the ruling in  Contex Corporation v. Commissioner of
Internal Revenue.7 Moreover, assuming arguendo that petitioner falls under any of the enumerated transactions/persons entitled to tax exemption under Section
135 of the 1997 Tax Code, what the law merely contemplates is exemption from the payment of excise tax to the seller/manufacturer, in this case Petron, but not
an exemption from payment of excise tax to the BIR, much more an entitlement to a refund from the BIR. Being the buyer, petitioner is not the person required by
law nor the person statutorily liable to pay the excise tax but the seller, following the provision of Section 130 (A) (1) (2).

The Solicitor General also asserts that contrary to petitioner’s argument that respondent never raised in the administrative level the issue of whether petitioner is
the proper party to file the claim for refund, records would show that respondent actually raised the matter of whether petitioner is entitled to the tax refund being
claimed in his Answer dated August 8, 2000, in the Joint Stipulation of Facts, and in his Memorandum submitted before the CTA where respondent categorically

Page 161 of 164

averred that "petitioner x x x is not the entity directly liable for the payment of the tax, hence, not the proper party who should claim the refund of the excise taxes
paid."8

We rule for the respondent.

The core issue presented is the legal personality of petitioner to file an administrative claim for refund of excise taxes alleged to have been erroneously paid to its
supplier of aviation fuel here in the Philippines.

In three previous cases involving the same parties, this Court has already settled the issue of whether petitioner is the proper party to seek the refund of excise
taxes paid on its purchase of aviation fuel from a local manufacturer/seller. Following the principle of stare decisis, the present petition must therefore be denied.

Excise taxes, which apply to articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things
imported into the Philippines,9 is basically an indirect tax. While the tax is directly levied upon the manufacturer/importer upon removal of the taxable goods from
its place of production or from the customs custody, the tax, in reality, is actually passed on to the end consumer as part of the transfer value or selling price of the
goods, sold, bartered or exchanged. 10 In early cases, we have ruled that for indirect taxes (such as valued-added tax or VAT), the proper party to question or seek a
refund of the tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even when he shifts the burden thereof to
another.11 Thus, in Contex Corporation v. Commissioner of Internal Revenue,12 we held that while it is true that petitioner corporation should not have been liable
for the VAT inadvertently passed on to it by its supplier since their transaction is a zero-rated sale on the part of the supplier, the petitioner is not the proper party
to claim such VAT refund. Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT
erroneously passed on to the latter.13

In the first Silkair case14 decided on February 6, 2008, this Court categorically declared:

The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another. Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus,  Petron Corporation, not Silkair, is
the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement
between RP and Singapore.

Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which
Silkair had to pay as a purchaser.15 (Emphasis supplied.)

Just a few months later, the decision in the second Silkair case16 was promulgated, reiterating the rule that in the refund of indirect taxes such as excise taxes, the
statutory taxpayer is the proper party who can claim the refund. We also clarified that petitioner Silkair, as the purchaser and end-consumer, ultimately bears the
tax burden, but this does not transform its status into a statutory taxpayer.

The person entitled to claim a tax refund is the statutory taxpayer. Section 22(N) of the NIRC defines a taxpayer as "any person subject to tax." In  Commissioner
of Internal Revenue v. Procter and Gamble Phil. Mfg. Corp., the Court ruled that:

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‘A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both
connote a legal obligation or duty to pay a tax.’

The excise tax is due from the manufacturers of the petroleum products and is paid upon removal of the products from their refineries. Even before the aviation jet
fuel is purchased from Petron, the excise tax is already paid by Petron. Petron, being the manufacturer, is the "person subject to tax." In this case, Petron, which
paid the excise tax upon removal of the products from its Bataan refinery, is the "person liable for tax." Petitioner is neither a "person liable for tax" nor "a person
subject to tax." There is also no legal duty on the part of petitioner to pay the excise tax; hence, petitioner cannot be considered the taxpayer.

Even if the tax is shifted by Petron to its customers and even if the tax is billed as a separate item in the aviation delivery receipts and invoices issued to its
customers, Petron remains the taxpayer because the excise tax is imposed directly on Petron as the manufacturer. Hence, Petron, as the statutory
taxpayer, is the proper party that can claim the refund of the excise taxes paid to the BIR. 17 (Emphasis supplied.)1avvphi1

Petitioner’s contention that the CTA and CA rulings would put to naught the exemption granted under Section 135 (b) of the  1997 Tax Code and Article 4 of the
Air Transport Agreement is not well-taken. Since the supplier herein involved is also Petron, our pronouncement in the second  Silkair case, relative to the
contractual undertaking of petitioner to submit a valid exemption certificate for the purpose, is relevant. We thus noted:

The General Terms & Conditions for Aviation Fuel Supply (Supply Contract) signed between petitioner (buyer) and Petron (seller) provide:

"11.3 If Buyer is entitled to purchase any Fuel sold pursuant to the Agreement free of any taxes, duties or charges,  Buyer shall timely deliver to Seller a valid
exemption certificate for such purchase." (Emphasis supplied)

This provision instructs petitioner to timely submit a valid exemption certificate to Petron in order that Petron will not pass on the excise tax to petitioner. As
correctly suggested by the CTA, petitioner should invoke its tax exemption to Petron before buying the aviation jet fuel. Petron, however, remains the statutory
taxpayer on those excise taxes.

Revenue Regulations No. 3-2008 (RR 3-2008) provides that "subject to the subsequent filing of a claim for excise tax credit/refund or product replenishment, all
manufacturers of articles subject to excise tax under Title VI of the NIRC of 1997, as amended, shall pay the excise tax that is otherwise due on every removal
thereof from the place of production that is intended for exportation or sale/delivery to international carriers or to tax-exempt entities/agencies." The Department of
Finance and the BIR recognize the tax exemption granted to international carriers but they consistently adhere to the view that manufacturers of articles subject to
excise tax are the statutory taxpayers that are liable to pay the tax, thus, the proper party to claim any tax refunds. 18

The above observation remains pertinent to this case because the very same provision in the General Terms and Conditions for Aviation Fuel Supply Contract also
appears in the documentary evidence submitted by petitioner before the CTA. 19 Except for its bare allegation of being "placed in a very complicated situation"
because Petron, "for fear of being assessed by Respondent, will not allow the withdrawal and delivery of the petroleum products without Petitioner’s pre-payment
of the excise taxes," petitioner has not demonstrated that it dutifully complied with its contractual undertaking to timely submit to Petron a valid certificate of
exemption so that Petron may subsequently file a claim for excise tax credit/refund pursuant to Revenue Regulations No. 3-2008 (RR 3-2008). It was indeed
premature for petitioner to assert that the denial of its claim for tax refund nullifies the tax exemption granted to it under Section 135 (b) of the  1997 Tax Code and
Article 4 of the Air Transport Agreement.

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In the third Silkair case20 decided last year, the Court called the attention to the consistent rulings in the previous two Silkair cases that petitioner as the purchaser
and end-consumer of the aviation fuel is not the proper party to claim for refund of excise taxes paid thereon. The situation clearly called for the application of the
doctrine, stare decisis et non quieta movere. Follow past precedents and do not disturb what has been settled. Once a case has been decided one way, any other
case involving exactly the same point at issue, as in the case at bar, should be decided in the same manner. 21 The Court thus finds no cogent reason to deviate from
those previous rulings on the same issues herein raised.

WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated September 13, 2004 and Resolution dated December 21, 2004 of the Court
of Appeals in CA-G.R. SP No. 82902 are AFFIRMED.

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