3.

Limitations on the Power of Taxation

A. Inherent Limitations

G.R. No. L-10405           December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of

Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-
appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:

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

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted
this action for declaratory relief, with injunction, upon the ground that Republic Act No. 920,
entitled "An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained,
in section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction,
repair, extension and improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta
— Gen. Lucban — Gen. Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen.
Lim)"; that, at the time of the passage and approval of said Act, the aforementioned feeder
roads were "nothing but projected and planned subdivision roads, not yet constructed, . . .
within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the tracings
attached to the petition as Annexes A and B, near Shaw Boulevard, not far away from the
intersection between the latter and Highway 54), which projected feeder roads "do not connect
any government property or any important premises to the main highway"; that the
aforementioned Antonio Subdivision (as well as the lands on which said feeder roads were to be
construed) were private properties of respondent Jose C. Zulueta, who, at the time of the
passage and approval of said Act, was a member of the Senate of the Philippines; that on May,
1953, respondent Zulueta, addressed a letter to the Municipal Council of Pasig, Rizal, offering to
donate said projected feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953,
the offer was accepted by the council, subject to the condition "that the donor would submit a
plan of the said roads and agree to change the names of two of them"; that no deed of
donation in favor of the municipality of Pasig was, however, executed; that on July 10, 1953,
respondent Zulueta wrote another letter to said council, calling attention to the approval of
Republic Act. No. 920, and the sum of P85,000.00 appropriated therein for the construction of
the projected feeder roads in question; that the municipal council of Pasig endorsed said letter

1
of respondent Zulueta to the District Engineer of Rizal, who, up to the present "has not made
any endorsement thereon" that inasmuch as the projected feeder roads in question were
private property at the time of the passage and approval of Republic Act No. 920, the
appropriation of P85,000.00 therein made, for the construction, reconstruction, repair,
extension and improvement of said projected feeder roads, was illegal and, therefore, void ab
initio"; that said appropriation of P85,000.00 was made by Congress because its members were
made to believe that the projected feeder roads in question were "public roads and not private
streets of a private subdivision"'; that, "in order to give a semblance of legality, when there is
absolutely none, to the aforementioned appropriation", respondents Zulueta executed on
December 12, 1953, while he was a member of the Senate of the Philippines, an alleged deed
of donation — copy of which is annexed to the petition — of the four (4) parcels of land
constituting said projected feeder roads, in favor of the Government of the Republic of the
Philippines; that said alleged deed of donation was, on the same date, accepted by the then
Executive Secretary; that being subject to an onerous condition, said donation partook of the
nature of a contract; that, such, said donation violated the provision of our fundamental law
prohibiting members of Congress from being directly or indirectly financially interested in any
contract with the Government, and, hence, is unconstitutional, as well as null and void ab initio,
for the construction of the projected feeder roads in question with public funds would greatly
enhance or increase the value of the aforementioned subdivision of respondent Zulueta, "aside
from relieving him from the burden of constructing his subdivision streets or roads at his own
expense"; that the construction of said projected feeder roads was then being undertaken by
the Bureau of Public Highways; and that, unless restrained by the court, the respondents would
continue to execute, comply with, follow and implement the aforementioned illegal provision of
law, "to the irreparable damage, detriment and prejudice not only to the petitioner but to the
Filipino nation."

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

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

2
fide case . . . in which the validity of Republic Act No. 920 is necessarily involved" and petitioner
"has not shown that he has a personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."

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

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

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

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

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However,

respondent Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of

3
 any law which makes illegal the appropriation of public funds for the improvement of
what we, in the meantime, may assume as private property . . . (Record on Appeal, p.
33.)

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

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

It is a general rule that the legislature is without power to appropriate public revenue

for anything but a public purpose. . . . It is the essential character of the direct object of
the expenditure which must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to which the general advantage
of the community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental  to the public or to the state, which results from the promotion of
private interest and the prosperity of private enterprises or business, does not justify
their aid by the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)

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

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

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

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

x x x           x x x          x x x

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

Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as
such, exists primarily for the promotion of the general welfare. Besides, reflecting as they do,

4
the established jurisprudence in the United States, after whose constitutional system ours has
been patterned, said views and jurisprudence are, likewise, part and parcel of our own
constitutional law.lawphil.net

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

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

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

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

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

5
 expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys. (11 Am. Jur. 761;
emphasis supplied.)

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

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

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

6
most populated political subdivision, 8and, the taxpayers therein bear a substantial portion of
the burden of taxation, in the Philippines.

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

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

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

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only
pure questions of law, challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines,
Inc., commenced a complaint with preliminary injunction before the Court of First Instance of
Leyte for that court to declare Section 2 of Republic Act No. 2264.1 otherwise known as the
Local Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to
declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null
and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which
state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and
the production tax rates imposed therein are practically the same, and second, that on January
17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the

7
Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by
the latter of the provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962,
levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16)
of a centavo for every bottle of soft drink corked." 2 For the purpose of computing the taxes
due, the person, firm, company or corporation producing soft drinks shall submit to the
Municipal Treasurer a monthly report, of the total number of bottles produced and corked
during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962,
levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction of
this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity." 4 For the purpose of computing the taxes due, the person, fun company,
partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer a
monthly report of the total number of gallons produced or manufactured during the month. 5

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production
tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power,

confiscatory and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose

percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a

matter of right to every independent government, without being expressly conferred by the
people. 6 It is a power that is purely legislative and which the central legislative body cannot
delegate either to the executive or judicial department of the government without infringing
upon the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. 7 This is sanctioned by immemorial
practice. 8 By necessary implication, the legislative power to create political corporations for
purposes of local self-government carries with it the power to confer on such local

8
governmental agencies the power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local government unit shall have the power to create its
sources of revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local governments the power of local
taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is exercised
by itself. When it is said that the taxing power may be delegated to municipalities and the like,
it is meant that there may be delegated such measure of power to impose and collect taxes as
the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects
which for reasons of public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction against deprivation of
property without due process of law may be passed over under the guise of the taxing power,
except when the taking of the property is in the lawful exercise of the taxing power, as when
(1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either
the person or property taxed is within the jurisdiction of the government levying the tax; and
(4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing
are provided. 11 Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount of
tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be apportioned are generally not necessary
to due process of law. 12

There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may not
be exercised. 13 The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law,
since We have not adopted as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the Union.14 Double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax is
imposed by the State and the other by the city or municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation,
because these two ordinances cover the same subject matter and impose practically the same
tax rate. The thesis proceeds from its assumption that both ordinances are valid and legally
enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax of
one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of

9
the bottle used. When it was discovered that the producer or manufacturer could increase the
volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the
two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it
was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council
of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for
the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that
the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-
appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned
admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-
appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that
Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions
of the latter are inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local governments
under Section 2, Republic Act No. 2264, is broad enough as to extend to almost "everything,
accepting those which are mentioned therein." As long as the text levied under the authority of
a city or municipal ordinance is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules of exclucion
attehus  and exceptio firmat regulum in cabisus non excepti  19 The limitation applies,
particularly, to the prohibition against municipalities and municipal districts to impose "any
percentage tax or other taxes in any form based thereon  nor impose taxes on articles subject
to specific tax  except gasoline, under the provisions of the National Internal Revenue Code."
For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and
is null and void for being outside the power of the municipality to enact. 20 But, the imposition
of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on
all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the
nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied
on the produce (whether sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate
on the products, but there is not set ratio between the volume of sales and the amount of the
tax.21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars
and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil,
diesel fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming
drugs. 22 Soft drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, 23 cannot be
considered unjust and unfair. 24 an increase in the tax alone would not support the claim that

10
the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much
discretion in determining the reates of imposable taxes. 25 This is in line with the constutional
policy of according the widest possible autonomy to local governments in matters of local
taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973).
26 Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an
ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance such
as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be
realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than
ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under
Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of
defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No.
27. Municipalities are empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for public purposes, just and uniform
taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a
municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as
the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same
series, is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

G.R. No. 155650             July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,

vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF PARAÑAQUE,
and CITY TREASURER OF PARAÑAQUE, respondents.

DECISION

CARPIO, J.:

The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Parañaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive
Order No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos.
Subsequently, Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and
equipment within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600

11
hectares of land,3 including the runways and buildings ("Airport Lands and Buildings") then
under the Bureau of Air Transportation.4 The MIAA Charter further provides that no portion of
the land transferred to MIAA shall be disposed of through sale or any other mode unless
specifically approved by the President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from
real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated
with respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then
paid some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken
down as follows:

TAX
TAXABLE YEAR TAX DUE PENALTY TOTAL
DECLARATION
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00

#9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt
from real estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA
Charter is the proof that MIAA is exempt from real estate tax.

12
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition
sought to restrain the City of Parañaque from imposing real estate tax on, levying against, and
auctioning for public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R.
SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond
the 60-day reglementary period. The Court of Appeals also denied on 27 September 2002
MIAA's motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA
filed on 5 December 2002 the present petition for review.7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the
Barangay Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public
market of Barangay La Huerta; and in the main lobby of the Parañaque City Hall. The City of
Parañaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily
Inquirer, a newspaper of general circulation in the Philippines. The notices announced the
public auction sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003,
10:00 a.m., at the Legislative Session Hall Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this
Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining
Order. The motion sought to restrain respondents — the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective
immediately. The Court ordered respondents to cease and desist from selling at public auction
the Airport Lands and Buildings. Respondents received the TRO on the same day that the Court
issued it. However, respondents received the TRO only at 1:25 p.m. or three hours after the
conclusion of the public auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.

On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the
directive issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor
General subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties
since the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The
MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the
general public. Since the Airport Lands and Buildings are devoted to public use and public
service, the ownership of these properties remains with the State. The Airport Lands and
Buildings are thus inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under
Section 234 of the Local Government Code because the Airport Lands and Buildings are owned

13
by the Republic. To justify the exemption, MIAA invokes the principle that the government
cannot tax itself. MIAA points out that the reason for tax exemption of public property is that its
taxation would not inure to any public advantage, since in such a case the tax debtor is also the
tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly

withdrew the tax exemption privileges of "government-owned and-controlled
corporations" upon the effectivity of the Local Government Code. Respondents also argue
that a basic rule of statutory construction is that the express mention of one person, thing, or
act excludes all others. An international airport is not among the exceptions mentioned in
Section 193 of the Local Government Code. Thus, respondents assert that MIAA cannot claim
that the Airport Lands and Buildings are exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v.
Marcos8 where we held that the Local Government Code has withdrawn the exemption from
real estate tax granted to international airports. Respondents further argue that since MIAA has
already paid some of the real estate tax assessments, it is now estopped from claiming that the
Airport Lands and Buildings are exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax
assessments issued by the City of Parañaque, and all proceedings taken pursuant to such
assessments, are void. In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.

First, MIAA is not a government-owned or controlled corporation but an instrumentality of

the National Government and thus exempt from local taxation. Second, the real properties of
MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not

exempt from real estate tax. Respondents claim that the deletion of the phrase "any
government-owned or controlled so exempt by its charter" in Section 234(e) of the Local
Government Code withdrew the real estate tax exemption of government-owned or controlled
corporations. The deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code
enumerating the entities exempt from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13)
of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned
or controlled corporation as follows:

14
 SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government directly
or through its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x.
(Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock

corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders
or voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National

Government shall be increased from Two and One-half Billion (P2,500,000,000.00)
Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and
such other properties, movable and immovable[,] which may be contributed by the
National Government or transferred by it from any of its agencies, the valuation of which
shall be determined jointly with the Department of Budget and Management and the
Commission on Audit on the date of such contribution or transfer after making due
allowances for depreciation and other deductions taking into account the loans and
other liabilities of the Authority at the time of the takeover of the assets and other
properties;

(b) That the amount of P605 million as of December 31, 1986 representing about
seventy percentum (70%) of the unremitted share of the National Government from
1983 to 1986 to be remitted to the National Treasury as provided for in Section 11 of E.
O. No. 903 as amended, shall be converted into the equity of the National Government
in the Authority. Thereafter, the Government contribution to the capital of the Authority
shall be provided in the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must
have members. Even if we assume that the Government is considered as the sole member of
MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of the MIAA Charter mandates

15
MIAA to remit 20% of its annual gross operating income to the National Treasury.11 This
prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is organized
to operate an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently

its governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory
Provisions of the Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated

within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter. x x x (Emphasis
supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or
non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain,12 police authority13 and the levying of fees and charges.14 At the same time,
MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as these
powers are not inconsistent with the provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the

instrumentality remains part of the National Government machinery although not integrated
with the department framework. The MIAA Charter expressly states that transforming MIAA into
a "separate and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the Administrative Code. These government
instrumentalities are sometimes loosely called government corporate entities. However, they
are not government-owned or controlled corporations in the strict sense as understood under

16
the Administrative Code, which is the governing law defining the legal relationship and status of
government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government

Code, which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.

– Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its

agencies and instrumentalities and local government units.(Emphasis and
underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While
the 1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities,
such power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt whether a
person, article or activity is taxable is resolved against taxation. This rule applies with greater
force when local governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit
of the government itself or its agencies. In such case the practical effect of an
exemption is merely to reduce the amount of money that has to be handled by
government in the course of its operations. For these reasons, provisions granting
exemptions to government agencies may be construed liberally, in favor of non tax-
liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one government pocket
to another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the

17
delivery of essential public services for sound and compelling policy considerations.
There must be express language in the law empowering local governments to tax national
government instrumentalities. Any doubt whether such power exists is resolved against local
governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in
the Code, local governments cannot tax national government instrumentalities. As this Court
held in Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or

in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal government. (MC Culloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 US
51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the "power to destroy" (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of
the very entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers,

torrents, ports and bridges constructed by the State, banks, shores, roadsteads,
and others of similar character;

18
 (2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State,"
are owned by the State. The term "ports" includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of
the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the
public for international and domestic travel and transportation. The fact that the MIAA
collects terminal fees and other charges from the public does not remove the character of the
Airport Lands and Buildings as properties for public use. The operation by the government of a
tollway does not change the character of the road as one for public use. Someone must pay for
the maintenance of the road, either the public indirectly through the taxes they pay the
government, or only those among the public who actually use the road through the toll fees
they pay upon using the road. The tollway system is even a more efficient and equitable
manner of taxing the public for the maintenance of public roads.

The charging of fees to the public does not determine the character of the property whether it
is of public dominion or not. Article 420 of the Civil Code defines property of public dominion as
one "intended for public use." Even if the government collects toll fees, the road is still
"intended for public use" if anyone can use the road under the same terms and conditions as
the rest of the public. The charging of fees, the limitation on the kind of vehicles that can use
the road, the speed restrictions and other conditions for the use of the road do not affect the
public character of the road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed user's tax. This means taxing those among the public who actually use a public
facility instead of taxing all the public including those who never use the particular public
facility. A user's tax is more equitable — a principle of taxation mandated in the 1987
Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use. As properties of public dominion, they
indisputably belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

19
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are
outside the commerce of man. The Court has ruled repeatedly that properties of public
dominion are outside the commerce of man. As early as 1915, this Court already ruled
in Municipality of Cavite v. Rojas that properties devoted to public use are outside the
commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in
towns comprises the provincial and town roads, the squares, streets, fountains, and
public waters, the promenades, and public works of general service supported by said
towns or provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of
Cavite could not in 1907 withdraw or exclude from public use a portion thereof in order
to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said
plaza or public place to the defendant for private use the plaintiff municipality exceeded
its authority in the exercise of its powers by executing a contract over a thing of which it
could not dispose, nor is it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are outside
of this commerce, as was decided by the supreme court of Spain in its decision of
February 12, 1895, which says: "Communal things that cannot be sold because
they are by their very nature outside of commerce are those for public use,
such as the plazas, streets, common lands, rivers, fountains, etc." (Emphasis
supplied) 23

Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion
are outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and
to be made available to the public in general. They are outside the commerce of
man and cannot be disposed of or even leased by the municipality to private parties.
While in case of war or during an emergency, town plazas may be occupied temporarily
by private individuals, as was done and as was tolerated by the Municipality of
Pozorrubio, when the emergency has ceased, said temporary occupation or use must
also cease, and the town officials should see to it that the town plazas should ever be
kept open to the public and free from encumbrances or illegal private
constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale
of any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and

20
auction sale. This will happen if the City of Parañaque can foreclose and compel the auction
sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must
first withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the
Public Land Law or Commonwealth Act No. 141, which "remains to this day the existing general
law governing the classification and disposition of lands of the public domain other than timber
and mineral lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of
the public domain as reservations for the use of the Republic of the Philippines or of any
of its branches, or of the inhabitants thereof, in accordance with regulations prescribed
for this purposes, or for quasi-public uses or purposes when the public interest requires
it, including reservations for highways, rights of way for railroads, hydraulic power sites,
irrigation systems, communal pastures or lequas communales, public parks, public
quarries, public fishponds, working men's village and other improvements for the public
benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of

Section eighty-three shall be non-alienable and shall not be subject to
occupation, entry, sale, lease, or other disposition until again declared
alienable under the provisions of this Act or by proclamation of the President.
(Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable.
Since the Airport Lands and Buildings are inalienable in their present status as properties of
public dominion, they are not subject to levy on execution or foreclosure sale. As long as the
Airport Lands and Buildings are reserved for public use, their ownership remains with the State
or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to
withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
— (1) The President shall have the power to reserve for settlement or public
use, and for specific public purposes, any of the lands of the public domain,
the use of which is not otherwise directed by law. The reserved land shall
thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by
law or presidential proclamation from public use, they are properties of public dominion, owned
by the Republic and outside the commerce of man.

21
c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section
48, Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to
hold title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be
executed in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines,
by the President, unless the authority therefor is expressly vested by law in another
officer.

(2) For property belonging to the Republic of the Philippines but titled in the
name of any political subdivision or of any corporate agency or
instrumentality, by the executive head of the agency or instrumentality. (Emphasis
supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer
because even its executive head cannot sign the deed of conveyance on behalf of the Republic.
Only the President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:

SECTION 3. Creation of the Manila International Airport Authority. — x x x x

The land where the Airport is presently located as well as the surrounding
land area of approximately six hundred hectares, are hereby transferred,
conveyed and assigned to the ownership and administration of the Authority,
subject to existing rights, if any. The Bureau of Lands and other appropriate
government agencies shall undertake an actual survey of the area transferred within one
year from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed
through sale or through any other mode unless specifically approved by the
President of the Philippines. (Emphasis supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public

airport facilities, runways, lands, buildings and other property, movable or
immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works
or air operations, including all equipment which are necessary for the operation of crash
fire and rescue facilities, are hereby transferred to the Authority. (Emphasis supplied)

22
 SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of
Air Transportation and Transitory Provisions. — The Manila International Airport
including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for
both international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to
be upgraded to meet the current and future air traffic and other demands of aviation in
Metro Manila;

WHEREAS, a management and organization study has indicated that the objectives of

providing high standards of accommodation and service within the context of
a financially viable operation, will best be achieved by a separate and
autonomous body; and

WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities,
agencies and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The
purpose was merely to reorganize a division in the Bureau of Air Transportation into a
separate and autonomous body. The Republic remains the beneficial owner of the Airport
Lands and Buildings. MIAA itself is owned solely by the Republic. No party claims any ownership
rights over MIAA's assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be
disposed through sale or through any other mode unless specifically approved by
the President of the Philippines." This only means that the Republic retained the beneficial
ownership of the Airport Lands and Buildings because under Article 428 of the Civil Code, only
the "owner has the right to x x x dispose of a thing." Since MIAA cannot dispose of the Airport
Lands and Buildings, MIAA does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can authorize the sale or disposition of the Airport

23
Lands and Buildings. This only confirms that the Airport Lands and Buildings belong to the
Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its

political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing "[t]axes, fees or charges of any kind on the National
Government, its agencies and instrumentalities x x x." The real properties owned by the
Republic are titled either in the name of the Republic itself or in the name of agencies or
instrumentalities of the National Government. The Administrative Code allows real property
owned by the Republic to be titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and continue to be exempt
from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an
agency or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption only
if the "beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person." MIAA, as a government instrumentality, is not a taxable person under Section 133(o)
of the Local Government Code. Thus, even if we assume that the Republic has granted to MIAA
the beneficial use of the Airport Lands and Buildings, such fact does not make these real
properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax. For example, the land area occupied by hangars that MIAA
leases to private corporations is subject to real estate tax. In such a case, MIAA has granted the
beneficial use of such land area for a consideration to a taxable person and therefore such
land area is subject to real estate tax. In Lung Center of the Philippines v. Quezon City,
the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such taxes.
On the other hand, the portions of the land occupied by the hospital and portions of the

24
 hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of
the Local Government Code of 1991 withdrew the tax exemption of "all persons, whether
natural or juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions are hereby
withdrawn upon effectivity of this Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that
since the Local Government Code withdrew the tax exemption of all juridical persons, then
MIAA is not exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that
the withdrawn exemptions from realty tax cover not just GOCCs, but all
persons. To repeat, the provisions lay down the explicit proposition that the withdrawal
of realty tax exemption applies to all persons. The reference to or the inclusion of
GOCCs is only clarificatory or illustrative of the explicit provision.

The term "All persons" encompasses the two classes of persons recognized
under our laws, natural and juridical persons. Obviously, MIAA is not a
natural person. Thus, the determinative test is not just whether MIAA is a
GOCC, but whether MIAA is a juridical person at all. (Emphasis and underscoring
in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is
its status — whether MIAA is a juridical person or not. The minority also insists that "Sections
193 and 234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of
exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise provided
in this Code." Now, Section 133(o) of the Local Government Code expressly provides
otherwise, specifically prohibiting local governments from imposing any kind of tax on
national government instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. –

Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

25
 (o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)

By express mandate of the Local Government Code, local governments cannot impose any kind
of tax on national government instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and instrumentalities. The taxing powers of
local governments do not extend to the national government, its agencies and instrumentalities,
"[u]nless otherwise provided in this Code" as stated in the saving clause of Section 133. The
saving clause refers to Section 234(a) on the exception to the exemption from real estate tax of
real property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons
are subject to tax by local governments. The minority insists that the juridical persons exempt
from local taxation are limited to the three classes of entities specifically enumerated as exempt
in Section 193. Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and non-
profit hospitals and educational institutions. It would be belaboring the obvious why the
MIAA does not fall within any of the exempt entities under Section 193. (Emphasis
supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193.
Under this theory, local governments can impose any kind of local tax, and not only real estate
tax, on the national government.

Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some of
the national government instrumentalities vested by law with juridical personalities are: Bangko
Sentral ng Pilipinas,30 Philippine Rice Research Institute,31 Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development

Authority,34 Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish,
courts should not distinguish. Thus, Section 133(o) applies to all national government
instrumentalities, with or without juridical personalities. The determinative test whether MIAA is
exempt from local taxation is not whether MIAA is a juridical person, but whether it is a national
government instrumentality under Section 133(o) of the Local Government Code. Section
133(o) is the specific provision of law prohibiting local governments from imposing any kind of
tax on the national government, its agencies and instrumentalities.

26
Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies
and instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments
may tax the national government, its agencies and instrumentalities only if the Local
Government Code expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of
the Code, which makes the national government subject to real estate tax when it gives the
beneficial use of its real properties to a taxable entity. Section 234(a) of the Local Government
Code provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person.

x x x. (Emphasis supplied)

Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real
property to a taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments. The exception to the exemption applies only to real estate tax and not to any
other tax. The justification for the exception to the exemption is that the real property, although
owned by the Republic, is not devoted to public use or public service but devoted to the private
gain of a taxable person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should
prevail. Therefore, MIAA, as a juridical person, is subject to real property taxes, the
general exemptions attaching to instrumentalities under Section 133(o) of the Local
Government Code being qualified by Sections 193 and 234 of the same law. (Emphasis
supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand,
and Sections 193 and 234 on the other. No one has urged that there is such a conflict, much
less has any one presenteda persuasive argument that there is such a conflict. The minority's
assumption of an irreconcilable conflict in the statutory provisions is an egregious error for two
reasons.

27
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193
expressly admits its subordination to other provisions of the Code when Section 193 states
"[u]nless otherwise provided in this Code." By its own words, Section 193 admits the superiority
of other provisions of the Local Government Code that limit the exercise of the taxing power in
Section 193. When a provision of law grants a power but withholds such power on certain
matters, there is no conflict between the grant of power and the withholding of power. The
grantee of the power simply cannot exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local
Government Units." Section 133 limits the grant to local governments of the power to tax, and
not merely the exercise of a delegated power to tax. Section 133 states that the taxing powers
of local governments "shall not extend to the levy" of any kind of tax on the national
government, its agencies and instrumentalities. There is no clearer limitation on the taxing
power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local
governments, Section 133 logically prevails over Section 193 which grants local governments
such taxing powers. By their very meaning and purpose, the "common limitations" on the taxing
power prevail over the grant or exercise of the taxing power. If the taxing power of local
governments in Section 193 prevails over the limitations on such taxing power in Section 133,
then local governments can impose any kind of tax on the national government, its agencies
and instrumentalities — a gross absurdity.

Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception
— which is an exception to the exemption of the Republic from real estate tax imposed by local
governments — refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such
property is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority points out that
Section 2 of the Introductory Provisions of the Administrative Code admits that its definitions
are not controlling when it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context
as a whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code
recognizes that a statute may require a different meaning than that defined in the
Administrative Code. However, this does not automatically mean that the definition in the
Administrative Code does not apply to the Local Government Code. Section 2 of the

28
Administrative Code clearly states that "unless the specific words x x x of a particular statute
shall require a different meaning," the definition in Section 2 of the Administrative Code shall
apply. Thus, unless there is specific language in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the
Administrative Code, the definition in the Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the
definition of the phrase "government-owned or controlled corporation." The Administrative
Code, however, expressly defines the phrase "government-owned or controlled corporation."
The inescapable conclusion is that the Administrative Code definition of the phrase
"government-owned or controlled corporation" applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a
unified document the major structural, functional and procedural principles and rules of
governance." Thus, the Administrative Code is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities.
Unless a statute expressly provides for a different status and relationship for a specific
government unit or entity, the provisions of the Administrative Code prevail.

The minority also contends that the phrase "government-owned or controlled corporation"
should apply only to corporations organized under the Corporation Code, the general
incorporation law, and not to corporations created by special charters. The minority sees no
reason why government corporations with special charters should have a capital stock. Thus,
the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the

Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital
structure for GOCCs whose full ownership is limited by its charter to the State or
Republic. Such GOCCs are not empowered to declare dividends or alienate their capital
shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled

corporation" does not distinguish between one incorporated under the Corporation Code or
under a special charter. Where the law does not distinguish, courts should not distinguish.

29
Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion
pesos, divided into seven hundred and eighty million common shares with a par value of
ten pesos each, which shall be fully subscribed by the Government, and one hundred
and twenty million preferred shares with a par value of ten pesos each, which shall be
issued in accordance with the provisions of Sections seventy-seven and eighty-three of
this Code. (Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall
be Five Billion Pesos to be divided into Fifty Million common shares with par value of
P100 per share. These shares are available for subscription by the National Government.
Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-
Five Million common shares of stock worth Two Billion Five Hundred Million which shall
be deemed paid for by the Government with the net asset values of the Bank remaining
after the transfer of assets and liabilities as provided in Section 30 hereof. (Emphasis
supplied)

Other government-owned corporations organized as stock corporations under their special

charters are the Philippine Crop Insurance Corporation,42 Philippine International Trading
Corporation,43 and the Philippine National Bank44 before it was reorganized as a stock
corporation under the Corporation Code. All these government-owned corporations organized
under special charters as stock corporations are subject to real estate tax on real properties
owned by them. To rule that they are not government-owned or controlled corporations
because they are not registered with the Securities and Exchange Commission would remove
them from the reach of Section 234 of the Local Government Code, thus exempting them from
real estate tax.

Third, the government-owned or controlled corporations created through special charters are
those that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The
first condition is that the government-owned or controlled corporation must be established for
the common good. The second condition is that the government-owned or controlled
corporation must meet the test of economic viability. Section 16, Article XII of the 1987
Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the
common good and subject to the test of economic viability. (Emphasis and underscoring
supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled

corporations" through special charters only if these entities are required to meet the twin

30
conditions of common good and economic viability. In other words, Congress has no power to
create government-owned or controlled corporations with special charters unless they are made
to comply with the two conditions of common good and economic viability. The test of
economic viability applies only to government-owned or controlled corporations that perform
economic or commercial activities and need to compete in the market place. Being essentially
economic vehicles of the State for the common good — meaning for economic development
purposes — these government-owned or controlled corporations with special charters are
usually organized as stock corporations just like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing

governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are
not the "government-owned or controlled corporations" referred to in Section 16, Article XII of
the 1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special charters corporations
that perform economic or commercial activities, such entities — known as "government-owned
or controlled corporations" — must meet the test of economic viability because they compete in
the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their income
to meet operating expenses solely from commercial transactions in competition with the private
sector. The intent of the Constitution is to prevent the creation of government-owned or
controlled corporations that cannot survive on their own in the market place and thus merely
drain the public coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If
a government corporation loses, then it makes its claim upon the taxpayers' money
through new equity infusions from the government and what is always invoked is the
common good. That is the reason why this year, out of a budget of P115 billion for the
entire government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have
been relocated to agrarian reform, to social services like health and education, to
augment the salaries of grossly underpaid public employees. And yet this is all going
down the drain.

31
 Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. And so, Madam President, I reiterate, for the committee's consideration
and I am glad that I am joined in this proposal by Commissioner Foz, the insertion of
the standard of "ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the
common good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the
test of economic viability." The addition includes the ideas that they must show capacity
to function efficiently in business and that they should not go into activities which the
private sector can do better. Moreover, economic viability is more than financial viability
but also includes capability to make profit and generate benefits not quantifiable in
financial terms.46 (Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with
corporate powers and performing essential public services. The State is obligated to render
essential public services regardless of the economic viability of providing such service. The non-
economic viability of rendering such essential public service does not excuse the State from
withholding such essential services from the public.

However, government-owned or controlled corporations with special charters, organized

essentially for economic or commercial objectives, must meet the test of economic viability.
These are the government-owned or controlled corporations that are usually organized under
their special charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or controlled
corporations, along with government-owned or controlled corporations organized under the
Corporation Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because
there is no competing international airport operated by the private sector. MIAA performs an
essential public service as the primary domestic and international airport of the Philippines. The
operation of an international airport requires the presence of personnel from the following
government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

32
 3. The quarantine office of the Department of Health, to enforce health measures
against the spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry
of terrorists and the escape of criminals, as well as to secure the airport premises from
terrorist attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to

authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off
from, the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.

MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes on
passengers and airlines. The terminal fees that MIAA charges every passenger are regulatory or
administrative fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure, MIAA
remains a government instrumentality under Section 2(10) of the Introductory Provisions of the
Administrative Code. More importantly, as long as MIAA renders essential public services, it
need not comply with the test of economic viability. Thus, MIAA is outside the scope of the
phrase "government-owned or controlled corporations" under Section 16, Article XII of the 1987
Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned
or controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987
Constitution prescribes explicit conditions for the creation of "government-owned or controlled
corporations." The Administrative Code defines what constitutes a "government-owned or
controlled corporation." To belittle this phrase as "clarificatory or illustrative" is grave error.

33
To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)
of the Introductory Provisions of the Administrative Code because it is not organized as a stock
or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of
tax by local governments under Section 133(o) of the Local Government Code. The exception to
the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity
under the Local Government Code. Such exception applies only if the beneficial use of real
property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for public use, and at the very least intended for
public service. Whether intended for public use or public service, the Airport Lands and
Buildings are properties of public dominion. As properties of public dominion, the Airport Lands
and Buildings are owned by the Republic and thus exempt from real estate tax under Section
234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or
charges of any kind" by local governments. The only exception is when MIAA leases its real
property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like private parties are
subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of
the Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which

34
includes public airports and seaports, as properties of public dominion and owned by the
Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever
that the Airport Lands and Buildings are expressly exempt from real estate tax under Section
234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of
public dominion are not subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court

of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878.
We DECLARE the Airport Lands and Buildings of the Manila International Airport
Authority EXEMPT from the real estate tax imposed by the City of Parañaque. We
declare VOID all the real estate tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Parañaque on the Airport Lands and Buildings of the Manila
International Airport Authority, except for the portions that the Manila International Airport
Authority has leased to private parties. We also declare VOID the assailed auction sale, and all
its effects, of the Airport Lands and Buildings of the Manila International Airport Authority.

No costs.

SO ORDERED.

G.R. No. 122605       April 30, 2001

SEA-LAND SERVICE, INC., petitioner,

vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

PARDO, J.:

The Case

Appeal via  certiorari from the decision of the Court of Appeals affirming in toto that of the Court
of Tax Appeals which denied petitioner’s claim for tax credit or refund of income tax paid on its
gross Philippine billings for taxable year 1984, in the amount of P870,093.12.1

The Facts

The facts, as found by the Court of Appeals, are as follows:

"Sea-Land Service Incorporated (SEA-LAND), an American international shipping

company licensed by the Securities and Exchange Commission to do business in
the Philippines entered into a contract with the United States Government to
transport military household goods and effects of U.S. military personnel
assigned to the Subic Naval Base.

"From the aforesaid contract, SEA-LAND derived an income for the taxable year
1984 amounting to P58,006,207.54. During the taxable year in question, SEA-
LAND filed with the Bureau of Internal Revenue (BIR) the corresponding
corporate Income Tax Return (ITR) and paid the income tax due thereon of

35
 1.5% as required in Section 25 (a)(2) of the National Internal Revenue Code
(NIRC) in relation to Article 9 of the RP-US Tax Treaty, amounting to
P870,093.12.

"Claiming that it paid the aforementioned income tax by mistake, a written claim
for refund was filed with the BIR on 15 April 1987. However, before the said
claim for refund could be acted upon by public respondent Commissioner of
Internal Revenue, petitioner-appellant filed a petition for review with the CTA
docketed as CTA Case No. 4149, to judicially pursue its claim for refund and to
stop the running of the two-year prescriptive period under the then Section 243
of the NIRC.

"On 21 February 1995, CTA rendered its decision denying SEA-LAND’s claim for
refund of the income tax it paid in 1984."2

On March 30, 1995, petitioner appealed the decision of the Court of Tax Appeals to the Court of
Appeals.3

After due proceedings, on October 26, 1995, the Court of Appeals promulgated its decision
dismissing the appeal and affirming in toto the decision of the Court of Tax Appeals.4

Hence, this petition.5

The Issue

The issue raised is whether or not the income that petitioner derived from services in
transporting the household goods and effects of U.S. military personnel falls within the tax
exemption provided in Article XII, paragraph 4 of the RP-US Military Bases Agreement.

The Court’s Ruling

We deny the petition.

The RP-US Military Bases Agreement provides:

"No national of the United States, or corporation organized under the laws of the
United States, shall be liable to pay income tax in the Philippines in respect of
any profits derived under a contract made in the United States with the
government of the United States in connection with the construction,
maintenance, operation and defense of the bases, or any tax in the nature of a
license in respect of any service or work for the United States in connection with
the construction, maintenance, operation and defense of the bases."6

Petitioner Sea-Land Service, Inc. a US shipping company licensed to do business in the

Philippines earned income during taxable year 1984 amounting to P58,006,207.54, and paid
income tax thereon of 1.5% amounting to P870,093.12.

36
The question is whether petitioner is exempted from the payment of income tax on its revenue
earned from the transport or shipment of household goods and effects of US personnel
assigned at Subic Naval Base.

"Laws granting exemption from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and exemption is the exception."7 The
law "does not look with favor on tax exemptions and that he who would seek to be thus
privileged must justify it by words too plain to be mistaken and too categorical to be
misinterpreted."8

Under Article XII (4) of the RP-US Military Bases Agreement, the Philippine Government agreed
to exempt from payment of Philippine income tax nationals of the United States, or corporations
organized under the laws of the United States, residents in the United States in respect of any
profit derived under a contract made in the United States with the Government of the United
States in connection with the construction, maintenance, operation and defense of the
bases.

It is obvious that the transport or shipment of household goods and effects of U.S. military
personnel is not included in the term "construction, maintenance, operation and defense of the
bases." Neither could the performance of this service to the U.S. government be interpreted as
directly related to the defense and security of the Philippine territories. "When the law speaks in
clear and categorical language, there is no reason for interpretation or construction, but only for
application."9 Any interpretation that would give it an expansive construction to encompass
petitioner’s exemption from taxation would be unwarranted.

The avowed purpose of tax exemption "is some public benefit or interest, which the lawmaking
body considers sufficient to offset the monetary loss entailed in the grant of the
exemption."10 The hauling or transport of household goods and personal effects of U. S. military
personnel would not directly contribute to the defense and security of the Philippines.

We see no reason to reverse the ruling of the Court of Appeals, which affirmed the decision of
the Court of Tax Appeals. The Supreme "Court will not set aside lightly the conclusion reached
by the Court of Tax Appeals which, by the very nature of its function, is dedicated exclusively to
the consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority."11

Hence, the Court of Appeals did not err or gravely abuse its discretion in dismissing the petition
for review. We can not grant the petition.1âwphi1.nêt

The Judgment

WHEREFORE, the Court DENIES the petition for lack of merit.

No costs.

SO ORDERED.

G.R. No. 33403           September 4, 1930

37
THIRTY-FIRST INFANTRY POST EXCHANGE and FIRST LIEUTENANT DAVID L.
HARDEE, THIRTY-FIRST INFANTRY, UNITED STATES ARMY, plaintiffs,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, Philippine Islands, defendant.

Wm. Taylor, Mark E. Guerin, and Thomas T. Trapnell for plaintiffs.

Attorney-General Jaranilla for defendant.

MALCOLM, J.:

The question involved in these original proceedings of prohibition is whether a tax may be
levied by the Government of the Philippine Islands on sales made by merchants to Post
Exchanges of the United States Army in the Philippines. The point of jurisdiction of this court
has not been raised by the Attorney-General in representation of the defendant, and we do not
propose to be supercritical in this respect.

The parties have submitted the case on the following agreed statement of facts:

1. The plaintiff, Thirty-first Infantry Post Exchange, is now and for all the times material
to this suit has been constituted as a post exchange in accordance with the Army
Regulations (of which the court may take judicial notice) and the laws of the United
States, with its place of business in the Cuartel de España in the City of Manila, P. I. It is
an agency within the United States Army, under the control of the officers of the Army.
It is recognized and authorized in general terms by the Congress of the United States in
various enactments. First Lieutenant David L. Hardee, Thirty-first Infantry, whose
residence is in the City of Manila, P. I., is the duly appointed and acting Exchange
Officer of said exchange, and is charged with the immediate conduct and management
of the business of said plaintiff Exchange. The defendant, Juan Posadas, jr., is the duly
qualified and acting Collector of Internal Revenue of the Philippine islands, with office
and residence in the City of Manila, P. I.

2. The said plaintiff Exchange is designed for the accommodation, convenience, and
assistance of the personnel of the Army. All of the goods sold to and purchased by the
said plaintiff Exchange are intended for resale to and are in fact resold, as they have
been in the past, to the officers, soldiers and the civilian employees of the Army, and
their families. The goods sold to and purchased by the said plaintiff Exchange have
consisted and do consist largely of sundry articles for personal use, such as soaps,
shaving materials, and other toilet articles, and other goods generally found in a well-
stocked general store. Such purchases and resales, though fully authorized by law and
the Army Regulations, are not specifically required by statutory enactment. The net
proceeds derived from all such resales do not accrue to the general funds of the United
States, that is, they are not deposited in the Treasury of the United States, but are used
for the betterment of the condition of the enlisted personnel of the Army, to the end
that thereby the morale and efficiency of the armed forces of the United States may be
improved and increased.

3. In the course of its duly authorized business transactions, the said plaintiff Exchange,
under the direction of the said plaintiff David L. Hardee, as Exchange Officer, and his

38
 predecessors in that office, has, during the period of several years last past, made many
purchases of various and divers commodities, goods, wares, and merchandise from
various and divers merchants in the Philippine Islands, and is continuing to do so, and
like purchases by the said plaintiff Exchange from merchants in the Philippine Islands
are intended and contemplated as necessary in the conduct of its duly authorized
business.

4. Following many and divers of the aforesaid purchases by the said plaintiff Exchange,
the defendant, Juan Posadas, Jr., Collector of Internal Revenue of the Philippine Islands,
and his predecessors in that office, have collected from the merchants who made the
sales of the commodities, goods, wares, and merchandise to the plaintiff Exchange,
taxes at the rate of one and one-half per centum on the gross value in money of the
commodities, goods, wares, and merchandise, sold by them to the plaintiff Exchange,
and based on the actual prices at which the sales were made, and the average amount
of money per annum for several years last past demanded and collected by the
defendant and his predecessors in office as such taxes on the aforesaid sales to the
plaintiff Exchange has been several thousand pesos, averaging more than two thousand
pesos per annum since January 1, 1927.

5. The defendant persists in demanding and collecting such taxes and at the said rates
on the sales of commodities, goods, wares, and merchandise which are being effected
by merchants in the Philippine Islands to the plaintiff Exchange. He intends and expects
to continue to demand and collect such taxes and at said rates on sales of commodities,
goods, wares, and merchandise sold by merchants in the Philippine Islands to plaintiff
Exchange, and all other Army post exchanges in the Philippine Islands, unless certain
statutes of the Philippine Islands and of the United States in respect thereof shall be
modified or repealed, or he be restrained and prohibited therefrom by judgment of the
proper tribunal. The statutes upon which the defendant relies as his authority for such
demand and collection of taxes, particularly, are section 1459 of Act. No. 2711, and Act
No. 3243 of the public laws enacted by the Philippine Legislature; also the Act of June 4,
1918 (40 Stat., 597) and the Act of March 3, 1927 (44 Stat., 1390), enacted by the
Congress of the United States, ratifying the said two enactments of the Philippine
Legislature.

6. The effect of the demand and collection of taxes by the defendant on the sales of
such commodities, goods, wares and merchandise thus sold to and bought by the
plaintiff Exchange has been, is, and in the future will be unless the defendant be
commanded to desist and refrain from such demand and collection, to increase the cost
thereof to the plaintiff Exchange, by at least the amounts of such taxes demanded and
collected as aforesaid in each instance.

What is known as the sales tax is in force in the Philippines. A percentage tax of 1 1/2 per
centum is collected on merchants' sales. (Administrative Code, sec. 1459; Act No. 3243.) The
taxes imposed by the Philippine Legislature in said section 1459 and in Act No. 3243 have by
Acts of Congress been "legalized and ratified, and the collection of all such taxes . . . legalized,
ratified, and confirmed to all intents and purposes as if the same had by prior Act of Congress
been specifically authorized and directed." (Acts of Congress of June 4, 1918, and March 3,
1927, 40 Stat. L., 597, and 44 Stat. L., 1390.) Philippine law as thus enacted and expressly

39
confirmed by the Congress, makes particular mention of the persons exempt from this tax,
without, however, including in the enumeration commercial transactions with Army Post
Exchanges. On the other hand, our general law provides express exemptions from the other
taxes for the United States and its agencies. (Administrative Code, sec. 344, 1418, 1439, 1449
[s], 1450, 1474, and 1478.)

Taxes have been collected from merchants who make sales to Army Post Exchanges since
1904. (Act No. 1189, sec. 139.) Similar taxes are paid by those who sell merchandise to the
Philippine Government through the Bureau of Supply (Ruling, Bureau of Internal Revenue,
March 5, 1925, and prior precedents), and we likewise assume, by those who do business with
the United States Army and Navy in the Philippines. Only in the case at bar has formal legal
protest been made.

In 1916, the case of Walter E. Olsen & Co. vs. Rafferty ([1919], 39 Phil., 464), pertaining to the
payment of specific taxes by Army Post Exchanges, arose. The revenue laws at that time, as
they do now, provided that "no specific tax shall be collected on any articles sold and delivered
directly to the United States Army or Navy for actual use or issue by the Army or Navy, and any
taxes which have been paid on articles so sold and delivered for such use or issue shall be
refunded upon such sale and delivery, . . . ." Although in this case passing reference was made
in the court below and in appellant's brief to some of the larger constitutional aspects, the
Supreme Court confined its decision to determining whether or not merchandise, which is
generally subject to the payment of internal revenue tax, is relieved from said tax when it is
sold to the Army or Navy of the United States for resale to individuals by means or through the
post exchanges or ship's stores. The court, in resolving against the contention of the plaintiff
merchant, said:

While "post exchanges" and "ship's stores" are institutions within the Army and Navy of
the United States, and are recognized by Acts of Congress, and are under the control of
the Army and Navy, and are organized for the convenience and assistance of the
soldiers and sailors, we are not inclined to believe that goods sold to the soldiers and
sailors of the Army and Navy, even though they be sold through said exchanges by the
intervention of officers of the Army and Navy, are goods sold directly to the United
States Army or Navy for actual use or issue by the Army or Navy. They are goods sold
for the use and benefit of the post exchanges, etc., and not for the actual use or issue
by the Army or Navy. We do not believe that the exemption provided for in the above-
quoted section applies to goods sold to the United States Army and Navy to be resold to
the individuals of said organization. The money used for the purchase of merchandise
sold through the post exchanges, etc., is not supplied by, nor for, the United States
Army and Navy. Neither does the money received  in the resale of such merchandise
through the post exchanges, etc., become a part of the general funds of the Army and
Navy. In our opinion, the sale of merchandise through the post exchanges to the
individuals of the United States Army and Navy are not goods sold and delivered directly
to the United States Army or Navy for the actual use  or issue  by the Army or Navy and
are therefore, not exempt from the payment of the internal revenue tax imposed by the
law. (Emphasis those of court.)

The laws to be applied are, in effect, Acts of the Congress of the United States, and so form a
part of Philippine Organic Law. (Mitsui Bussan Kaisha vs. Manila E. R. R. & L. Co. [1919], 39

40
Phil., 624.) We do not wish to be guilty of overstating the proper principle, but it would seem
that since no law of the Congress forbids the taxation of merchants who deal with Army Post
Exchanges, and since the Congress has legalized the applicable law, and in doing so has
granted no immunity from taxation to merchants who deal with Army Post Exchanges, the
Congress has permitted such transactions with Army Post Exchanges, on the assumption that
Post Exchanges are agencies of the United States, to be taxed by the Philippine Government. It
must be understood, however, that the waiver must be clear, and that every well grounded
doubt should be resolved in favor of the exemption. (Austin vs. Aldermen of Boston [1869], 7
Wall., 694.)

As to the facts, the nature of Army Post Exchanges is explained in the stipulation of facts and in
the case of Walter E. Olsen & Co. vs. Rafferty, supra. In addition, it might be advisable to state
that the construction, equipment, and maintenance of post exchange buildings are provided for
by appropriation Acts of the Congress. The Court of Claims in holding an officer in charge of a
post exchange not a retail dealer in liquors, said that post exchanges "though conducted
without financial liability to the Government, are, in their creation and management,
governmental agencies . . . ." (Dugan vs. U. S. [1899], 34 Court of Claims, 458.) The Judge
Advocate General has said that "a post exchange is a voluntary unincorporated cooperative
association of Army organizations, a kind of cooperative store, in which all share in the benefits
and all assume a position analogous to that of partners." (Opinion, J. A. G., June 4, 1918.)
Again, although we do not desire to overstate the matter, the rule is that whenever a state
engages in a business which is of a private nature, that business is not withdrawn from the
taxing power of the Nation, or, conversely stated, whenever the National Government permits
an organization under its control to engage in a business which is of a private nature, that
business is not withdrawn from the taxing power of the state. (South Carolina vs. U. S. [1905],
199 U. S., 437.)

The plaintiffs in this case are the Thirty-first Infantry Post Exchange and the Exchange Officer
of that Exchange. But the stipulation of facts concedes that it is the merchants who effect the
sales to the Post Exchange who pay the tax. And it is the officers, soldiers, and civilian
employees and their families who are benefited by the post exchange to whom the tax is
ultimately shifted. Justice Holmes of the Supreme Court of the United States had quite similar
facts in mind when in his dissenting opinion in the case of Panhandle Oil Co. vs. Knox ([1928],
277 U. S., 218), he said: "If the plaintiff in error had paid the tax and had added it to the price,
the Government would have had nothing to say." Here, it must again be stated that it is not the
vendors of merchandise who are protesting, but it is the Army Post Exchange which is the
complainant.

The foregoing might be sufficient to dispose of the case. However, we would not like to be
charged with dodging the more vital issues, and so will take under view the larger constitutional
aspects of the question.

Chief Justice Marshall was originally responsible for the rule that without Congressional consent,
no Federal agency or instrumentality can be taxed by state authority. (McCulloch vs. State of
Maryland [1819], 4 Wheat., 316; Jaybird Mining Co. vs. Weir [1926], 271 U. S., 609.) Naturally,
in the course of time, attempts have been made to extend the exemption from state taxation,
established by the case of McCulloch vs. State of Maryland, supra, beyond its terms. Only those
agencies through which the Federal Government immediately and directly exercises its

41
sovereign powers are immune from the taxing power of the states. The reason upon which the
rule rests must be the guiding principle to control its operation. The limitations upon the taxing
power of the state must receive a practical construction which does not seriously impair the
taxing power of the Government imposing the tax. The effect of the tax upon the functions of
the Government and the nature of the governmental agency determine finally the extent of the
exemption. (Metcalf vs. Mitchell [1926], 269 U. S., 514; Thomson vs. Union Pacific Railroad Co.
[1869], 9 Wall., 579.)

It would be impracticable to point out all of the limitations to the general rule, but a few may be
noted. Thus in the well considered decision in Union Pacific Railroad Co. vs. Peniston ([1873],
18 Wall., 5), it was said: "It cannot be that a state tax which remotely affects the efficient
exercise of a federal power is for that reason alone inhibited by the Constitution." Again, with
more direct application, although contained in a dissenting opinion, Justice Thompson, in
Weston vs. City Council of Charleston ([1829], 2 Pet., 449), said: "The unqualified proposition
that a State cannot directly or indirectly tax any instrument or means employed by the general
government in the execution of its power, cannot be literally sustained. Congress has power to
raise armies, such armies are made up of officers and soldiers, and are instruments employed
by the government in executing its powers; and although the army, as such, cannot be taxed,
yet it will not be claimed that all such officers and soldiers are exempt from State taxation." The
United States Supreme Court has held that the use of machinery and boats in the harbor of San
Juan, Porto Rico, in the performance of a dredging contract with the United States, does not
exempt them from location taxation. (Gromer vs. Standard Dredging Co. [1911], 224 U. S.,
362.)

It has been contended during the course of our deliberations that, all other questions to one
side, the case is governed by the comparatively recent decision of the Supreme Court of the
United States in the case of Panhandle Oil Co. vs. Knox, supra. There it was held by a closely
divided court that (1) A state tax imposed on dealers in gasoline for the privilege of selling, and
measured at so many cents per gallon of gasoline sold, is void under the Federal Constitution as
applied to sales to instrumentalities of the United States, such as the Coast Guard Fleet and a
Veterans' Hospital; (2) that the substance and legal effect is to tax the sale, and thus burden
and tax the United States, exacting tribute on its transactions for the support of the State; and
(3) that such an exaction infringes the right of the dealer to have the constitutional
independence of the United States in respect of such purchases remain untrammeled. With all
due deference to the pronouncements of the higher court which we are bound to abide by, we
are yet convinced that the cited case is not controlling. We will point out some of the
differences between the two cases. There the plaintiff in error was a private oil company which
had been sued by the state to recover taxes; here the plaintiffs are not the private individuals
who paid the taxes but are an Army Post Exchange and its Exchange Officer. There the law in
question was an Act of the State Legislature; here the laws in question are Acts of the
Philippine Legislature which have been ratified by the Congress of the United States and raised
to the level of organic laws. There the right of the United States to make purchases was derived
from the United States' Constitution; here the right of the Army Post Exchange to make
purchases is derived from Army regulations and Army practice. There the sale was made to
instrumentalities authorized by the constitution, which consumed the merchandise; here the
sales were made to Army Post Exchanges not so constitutionally authorized, which merely acted
as intermediaries. There it must be taken for granted that the Coast Guard Fleet and the
Veterans' Hospital were constructed and operated by Government funds; here, except that

42
buildings are provided by the United States Government for the Army Post Exchanges, the latter
are not so constructed and operated.

The majority decision in the Panhandle Oil case carries the Marshallian theory of national
supremacy just about to its extreme limits. We do not think that the present case falls within
those limits. When a merchant sells a case of hair pins to an Army post exchange, and the wife
of an Army officer purchases a package of those hair pins, and when a merchant sells a
quantity of tobacco to an Army post exchange, and a soldier provides himself with his tobacco;
and when the merchants who perfect the sales make good the required taxes, "the exertion of
national power" is not so burdened or interfered with, and "the exactions demanded" do not so
infringe the constitutional independence of the United States as to exempt the sales from
taxation, which every one else, including the merchant who sells to the Philippine Government,
must pay. That is our understanding of the authorities and of the law.

There can exist no measure of doubt that the basic rule, together with its qualifications, applies
not only to the States of the American Union, but also to unincorporated territories with the
status of the Government of the Philippine Islands.

Placing some emphasis on the point of long acquiescence in the imposition of the sales tax on
vendors of merchandise to Army Post Exchanges; on the point that the Congress of the United
States has virtually sanctioned such a sales tax by confirming Philippine revenue laws without
reservation; and on the point that a kind of cooperative store in the Army is akin to a private
business enterprise which is not withdrawn from taxation, we desire with more emphasis to
indicate the lack of standing of the plaintiffs to contest the tax. On still broader grounds, we
would consider the effects of the sales tax upon the United States Army, and the nature of an
Army Post Exchange. The tax laid upon Philippine merchants who sell to Army Post Exchanges
does not interfere with the supremacy of the United States Government, or with the operations
of its instrumentality, the United States Army, to such an extent or in such a manner as to
render the tax illegal. The tax does not deprive the Army of the power to serve the Government
as it was intended to serve it, or hinder the efficient exercise of its power.

We rule that an Army Post Exchange, although an agency within the United States Army,
cannot secure exemption from taxation for merchants who make sales to the Post Exchange.
The question must, therefore, be answered in the affirmative. The plaintiffs have not made out
a case.

Wherefore, the complaint will be dismissed, with costs.

G.R. No. L-26379      December 27, 1969

WILLIAM C. REAGAN, ETC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Quasha, Asperilla, Blanco, Zafra and Tayag for petitioner.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R.
Rosete, Solicitor Lolita O. Gal-lang and Special Attorney Gamaliel H. Mantolino for respondent.

43
FERNANDO, J.:

A question novel in character, the answer to which has far-reaching implications, is raised by
petitioner William C. Reagan, at one time a civilian employee of an American corporation
providing technical assistance to the United States Air Force in the Philippines. He would dispute
the payment of the income tax assessed on him by respondent Commissioner of Internal
Revenue on an amount realized by him on a sale of his automobile to a member of the United
States Marine Corps, the transaction having taken place at the Clark Field Air Base at
Pampanga. It is his contention, seriously and earnestly expressed, that in legal contemplation
the sale was made outside Philippine territory and therefore beyond our jurisdictional power to
tax.

Such a plea, far-fetched and implausible, on its face betraying no kinship with reality, he would
justify by invoking, mistakenly as will hereafter be more fully shown an observation to that
effect in a 1951 opinion, 1 petitioner ignoring that such utterance was made purely as a flourish
of rhetoric and by way of emphasizing the decision reached, that the trading firm as purchaser
of army goods must respond for the sales taxes due from an importer, as the American armed
forces being exempt could not be taxed as such under the National Internal Revenue
Code.2 Such an assumption, inspired by the commendable aim to render unavailing any attempt
at tax evasion on the part of such vendee, found expression anew in a 1962 decision,3 coupled
with the reminder however, to render the truth unmistakable, that "the areas covered by the
United States Military Bases are not foreign territories both in the political and geographical
sense."

As thus clarified, it is manifest that such a view amounts at most to a legal fiction and is
moreover obiter. It certainly cannot control the resolution of the specific question that confronts
us. We declare our stand in an unequivocal manner. The sale having taken place on what
indisputably is Philippine territory, petitioner's liability for the income tax due as a result thereof
was unavoidable. As the Court of Tax Appeals reached a similar conclusion, we sustain its
decision now before us on appeal.

In the decision appealed from, the Court of Tax Appeals, after stating the nature of the case,
started the recital of facts thus: "It appears that petitioner, a citizen of the United States and an
employee of Bendix Radio, Division of Bendix Aviation Corporation, which provides technical
assistance to the United States Air Force, was assigned at Clark Air Base, Philippines, on or
about July 7, 1959 ... . Nine (9) months thereafter and before his tour of duty expired,
petitioner imported on April 22, 1960 a tax-free 1960 Cadillac car with accessories valued at
$6,443.83, including freight, insurance and other charges."4 Then came the following: "On July
11, 1960, more than two (2) months after the 1960 Cadillac car was imported into the
Philippines, petitioner requested the Base Commander, Clark Air Base, for a permit to sell the
car, which was granted provided that the sale was made to a member of the United States
Armed Forces or a citizen of the United States employed in the U.S. military bases in the
Philippines. On the same date, July 11, 1960, petitioner sold his car for $6,600.00 to a certain
Willie Johnson, Jr. (Private first class), United States Marine Corps, Sangley Point, Cavite,
Philippines, as shown by a Bill of Sale . . . executed at Clark Air Base. On the same date, Pfc.
Willie (William) Johnson, Jr. sold the car to Fred Meneses for P32,000.00 as evidenced by a
deed of sale executed in Manila."5

44
As a result of the transaction thus made, respondent Commissioner of Internal Revenue, after
deducting the landed cost of the car as well as the personal exemption to which petitioner was
entitled, fixed as his net taxable income arising from such transaction the amount of
P17,912.34, rendering him liable for income tax in the sum of P2,979.00. After paying the sum,
he sought a refund from respondent claiming that he was exempt, but pending action on his
request for refund, he filed the case with the Court of Tax Appeals seeking recovery of the sum
of P2,979.00 plus the legal rate of interest.

As noted in the appealed decision: "The only issue submitted for our resolution is whether or
not the said income tax of P2,979.00 was legally collected by respondent for petitioner."6 After
discussing the legal issues raised, primarily the contention that the Clark Air Base "in legal
contemplation, is a base outside the Philippines" the sale therefore having taken place on
"foreign soil", the Court of Tax Appeals found nothing objectionable in the assessment and
thereafter the payment of P2,979.00 as income tax and denied the refund on the same. Hence,
this appeal predicated on a legal theory we cannot accept. Petitioner cannot make out a case
for reversal.

1. Resort to fundamentals is unavoidable to place things in their proper perspective, petitioner

apparently feeling justified in his refusal to defer to basic postulates of constitutional and
international law, induced no doubt by the weight he would accord to the observation made by
this Court in the two opinions earlier referred to. To repeat, scant comfort, if at all is to be
derived from such an obiter dictum, one which is likewise far from reflecting the fact as it is.

Nothing is better settled than that the Philippines being independent and sovereign, its
authority may be exercised over its entire domain. There is no portion thereof that is beyond its
power. Within its limits, its decrees are supreme, its commands paramount. Its laws govern
therein, and everyone to whom it applies must submit to its terms. That is the extent of its
jurisdiction, both territorial and personal. Necessarily, likewise, it has to be exclusive. If it were
not thus, there is a diminution of its sovereignty.

It is to be admitted that any state may, by its consent, express or implied, submit to a
restriction of its sovereign rights. There may thus be a curtailment of what otherwise is a power
plenary in character. That is the concept of sovereignty as auto-limitation, which, in the succinct
language of Jellinek, "is the property of a state-force due to which it has the exclusive capacity
of legal self-determination and self-restriction."7 A state then, if it chooses to, may refrain from
the exercise of what otherwise is illimitable competence.

Its laws may as to some persons found within its territory no longer control. Nor does the
matter end there. It is not precluded from allowing another power to participate in the exercise
of jurisdictional right over certain portions of its territory. If it does so, it by no means follows
that such areas become impressed with an alien character. They retain their status as native
soil. They are still subject to its authority. Its jurisdiction may be diminished, but it does not
disappear. So it is with the bases under lease to the American armed forces by virtue of the
military bases agreement of 1947. They are not and cannot be foreign territory.

Decisions coming from petitioner's native land, penned by jurists of repute, speak to that effect
with impressive unanimity. We start with the citation from Chief Justice Marshall, announced in
the leading case of Schooner Exchange v. M'Faddon,8 an 1812 decision: "The jurisdiction of the

45
nation within its own territory is necessarily exclusive and absolute. It is susceptible of no
limitation not imposed by itself. Any restriction upon it, deriving validity from an external
source, would imply a diminution of its sovereignty to the extent of the restriction, and an
investment of that sovereignty to the same extent in that power which could impose such
restriction." After which came this paragraph: "All exceptions, therefore, to the full and
complete power of a nation within its own territories, must be traced up to the consent of the
nation itself. They can flow from no other legitimate source."

Chief Justice Taney, in an 1857 decision,9 affirmed the fundamental principle of everyone within
the territorial domain of a state being subject to its commands: "For undoubtedly every person
who is found within the limits of a government, whether the temporary purposes or as a
resident, is bound by its laws." It is no exaggeration then for Justice Brewer to stress that the
United States government "is one having jurisdiction over every foot of soil within its territory,
and acting directly upon each [individual found therein]; . . ."10

Not too long ago, there was a reiteration of such a view, this time from the pen of Justice Van
Devanter. Thus: "It now is settled in the United States and recognized elsewhere that the
territory subject to its jurisdiction includes the land areas under its dominion and control the
ports, harbors, bays, and other in closed arms of the sea along its coast, and a marginal belt of
the sea extending from the coast line outward a marine league, or 3 geographic miles."11 He
could cite moreover, in addition to many American decisions, such eminent treatise-writers as
Kent, Moore, Hyde, Wilson, Westlake, Wheaton and Oppenheim.

As a matter of fact, the eminent commentator Hyde in his three-volume work on International
Law, as interpreted and applied by the United States, made clear that not even the embassy
premises of a foreign power are to be considered outside the territorial domain of the host
state. Thus: "The ground occupied by an embassy is not in fact the territory of the foreign State
to which the premises belong through possession or ownership. The lawfulness or unlawfulness
of acts there committed is determined by the territorial sovereign. If an attache commits an
offense within the precincts of an embassy, his immunity from prosecution is not because he
has not violated the local law, but rather for the reason that the individual is exempt from
prosecution. If a person not so exempt, or whose immunity is waived, similarly commits a crime
therein, the territorial sovereign, if it secures custody of the offender, may subject him to
prosecution, even though its criminal code normally does not contemplate the punishment of
one who commits an offense outside of the national domain. It is not believed, therefore, that
an ambassador himself possesses the right to exercise jurisdiction, contrary to the will of the
State of his sojourn, even within his embassy with respect to acts there committed. Nor is there
apparent at the present time any tendency on the part of States to acquiesce in his exercise of
it."12

2. In the light of the above, the first and crucial error imputed to the Court of Tax Appeals to
the effect that it should have held that the Clark Air Force is foreign soil or territory for
purposes of income tax legislation is clearly without support in law. As thus correctly viewed,
petitioner's hope for the reversal of the decision completely fades away. There is nothing in the
Military Bases Agreement that lends support to such an assertion. It has not become foreign
soil or territory. This country's jurisdictional rights therein, certainly not excluding the power to
tax, have been preserved. As to certain tax matters, an appropriate exemption was provided
for.

46
Petitioner could not have been unaware that to maintain the contrary would be to defy reality
and would be an affront to the law. While his first assigned error is thus worded, he would seek
to impart plausibility to his claim by the ostensible invocation of the exemption clause in the
Agreement by virtue of which a "national of the United States serving in or employed in the
Philippines in connection with the construction, maintenance, operation or defense of the bases
and residing in the Philippines only by reason of such employment" is not to be taxed on his
income unless "derived from Philippine source or sources other than the United States
sources."13 The reliance, to repeat, is more apparent than real for as noted at the outset of this
opinion, petitioner places more faith not on the language of the provision on exemption but on
a sentiment given expression in a 1951 opinion of this Court, which would be made to yield
such an unwarranted interpretation at war with the controlling constitutional and international
law principles. At any rate, even if such a contention were more adequately pressed and
insisted upon, it is on its face devoid of merit as the source clearly was Philippine.

In Saura Import and Export Co. v. Meer,14 the case above referred to, this Court affirmed a
decision rendered about seven months previously,15 holding liable as an importer, within the
contemplation of the National Internal Revenue Code provision, the trading firm that purchased
army goods from a United States government agency in the Philippines. It is easily
understandable why. If it were not thus, tax evasion would have been facilitated. The United
States forces that brought in such equipment later disposed of as surplus, when no longer
needed for military purposes, was beyond the reach of our tax statutes.

Justice Tuason, who spoke for the Court, adhered to such a rationale, quoting extensively from
the earlier opinion. He could have stopped there. He chose not to do so. The transaction having
occurred in 1946, not so long after the liberation of the Philippines, he proceeded to discuss the
role of the American military contingent in the Philippines as a belligerent occupant. In the
course of such a dissertion, drawing on his well-known gift for rhetoric and cognizant that he
was making an as if  statement, he did say: "While in army bases or installations within the
Philippines those goods were in contemplation of law on foreign soil."

It is thus evident that the first, and thereafter the controlling, decision as to the liability for
sales taxes as an importer by the purchaser, could have been reached without any need for
such expression as that given utterance by Justice Tuason. Its value then as an authoritative
doctrine cannot be as much as petitioner would mistakenly attach to it. It was clearly obiter not
being necessary for the resolution of the issue before this Court.16 It was an opinion "uttered by
the way."17 It could not then be controlling on the question before us now, the liability of the
petitioner for income tax which, as announced at the opening of this opinion, is squarely raised
for the first time.18

On this point, Chief Justice Marshall could again be listened to with profit. Thus: "It is a maxim,
not to be disregarded, that general expressions, in every opinion, are to be taken in connection
with the case in which those expressions are used. If they go beyond the case, they may be
respected, but ought not to control the judgment in a subsequent suit when the very point is
presented for decision."19

Nor did the fact that such utterance of Justice Tuason was cited in Co Po v. Collector of Internal
Revenue,20 a 1962 decision relied upon by petitioner, put a different complexion on the matter.
Again, it was by way of pure embellishment, there being no need to repeat it, to reach the

47
conclusion that it was the purchaser of army goods, this time from military bases, that must
respond for the advance sales taxes as importer. Again, the purpose that animated the
reiteration of such a view was clearly to emphasize that through the employment of such a
fiction, tax evasion is precluded. What is more, how far divorced from the truth was such
statement was emphasized by Justice Barrera, who penned the Co Po opinion, thus: "It is true
that the areas covered by the United States Military Bases are not foreign territories both in the
political and geographical sense."21

Justice Tuason moreover made explicit that rather than corresponding with reality, what was
said by him was in the way of a legal fiction. Note his stress on "in contemplation of law." To
lend further support to a conclusion already announced, being at that a confirmation of what
had been arrived at in the earlier case, distinguished by its sound appreciation of the issue then
before this Court and to preclude any tax evasion, an observation certainly not to be taken
literally was thus given utterance.

This is not to say that it should have been ignored altogether afterwards. It could be utilized
again, as it undoubtedly was, especially so for the purpose intended, namely to stigmatize as
without support in law any attempt on the part of a taxpayer to escape an obligation incumbent
upon him. So it was quoted with that end in view in the Co Po case. It certainly does not justify
any effort to render futile the collection of a tax legally due, as here. That was farthest from the
thought of Justice Tuason.

What is more, the statement on its face is, to repeat, a legal fiction. This is not to discount the
uses of a  fictio juris  in the science of the law. It was Cardozo who pointed out its value as a
device "to advance the ends of justice" although at times it could be "clumsy" and even
"offensive".22 Certainly, then, while far from objectionable as thus enunciated, this observation
of Justice Tuason could be misused or misconstrued in a clumsy manner to reach an offensive
result. To repeat, properly used, a legal fiction could be relied upon by the law, as Frankfurter
noted, in the pursuit of legitimate ends.23 Petitioner then would be well-advised to take to heart
such counsel of care and circumspection before invoking not a legal fiction that would avoid a
mockery of the law by avoiding tax evasion but what clearly is a misinterpretation thereof,
leading to results that would have shocked its originator.

The conclusion is thus irresistible that the crucial error assigned, the only one that calls for
discussion to the effect that for income tax purposes the Clark Air Force Base is outside
Philippine territory, is utterly without merit. So we have said earlier.

3. To impute then to the statement of Justice Tuason the meaning that petitioner would fasten
on it is, to paraphrase Frankfurter, to be guilty of succumbing to the vice of literalness. To so
conclude is, whether by design or inadvertence, to misread it. It certainly is not susceptible of
the mischievous consequences now sought to be fastened on it by petitioner.

That it would be fraught with such peril to the enforcement of our tax statutes on the military
bases under lease to the American armed forces could not have been within the contemplation
of Justice Tuason. To so attribute such a bizarre consequence is to be guilty of a grave
disservice to the memory of a great jurist. For his real and genuine sentiment on the matter in
consonance with the imperative mandate of controlling constitutional and international law
concepts was categorically set forth by him, not as an obiter but as the rationale of the

48
decision, in People v. Acierto24 thus: "By the [Military Bases] Agreement, it should be noted, the
Philippine Government merely consents that the United States exercise jurisdiction in certain
cases. The consent was given purely as a matter of comity, courtesy, or expediency over the
bases as part of the Philippine territory or divested itself completely of jurisdiction over offenses
committed therein."

Nor did he stop there. He did stress further the full extent of our territorial jurisdiction in words
that do not admit of doubt. Thus: "This provision is not and can not on principle or authority be
construed as a limitation upon the rights of the Philippine Government. If anything, it is an
emphatic recognition and reaffirmation of Philippine sovereignty over the bases and of the truth
that all jurisdictional rights granted to the United States and not exercised by the latter are
reserved by the Philippines for itself."25

It is in the same spirit that we approach the specific question confronting us in this litigation.
We hold, as announced at the outset, that petitioner was liable for the income tax arising from
a sale of his automobile in the Clark Field Air Base, which clearly is and cannot otherwise be
other than, within our territorial jurisdiction to tax.

4. With the mist thus lifted from the situation as it truly presents itself, there is nothing that
stands in the way of an affirmance of the Court of Tax Appeals decision. No useful purpose
would be served by discussing the other assigned errors, petitioner himself being fully aware
that if the Clark Air Force Base is to be considered, as it ought to be and as it is, Philippine soil
or territory, his claim for exemption from the income tax due was distinguished only by its
futility.

There is further satisfaction in finding ourselves unable to indulge petitioner in his plea for
reversal. We thus manifest fealty to a pronouncement made time and time again that the law
does not look with favor on tax exemptions and that he who would seek to be thus privileged
must justify it by words too plain to be mistaken and too categorical to be
misinterpreted.26 Petitioner had not done so. Petitioner cannot do so.

WHEREFORE, the decision of the Court of Tax Appeals of May 12, 1966 denying the refund of
P2,979.00 as the income tax paid by petitioner is affirmed. With costs against petitioner.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro and Teehankee, JJ., concur.

Reyes, J.B.L., J., concurs in the result.

Barredo, J., took no part.

G.R. No. L-54908               January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.

G.R. No. 80041               January 22, 1990

49
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.

Gadioma Law Offices for respondents.

REGALADO, J.:

These cases, involving the same issue being contested by the same parties and having
originated from the same factual antecedents generating the claims for tax credit of private
respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and
are jointly decided herein.

The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development
Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal
Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in
the Philippines, for purposes of the projected expansion of the productive capacity of the
former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas
'in the amount of $20,000,000.00, United States currency, for the installation of a new
concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper
concentrates produced from said machine for a period of fifteen (15) years. It was
contemplated that $9,000,000.00 of said loan was to be used for the purchase of the
concentrator machinery from Japan. 1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for
short) obviously for purposes of its obligation under said contract. Its loan application was
approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time as the
approval of its loan for ¥2,880,000,000.00 from a consortium of Japanese banks. The total
amount of both loans is equivalent to $20,000,000.00 in United States currency at the then
prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval
of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the
amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas,
and that Mitsubishi had to pay back the total amount of loan by September 30, 1981. 2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the
former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding
15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1)
and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential
Decree No. 131, and duly remitted to the Government. 3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was
later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976,

50
Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of
Atlas. 4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private
respondents filed a petition for review with respondent court, docketed therein as CTA Case No.
2801. 5 The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank,
which is a financing institution owned, controlled and financed by the Japanese Government.
Such governmental status of Eximbank, if it may be so called, is the basis for private
repondents' claim for exemption from paying the tax on the interest payments on the loan as
earlier stated. It was further claimed that the interest payments on the loan from the
consortium of Japanese banks were likewise exempt because said loan supposedly came from
or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon
is Section 29 (b) (7) (A), 6 which excludes from gross income:

(A) Income received from their investments in the Philippines in loans, stocks, bonds or
other domestic securities, or from interest on their deposits in banks in the Philippines
by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying
refinancing from them, and (3) international or regional financing institutions established
by governments.

Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but
was later reset upon manifestation of petitioner that the claim for tax credit of the alleged
erroneous payment was still being reviewed by the Appellate Division of the Bureau of Internal
Revenue. The records show that on November 16, 1976, the said division recommended to
petitioner the approval of private respondent's claim. However, before action could be taken
thereon, respondent court scheduled the case for hearing on September 30, 1977, during which
trial private respondents presented their evidence while petitioner submitted his case on the
basis of the records of the Bureau of Internal Revenue and the pleadings. 7

On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax
credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that
petitioner admitted the material averments of private respondents when he supposedly prayed
"for judgment on the pleadings without off-spring proof as to the truth of his
allegations." 8 Furthermore, the court declared that all papers and documents pertaining to the
loan of ¥4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same
amount given to Atlas. It also observed that the money for the loans from the consortium of
private Japanese banks in the sum of ¥2,880,000,000.00 "originated" from Eximbank. From
these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with
Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from the
creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development
Corporation." 9

A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an
appeal to this Court, docketed herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on
the amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and

51
1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with
the petitioner, repeating the same basis for exemption.

On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals
docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in
a letter to private respondents dated November 12, 1979, denied said claim for tax credit for
lack of factual or legal basis. 10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court
rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A
motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a
resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by
petitioner with respondent court and a petition for review was filed with this Court on December
19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No.
54908.

The principal issue in both petitions is whether or not the interest income from the loans
extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29
b) (7) (A) of the tax code and, therefore, exempt from withholding tax. Apropos  thereto, the
focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will then be
considered as the creditor whose investments in the Philippines on loans are exempt from taxes
under the code.

Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that
petitioner should be deemed to have admitted the allegations of the private respondents when
it submitted the case on the basis of the pleadings and records of the bureau. There is nothing
to indicate such admission on the part of petitioner nor can we accept respondent court's
pronouncement that petitioner did not offer to prove the truth of its allegations. The records of
the Bureau of Internal Revenue relevant to the case were duly submitted and admitted as
petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of
evidence, and the findings of respondent court were based not only on the pleadings but on the
evidence adduced by the parties. There could, therefore, not have been a judgment on the
pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by
respondent court.

Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to
the highest respect and can only be disturbed on appeal if they are not supported by
substantial evidence or if there is a showing of gross error or abuse on the part of the tax
court. 11 Thus, ordinarily, we could give due consideration to the holding of respondent court
that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in
these cases, however, warrant a departure from said general rule since we are convinced that
there is a misapprehension of facts on the part of the tax court to the extent that its
conclusions are speculative in nature.

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or
inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as
creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the
categorical language used in the document, one prestation was in consideration of the other.

52
The specific terms and the reciprocal nature of their obligations make it implausible, if not
vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said
transaction.

Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that
Mitsubishi stated in its loan application with the former was that the amount being procured
would be used as a loan to and in consideration for importing copper concentrates from
Atlas. 12 Such an innocuous statement of purpose could not have been intended for, nor could it
legally constitute, a contract of agency. If that had been the purpose as respondent court
believes, said corporations would have specifically so stated, especially considering their
experience and expertise in financial transactions, not to speak of the amount involved and its
purchasing value in 1970.

A thorough analysis of the factual and legal ambience of these cases impels us to give weight to
the following arguments of petitioner:

The nature of the above contract shows that the same is not just a simple contract of
loan. It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation
between ATLAS and MITSUBISHI where the latter shall provide the funds in the
installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in
consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire
copper concentrate that will be produced by the installed concentrator.

Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the
specified term was the consideration of the granting of the amount of $20 million to
ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds.
Hence, it had to secure a loan or loans from other sources. And from what sources, it is
immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20
million from the EXIMBANK, of Japan and the consortium of Japanese banks financed
through the EXIMBANK, of Japan.

When MITSUBISHI therefore secured such loans, it was in its own independent capacity
as a private entity and not as a conduit of the consortium of Japanese banks or the
EXIMBANK of Japan. While the loans were secured by MITSUBISHI primarily "as a loan
to and in consideration for importing copper concentrates from ATLAS," the fact remains
that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.

Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter
contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which
stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only
signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be
inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any
entity, private or public, for that matter.

Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule
that when a contract of loan is completed, the money ceases to be the property of the

53
 former owner and becomes the sole property of the obligor (Tolentino and Manio vs.
Gonzales Sy, 50 Phil. 558).

In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK,
of Japan, said amount ceased to be the property of the bank and became the property
of MITSUBISHI.

The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon completion of its loan
contract with EXIMBANK of Japan.

The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely
different from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What
was the subject of the 15% withholding tax is not the interest income paid by
MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the
loan to ATLAS. . . . 13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in
itself, does not appear to be suppletory or collateral to another contract and is, therefore, not to
be distorted by other considerations aliunde. The application for the loan was approved on May
20, 1970, or more than a month after the contract between Mitsubishi and Atlas was entered
into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi
agreed to use the amount as a loan to and in consideration for importing copper concentrates
from Atlas, but all that this proves is the justification for the loan as represented by Mitsubishi,
a standard banking practice for evaluating the prospects of due repayment. There is nothing
wrong with such stipulation as the parties in a contract are free to agree on such lawful terms
and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain
person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside
from protecting its financial exposure, must see to it that the same are in line with the
provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents
it from making loans except to Japanese individuals and corporations. We are not impressed.
Not only is there a failure to establish such submission by adequate evidence but it posits the
unfair and unexplained imputation that, for reasons subject only of surmise, said financing
institution would deliberately circumvent its own charter to accommodate an alien borrower
through a manipulated subterfuge, but with it as a principal and the real obligee.

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank,
assuming the truth thereof, is too tenuous and conjectural to support the proposition that
Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also be
logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever
arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for
the payment of the latter's obligation is their own concern. It should also be noted that
Eximbank's loan to Mitsubishi imposes interest at the rate of 75% per annum, while Mitsubishis
contract with Atlas merely states that the "interest on the amount of the loan shall be the actual
cost beginning from and including other dates of releases against loan." 14

54
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws
granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of
proof rests upon the party claiming exemption to prove that it is in fact covered by the
exemption so claimed, which onus petitioners have failed to discharge. Significantly, private
respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax
code, are entitled to exemption and which should indispensably be the party in interest in this
case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed
"broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental
operations suffer due to diminution of much needed funds. Nor can we close this discussion
without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while
international comity is invoked in this case on the nebulous representation that the funds
involved in the loans are those of a foreign government, scrupulous care must be taken to
avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of
having a Philippine corporation enter into a contract for loans or other domestic securities with
private foreign entities, which in turn will negotiate independently with their governments, could
be availed of to take advantage of the tax exemption law under discussion.

WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015,
dated April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.

SO ORDERED.

G.R. No. 137377            December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered
the Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income,
branch profit remittance and contractor's taxes from Marubeni Corporation after finding the
latter to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as
amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the
laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines and
maintains a branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of

authority to examine the books of accounts of the Manila branch office of respondent

55
corporation for the fiscal year ending March 1985. In the course of the examination, petitioner
found respondent to have undeclared income from two (2) contracts in the Philippines, both of
which were completed in 1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation of a wharf/port complex at
the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The
other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency

income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX

     FY ended March 31, 1985
Undeclared gross income (Philphos and
NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
20% int. p.a.fr. 7-15-85 to 8-15-
86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
     FY ended March 31, 1985
Undeclared gross income from Philphos
and NDC construction projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr. 4-26-85 to 8-15-
86 12,305,360.66
TOTAL AMOUNT DUE P83,036,965.16
III. DEFICIENCY CONTRACTOR'S TAX
     FY ended March 31, 1985
Undeclared gross receipts/gross P967,269,811.14

56
 income from Philphos and NDC
construction projects
Contractor's tax due thereon (4%) 38,690,792.00
50% surcharge for non-
Add: declaration 19,345,396.00
20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86 17,854,739.46
TOTAL AMOUNT DUE P85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
     FY ended March 31, 1985
Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
50% surcharge for non-
Add: declaration 814,284.50
20% surcharge for late payment    407,142.25
Sub-total 2,849,995.75
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86    751,539.98
   
TOTAL AMOUNT DUE P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the
aforesaid taxable revenues while the 25% surcharge was imposed because of your client's
failure to pay on time the above deficiency percentage taxes.

xxx           xxx           xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that
the gross income from the two projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction and installation of facilities in
the Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the same was
petitioner's final decision and that if respondent disagreed with it, respondent may file an
appeal with the Court of Tax Appeals within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit

57
remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a
certified true copy of his statement declaring his net worth as of December 31, 1980 on record
with the Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of said
net worth subject to verification by the BIR; and (c) file a return and pay a tax equivalent to ten
per cent (10%) of the increase in net worth from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net
worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten percent
(10%) of its net worth increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the
years 1981 to 1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax
on business under Chapter II, Title V of the National Internal Revenue Code, also covering the
years 1981 to 1985. E.O. No. 64 further provided that the immunities and privileges under E.O.
No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer
could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already
filed their amnesty return under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an amended return and paying
an additional 5% on the increase in net worth to cover business, estate and donor's tax
liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit
of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent
(5%) of the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had properly
availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject
of said case as deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to

DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and

58
 the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order No. 41, as
amended."4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court
of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of
the Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's availment of tax amnesty under Executive Orders Nos.
41 and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5

The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income
tax, branch profit remittance tax and contractor's tax. These taxes are covered by the
amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is
disqualified from availing of the said amnesties because the latter falls under the exception in
Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty
herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code,
as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of
the effectivity hereof as a result of information furnished under Section 316 of the
National Internal Revenue Code, as amended;

59
 f) Those with pending cases involving unexplained or unlawfully acquired wealth before
the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty on October 30,
1986, CTA Case No. 4109 had already been filed and was pending; before the Court of Tax
Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases
already filed in court as of the effectivity hereof." The point of reference is the date of
effectivity of E.O. No. 41. The filing of income tax cases in court must have been made before
and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under
Section 4 (b) there must have been no income tax cases filed in court against him when E.O.
No. 41 took effect. This is regardless of when the taxpayer filed for income tax amnesty,
provided of course he files it on or before the deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractor's tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became
effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court. Respondent
corporation did not fall under the said exception in Section 4 (b), hence, respondent was not
disqualified from availing of the amnesty for income tax under E.O. No. 41.

The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter
III of the National Internal Revenue Code.6 In the tax code, this tax falls under Title II on
Income Tax. It is a tax on income. Respondent therefore did not fall under the exception in
Section 4 (b) when it filed for amnesty of its deficiency branch profit remittance tax
assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41
by including estate and donor's taxes and tax on business. Estate and donor's taxes fall under
Title III of the Tax Code while business taxes fall under Chapter II, Title V of the same. The
contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and
imposed under the title on business taxes, and is therefore a tax on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No.
64 provided that:

"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and
effect."

60
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or
inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O.
No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to
Section 4 (b) in particular, this provision excepts from tax amnesty coverage a taxpayer who
has "income tax cases already filed in court as of the effectivity hereof." As to what Executive
Order the exception refers to, respondent argues that because of the words "income" and
"hereof," they refer to Executive Order No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to
refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act
operates prospectively.9 While an amendment is generally construed as becoming a part of the
original act as if it had always been contained therein,10 it may not be given a retroactive effect
unless it is so provided expressly or by necessary implication and no vested right or obligations
of contract are thereby impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of
E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or
any of its provisions should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements
the original act by adding other taxes not covered in the first.12 It has been held that where a
statute amending a tax law is silent as to whether it operates retroactively, the amendment will
not be given a retroactive effect so as to subject to tax past transactions not subject to tax
under the original act.13 In an amendatory act, every case of doubt must be resolved against its
retroactive effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon
or intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or
waiver by the government of its right to collect what is due it and to give tax evaders who wish
to relent a chance to start with a clean slate.16 A tax amnesty, much like a tax exemption, is
never favored nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.18 For the right of taxation is inherent in government. The State cannot strip itself of
the most essential power of taxation by doubtful words. He who claims an exemption (or an
amnesty) from the common burden must justify his claim by the clearest grant of organic or
state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the
intent of the legislature, that doubt must be resolved in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax cases" should be
read as to refer to estate and donor's taxes and taxes on business while the word "hereof," to
E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986, consequently,
insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in Section 4
(b) of E.O. No. 41 should be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent

61
already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified
from availing of the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under
the two Executive Orders, it is still not liable for the deficiency contractor's tax because the
income from the projects came from the "Offshore Portion" of the contracts. The two contracts
were divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials
and equipment in the contract under the "Offshore Portion" were manufactured and completed
in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-
scale manufacture of phosphatic fertilizer for the local and foreign markets.20 The Philphos plant
complex which was envisioned to be the largest phosphatic fertilizer operation in Asia, and
among the largest in the world, covered an area of 180 hectares within the 435-hectare Leyte
Industrial Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at the
Leyte Industrial Development Estate. It was to be specifically adapted to the site for the
handling of phosphate rock, bagged or bulk fertilizer products, liquid materials and other
products of Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar),21 and
other industrial plants within the Estate. The bidding was participated in by Marubeni Head
Office in Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation."22 The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities,
harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.23 The scope of the works under the contract
covered turn-key supply, which included grants of licenses and the transfer of technology and
know-how,24 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Wharf-Port Complex as set forth in Annex I of this Contract, as well as the coordination
of tie-ins at boundaries and schedule of the use of a part or the whole of the Wharf/Port
Complex through the Owner, with the design and construction of other facilities around
the site. The scope of works shall also include any activity, work and supply necessary
for, incidental to or appropriate under present international industrial port practice, for
the timely and successful implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I."25

62
The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In
the contract, the price in Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency
was referred to as the Philippine Pesos Portion. The Japanese Yen Portions I and II were
financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-
Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of Japan extended by
the Japanese government as assistance to foreign governments to promote economic
development.26 The OECF extended to the Philippine Government a loan of ¥7,560,000,000.00
for the Leyte Industrial Estate Port Development Project and authorized the NDC to implement
the same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni,
obtained a loan from the Export-Import Bank of Japan to advance payment to its sub-
contractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment and
services rendered on the project. The price breakdown and the corresponding materials,
equipment and services were contained in a list attached as Annex III to the contract.29

A few months after execution of the NDC contract, Philphos opened for public bidding a project
to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982,
Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract for
Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni
Corporation."30 The object of the contract was to establish and place in operating condition a
modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia31 and for the delivery of ammonia to an
integrated fertilizer plant adjacent to the storage complex and to vessels at the dock.32 The
storage complex was to consist of ammonia storage tanks, refrigeration system, ship unloading
system, transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare
parts, and other related facilities.33 The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses and transfer of
technology and know-how,34 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of
the Ammonia Storage Complex through the Owner with the design and construction of
other facilities at and around the Site. The scope of works shall also include any activity,
work and supply necessary for, incidental to or appropriate under present international
industrial practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I."35

The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken
down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine
currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II

63
were financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the
three portions were further broken down into the corresponding materials, equipment and
services required for the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to the latter as Annex III.36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were classified —
the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the
Japanese Yen Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II
and the Philippine Pesos Portion correspond to the Philippine Onshore Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's
tax on the income from the two projects. In fact respondent claims, which petitioner has not
denied, that the income it derived from the Onshore Portion of the two projects had been
declared for tax purposes and the taxes thereon already paid to the Philippine government.39 It
is with regard to the gross receipts from the Foreign Offshore Portion of the two contracts that
the liabilities involved in the assessments subject of this case arose. Petitioner argues that since
the two agreements are turn-key,40 they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is
in the Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines.41 Accordingly, respondent's entire
receipts from the contracts, including its receipts from the Offshore Portion, constitute income
from Philippine sources. The total gross receipts covering both labor and materials should be
subjected to contractor's tax in accordance with the ruling in Commissioner of Internal Revenue
v. Engineering Equipment & Supply Co.42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A

contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or
operators of the following business establishments and/or persons engaged in the
business of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in

Republic Act No. 4566;

xxx           xxx           xxx

(q) Other independent contractors. The term "independent contractors" includes

persons (juridical or natural) not enumerated above (but not including individuals
subject to the occupation tax under the Local Tax Code) whose activity consists
essentially of the sale of all kinds of services for a fee regardless of whether or
not the performance of the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees. It does not include
regional or area headquarters established in the Philippines by multinational
corporations, including their alien executives, and which headquarters do not
earn or derive income from the Philippines and which act as supervisory,

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 communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.

xxx           xxx           xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the
performance of the service calls for the exercise or use of the physical or mental faculties of
such contractors or their employees. The word "contractor" refers to a person who, in the
pursuit of independent business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting himself to control as to the
petty details.44

A contractor's tax is a tax imposed upon the privilege of engaging in business.45 It is generally
in the nature of an excise tax on the exercise of a privilege of selling services or labor rather
than a sale on products;46 and is directly collectible from the person exercising the
privilege.47 Being an excise tax, it can be levied by the taxing authority only when the acts,
privileges or business are done or performed within the jurisdiction of said authority.48 Like
property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent contractor under the
terms of the two subject contracts. Respondent, however, argues that the work therein were
not all performed in the Philippines because some of them were completed in Japan in
accordance with the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials and equipment to
be made and the works and services to be performed by respondent are indeed classified into
two. The first part, entitled "Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots.
This subdivision of price is to be used by owner to verify invoice for Progress Payments
under Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is
as follows:

xxx           xxx           xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project
are listed under Portion I while labor and other supplies are listed under Portion II and the
Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section
II of the Industrial Plant Department of Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines and equipment listed under
Japanese Yen Portion I in Annex III were manufactured in Japan.51 The machines and
equipment were designed, engineered and fabricated by Japanese firms sub-contracted by
Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel

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Corporation which did the design, fabrication, engineering and manufacture thereof;53 Yashima
& Co. Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment;54 and B.S. Japan for the supply of radio equipment.55 The
engineering and design works made by Kawasaki Steel Corporation included the lay-out of the
plant facility and calculation of the design in accordance with the specifications given by
respondent.56 All sub-contractors and manufacturers are Japanese corporations and are based
in Japan and all engineering and design works were performed in that country.57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of
two (2) sets of ship unloader and loader; several boats and mobile equipment.58 The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top of
each is a large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the specifications of the
project. After manufacture, they were rolled on to a barge and transported to Isabel,
Leyte.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to
the pier to the spot where they were installed.60 Their installation simply consisted of bolting
them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile equipment,
consisting of three to four sets of tractors, cranes and dozers, trailers and forklifts, were also
manufactured and completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self-propelled. Once
unloaded at the port, they were ready to be driven and perform what they were designed to
do.62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III
to the NDC contract. These other items consist of supplies and materials for five (5) berths, two
(2) roads, a causeway, a warehouse, a transit shed, an administration building and a security
building. Most of the materials consist of steel sheets, steel pipes, channels and beams and
other steel structures, navigational and communication as well as electrical equipment.63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and specifications and then shipped to
Isabel. Once there, respondent's employees put the steel plates together to form the storage
tank. As to the refrigeration units, they were completed and assembled in Japan and thereafter
shipped to Isabel. The units were simply installed there. 65 Annex III to the Philphos contract
lists down under the Japanese Yen Portion I the materials for the ammonia storage tank,
incidental equipment, piping facilities, electrical and instrumental apparatus, foundation material
and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts.66 The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests on

66
the machines and equipment67 while Philphos sent a representative to Japan to inspect the
storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid
by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly
the Assistant General Manager and Manager of the Steel Plant Marketing Department,
Engineering & Construction Division, Kawasaki Steel Corporation, testified that the equipment
and supplies for the two projects provided by Kawasaki under Japanese Yen Portion I were paid
by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in Japanese
and English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank, established letters of credit in favor of
respondent through the Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon
respondent's submission of pertinent documents, released the amount in the letters of credit in
favor of respondent and credited the amount therein to respondent's account within the same
bank.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . .
"72 of the two projects involved two taxing jurisdictions. These acts occurred in two countries —
Japan and the Philippines. While the construction and installation work were completed within
the Philippines, the evidence is clear that some pieces of equipment and supplies were
completely designed and engineered in Japan. The two sets of ship unloader and loader, the
boats and mobile equipment for the NDC project and the ammonia storage tanks and
refrigeration units were made and completed in Japan. They were already finished products
when shipped to the Philippines. The other construction supplies listed under the Offshore
Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus,
these were not finished products when shipped to the Philippines. They, however, were likewise
fabricated and manufactured by the sub-contractors in Japan. All services for the design,
fabrication, engineering and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered outside the taxing
jurisdiction of the Philippines and are therefore not subject to contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported
some items for the system it designed and installed.74 The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign element involved in the
supply of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.

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IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.SO
ORDERED.

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