9. Deutsche Bank Ag Manila Branch vs.
CIR, After trial on the merits, the CTA Second Division found that petitioner
G.R. No. 188550 August 19, 2013
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch
(petitioner) under Rule 45 of the 1997 Rules of Civil Procedure assailing
the Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 29
May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue
Code (NIRC) of 1997, petitioner withheld and remitted to respondent
on 21 October 2003 the amount of PHP 67,688,553.51, which
represented the fifteen percent (15%) branch profit remittance tax
(BPRT) on its regular banking unit (RBU) net income remitted to
Deutsche Bank Germany (DB Germany) for 2002 and prior taxable
years.5
Believing that it made an overpayment of the BPRT, petitioner filed with
the BIR Large Taxpayers Assessment and Investigation Division on 4
October 2005 an administrative claim for refund or issuance of its tax
credit certificate in the total amount of PHP 22,562,851.17. On the
same date, petitioner requested from the International Tax Affairs
Division (ITAD) a confirmation of its entitlement to the preferential tax
rate of 10% under the RP-Germany Tax Treaty.6
Alleging the inaction of the BIR on its administrative claim, petitioner
filed a Petition for Review7 with the CTA on 18 October 2005. Petitioner
reiterated its claim for the refund or issuance of its tax credit certificate
for the amount of PHP 22,562,851.17 representing the alleged excess
BPRT paid on branch profits remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
indeed paid the total amount of PHP 67,688,553.51 representing the
15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for
2002 and prior taxable years. Records also disclose that for the year
2003, petitioner remitted to DB Germany the amount of EURO
5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP
63.804:1 EURO), which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground
that the application for a tax treaty relief was not filed with ITAD prior to
the payment by the former of its BPRT and actual remittance of its
branch profits to DB Germany, or prior to its availment of the
preferential rate of ten percent (10%) under the RP-Germany Tax
Treaty provision. The court a quo held that petitioner violated the fifteen
(15) day period mandated under Section III paragraph (2) of Revenue
Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines)
Operations Corporation (formerly Southern Energy Asia-Pacific
Operations [Phils.], Inc.) v. Commissioner of Internal Revenue9 (Mirant)
where the CTA En Banc ruled that before the benefits of the tax treaty
may be extended to a foreign corporation wishing to avail itself thereof,
the latter should first invoke the provisions of the tax treaty and prove
that they indeed apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Division’s Decision dated
29 August 2008 and Resolution dated 14 January 2009. Citing Mirant,
the CTA En Banc held that a ruling from the ITAD of the BIR must be
secured prior to the availment of a preferential tax rate under a tax
treaty. Applying the principle of stare decisis et non quieta movere, the
CTA En Banc took into consideration that this Court had denied the
1
Petition in G.R. No. 168531 filed by Mirant for failure to sufficiently show withheld at source in accordance with Philippine law but shall not
any reversible error in the assailed judgment.11 The CTA En Banc exceed 10% of the gross amount of the profits remitted by that branch
ruled that once a case has been decided in one way, any other case to the head office.
involving exactly the same point at issue should be decided in the same
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a
manner.
branch in the Philippines, remitting to its head office in Germany, the
The court likewise ruled that the 15-day rule for tax treaty relief benefit of a preferential rate equivalent to 10% BPRT.
application under RMO No. 1-2000 cannot be relaxed for petitioner,
On the other hand, the BIR issued RMO No. 1-2000, which requires
unlike in CBK Power Company Limited v. Commissioner of Internal
that any availment of the tax treaty relief must be preceded by an
Revenue.12 In that case, the rule was relaxed and the claim for refund
application with ITAD at least 15 days before the transaction. The Order
of excess final withholding taxes was partially granted. While it issued
was issued to streamline the processing of the application of tax treaty
a ruling to CBK Power Company Limited after the payment of
relief in order to improve efficiency and service to the taxpayers.
withholding taxes, the ITAD did not issue any ruling to petitioner even
Further, it also aims to prevent the consequences of an erroneous
if it filed a request for confirmation on 4 October 2005 that the
interpretation and/or application of the treaty provisions (i.e., filing a
remittance of branch profits to DB Germany is subject to a preferential
claim for a tax refund/credit for the overpayment of taxes or for
tax rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.
deficiency tax liabilities for underpayment).13
ISSUE
The crux of the controversy lies in the implementation of RMO No. 1-
This Court is now confronted with the issue of whether the failure to 2000.
strictly comply with RMO No. 1-2000 will deprive persons or
Petitioner argues that, considering that it has met all the conditions
corporations of the benefit of a tax treaty.
under Article 10 of the RP-Germany Tax Treaty, the CTA erred in
THE COURT’S RULING denying its claim solely on the basis of RMO No. 1-2000. The filing of a
tax treaty relief application is not a condition precedent to the availment
The Petition is meritorious.
of a preferential tax rate. Further, petitioner posits that, contrary to the
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office ruling of the CTA, Mirant is not a binding judicial precedent to deny a
shall be subject to a tax of 15% based on the total profits applied for or claim for refund solely on the basis of noncompliance with RMO No. 1-
earmarked for remittance without any deduction of the tax component. 2000.
However, petitioner invokes paragraph 6, Article 10 of the RP-Germany
Respondent counters that the requirement of prior application under
Tax Treaty, which provides that where a resident of the Federal
RMO No. 1-2000 is mandatory in character. RMO No. 1-2000 was
Republic of Germany has a branch in the Republic of the Philippines,
issued pursuant to the unquestioned authority of the Secretary of
this branch may be subjected to the branch profits remittance tax

2
Finance to promulgate rules and regulations for the effective
implementation of the NIRC. Thus, courts cannot ignore administrative
issuances which partakes the nature of a statute and have in their favor
a presumption of legality.
The CTA ruled that prior application for a tax treaty relief is mandatory,
and noncompliance with this prerequisite is fatal to the taxpayer’s
availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on Mirant is not a binding
precedent. The Court has clarified this matter in Philippine Health Care
Providers, Inc. v. Commissioner of Internal Revenue14 as follows:
It is true that, although contained in a minute resolution, our dismissal
of the petition was a disposition of the merits of the case. When we
dismissed the petition, we effectively affirmed the CA ruling being
questioned. As a result, our ruling in that case has already become
final. When a minute resolution denies or dismisses a petition for failure
to comply with formal and substantive requirements, the challenged
decision, together with its findings of fact and legal conclusions, are
deemed sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata. However, if
other parties or another subject matter (even with the same parties and
issues) is involved, the minute resolution is not binding precedent.
Thus, in CIR v. Baier-Nickel, the Court noted that a previous case, CIR
v. Baier-Nickel involving the same parties and the same issues, was
previously disposed of by the Court thru a minute resolution dated
February 17, 2003 sustaining the ruling of the CA. Nonetheless, the
Court ruled that the previous case "ha(d) no bearing" on the latter case
because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions between
a minute resolution and a decision. The constitutional requirement
under the first paragraph of Section 14, Article VIII of the Constitution
that the facts and the law on which the judgment is based must be
expressed clearly and distinctly applies only to decisions, not to minute
resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the
certification of the Chief Justice. Moreover, unlike decisions, minute
resolutions are not published in the Philippine Reports. Finally, the
proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as a
rule, this Court lays down doctrines or principles of law which constitute
binding precedent in a decision duly signed by the members of the
Court and certified by the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that
Decision cannot bind this Court in cases of a similar nature. There are
differences in parties, taxes, taxable periods, and treaties involved;
more importantly, the disposition of that case was made only through a
minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of
international law as part of the law of the land.15 The time-honored
international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states
that enter into the agreement. Every treaty in force is binding upon the
parties, and obligations under the treaty must be performed by them in
3
good faith.16 More importantly, treaties have the force and effect of law
in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal legislations
of the contracting parties and, in turn, help the taxpayer avoid
simultaneous taxations in two different jurisdictions."18 CIR v. S.C.
Johnson and Son, Inc. further clarifies that "tax conventions are drafted
with a view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes in two
or more states on the same taxpayer in respect of the same subject
matter and for identical periods. The apparent rationale for doing away
with double taxation is to encourage the free flow of goods and services
and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable
and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate."19
Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they
are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to
make in its legislations those modifications that may be necessary to
ensure the fulfillment of the obligations undertaken."20 Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are
accorded to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the reliefs
provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000
which would indicate a deprivation of entitlement to a tax treaty relief
for failure to comply with the 15-day period. We recognize the clear
intention of the BIR in implementing RMO No. 1-2000, but the CTA’s
outright denial of a tax treaty relief for failure to strictly comply with the
prescribed period is not in harmony with the objectives of the
contracting state to ensure that the benefits granted under tax treaties
are enjoyed by duly entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of application for
the availment of tax treaty relief as required by RMO No. 1-2000 should
not operate to divest entitlement to the relief as it would constitute a
violation of the duty required by good faith in complying with a tax treaty.
The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance
would impair the value of the tax treaty. At most, the application for a
tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over
the objective of RMO No. 1-2000.1âwphi1 Logically, noncompliance
with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences
sought to be prevented by RMO No. 1-2000 involve an administrative
procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally
deprive those who are entitled to the benefit of a treaty for failure to
strictly comply with an administrative issuance requiring prior
application for tax treaty relief.
Prior Application vs. Claim for Refund
4
Again, RMO No. 1-2000 was implemented to obviate any erroneous
interpretation and/or application of the treaty provisions. The objective
of the BIR is to forestall assessments against corporations who
erroneously availed themselves of the benefits of the tax treaty but are
not legally entitled thereto, as well as to save such investors from the
tedious process of claims for a refund due to an inaccurate application
of the tax treaty provisions. However, as earlier discussed,
noncompliance with the 15-day period for prior application should not
operate to automatically divest entitlement to the tax treaty relief
especially in claims for refund.
The underlying principle of prior application with the BIR becomes moot
in refund cases, such as the present case, where the very basis of the
claim is erroneous or there is excessive payment arising from non-
availment of a tax treaty relief at the first instance. In this case, petitioner
should not be faulted for not complying with RMO No. 1-2000 prior to
the transaction. It could not have applied for a tax treaty relief within the
period prescribed, or 15 days prior to the payment of its BPRT,
precisely because it erroneously paid the BPRT not on the basis of the
preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by
the NIRC. Hence, the prior application requirement becomes illogical.
Therefore, the fact that petitioner invoked the provisions of the RP-
Germany Tax Treaty when it requested for a confirmation from the ITAD
before filing an administrative claim for a refund should be deemed
substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a
remedy for tax recovery when there has been an erroneous payment of
tax.1âwphi1 The outright denial of petitioner’s claim for a refund, on the
sole ground of failure to apply for a tax treaty relief prior to the payment
of the BPRT, would defeat the purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied – though belatedly
– for a tax treaty relief, in substantial compliance with RMO No. 1-2000.
A ruling by the BIR would have confirmed whether petitioner was
entitled to the lower rate of 10% BPRT pursuant to the RP-Germany
Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division
found as follows:
Based on the evidence presented, both documentary and testimonial,
petitioner was able to establish the following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank
AG, a corporation organized and existing under the laws of the Federal
Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of
Final Income Taxes Withheld under BIR Form No. 1601-F and remitted
the amount of ₱67,688,553.51 as branch profits remittance tax with the
BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having
issued a clearance, petitioner remitted to Frankfurt Head Office the
amount of EUR5,174,847.38 (or ₱330,175,961.88 at 63.804
Peso/Euro) representing its 2002 profits remittance.22
5
The amount of PHP 67,688,553.51 paid by petitioner represented the
15% BPRT on its RBU net income, due for remittance to DB Germany
amounting to PHP 451,257,023.29 for 2002 and prior taxable years.23
Likewise, both the administrative and the judicial actions were filed
within the two-year prescriptive period pursuant to Section 229 of the
NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of a
preferential tax rate of 10% BPRT in accordance with the RP-Germany
Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its
RBU net income amounting to PHP 451,257,023.29 for 2002 and prior
taxable years, applying the 10% BPRT. Thus, it is proper to grant
petitioner a refund ofthe difference between the PHP 67,688,553.51
(15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total of PHP
22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED.
Accordingly, the Court of Tax Appeals En Banc Decision dated 29 May
2009 and Resolution dated 1 July 2009 are REVERSED and SET
ASIDE. A new one is hereby entered ordering respondent
Commissioner of Internal Revenue to refund or issue a tax credit
certificate in favor of petitioner Deutsche Bank AG Manila Branch the
amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO
THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND
SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency,
representing the erroneously paid BPRT for 2002 and prior taxable
years.
SO ORDERED.

6
10. CREBA, INC. vs. Hon. Executive Sec. Romulo,
G.R. No. 160756 March 9, 2010
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner
Chamber of Real Estate and Builders’ Associations, Inc. is questioning
the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and
the revenue regulations (RRs) issued by the Bureau of Internal
Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo,
then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.
Petitioner assails the validity of the imposition of minimum corporate
income tax (MCIT) on corporations and creditable withholding tax
(CWT) on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations
and is implemented by RR 9-98. Petitioner argues that the MCIT
violates the due process clause because it levies income tax even if
there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR
6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-
2003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary assets.
Petitioner contends that these revenue regulations are contrary to law
for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary
of Finance has no authority to collect CWT, much less, to base the CWT
on the gross selling price or fair market value of the real properties
classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject
revenue regulations violate the due process clause because, like the
MCIT, the government collects income tax even when the net income
has not yet been determined. They contravene the equal protection
clause as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present
case;
(2) whether or not the imposition of the MCIT on domestic corporations
is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-
2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of
operation, is assessed an MCIT of 2% of its gross income when such
7
MCIT is greater than the normal corporate income tax imposed under
Section 27(A).4 If the regular income tax is higher than the MCIT, the
corporation does not pay the MCIT. Any excess of the MCIT over the
normal tax shall be carried forward and credited against the normal
income tax for the three immediately succeeding taxable years. Section
27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of
this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT]
over the normal income tax as computed under Subsection (A) of this
Section shall be carried forward and credited against the normal income
tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The Secretary of
Finance is hereby authorized to suspend the imposition of the [MCIT]
on any corporation which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of legitimate business
reverses.
The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and
regulations that shall define the terms and conditions under which he
may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. – For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term ‘gross income’ shall
mean gross sales less sales returns, discounts and allowances and
cost of goods sold. "Cost of goods sold" shall include all business
expenses directly incurred to produce the merchandise to bring them to
their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include
the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold"
shall include all costs of production of finished goods, such as raw
materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income"
means gross receipts less sales returns, allowances, discounts and
cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the
customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided,
however, that in the case of banks, "cost of services" shall include
interest expense.
8
On August 25, 1998, respondent Secretary of Finance (Secretary), on
the recommendation of the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section 27(E).5 The pertinent
portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year (whether calendar or fiscal
year, depending on the accounting period employed) is hereby imposed
upon any domestic corporation beginning the fourth (4th) taxable year
immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than
the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax"
means the income tax rates prescribed under Sec. 27(A) and Sec.
28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over
the normal income tax as computed under Sec. 27(A) of the Code shall
be carried forward on an annual basis and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon
recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from
the sale, exchange or transfer of real property, other than capital
assets, by persons residing in the Philippines and habitually engaged
in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent
paid to the seller/owner for the sale, exchange or transfer of. – Real
property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the
following schedule –
Those which are exempt from a withholding tax at source as prescribed
in Sec. 2.57.5 of these regulations.
Exempt
With a selling price of five hundred thousand pesos (₱500,000.00) or
less.
1.5%
With a selling price of more than five hundred thousand pesos
(₱500,000.00) but not more than two million pesos (₱2,000,000.00).
9
3.0%
With selling price of more than two million pesos (₱2,000,000.00)
5.0%
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange,
as determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments to
be paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld by the
buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed
thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent
paid to the seller/owner for the sale, exchange or transfer of real
property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value
determined in accordance with Section 6(E) of the Code, whichever is
higher, paid to the seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with
Sec. 2.57.5 of these regulations.
Exempt
Upon the following values of real property, where the seller/transferor
is habitually engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos (₱500,000.00) or
less.
1.5%
With a selling price of more than Five Hundred Thousand Pesos
(₱500,000.00) but not more than Two Million Pesos (₱2,000,000.00).
3.0%
With a selling price of more than two Million Pesos (₱2,000,000.00).
5.0%
xxx xxx xxx
Gross selling price shall remain the consideration stated in the sales
document or the fair market value determined in accordance with
10
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange
shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is,
payments in the year of sale do not exceed 25% of the selling price),
the tax shall be deducted and withheld by the buyer on every
installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-
payment sale not on the installment plan" (that is, payments in the year
of sale exceed 25% of the selling price), the buyer shall withhold the tax
based on the gross selling price or fair market value of the property,
whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be
issued to the buyer unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset has been fully paid.
(Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424
provides that any sale, barter or exchange subject to the CWT will not
be recorded by the Registry of Deeds until the CIR has certified that
such transfers and conveyances have been reported and the taxes
thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of
conveyances of land or land and building/improvement thereon arising
from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless
the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for
the guidelines in determining whether a particular real property is a
capital or an ordinary asset for purposes of imposing the MCIT, among
others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of
real property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall, unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident
aliens, and non-resident aliens engaged in trade or business in the
Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price
or current fair market value as determined in accordance with Section
6(E) of the Code, whichever is higher, and consequently, to the ordinary
11
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as
the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as capital
asset), regardless of the classification thereof, all of which are located
in the Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless
the following requisites are satisfied: (1) there must be an actual case
calling for the exercise of judicial review; (2) the question before the
court must be ripe for adjudication; (3) the person challenging the
validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and
(5) the issue of constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case.
According to them, there is no actual case calling for the exercise of
judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of
its members, has been assessed by the BIR for the payment of [MCIT]
or [CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment
of the MCIT or CWT. Petitioner has raised concerns in mere abstract
and hypothetical form without any actual, specific and concrete
instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to
base any conclusion, any discussion on the constitutionality of the
MCIT or CWT on sales of real property is essentially an academic
exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not
really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an
assertion of opposite legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or abstract difference or
dispute.11 On the other hand, a question is considered ripe for
adjudication when the act being challenged has a direct adverse effect
on the individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until
petitioner’s members have shut down their operations as a result of the
MCIT or CWT. The assailed provisions are already being implemented.
12
As we stated in Didipio Earth-Savers’ Multi-Purpose Association,
Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the
challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial
duty.14
If the assailed provisions are indeed unconstitutional, there is no better
time than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and
builders in the Philippines. Petitioners did not allege that [it] itself is in
the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed
provisions].15
Legal standing or locus standi is a party’s personal and substantial
interest in a case such that it has sustained or will sustain direct injury
as a result of the governmental act being challenged.16 In Holy Spirit
Homeowners Association, Inc. v. Defensor,17 we held that the
association had legal standing because its members stood to be injured
by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement
of the IRR, particularly as regards the selection process of beneficiaries
and lot allocation to qualified beneficiaries. Thus, petitioner association
may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and
its members have sustained direct injury arising from the enforcement
of the IRR in that they have been disqualified and eliminated from the
selection process.18
In any event, this Court has the discretion to take cognizance of a suit
which does not satisfy the requirements of an actual case, ripeness or
legal standing when paramount public interest is involved.19 The
questioned MCIT and CWT affect not only petitioners but practically all
domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to
society make it proper for us to take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA
8424 to the Philippine taxation system. It came about as a result of the
perceived inadequacy of the self-assessment system in capturing the
true income of corporations.21 It was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income
tax which is more difficult to control and enforce. It is a means to ensure
that everyone will make some minimum contribution to the support of
the public sector. The congressional deliberations on this are
illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of
certain corporations of reporting constantly a loss in their operations to
avoid the payment of taxes, and thus avoid sharing in the cost of
13
government. In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative
convenience. … This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic
advancement.22
Domestic corporations owe their corporate existence and their privilege
to do business to the government. They also benefit from the efforts of
the government to improve the financial market and to ensure a
favorable business climate. It is therefore fair for the government to
require them to make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which,
while having large turn-overs, report minimal or negative net income
resulting in minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses otherwise
called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy,
that is why they have proposed the [MCIT]. Because from experience
too, you have corporations which have been losing year in and year out
and paid no tax. So, if the corporation has been losing for the past five
years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year
out? So, we have this provision to avoid this type of tax shelters, Your
Honor.24
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes
resorted to by corporations are allowed in our jurisdiction. The MCIT
serves to put a cap on such tax shelters. As a tax on gross income, it
prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the
need to recoup initial major capital expenditures, the imposition of the
MCIT commences only on the fourth taxable year immediately following
the year in which the corporation commenced its operations.25 This
grace period allows a new business to stabilize first and make its
ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT
paid over the normal income tax which shall be credited against the
normal income tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated
losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own system
of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries,
14
have the same form of safeguards as we do. As pointed out during the
committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of
course quite a bit of room for underdeclaration of gross receipts have
this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of
income tax of half a percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before deductions and exemptions. Of
course the different countries have different basis for that minimum
income tax.
The other thing you’ll notice is the preponderance of Latin American
countries that employed this method. Okay, those are additional Latin
American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia,
Panama and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross
income, were not taken into account.31 Thus, pegging the tax base of
the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
"realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. The exercise of taxing power
derives its source from the very existence of the State whose social
contract with its citizens obliges it to promote public interest and the
common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is
purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check
against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay
it.37 Nevertheless, it is circumscribed by constitutional limitations. At
the same time, like any other statute, tax legislation carries a
presumption of constitutionality.
15
The constitutional safeguard of due process is embodied in the fiat "[no]
person shall be deprived of life, liberty or property without due process
of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process
clause may properly be invoked to invalidate, in appropriate cases, a
revenue measure39 when it amounts to a confiscation of property.40
But in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the
taxpayer.41 There must be a factual foundation to such an
unconstitutional taint.42 This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that
it is not a fixed rule but rather a broad standard, there is a need for proof
of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44
Income means all the wealth which flows into the taxpayer other than a
mere return on capital. Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a
definite period of time.45 Income is gain derived and severed from
capital.46 For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. In other words, it is income, not capital,
which is subject to income tax. However, the MCIT is not a tax on
capital.
The MCIT is imposed on gross income which is arrived at by deducting
the capital spent by a corporation in the sale of its goods, i.e., the cost
of goods48 and other direct expenses from gross sales. Clearly, the
capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed
in lieu of the normal net income tax, and only if the normal income tax
is suspiciously low. The MCIT merely approximates the amount of net
income tax due from a corporation, pegging the rate at a very much
reduced 2% and uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time
reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions. Tax thereon is
generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates
the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system
which is generally characterized by a lower tax rate but a broader tax
base.51 Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have
persuasive effect on the interpretation of these laws.52 Although our
MCIT is not exactly the same as the AMT, the policy behind them and
the procedure of their implementation are comparable. On the question
of the AMT’s constitutionality, the United States Court of Appeals for
the Ninth Circuit stated in Okin v. Commissioner:53
16

In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of
taxpayers with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality
of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax,
and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes was
a legitimate governmental end to which the AMT bore a reasonable
relation.55
American courts have also emphasized that Congress has the power
to condition, limit or deny deductions from gross income in order to
arrive at the net that it chooses to tax.56 This is because deductions
are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income,
instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.
Moreover, petitioner does not cite any actual, specific and concrete
negative experiences of its members nor does it present empirical data
to show that the implementation of the MCIT resulted in the confiscation
of their property.
In sum, petitioner failed to support, by any factual or legal basis, its
allegation that the MCIT is arbitrary and confiscatory. The Court cannot
strike down a law as unconstitutional simply because of its yokes.58
Taxation is necessarily burdensome because, by its nature, it adversely
affects property rights.59 The party alleging the law’s unconstitutionality
has the burden to demonstrate the supposed violations in
understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due
process of law because the MCIT is being imposed and collected even
when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the
amount of [MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines the
coverage of Section 27(E). This means that even if a corporation incurs
a net loss in its business operations or reports zero income after
deducting its expenses, it is still subject to an MCIT of 2% of its gross
income. This is consistent with the law which imposes the MCIT on
gross income notwithstanding the amount of the net income. But the
law also states that the MCIT is to be paid only if it is greater than the
normal net income. Obviously, it may well be the case that the MCIT
17
would be less than the net income of the corporation which posts a zero
or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes
(including income taxes) are collected.61 Under Section 57 of RA 8424,
the types of income subject to withholding tax are divided into three
categories: (a) withholding of final tax on certain incomes; (b)
withholding of creditable tax at source and (c) tax-free covenant bonds.
Petitioner is concerned with the second category (CWT) and maintains
that the revenue regulations on the collection of CWT on sale of real
estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and
ordinary assets under RA 8424, contends that Sections 2.57.2(J) and
2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated "with grave abuse of discretion amounting to lack of
jurisdiction" and "patently in contravention of law"62 because they
ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price
(GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a
per transaction basis, i.e., upon consummation of the sale via the CWT,
contrary to RA 8424 which calls for the payment of the net income at
the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and
ordinary assets differently, respondents cannot disregard the
distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital and
ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on
Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424,
the authority to promulgate the necessary rules and regulations for the
effective enforcement of the provisions of the law. Such authority is
subject to the limitation that the rules and regulations must not override,
but must remain consistent and in harmony with, the law they seek to
apply and implement.64 It is well-settled that an administrative agency
cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source
is a procedure of collecting income tax which is sanctioned by our tax
laws.66 The withholding tax system was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet his
probable income tax liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure
to file the corresponding returns and third, to improve the government’s
cash flow.67 This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means
and remedies.68
Respondent Secretary has the authority to require the withholding of a
tax on items of income payable to any person, national or juridical,
18
residing in the Philippines. Such authority is derived from Section 57(B)
of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source. –
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the
authority given by Section 57(B) to the Secretary, i.e., the graduated
rate of 1.5%-5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable against the
income tax liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or
Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the
tax base of a real estate business’ income tax from net income to GSP
or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to extinguish its possible tax obligation. 69 They are
installments on the annual tax which may be due at the end of the
taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entity’s net
income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT is to be deducted from the
net income tax payable by the taxpayer at the end of the taxable year.71
Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax
base for the sale of real property classified as ordinary assets remains
to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or other disposition of
real property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or business
in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
19
2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other
real property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income
tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable.
(Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on
its net income.
The use of the GSP/FMV as basis to determine the withholding taxes
is evidently for purposes of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to withhold the tax does not
know, nor is he privy to, how much the taxpayer/seller will have as its
net income at the end of the taxable year. Instead, said withholding
agent’s knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be
the GSP or FMV as these are the only factors reasonably known or
knowable by him in connection with the performance of his duties as a
withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or
FMV of the real property categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of
6% on the gain presumed to be realized from the sale of a capital asset
based on its GSP or FMV. This final tax is also withheld at source.72
The differences between the two forms of withholding tax, i.e.,
creditable and final, show that ordinary assets are not treated in the
same manner as capital assets. Final withholding tax (FWT) and CWT
are distinguished as follows:
FWT
a) The amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the
payee on the said income.
b)The liability for payment of the tax rests primarily on the payor as a
withholding agent.
c) The payee is not required to file an income tax return for the particular
income.73
20
CWT
a) Taxes withheld on certain income payments are intended to equal or
at least approximate the tax due of the payee on said income.
b) Payee of income is required to report the income and/or pay the
difference between the tax withheld and the tax due on the income. The
payee also has the right to ask for a refund if the tax withheld is more
than the tax due.
c) The income recipient is still required to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended.74
As previously stated, FWT is imposed on the sale of capital assets. On
the other hand, CWT is imposed on the sale of ordinary assets. The
inherent and substantial differences between FWT and CWT disprove
petitioner’s contention that ordinary assets are being lumped together
with, and treated similarly as, capital assets in contravention of the
pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the
time of transaction are contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean
that it is treated exactly the same way as capital gains. As
aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of collecting the tax at the
time of the transaction by withholding the tax due from the income
payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to
withholding tax, whether final or creditable. According to petitioner, the
whole of Section 57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to passive income
being subjected to FWT. It follows that Section 57(B) on CWT should
also be limited to passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject to rules
and regulations, the [Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of income tax return
by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code
on specified items of income shall be withheld by payor-corporation
and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. — The [Secretary] may,
upon the recommendation of the [CIR], require the withholding of a tax
on the items of income payable to natural or juridical persons, residing
in the Philippines, by payor-corporation/persons as provided for by law,
at the rate of not less than one percent (1%) but not more than thirty-
two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year. (Emphasis supplied)
21

This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain
kinds of income and enumerates these as passive income. The BIR
defines passive income by stating what it is not:
…if the income is generated in the active pursuit and performance of
the corporation’s primary purposes, the same is not passive
income…76
It is income generated by the taxpayer’s assets. These assets can be
in the form of real properties that return rental income, shares of stock
in a corporation that earn dividends or interest income received from
savings.
On the other hand, Section 57(B) provides that the Secretary can
require a CWT on "income payable to natural or juridical persons,
residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily
said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT
while Section 57(B) pertains to CWT. The former covers the kinds of
passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not
modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency may
adopt any reasonable method to carry out its functions.77 Similarly,
considering that the law uses the general term "income," the Secretary
and CIR may specify the kinds of income the rules will apply to based
on what is feasible. In addition, administrative rules and regulations
ordinarily deserve to be given weight and respect by the courts78 in
view of the rule-making authority given to those who formulate them
and their specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their property
without due process of law because, in their line of business, gain is
never assured by mere receipt of the selling price. As a result, the
government is collecting tax from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from
the seller of the property at the end of the taxable year. The seller will
be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of
property repugnant to the constitutional guarantee of due process.
More importantly, the due process requirement applies to the power to
tax.79 The CWT does not impose new taxes nor does it increase
taxes.80 It relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even
resort to litigation before they are granted a refund.81 This argument is
misleading. The practical problems encountered in claiming a tax
22
refund do not affect the constitutionality and validity of the CWT as a
method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise
been used by the enterprise to pay labor wages, materials, cost of
money and other expenses which can then save the entity from having
to obtain loans entailing considerable interest expense. Petitioner also
lists the expenses and pitfalls of the trade which add to the burden of
the realty industry: huge investments and borrowings; long gestation
period; sudden and unpredictable interest rate surges; continually
spiraling development/construction costs; heavy taxes and prohibitive
"up-front" regulatory fees from at least 20 government agencies.82
Petitioner’s lamentations will not support its attack on the
constitutionality of the CWT. Petitioner’s complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity. Sales
on installment are taxed on a per-installment basis.83 Petitioner’s
desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option
but it is not a fundamental right which can be demanded from the court
or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their
manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is
involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that "goods"
produced by the real estate business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no
person or class of persons shall be deprived of the same protection of
laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."85 Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must
(1) rest on substantial distinctions; (2) be germane to the purpose of the
law; (3) not be limited to existing conditions only and (4) apply equally
to all members of the same class.86
The taxing power has the authority to make reasonable classifications
for purposes of taxation.87 Inequalities which result from a singling out
of one particular class for taxation, or exemption, infringe no
constitutional limitation.88 The real estate industry is, by itself, a class
and can be validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the
real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production
processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is
bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.
23
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the
taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive
items are also sold infrequently, e.g. heavy equipment, jewelry,
furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.89 As already discussed, the Secretary may
adopt any reasonable method to carry out its functions.90 Under
Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that
petitioner’s argument is not accurate. The sales of manufacturers who
have clients within the top 5,000 corporations, as specified by the BIR,
are also subject to CWT for their transactions with said 5,000
corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA
8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that
the Registry of Deeds should not effect the regisration of any document
transferring real property unless a certification is issued by the CIR that
the withholding tax has been paid. Petitioner proffers hardly any reason
to strike down this rule except to rely on its contention that the CWT is
unconstitutional. We have ruled that it is not. Furthermore, this provision
uses almost exactly the same wording as Section 58(E) of RA 8424 and
is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the Register of
Deeds unless the [CIR] or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the
Register of Deeds shall be subject to the penalties imposed under
Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the]
hardest thing in the world to understand is the income tax."92 When a
party questions the constitutionality of an income tax measure, it has to
contend not only with Einstein’s observation but also with the vast and
well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge
its burden of convincing the Court that the imposition of MCIT and CWT
is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner. SO ORDERED.
24
11. PAGCOR vs. BIR,
G.R. No. 172087 March 15, 2011
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition1
with prayer for the issuance of a Temporary Restraining Order and/or
Preliminary Injunction, dated April 17, 2006, of petitioner Philippine
Amusement and Gaming Corporation (PAGCOR), seeking the
declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar
as it amends Section 27 (c) of the National Internal Revenue Code of
1997, by excluding petitioner from exemption from corporate income
tax for being repugnant to Sections 1 and 10 of Article III of the
Constitution. Petitioner further seeks to prohibit the implementation of
Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005
for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No.
1067-A2 on January 1, 1977. Simultaneous to its creation, P.D. No.
1067-B3 (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax
of five percent (5%) of the gross revenue.4 Thereafter, on June 2, 1978,
P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption.5
To consolidate the laws pertaining to the franchise and powers of
PAGCOR, P.D. No. 18696 was issued. Section 13 thereof reads as
follows:
Sec. 13. Exemptions. — x x x
(1) Customs Duties, taxes and other imposts on importations. - All
importations of equipment, vehicles, automobiles, boats, ships, barges,
aircraft and such other gambling paraphernalia, including accessories
or related facilities, for the sole and exclusive use of the casinos, the
proper and efficient management and administration thereof and such
other clubs, recreation or amusement places to be established under
and by virtue of this Franchise shall be exempt from the payment of
duties, taxes and other imposts, including all kinds of fees, levies, or
charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any
corporation having existing contractual arrangements with the
Corporation, for the sole and exclusive use of the casino or to be used
to service the operations and requirements of the casino, shall likewise
be totally exempt from the payment of all customs duties, taxes and
other imposts, including all kinds of fees, levies, assessments or
charges of any kind or nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind
or form, income or otherwise, as well as fees, charges, or levies of
whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form
of tax or charge attach in any way to the earnings of the Corporation,
except a Franchise Tax of five percent (5%)of the gross revenue or
earnings derived by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or
25
assessments of any kind, nature or description, levied, established, or
collected by any municipal, provincial or national government authority.
(b) Others: The exemption herein granted for earnings derived from the
operations conducted under the franchise, specifically from the
payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom
the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation
or other remuneration from the Corporation as a result of essential
facilities furnished and/or technical services rendered to the
Corporation or operator.
The fee or remuneration of foreign entertainers contracted by the
Corporation or operator in pursuance of this provision shall be free of
any tax.
(3) Dividend Income. − Notwithstanding any provision of law to the
contrary, in the event the Corporation should declare a cash dividend
income corresponding to the participation of the private sector shall, as
an incentive to the beneficiaries, be subject only to a final flat income
rate of ten percent (10%) of the regular income tax rates. The dividend
income shall not in such case be considered as part of the beneficiaries'
taxable income; provided, however, that such dividend income shall be
totally exempted from income or other form of taxes if invested within
six (6) months from the date the dividend income is received in the
following:
(a) operation of the casino(s) or investments in any affiliate activity that
will ultimately redound to the benefit of the Corporation; or any other
corporation with whom the Corporation has any existing arrangements
in connection with or related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government
debentures; or
(c) BOI-registered or export-oriented corporation(s).7
PAGCOR's tax exemption was removed in June 1984 through P.D. No.
1931, but it was later restored by Letter of Instruction No. 1430, which
was issued in September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National
Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No.
8424 provides that government-owned and controlled corporations
(GOCCs) shall pay corporate income tax, except petitioner PAGCOR,
the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the
Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to
the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the
Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the
Philippine Amusement and Gaming Corporation (PAGCOR), shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.9
26
With the enactment of R.A. No. 933710 on May 24, 2005, certain
sections of the National Internal Revenue Code of 1997 were amended.
The particular amendment that is at issue in this case is Section 1 of
R.A. No. 9337, which amended Section 27 (c) of the National Internal
Revenue Code of 1997 by excluding PAGCOR from the enumeration
of GOCCs that are exempt from payment of corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special general laws to
the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned and controlled by the Government, except the
Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), and the Philippine Charity Sweepstakes Office (PCSO), shall
pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.
Different groups came to this Court via petitions for certiorari and
prohibition11 assailing the validity and constitutionality of R.A. No.
9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of
goods and properties; Section 5, which imposes a 10% VAT on
importation of goods; and Section 6, which imposes a 10% VAT on sale
of services and use or lease of properties, all contain a uniform proviso
authorizing the President, upon the recommendation of the Secretary
of Finance, to raise the VAT rate to 12%. The said provisions were
alleged to be violative of Section 28 (2), Article VI of the Constitution,
which section vests in Congress the exclusive authority to fix the rate
of taxes, and of Section 1, Article III of the Constitution on due process,
as well as of Section 26 (2), Article VI of the Constitution, which section
provides for the "no amendment rule" upon the last reading of a bill;
2) Sections 8 and 12 were alleged to be violative of Section 1, Article
III of the Constitution, or the guarantee of equal protection of the laws,
and Section 28 (1), Article VI of the Constitution; and
3) other technical aspects of the passage of the law, questioning the
manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and upheld
the constitutionality of R.A. No. 9337.12
On the same date, respondent BIR issued Revenue Regulations (RR)
No. 16--2005,13 specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the
National Internal Revenue Code of 1997, as amended by R.A. No.
9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than those covered by
Sec. 119 of the Tax Code, regardless of how their franchisees may
have been granted, shall be subject to the 10% VAT imposed under
Sec.108 of the Tax Code. This includes, among others, the Philippine
Amusement and Gaming Corporation (PAGCOR), and its licensees or
franchisees.
27

Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF LAWS
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB
INITIO FOR BEING REPUGNANT TO THE EQUAL PROTECTION
[CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987
CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB
INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT
[CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH
(H) IS NULL AND VOID AB INITIO FOR BEING BEYOND THE SCOPE
OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE
SAID REGULATION IMPOSED VAT ON THE SERVICES OF THE
PETITIONER AS WELL AS PETITIONER’S LICENSEES OR
FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY
APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON
PETITIONER OR ON PETITIONER’S LICENSEES OR
FRANCHISEES.14
The BIR, in its Comment15 dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869
THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO
AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS WHENEVER
POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1
AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND
CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In
Lieu of Comment,16 concurred with the arguments of the petitioner. It
added that although the State is free to select the subjects of taxation
and that the inequity resulting from singling out a particular class for
taxation or exemption is not an infringement of the constitutional
limitation, a tax law must operate with the same force and effect to all
persons, firms and corporations placed in a similar situation.
Furthermore, according to the OSG, public respondent BIR exceeded
its statutory authority when it enacted RR No. 16-2005, because the
28
latter's provisions are contrary to the mandates of P.D. No. 1869 in
relation to R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from
corporate income tax and VAT with the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court
finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the
National Internal Revenue Code of 1977, petitioner is no longer exempt
from corporate income tax as it has been effectively omitted from the
list of GOCCs that are exempt from it. Petitioner argues that such
omission is unconstitutional, as it is violative of its right to equal
protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without
due process of law, nor shall any person be denied the equal protection
of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning
and scope of equal protection, thus:
Equal protection requires that all persons or things similarly situated
should be treated alike, both as to rights conferred and responsibilities
imposed. Similar subjects, in other words, should not be treated
differently, so as to give undue favor to some and unjustly discriminate
against others. The guarantee means that no person or class of
persons shall be denied the same protection of laws which is enjoyed
by other persons or other classes in like circumstances. The "equal
protection of the laws is a pledge of the protection of equal laws." It
limits governmental discrimination. The equal protection clause
extends to artificial persons but only insofar as their property is
concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If
the classification is reasonable, the law may operate only on some and
not all of the people without violating the equal protection clause. The
classification must, as an indispensable requisite, not be arbitrary. To
be valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.18
It is not contested that before the enactment of R.A. No. 9337, petitioner
was one of the five GOCCs exempted from payment of corporate
income tax as shown in R.A. No. 8424, Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies or
Instrumentalities. - The provisions of existing special or general laws to
the contrary notwithstanding, all corporations, agencies or
instrumentalities owned and controlled by the Government, except the
Government Service and Insurance Corporation (GSIS), the Social
Security System (SSS), the Philippine Health Insurance Corporation
(PHIC), the Philippine Charity Sweepstakes Office (PCSO), and the
29
Philippine Amusement and Gaming Corporation (PAGCOR), shall pay
such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business,
industry, or activity.19
A perusal of the legislative records of the Bicameral Conference
Meeting of the Committee on Ways on Means dated October 27, 1997
would show that the exemption of PAGCOR from the payment of
corporate income tax was due to the acquiescence of the Committee
on Ways on Means to the request of PAGCOR that it be exempt from
such tax.20 The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax
on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the tax
on --- Whether on a universal basis, we included a tax on cockfighting
winnings.
CHAIRMAN ENRILE. No, we removed the ---
HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon
ang request ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon,
maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we
factored in an amount that would reflect the VAT and other sales taxes-
--
CHAIRMAN ENRILE. No, we’re talking of this measure only. We will
not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption.
Assuming that when we release the money into the hands of the public,
they will not use that to --- for wallpaper. They will spend that eh, Mr.
Chairman. So when they spend that---
CHAIRMAN ENRILE. There’s a VAT.
HON. ROXAS. There will be a VAT and there will be other sales taxes
no. Is there a quantification? Is there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven billion.
In effect, it is not circulating in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent
by government, somebody receives it in the form of wages and supplies
30
and other services and other goods. They are not being taken from the
public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will
be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21
The discussion above bears out that under R.A. No. 8424, the
exemption of PAGCOR from paying corporate income tax was not
based on a classification showing substantial distinctions which make
for real differences, but to reiterate, the exemption was granted upon
the request of PAGCOR that it be exempt from the payment of
corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No.
8424, PAGCOR has been excluded from the enumeration of GOCCs
that are exempt from paying corporate income tax. The records of the
Bicameral Conference Meeting dated April 18, 2005, of the Committee
on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill
No. 3555, show that it is the legislative intent that PAGCOR be subject
to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the
amendment.
SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're
even considering this VAT bill is we want to show the world who our
creditors, that we are increasing official revenues that go to the national
budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net income
of 9.7 billion after paying some small taxes that they are subjected to.
Of the 9.7 billion, they claim they remitted to national government seven
billion. Pagkatapos, there are other specific remittances like to the
Philippine Sports Commission, etc., as mandated by various laws, and
then about 400 million to the President's Social Fund. But all in all, their
net profit today should be about 12 billion. That's why I am questioning
this two billion. Because while essentially they claim that the money
goes to government, and I will accept that just for the sake of argument.
It does not pass through the appropriation process. And I think that at
least if we can capture 35 percent or 32 percent through the budgetary
process, first, it is reflected in our official income of government which
is applied to the national budget, and secondly, it goes through what is
constitutionally mandated as Congress appropriating and defining
where the money is spent and not through a board of directors that has
absolutely no accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow
up lang.
There is wisdom in the comments of my good friend from Cebu, Senator
Osmeña.
SEN. OSMEÑA. And Negros.
REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa.
But I would not want to put my friends from the Department of Finance
in a difficult position, but may we know your comments on this knowing
that as Senator Osmeña just mentioned, he said, "I accept that that a
lot of it is going to spending for basic services," you know, going to
most, I think, supposedly a lot or most of it should go to government
31
spending, social services and the like. What is your comment on this?
This is going to affect a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEÑA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr.
Senator, because you may have your own pre-judgment on this and I
don't blame you. I don't blame you. And I know you have your own
research. But will this not affect a lot, the disbursements on social
services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that
question also. Wouldn't it be easier for you to explain to, say, foreign
creditors, how do you explain to them that if there is a fiscal gap some
of our richest corporations has [been] spared [from] taxation by the
government which is one rich source of revenues. Now, why do you
save, why do you spare certain government corporations on that, like
Pagcor? So, would it be easier for you to make an argument if
everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to
those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us because it
will then enter as an official revenue although when dividends declare
it also goes in as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on
income tax. Now, we are talking here on value-added tax. Do you mean
to say we are going to amend it from income tax to value-added tax, as
far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that
section with regard to the exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly
are the functions of Pagcor that are VATable? What will we VAT in
Pagcor?
32
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is
Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale
of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we
VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way
they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate
version does not discuss a VAT on Pagcor but it just takes away their
exemption from non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of
proof rests upon the party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed.24 As a rule, tax exemptions are
construed strongly against the claimant.25 Exemptions must be shown
to exist clearly and categorically, and supported by clear legal
provision.26
In this case, PAGCOR failed to prove that it is still exempt from the
payment of corporate income tax, considering that Section 1 of R.A.
No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The legislative
intent, as shown by the discussions in the Bicameral Conference
Meeting, is to require PAGCOR to pay corporate income tax; hence,
the omission or removal of PAGCOR from exemption from the payment
of corporate income tax. It is a basic precept of statutory construction
that the express mention of one person, thing, act, or consequence
excludes all others as expressed in the familiar maxim expressio unius
est exclusio alterius.27 Thus, the express mention of the GOCCs
exempted from payment of corporate income tax excludes all others.
Not being excepted, petitioner PAGCOR must be regarded as coming
within the purview of the general rule that GOCCs shall pay corporate
income tax, expressed in the maxim: exceptio firmat regulam in casibus
non exceptis.28
PAGCOR cannot find support in the equal protection clause of the
Constitution, as the legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the Committee on Ways and
Means, show that PAGCOR’s exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the
National Internal Revenue Code of 1997, was not made pursuant to a
valid classification based on substantial distinctions and the other
requirements of a reasonable classification by legislative bodies, so that
the law may operate only on some, and not all, without violating the
equal protection clause. The legislative records show that the basis of
the grant of exemption to PAGCOR from corporate income tax was
PAGCOR’s own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null
and void ab initio for violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part of, and is read into,
the contract even without the parties expressly saying so. Petitioner
states that the private parties/investors transacting with it considered
the tax exemptions, which inure to their benefit, as the main
consideration and inducement for their decision to transact/invest with
33
it. Petitioner argues that the withdrawal of its exemption from corporate
income tax by R.A. No. 9337 has the effect of changing the main
consideration and inducement for the transactions of private parties
with it; thus, the amendatory provision is violative of the non-impairment
clause of the Constitution.
Petitioner’s contention lacks merit.
The non-impairment clause is contained in Section 10, Article III of the
Constitution, which provides that no law impairing the obligation of
contracts shall be passed. The non-impairment clause is limited in
application to laws that derogate from prior acts or contracts by
enlarging, abridging or in any manner changing the intention of the
parties.29 There is impairment if a subsequent law changes the terms
of a contract between the parties, imposes new conditions, dispenses
with those agreed upon or withdraws remedies for the enforcement of
the rights of the parties.30
As regards franchises, Section 11, Article XII of the Constitution31
provides that no franchise or right shall be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires.32
In Manila Electric Company v. Province of Laguna,33 the Court held
that a franchise partakes the nature of a grant, which is beyond the
purview of the non-impairment clause of the Constitution.34 The
pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions
contained in special franchises as being in the nature of contracts and
a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such
as those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be
revoked without impairing the obligations of contracts. These
contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature
of a grant which is beyond the purview of the non-impairment clause of
the Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public
utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and
when the common good so requires.35
In this case, PAGCOR was granted a franchise to operate and maintain
gambling casinos, clubs and other recreation or amusement places,
sports, gaming pools, i.e., basketball, football, lotteries, etc., whether
on land or sea, within the territorial jurisdiction of the Republic of the
Philippines.36 Under Section 11, Article XII of the Constitution,
PAGCOR’s franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A. No. 9377.
Hence, the provision in Section 1 of R.A. No. 9337, amending Section
27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits to PAGCOR’s
transactions with private parties, is not violative of the non-impairment
clause of the Constitution.
34
Anent the validity of RR No. 16-2005, the Court holds that the provision
subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A.
No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can
be subjected to VAT. R.A. No. 9337 is clear only as to the removal of
petitioner's exemption from the payment of corporate income tax, which
was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from
VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further
amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of
Subsection (2) hereof, the following transactions shall be exempt from
the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws, except
Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCOR’s
charter, P.D. No. 1869, is a special law that grants petitioner exemption
from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by
Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A.
No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No.
8424), as amended, is hereby further amended to read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of
Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of gross
receipts derived from the sale or exchange of services, including the
use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. — The following
services performed in the Philippines by VAT-registered persons shall
be subject to zero percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero
percent (0%) rate;
x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced
amendments to Section 108 of R.A. No. 8424 by imposing VAT on other
services not previously covered, it did not amend the portion of Section
108 (B) (3) that subjects to zero percent rate services performed by
35
VAT-registered persons to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No.
8424 has been thoroughly and extensively discussed in Commissioner
of Internal Revenue v. Acesite (Philippines) Hotel Corporation.39
Acesite was the owner and operator of the Holiday Inn Manila Pavilion
Hotel. It leased a portion of the hotel’s premises to PAGCOR. It incurred
VAT amounting to ₱30,152,892.02 from its rental income and sale of
food and beverages to PAGCOR from January 1996 to April 1997.
Acesite tried to shift the said taxes to PAGCOR by incorporating it in
the amount assessed to PAGCOR. However, PAGCOR refused to pay
the taxes because of its tax-exempt status. PAGCOR paid only the
amount due to Acesite minus VAT in the sum of ₱30,152,892.02.
Acesite paid VAT in the amount of ₱30,152,892.02 to the
Commissioner of Internal Revenue, fearing the legal consequences of
its non-payment. In May 1998, Acesite sought the refund of the amount
it paid as VAT on the ground that its transaction with PAGCOR was
subject to zero rate as it was rendered to a tax-exempt entity. The Court
ruled that PAGCOR and Acesite were both exempt from paying VAT,
thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants
the latter an exemption from the payment of taxes. Section 13 of P.D.
1869 pertinently provides:
Sec. 13. Exemptions. —
xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind
or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall be assessed and
collected under this Franchise from the Corporation; nor shall any form
of tax or charge attach in any way to the earnings of the Corporation,
except a Franchise Tax of five (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or
collected by any municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from
the operations conducted under the franchise specifically from the
payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom
the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation
or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the
Corporation or operator.
Petitioner contends that the above tax exemption refers only to
PAGCOR's direct tax liability and not to indirect taxes, like the VAT.
36
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket
exemption to taxes with no distinction on whether the taxes are direct
or indirect. We are one with the CA ruling that PAGCOR is also exempt
from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does
not specifically mention PAGCOR's exemption from indirect taxes,
PAGCOR is undoubtedly exempt from such taxes because the law
exempts from taxes persons or entities contracting with PAGCOR in
casino operations. Although, differently worded, the provision clearly
exempts PAGCOR from indirect taxes. In fact, it goes one step further
by granting tax exempt status to persons dealing with PAGCOR in
casino operations. The unmistakable conclusion is that PAGCOR is not
liable for the P30, 152,892.02 VAT and neither is Acesite as the latter
is effectively subject to zero percent rate under Sec. 108 B (3), R.A.
8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing
with PAGCOR, the legislature clearly granted exemption also from
indirect taxes. It must be noted that the indirect tax of VAT, as in the
instant case, can be shifted or passed to the buyer, transferee, or
lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said
tax.
It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as
1/11 of such value, or charged as an additional 10% to the value. Verily,
the seller or lessor has the option to follow either way in charging its
clients and customer. In the instant case, Acesite followed the latter
method, that is, charging an additional 10% of the gross sales and
rentals. Be that as it may, the use of either method, and in particular,
the first method, does not denigrate the fact that PAGCOR is exempt
from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged
by Acesite, the latter is not liable for the payment of it as it is exempt in
this particular transaction by operation of law to pay the indirect tax.
Such exemption falls within the former Section 102 (b) (3) of the 1977
Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which
provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base
of tax - There shall be levied, assessed and collected, a value-added
tax equivalent to 10% of gross receipts derived by any person engaged
in the sale of services x x x; Provided, that the following services
performed in the Philippines by VAT- registered persons shall be
subject to 0%.
xxxx
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
37
signatory effectively subjects the supply of such services to zero (0%)
rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D.
1869 and the extension of such exemption to entities or individuals
dealing with PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v. John Gotamco
& Sons, Inc., where the absolute tax exemption of the World Health
Organization (WHO) upon an international agreement was upheld. We
held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor
itself who constructed the building owned by contractee WHO, and
such does not violate the rule that tax exemptions are personal because
the manifest intention of the agreement is to exempt the contractor so
that no contractor's tax may be shifted to the contractee WHO. Thus,
the proviso in P.D. 1869, extending the exemption to entities or
individuals dealing with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.40
from VAT under R.A. No. 9337, the BIR exceeded its authority in
subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the
said regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of
Republic Act No. 9337, amending Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner Philippine Amusement
and Gaming Corporation from the enumeration of government-owned
and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005
insofar as it subjects PAGCOR to 10% VAT is null and void for being
contrary to the National Internal Revenue Code of 1997, as amended
by Republic Act No. 9337.
No costs.
SO ORDERED

Although the basis of the exemption of PAGCOR and Acesite from VAT
in the case of The Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation was Section 102 (b) of the 1977 Tax
Code, as amended, which section was retained as Section 108 (B) (3)
in R.A. No. 8424,41 it is still applicable to this case, since the provision
relied upon has been retained in R.A. No. 9337.421avvphi1

It is settled rule that in case of discrepancy between the basic law and
a rule or regulation issued to implement said law, the basic law prevails,
because the said rule or regulation cannot go beyond the terms and
provisions of the basic law.43 RR No. 16-2005, therefore, cannot go
beyond the provisions of R.A. No. 9337. Since PAGCOR is exempt

38
12. CIR vs. Apo Cement, Inc DEFICIENCY TAXES AMOUNT
G.R. No. 193381, February 08, 2017
Income Tax P 9,305,697.74
Value-Added Tax 1,610,070.51
LEONEN, J.:
On September 1, 2003, the Bureau of Internal Revenue sent Apo Withholding Tax on Compensation 20,916,611.66
Cement Corporation (Apo Cement) a Final Assessment Notice (FAN)
for deficiency taxes for the taxable year 1999, as follows: Unremitted Withholding Tax on
13,479,061.25
Compensation
DEFICIENCY TAXES AMOUNT Expanded Withholding Tax 23,664,416.36
Income Tax P 479,977,176.22 Unremitted Expanded Withholding Tax 4,549,677.32
Value-Added Tax 181,345,963.86 Final Withholding Tax 3,095,786.45
VAT Withholding 23,536,374.48 Fringe Benefits Tax 213,656.97
Withholding Tax on Compensation 15,595,098.12 Documentary Stamp Tax 67,433,862.97
Unremitted Withholding Tax on Compensation 10,388,757.86 Administrative Penalties 25,000.00
Expanded Withholding Tax 17,642,981.74 P144293840.658
Total
(Emphasis supplied)
Unremitted Expanded Withholding Tax 3,510,390.71
On August 3, 2006, Apo Cement filed a Petition for Review with the
Final Withholding Tax 53,808,355.59 Court of Tax Appeals.9
Fringe Benefits Tax 167,337.31 In its Answer, the Commissioner of Internal Revenue admitted that Apo
Documentary Stamp Tax 52,480,372.77 Cement had already paid the deficiency assessments reflected in the
Bureau's Final Decision on Disputed Assessment, except for the
Administrative Penalties 25,000.005 documentary stamp taxes.10 The deficiency documentary stamp taxes
Apo Cement protested the FAN.6 The Bureau issued the Final Decision were allegedly based on several real property transactions of the
on Disputed Assessment dated June 15, 2006 denying the Apo corporation consisting of the assignment of several parcels of land with
Cement's protest.7 The Final Decision contained the following mineral deposits to Apo Land and Quarry Corporation, a wholly owned
deficiency subsidiary, and land acquisitions in 1999.11 According to the

39
Commissioner, Apo Cement should have paid documentary stamp
taxes based on the zonal value of property with mineral/quarry content,
not on the zonal value of regular residential property. 12
On January 25, 2008, Apo Cement availed of the tax amnesty under
Republic Act No. 9480, particularly affecting the 1999 deficiency
documentary stamp taxes.13
After stipulation of facts and presentation of evidence, Apo Cement filed
on April 17, 2009 a Motion to Cancel Tax Assessment (with Motion to
Admit Attached Formal Offer of Evidence).14 The Commissioner filed
her Opposition.15
On June 11, 2009, the Court of Tax Appeals (Second Division)
granted16 Apo Cement's Motion to Cancel Tax Assessment. It found
Apo Cement a qualified tax amnesty applicant under Republic Act No.
9480;17 and fully compliant with the requirements of the law, the
Department Order No. 29-07, and Revenue Memorandum Circular No.
19-2008. The Decision disposed as follows:\
WHEREFORE, premises considered:
the Assessment Notices for deficiency Documentary Stamp
Taxes for taxable year 1999 issued against [Apo Cement
1) Corporation] are hereby CANCELLED and SET ASIDE, solely
in view of [its] availment of the Tax Amnesty under RA 9480;
the Assessment Notices for deficiency Income Tax, Value-
Added Tax, VAT Withholding Tax, Withholding Tax on
2) Compensation, Unremitted Withholding Tax on Compensation,
Expanded Withholding Tax, Unremitted Expanded Withholding
Tax, Final Withholding Tax, and Fringe Benefits Tax
are CANCELLED and SET ASIDE in view of petitioner's
payment of said taxes.
Accordingly, the above-captioned case is hereby
considered CLOSED and TERMINATED.
SO ORDERED.18
The Commissioner filed a Motion for Reconsideration, which the Court
of Tax Appeals denied in a Resolution dated October 19, 2009 for lack
of merit.
On November 19,2009, the Commissioner appealed to the En
Banc.19 However, in a Decision promulgated on June 24, 2010, the
Court of Tax Appeals En Banc dismissed the Commissioner's appeal
and affirmed the Second Division's resolution ordering the cancellation
of the assessment for deficiency documentary stamp taxes in view of
the Apo Cement's availment of the tax amnesty program. The En Banc
ruled that (a) Apo Cement is qualified to avail of the tax amnesty;20 (b)
it submitted the required documents to the court;21 (c) the
Commissioner is not the proper party to challenge the SALN;22 (d) the
one-year prescriptive period already lapsed;23 and (e) in another tax
case involving the same parties (CTA EB No. 256, CTA Case No.
6710), it was already adjudged that Apo Cement complied with the
requirements ofTaxAmnesty.24
The Commissioner filed a Motion for Reconsideration, but the same
was denied in the Court of Tax Appeals En Banc Resolution dated
August 23, 2010.25
Hence, the petitioner filed its Petition for Review with this Court.
Respondent filed its Comment26 and petitioner her Reply.27
40
In a Resolution28 dated June 15, 2011, the Court expunged from the
records respondent's Rejoinder to petitioner's Reply.
The core issue is whether respondent had fully complied with all the
requirements to avail of the tax amnesty granted under Republic Act
No.9480.
The Petition is devoid of merit. The Court of Tax Appeals committed no
reversible error.
I pleadings with a verification based on "information and belief' or
We shall first address the procedural issue of defective verification
raised by the respondent. Through the Verification and Certification of
Non-Forum Shopping29 attached to the present Petition, Deputy
Commissioner Estela V. Sales of the Legal and Inspection Group of the
Bureau of Internal Revenue states that the contents of the Petition are
true and correct of her own "knowledge and belief based on authentic
records."30
In the Court's Resolution31 dated December 8, 2010, the petitioner was
directed to submit a sufficient verification within five (5) days from
notice. Petitioner did not comply. Petitioner would argue however that
while the verification still stated "belief," it was qualified by "based on
authentic records." Hence, "the statement implies that the contents of
the petition were based not only on the pleader's belief but ultimately
they are recitals from authentic records."32
We are not persuaded.
The amendment to Section 4, Rule 7 entirely removed any reference to
"belief' as basis.33 This is to ensure that the pleading is anchored on
facts and not on imagination or speculation, and is filed in good faith.
In Go v. Court of Appeals:34
Mere belief is insufficient basis and negates the verification which
should be on the basis of personal knowledge or authentic records.
Verification is required to secure an assurance that the allegations of
the petition have been made in good faith, or are true and correct and
not merely speculative.35
To emphasize this further, the third paragraph of Rule 7, Section 4 of
the 1997 Rules of Civil Procedure, as amended, expressly treats
"knowledge, information and belief," as unsigned.36
In Negros Oriental Planters Association, Inc. v. Hon. Presiding Judge
of RTC-Negros Occidental, Branch 52, Bacolod City,37 the Court
explained that the amendment in the rules was made stricter so that a
party cannot be allowed to base his statements on his belief. Otherwise,
the pleading is treated as unsigned which produces no legal effect. The
court, though, in its discretion, may give the party a chance to remedy
the insufficiency. Thus:c
Clearly, the amendment was introduced in order to make the
verification requirement stricter, such that the party cannot now merely
state under oath that he believes the statements made in the pleading.
He cannot even merely state under oath that he has knowledge that
such statements are true and correct. His knowledge must be
specifically alleged under oath to be either personal knowledge or at
least based on authentic records.
Unlike, however, the requirement for a Certification against Forum
Shopping in Section 5, wherein failure to comply with the requirements
is not curable by amendment of the complaint or other initiatory
pleading, Section 4 of Rule 7, as amended, states that the effect of the
failure to properly verify a pleading is that the pleading shall be treated
as unsigned:
41
A pleading required to be verified which contains a
verification based on "information and belief'', or upon "knowledge,
information and belief', or lacks a proper verification, shall be treated
as an unsigned pleading.
Unsigned pleadings are discussed in the immediately preceding
section of Rule 7:
SEC. 3. Signature and address.
An unsigned pleading produces no legal effect. However, the
court may, in its discretion, allow such deficiency to be remedied if it
shall appear that the same was due to mere inadvertence and not
intended for delay. Counsel who deliberately files an unsigned
pleading, or signs a pleading in violation of this Rule, or alleges
scandalous or indecent matter therein, or fails to promptly report to the
court a change of his address, shall be subject to appropriate
disciplinary action. (5a)
A pleading, therefore, wherein the Verification is merely based on
the party's knowledge and belief produces no legal effect, subject to the
discretion of the court to allow the deficiency to be remedied.38
In this case, petitioner did not submit a corrected verification despite
the order of this Court. This alone merits the denial of the Petition
outright.
In any case, we find respondent had fully complied with the
requirements of Republic Act No. 9480. Hence, the Court of Tax
Appeals properly cancelled the remaining assessment for deficiency
documentary stamp taxes.
II.
The pertinent provisions on the grant and availment of tax amnesty
under Republic Act No. 9480 state:
SECTION 1. Coverage.-There is hereby authorized and granted a tax
amnesty which shall cover all national internal revenue taxes for the
taxable year 2005 and prior years, with or without assessments duly
issued therefor, that have remained unpaid as of December 31,
2005: Provided, however, That the amnesty hereby authorized and
granted shall not cover persons or cases enumerated under Section 8
hereof.
SEC. 2. Availment of the Amnesty. Any person, natural or juridical, who
wishes to avail himself of the tax amnesty authorized and granted under
this Act shall file with the Bureau of Internal Revenue (BIR) a notice and
Tax Amnesty Return accompanied by a Statement of Assets, Liabilities
and Net worth (SALN) as of December 31, 2005, in such form as may
be prescribed in the implementing rules and regulations (JRR) of this
Act, and pay the applicable amnesty tax within six months from the
effectivity of the IRR.
SECTION 3. What to Declare in the SALN - The SALN shall contain a
declaration of the assets, liabilities and net worth as of December
31,2005, as follows:
a) Assets within or without the Philippines, whether real or personal,
tangible or intangible, whether or not used in trade or
business: Provided, That property other than money shall be valued at
the cost at which the property was acquired: Provided, further, That
foreign currency assets and/or securities shall be valued at the rate of
exchange prevailing as of the date of the SALN;
(b) All existing liabilities which are legitimate and enforceable, secured
or unsecured, whether or not incurred in trade or business; and
(c) The net worth of the taxpayer, which shall be the difference between
the total assets and total liabilities.
42
SEC. 5. Grant of Tax Amnesty. Except for the persons or cases under this Act shall amend such previously :filed statements by
covered in Section 8 hereof, any person, whether natural or juridical, including still undeclared assets and/or liabilities and pay an amnesty
may avail himself of the benefits of tax amnesty under this Act, and pay tax equal to :five percent (5%) based on the resulting increase in net
the amnesty tax due thereon, based on his net worth as of December worth: Provided, That such taxpayers shall likewise be categorized in
31, 2005 as declared in the SALN as of said period, in accordance with accordance with, and subjected to the minimum amounts of amnesty
the following schedule of amnesty tax rates and minimum amnesty tax tax prescribed under the provisions of this Section. (Emphasis supplied)
payments required:chanRoblesvirtualLawlibrary In addition to the above provisions of law, the Department of Finance
Department Order No. 29-0739 provides:
(b)
Corporations SECTION 6. Method of Availment of Tax Amnesty.-
With subscribed
5% or P500,000, 1. Forms/Documents to be filed. - To avail of the general tax amnesty,
(1) capital of above
whichever is higher concerned taxpayers shall file the following documents/requirements:
P50 Million

a. Notice of Availment in such form as may be prescribed by the BIR.

With subscribed
capital of above 5% or P250,000,
(2) b. Statements of Assets, Liabilities and Net worth (SALN) as of
P20 Million up to whichever is higher
December 31, 2005 in such form, as may be prescribed by the BIR.
P50 Million
c. Tax Amnesty Return in such form as may be prescribed by the BIR.

With subscribed 2. Place of Filing of Amnesty Tax Return. - The Tax Amnesty Return,
5% or P100,000,
(3) capital of P5Million to together with the other documents stated in Sec. 6 (1) hereof, shall be
whichever is higher
P20Million filed as follows:
a. Residents shall file with the Revenue District Officer (RDO)/Large
Taxpayer District Office of the BIR which has jurisdiction over the legal
With subscribed residence or principal place of business of the taxpayer, as the case
5% or P25,000,
(4) capital of below may be.
whichever is higher
P5 Million
b. Non-residents shall file with the office of the Commissioner of the
BIR, or with any RDO.
(d) Taxpayers who :filed their balance sheet/SALN, together with their c. At the option of the taxpayer, the RDO may assist the taxpayer in
income tax returns for 2005, and who desire to avail of the tax amnesty accomplishing the forms and computing the taxable base and the

43
amnesty tax payable, but may not look into, question or examine the
veracity of the entries contained in the Tax Amnesty Return, Statement
of Assets, Liabilities and Net worth, or such other documents submitted
by the taxpayer.
3. Payment of Amnesty Tax and Full Compliance.- Upon filing of the
Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the taxpayer
shall pay the amnesty tax to the authorized agent bank or in the
absence thereof, the Collection Agent or duly authorized Treasurer of
the city or municipality in which such person has his legal residence or
principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may
be prescribed by the BIR for the use of-or to be accomplished by the
bank, the collection agent or the Treasurer, showing the acceptance of
the amnesty tax payment. In case of the authorized agent bank, the
branch manager or the assistant branch manager shall sign the
acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN,
and the Tax Amnesty Return shall be submitted to the RDO, which shall
be received only after complete payment. The completion of these
requirements shall be deemed full compliance with the provisions of RA
9480.
4. Time for Filing and Payment of Amnesty Tax. -The filing of the Tax
Amnesty Return, together with the SALN, and the payment of the
amnesty tax shall be made within six (6) months from the effectivity of
these Rules.
Taxpayers who availed themselves of the tax amnesty program are
entitled to the immunities and privileges under Section 6 of the
law:chanRoblesvirtualLawlibrary
SEC. 6. Immunities and Privileges. Those who availed themselves of
the tax amnesty under Section 5 hereof, and have fully complied with
all its conditions shall be entitled to the following immunities and
privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well
as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the National Internal Revenue Code of
1997, as amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years.
(b) The taxpayer's Tax Amnesty Return and the SALN as of December
31, 2005 shall not be admissible as evidence in all proceedings that
pertain to taxable year 2005 and prior years, insofar as such
proceedings relate to internal revenue taxes, before judicial, quasi-
judicial or administrative bodies in which he is a defendant or
respondent, and except for the purpose of ascertaining the net worth
beginning January 1, 2006, the same shall not be examined, inquired
or looked into by any person or government office. However, the
taxpayer may use this as a defense, whenever appropriate, in cases
brought against him.
(c) The books of accounts and other records of the taxpayer for the
years covered by the tax amnesty availed of shall not be
examined: Provided, That the Commissioner of Internal Revenue may
authorize in writing the examination of the said books of accounts and
other records to verify the validity or correctness of a claim for any tax
refund, tax credit (other than refund or credit of taxes withheld on
wages), tax incentives, and/or exemptions under existing laws.
All these immunities and privileges shall not apply where the person
failed to file a SALN and the Tax Amnesty Return, or where the amount
of net worth as of December 31, 2005 is proven to be understated to
the extent of thirty percent (30%) or more, in accordance with the
provisions of Section 3 hereof.
44
This Court has declared40 that submission of the documentary
requirements and payment of the amnesty tax is considered full
compliance with Republic Act No. 9480 and the taxpayer can
immediately enjoy the immunities and privileges enumerated in Section
6 of the law.
correctness of the Statement of Assets, Liabilities, and Net Worth
(SALN) have been filed within the one-year period stated in Section 4
of the law.43 Hence, it concluded that respondent had duly complied
with the requisites enumerated under Republic Act No. 9480 and is
therefore entitled to the benefits under Section 6.44

The plain and straightforward conditions were obviously meant to III.

encourage taxpayers to avail of the amnesty program, thereby
enhancing revenue administration and collection. 41 The Commissioner disputes, however, the correctness of respondent's
2005 SALN because respondent allegedly did not include the
Here, it is undisputed that respondent had submitted all the 57,500,000 shares of stocks it acquired in 1999 from its subsidiary -
documentary requirements. The Court of Tax Appeals En Banc found Apo Land and Quarry Corporation in exchange for several parcels of
that respondent had submitted the land.45
following:chanRoblesvirtualLawlibrary
Consequently, respondent underpaid its amnesty tax by
i. Letter to the Commissioner of Internal Revenue, P89,858,951.05, corresponding to the value of the shares of stocks,
addressed to the Chief-LT Audit and Investigation which respondent allegedly did not include in its declaration of assets
Division II, Ms. Olivia 0. Lao, received on January 25, in the SALN.
2008;
ii. Notice of Availment of the Tax Amnesty; Petitioner further submits that the one-year contestability period under
iii. Tax Amnesty Payment Form/Acceptance of Payment Section 4 has not yet lapsed - as it had not yet even commenced due
Form (BIR Form No. 0617); to respondent's failure to file a complete SALN and to pay the correct
iv. Tax Amnesty Return (BIR Form No. 2116); amnesty tax.47
v. Statement of Assets, Liabilities and Net worth;
vi. Annual Income Tax Return for the taxable year 2005 Respondent counters that the petitioner is not the proper party to
with Audited Financial Statements for the year 2005; question the correctness of its SALN.48 Under Section 4 of Republic Act
and No. 9480, there is a presumption of correctness of the SALN and only
vii. Development Bank of the Philippines BIR Tax parties other than the Bureau of Internal Revenue or its agents may
Payment Deposit Slip in the amount of dispute the correctness of the SALN.49
P3,668,951.06.42
Even assuming that petitioner has the standing to question the SALN,
The Court of Tax Appeals further found that there was nothing in the Republic Act No. 9480 provides that the proceeding to challenge the
records, which would show that proceedings to question the SALN must be initiated within one year following the date of filing of the
Tax Amnesty documents.50 Respondent asserts that it availed of the

45
tax amnesty program on January 25, 2008.51 Hence, petitioner's
challenge, made only in April2009, was already time-barred. 52
In her Reply, petitioner argues that: (1) she is the proper party to
question the completeness of the applicant's SALN; and (2) the State
is not bound by the acts of the Bureau's officials, who examined
respondent's SALN and accepted the wrong amnesty tax payment.53
IV.
Section 4 of Republic Act No. 9480 provides
SEC. 4. Presumption of Correctness of the SALN. -The SALN as of
December 31, 2005 shall be considered as true and correct except
where the amount of declared net worth is understated to the extent of
thirty percent (30%) or more as may be established in proceedings
initiated by, or at the instance of, parties other than the BIR or its
agents: Provided, That such proceedings must be initiated within one
year following the date of the filing of the tax amnesty return and the
SALN. Findings of or admission in congressional hearings, other
administrative agencies of government, and/or courts shall be
admissible to prove a thirty percent (30%) under-declaration.
(Emphasis and underscoring supplied)
Under the above-stated prov1s10n, the SALN is presumed correct
unless there is a concurrence of the following:
a. There is under-declaration of net worth by 30%;
b. The under-declaration is established in proceedings initiated
by parties other than the BIR; and
c. The proceedings were initiated within one (1) year from the
filing of the tax amnesty.
The Court of Tax Appeals ruled that petitioner is not the proper party to
question the veracity of respondent's SALN. It emphasized that "the
presumption of correctness of the SALN applies even against the
Commissioner . . . Thus, the thirty percent (30%) threshold can be
established in proceedings initiated by, or at the instance of, parties
other than the B[ureau of] I[ntemal] R[evenue] or its agents."54
The Court of Tax Appeals is correct.
We cannot disregard the plain and categorical text of Section 4. It is a
basic rule of statutory construction that where the language of the law
is clear and unambiguous, it should be applied as
written.55 Determining its wisdom or policy is beyond the realm of
judicial power.56
In CS Garment, Inc. v. Commissioner of Internal Revenue,57 the Court
clarified that -
The one-year period referred to in the law should ... be considered only
as a prescriptive period within which third parties, meaning 'parties
other than the BIR or its agents,' can question the SALN - not as a
waiting period during which the BIR may contest the SALN and the tax
payer prevented from enjoying the immunities and privileges under the
law. 58
The Court explained that the documentary requirements and payment
of the amnesty tax operate as a suspensive condition, such that
completion of these requirements entitles the taxpayer-applicant to
immediately enjoy the immunities and privileges under Republic Act No.
9480.
However, the Court further stated that Section 6 of the law contains a
resolutory condition. Immunities and privileges will cease to apply to
taxpayers who, in their SALN, were proven to have understated their
net worth by 30% or more.
46
This clarification, however, does not mean that the amnesty taxpayers
would go scot-free in case they substantially understate the amounts of
their net worth in their SALN. The 2007 Tax Amnesty Law imposes a
resolutory condition insofar as the enjoyment of immunities and
privileges under the law is concerned.
Pursuant to Section 4 of the law, third parties may initiate proceedings
contesting the declared amount of net worth of the amnesty taxpayer
within one year following the date of the filing of the tax amnesty return
and the SALN. Section 6 then states that "All these immunities and
privileges shall not apply ... where the amount of net worth as of
December 31, 2005 is proven to be understated to the extent of thirty
percent (30%) or more, in accordance with the provisions of Section 3
hereof." Accordingly, Section 10 provides that amnesty taxpayers who
willfully understate their net worth shall be (a) liable for perjury under
the Revised Penal Code; and (b) subject to immediate tax fraud
investigation in order to collect all taxes due and to criminally prosecute
those found to have willfully evaded lawful taxes due.59
Thus, the amnesty granted under the law is revoked once the taxpayer
is proven to have under-declared his assets in his SALN by 30% or
more. Pursuant to Section 1060of the Tax Amnesty Law, amnesty
taxpayers who wilfully understate their net worth shall not only be liable
for perjury under the Revised Penal Code, but, upon conviction, also
subject to immediate tax fraud investigation in order to collect all taxes
due and to criminally prosecute for tax evasion.
this Court, the existence of any such proceeding to challenge
respondent's 2005 SALN during this period. Indeed, petitioner first
raised the possibility of under-declaration of assets only in her
Opposition to respondent's Motion to Cancel Tax Assessment.63 Thus,
the lapse of the one-year period effectively closed the window to
question respondent's 2005 SALN.
Significantly, as explained by respondent, there was no understatement
in its 2005 SALN because the shares of stocks, which the BIR
repeatedly referred to, were sold in 2002 or more than three (3) years
prior to the tax amnesty availment.64 This was already discussed and
detailed before the Court of Tax Appeals together with proofs of the
transfer of ownership.65
Our judicial review under Rule 45 of the Rules of Court is confined only
to errors of law and does not extend to questions of fact. 66ïThis Court
is not a trier of facts.67ïAt any rate, petitioner's utter failure to refute
these material points constitutes an implied admission. WHEREFORE,
the Petition is DENIED. SO ORDERED.

Here, the requisites to overturn the presumption of correctness of

respondent's 2005 SALN were not met.

Respondent filed its Tax Amnesty documents on January 25,

2008.61 Since then, and up to the time of the filing of respondent's
Motion to Cancel Tax Assessment on April 17, 2009, there had been
no proceeding initiated to question its declared amount of net
worth.62 Petitioner never alleged, before the Court of Tax Appeals and

47
13. CS Garment, Inc. vs. CIR
G.R. No. 182399 March 12, 2014
SERENO, CJ:
Before the Court is a Rule 45 petition for review on certiorari, assailing
the respective Decision1 and Resolution2 of the Court of Tax. Appeals
(CTA) en bane in EB Case No. 287. These judgments in turn affirmed
the Decision3 and the Resolution4 of the CTA Second Division, which
ordered the cancellation of certain items in the 1998 tax assessments
against petitioner CS Garment, Inc. (CS Garment or petitioner).
Accordingly, petitioner was directed to pay the Bureau of Internal
Revenue (BIR) the remaining portion of the tax assessments.
This portion was comprised of the outstanding deficiency value-added
tax (VAT) on CS Garment’s undeclared local sales and on the incidental
sale of a motor vehicle; deficiency documentary stamp tax (DST) on a
lease agreement; and deficiency income tax as a result of the
disallowed expenses and undeclared local sales. However, while the
present case was pending before this Court, CS Garment filed a
Manifestation and Motion stating that the latter had availed itself of the
government’s tax amnesty program under Republic Act No. (R.A.)
9480, or the 2007 Tax Amnesty Law.
FACTS
We reproduce the narration of facts culled by the CTA en banc5 as
follows:
Petitioner [CS Garment] is a domestic corporation duly organized and
existing under and by virtue of the laws of the Philippines with principal
office at Road A, Cavite Ecozone, Rosario, Cavite. On the other hand,
respondent is the duly appointed Commissioner of Internal Revenue of
the Philippines authorized under law to perform the duties of said office,
including, inter alia, the power to assess taxpayers for [alleged]
deficiency internal revenue tax liabilities and to act upon administrative
protests or requests for reconsideration/reinvestigation of such
assessments.
Petitioner is registered with the Philippine Economic Zone Authority
(PEZA) under Certificate of Registration No. 89-064, duly approved on
December 18, 1989. As such, it is engaged in the business of
manufacturing garments for sale abroad.
On November 24, 1999, petitioner [CS Garment] received from
respondent [CIR] Letter of Authority No. 00012641 dated November 10,
1999, authorizing the examination of petitioner’s books of accounts and
other accounting records for all internal revenue taxes covering the
period January 1, 1998 to December 31, 1998.
On October 23, 2001, petitioner received five (5) formal demand letters
with accompanying Assessment Notices from respondent, through the
Office of the Revenue Director of Revenue Region No. 9, San Pablo
City, requiring it to pay the alleged deficiency VAT, Income, DST and
withholding tax assessments for taxable year 1998 in the aggregate
amount of ₱2,046,580.10 broken down as follows:
Deficiency VAT
Basic tax due P 314,194.00
Add: Surcharge 157,097.00
Interest 188,516.00
48
Total Amount Payable ₱ 2,046,580.10
₱ 659,807.00 On November 20, 2001, or within the 30-day period prescribed under
Deficiency Income Tax (at Normal Rate of 34%) Section 228 of the Tax Code, as amended, petitioner filed a formal
written protest with the respondent assailing the above assessments.
Basic tax due ₱ 78,639.00
Add: Surcharge 39,320.00 On January 11, 2002, or within the sixty-day period after the filing of the
Interest 43,251.00 protest, petitioner submitted to the Assessment Division of Revenue
Total Amount Payable Region No. 9, San Pablo City, additional documents in support of its
₱ 161,210.00 protest.
Deficiency Income Tax (at Normal Rate of 34%)
Respondent failed to act with finality on the protest filed by petitioner
Basic tax due ₱ 78,639.00 within the period of one hundred eighty (180) days from January 11,
Add: Surcharge 39,320.00 2002 or until July 10, 2002. Hence, petitioner appealed before [the CTA]
Interest 43,251.00 via a Petition for Review filed on August 6, 2002 or within thirty (30)
Total Amount Payable days from the last day of the aforesaid 180-day period.
₱ 161,210.00
Deficiency DST The case was raffled to the Second Division of [the CTA] for decision.
After trial on the merits, the Second Division rendered the Assailed
Basic tax due P 806.00 Decision on January 4, 2007 upon which the Second Division cancelled
Add: Surcharge 403.00 respondent’s assessment against CS Garments for deficiency
Interest 484.00 expanded withholding taxes for CY 1998 amounting to ₱47,880.00,
Total Amount Payable and partially cancelled the deficiency DST assessment amounting to
₱ 1,693.00 ₱1,963.00. However, the Second Division upheld the validity of the
Deficiency EWT deficiency income tax assessments by subjecting the disallowed
expenses in the amount of ₱14,851,478.83 and a portion of the
Basic tax due ₱ 22,800.00 undeclared local sales ₱1,541,936.60 (amounting to ₱1,500,000.00)
Add: Surcharge 11,400.00 to income tax at the special rate of 5%. The remainder of undeclared
Interest 13,680.00 local sales of ₱1,541,936.06 (amounting to ₱41,936.60) was subjected
Total Amount Payable to income tax at the rate of 34%. The Second Division found that total
₱ 47,880.00 tax liability of CS Garments amounted to ₱2,029,570.12, plus 20%
GRAND TOTAL

49
delinquency interest pursuant to Section 249(C)(3), and computed the from its sales to employees were not subject to 10% VAT; (3) the sale
same as follows: of the company vehicle to its general manager was not subject to 10%
VAT; (4) it had no undeclared local sales in the amount of
Deficiency Tax VAT DST Income Tax ₱1,541,936.60; and (5) Rule XX, Section 2 of the PEZA Rules and
TOTAL Regulations allowed deductions from the expenses it had incurred in
at 5% at 34% connection with advertising and representation; clinic and office
Basic Tax Due P 314,194.00 P 145.00 P 817,573.94 P supplies; commissions and professional fees; transportation, freight
1,789.44 and handling, and export fees; and licenses and other taxes.
25% Surcharge 78,548.50 36.25 204,393.49 447.36
20% Interest 188,516.00 102.02 422,898.52 925.6 The CTA en banc affirmed the Decision and Resolution of the CTA
Second Division. As regards the first issue, the banc ruled that the CIR
P 581,258.50 had duly apprised CS Garment of the factual and legal bases for
============= assessing the latter’s liability for deficiency income tax, as shown in the
P 283.27 attached Schedule of Discrepancies provided to petitioner; and in the
============= subsequent reference of the CIR to Rule XX, Section 2 of the Rules and
P 1,444,865.95 Regulations of R.A. 7916. With respect to the second issue, the CTA
============= pronounced that the income generated by CS Garment from the trade
P 3,162.40 fairs was subject to internal revenue taxes, as those transactions were
============= considered "domestic sales" under R.A. 7916, otherwise known as the
P 2,029,570.12 Special Economic Zone Act.
=============
On January 29, 2007, CS Garments filed its "Motion for Partial With respect to the third issue, the CTA en banc declared that the sale
Reconsideration" of the said decision. On May 25, 2007, in a resolution, of the motor vehicle by CS Garment to the latter’s general manager in
the Second Division denied CS Garments’ motion for lack of merit. the amount of ₱1.6 million was subject to VAT, since the sale was
(Citations omitted) considered an incidental transaction within the meaning of Section 105
of the NIRC. On the fourth issue, the CTA found that CS Garment had
Petitioner appealed the case to the CTA en banc and alleged the failed to declare the latter’s total local sales in the amount of
following: (1) the Formal Assessment Notices (FAN) issued by the ₱1,541,936.60 in its 1998 income tax return. The tax court then
Commissioner of Internal Revenue (CIR) did not comply with the calculated the income tax liability of petitioner by subjecting ₱1.5 million
requirements of the law; (2) the income generated by CS Garment from of that liability to the preferential income tax rate of 5%. This amount
its participation in the Cavite Export Processing Zone’s trade fairs and represented the extent of the authority of CS Garment, as a PEZA-

50
registered enterprise, to sell in the local market. The normal income tax
rate of 34% was then charged for the excess amount of ₱41,936.60.
Finally, as regards the fifth issue, the CTA ruled that Section 2, Rule XX
of the PEZA Rules – which enumerates the specific deductions for
ECOZONE Export Enterprises – does not mention certain claims of
petitioner as allowable deductions.
Aggrieved, CS Garment filed the present Petition for Review assailing
the Decision of the CTA en banc. However, on 26 September 2008,
while the instant case was pending before this Court, petitioner filed a
Manifestation and Motion stating that it had availed itself of the
government’s tax amnesty program under the 2007 Tax Amnesty Law.
It thus prays that we take note of its availment of the tax amnesty and
confirm that it is entitled to all the immunities and privileges under the
law. It has submitted to this Court the following documents, which have
allegedly been filed with Equitable PCI Bank–Cavite EPZA Branch, a
supposed authorized agent-bank of the BIR:6
1. Notice of Availment of Tax Amnesty under R.A. 9480
2. Statement of Assets, Liabilities, and Net worth (SALN)
3. Tax Amnesty Return (BIR Form No. 2116)
4. Tax Amnesty Payment Form (Acceptance of Payment Form or BIR
Form No. 0617)
5. Equitable PCI Bank’s BIR Payment Form indicating that CS Garment
deposited the amount of ₱250,000 to the account of the Bureau of
Treasury–BIR
On 26 January 2009, the Office of the Solicitor General (OSG) filed its
Comment objecting to the Manifestation and Motion of CS Garment.7
The OSG asserts that the filing of an application for tax amnesty does
not by itself entitle petitioner to the benefits of the law, as the BIR must
still assess whether petitioner was eligible for these benefits and
whether all the conditions for the availment of tax amnesty had been
satisfied. Next, the OSG claims that the BIR is given a one-year period
to contest the correctness of the SALN filed by CS Garment, thus
making petitioner’s motion premature. Finally, the OSG contends that
pursuant to BIR Revenue Memorandum Circular No. (RMC) 19-2008,
petitioner is disqualified from enjoying the benefits of the Tax Amnesty
Law, since a judgment was already rendered in favor of the BIR prior
to the tax amnesty availment. The OSG points out that CS Garment
submitted its application for tax amnesty only on 6 March 2008, which
was almost two months after the CTA en banc issued its 14 January
2008 Decision and more than one year after the CTA Second Division
issued its 4 January 2007 Decision.
On 8 February 2010, the Court required both parties to prepare and file
their respective memoranda within 30 days from notice.8 After this
Court granted the motions for extension filed by the parties, the OSG
eventually filed its Memorandum on 18 May 2010, and CS Garment on
7 June 2010. It is worthy to note that in its Memorandum, the OSG did
not raise any argument with respect to petitioner’s availment of the tax
amnesty program. Neither did the OSG deny the authenticity of the
documents submitted by CS Garments or mention that a case had been
filed against the latter for availing itself of the tax amnesty program,
taking into account the considerable lapse of time from the moment
petitioner filed its Tax Amnesty Return and Statement of Assets,
Liabilities, and Net Worth in 2008.
51
On 17 July 2013, the parties were ordered9 to "move in the premises"10
by informing the Court of the status of the tax amnesty availment of
petitioner CS Garment, including any supervening event that may be of
help to the Court in its immediate disposition of the present case.
Furthermore, the parties were directed to indicate inter alia (a) whether
CS Garment had complied with the requirements of the 2007 Tax
Amnesty Law, taking note of the aforementioned documents submitted;
(b) whether a case had been initiated against petitioner, with respect to
its availment of the tax amnesty program; and (c) whether respondent
CIR was still interested in pursuing the case. Petitioner eventually filed
its Compliance11 on 27 August 2013, and the OSG on 29 November
2013.12
According to the OSG,13 CS Garment had already complied with all
documentary requirements of the 2007 Tax Amnesty Law. It also stated
that the BIR Litigation Division had not initiated any case against
petitioner relative to the latter’s tax amnesty application. However, the
OSG reiterated that the CIR was still interested in pursuing the case.
ISSUE
The threshold question before this Court is whether or not CS Garment
is already immune from paying the deficiency taxes stated in the 1998
tax assessments of the CIR, as modified by the CTA.
DISCUSSION
Tax amnesty refers to the articulation of the absolute waiver by a
sovereign of its right to collect taxes and power to impose penalties on
persons or entities guilty of violating a tax law.14 Tax amnesty aims to
grant a general reprieve to tax evaders who wish to come clean by
giving them an opportunity to straighten out their records.15 In 2007,
Congress enacted R.A. 9480, which granted a tax amnesty covering
"all national internal revenue taxes for the taxable year 2005 and prior
years, with or without assessments duly issued therefor, that have
remained unpaid as of December 31, 2005."16 These national internal
revenue taxes include (a) income tax; (b) VAT; (c) estate tax; (d) excise
tax; (e) donor’s tax; (f) documentary stamp tax; (g) capital gains tax;
and (h) other percentage taxes.17 Pursuant to Section 6 of the 2007
Tax Amnesty Law, those who availed themselves of the benefits of the
law became "immune from the payment of taxes, as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties
under the National Internal Revenue Code of 1997, as amended,
arising from the failure to pay any and all internal revenue taxes for
taxable year 2005 and prior years."
Amnesty taxpayers may immediately enjoy the privileges and
immunities under the 2007 Tax Amnesty Law, as soon as they fulfill the
suspensive conditions imposed therein
A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the
law contains two types of conditions – one suspensive, the other
resolutory. Borrowing from the concepts under our Civil Code, a
condition may be classified as suspensive when the fulfillment of the
condition results in the acquisition of rights. On the other hand, a
condition may be considered resolutory when the fulfillment of the
condition results in the extinguishment of rights. In the context of tax
amnesty, the rights referred to are those arising out of the privileges
and immunities granted under the applicable tax amnesty law.
The imposition of a suspensive condition under the 2007 Tax Amnesty
Law is evident from the following provisions of the law:
52

2007 Tax Amnesty Law – Republic Act No. 9480
SECTION 2. Availment of the Amnesty. — Any person, natural or
juridical, who wishes to avail himself of the tax amnesty authorized and
granted under this Act shall file with the Bureau of Internal Revenue
(BIR) a notice and Tax Amnesty Return accompanied by a Statement
of Assets, Liabilities and Networth (SALN) as of December 31, 2005, in
such form as may be prescribed in the implementing rules and
regulations (IRR) of this Act, and pay the applicable amnesty tax within
six months from the effectivity of the IRR.
SECTION 4. Presumption of Correctness of the SALN. — The SALN
as of December 31, 2005 shall be considered as true and correct
except where the amount of declared networth is understated to the
extent of thirty percent (30%) or more as may be established in
proceedings initiated by, or at the instance of, parties other than the BIR
or its agents: Provided, That such proceedings must be initiated within
one year following the date of the filing of the tax amnesty return and
the SALN. Findings of or admission in congressional hearings, other
administrative agencies of government, and/or courts shall be
admissible to prove a thirty percent (30%) under-declaration.
SECTION 6. Immunities and Privileges. — Those who availed
themselves of the tax amnesty under Section 5 hereof, and have fully
complied with all its conditions shall be entitled to the following
immunities and privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well
as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the National Internal Revenue Code of
1997, as amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years.
(b) The taxpayer’s Tax Amnesty Return and the SALN as of December
31, 2005 shall not be admissible as evidence in all proceedings that
pertain to taxable year 2005 and prior years, insofar as such
proceedings relate to internal revenue taxes, before judicial, quasi-
judicial or administrative bodies in which he is a defendant or
respondent, and except for the purpose of ascertaining the networth
beginning January 1, 2006, the same shall not be examined, inquired
or looked into by any person or government office. However, the
taxpayer may use this as a defense, whenever appropriate, in cases
brought against him.
(c) The books of accounts and other records of the taxpayer for the
years covered by the tax amnesty availed of shall not be examined:
Provided, That the Commissioner of Internal Revenue may authorize in
writing the examination of the said books of accounts and other records
to verify the validity or correctness of a claim for any tax refund, tax
credit (other than refund or credit of taxes withheld on wages), tax
incentives, and/or exemptions under existing laws.
All these immunities and privileges shall not apply where the person
failed to file a SALN and the Tax Amnesty Return, or where the amount
of networth as of December 31, 2005 is proven to be understated to the
extent of thirty percent (30%) or more, in accordance with the provisions
of Section 3 hereof.
SECTION 7. When and Where to File and Pay. — The filing of the Tax
Amnesty Return and the payment of the amnesty tax for those availing
themselves of the tax amnesty shall be made within six months starting
53
from the effectivity of the IRR. It shall be filed at the office of the
Revenue District Officer which has jurisdiction over the legal residence
or principal place of business of the filer. The Revenue District Officer
shall issue an acceptance of payment form authorizing an authorized
agent bank, or in the absence thereof, the collection agent or municipal
treasurer concerned, to accept the amnesty tax payment.
Department of Finance Order No. 29-07: Rules and Regulations to
Implement R.A. 9480
SECTION 6. Method of Availment of Tax Amnesty. —
xxxx
3. Payment of Amnesty Tax and Full Compliance. — Upon filing of the
Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the taxpayer
shall pay the amnesty tax to the authorized agent bank or in the
absence thereof, the Collection Agent or duly authorized Treasurer of
the city or municipality in which such person has his legal residence or
principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may
be prescribed by the BIR for the use of — or to be accomplished by —
the bank, the collection agent or the Treasurer, showing the acceptance
of the amnesty tax payment. In case of the authorized agent bank, the
branch manager or the assistant branch manager shall sign the
acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN,
and the Tax Amnesty Return shall be submitted to the RDO, which shall
be received only after complete payment. The completion of these
requirements shall be deemed full compliance with the provisions of
R.A. 9480. (Emphases supplied)
In availing themselves of the benefits of the tax amnesty program,
taxpayers must first accomplish the following forms and prepare them
for submission: (1) Notice of Availment of Tax Amnesty Form; (2) Tax
Amnesty Return Form (BIR Form No. 2116); (3) Statement of Assets,
Liabilities and Net worth (SALN) as of December 31, 2005; and (4) Tax
Amnesty Payment Form (Acceptance of Payment Form or BIR Form
No. 0617).18
The taxpayers must then compute the amnesty tax due in accordance
with the rates provided in Section 5 of the law,19 using as tax base their
net worth as of 31 December 2005 as declared in their SALNs. At their
option, the revenue district office (RDO) of the BIR may assist them in
accomplishing the forms and computing the taxable base and the
amnesty tax due.20 The RDO, however, is disallowed from looking into,
questioning or examining the veracity of the entries contained in the
Tax Amnesty Return, SALN, and other documents they have
submitted.21 Using the Tax Amnesty Payment Form, the taxpayers
must make a complete payment of the computed amount to an
authorized agent bank, a collection agent, or a duly authorized
treasurer of the city or municipality.22
Thereafter, the taxpayers must file with the RDO or an authorized agent
bank the (1) Notice of Availment of Tax Amnesty Form; (2) Tax Amnesty
Return Form (BIR Form No. 2116); (3) SALN; and (4) Tax Amnesty
Payment Form.23 The RDO shall only receive these documents after
complete payment is made, as shown in the Tax Amnesty Payment
Form.24 It must be noted that the completion of these requirements
"shall be deemed full compliance with the provisions of R.A. 9480."25
54
In our considered view, this rule means that amnesty taxpayers may
immediately enjoy the privileges and immunities under the 2007 Tax
Amnesty Law as soon as the aforementioned documents are duly
received.
The OSG has already confirmed26 to this Court that CS Garment has
complied with all of the documentary requirements of the law.
Consequently, and contrary to the assertion of the OSG, no further
assessment by the BIR is necessary. CS Garment is now entitled to
invoke the immunities and privileges under Section 6 of the law.
Similarly, we reject the contention of OSG that the BIR was given a one-
year period to contest the correctness of the SALN filed by CS
Garment, thus making petitioner’s motion premature. Neither the 2007
Tax Amnesty Law nor Department of Finance (DOF) Order No. 29-07
(Tax Amnesty Law IRR) imposes a waiting period of one year before
the applicant can enjoy the benefits of the Tax Amnesty Law. It can be
surmised from the cited provisions that the law intended the immediate
enjoyment of the immunities and privileges of tax amnesty upon
fulfilment of the requirements. Further, a reading of Sections 4 and 6 of
the 2007 Tax Amnesty Law shows that Congress has adopted a "no
questions asked" policy, so long as all the requirements of the law and
the rules are satisfied. The one-year period referred to in the law should
thus be considered only as a prescriptive period within which third
parties, meaning "parties other than the BIR or its agents," can question
the SALN – not as a waiting period during which the BIR may contest
the SALN and the taxpayer prevented from enjoying the immunities and
privileges under the law.
This clarification, however, does not mean that the amnesty taxpayers
would go scot-free in case they substantially understate the amounts of
their net worth in their SALN. The 2007 Tax Amnesty Law imposes a
resolutory condition insofar as the enjoyment of immunities and
privileges under the law is concerned. Pursuant to Section 4 of the law,
third parties may initiate proceedings contesting the declared amount
of net worth of the amnesty taxpayer within one year following the date
of the filing of the tax amnesty return and the SALN. Section 6 then
states that "All these immunities and privileges shall not apply x x x
where the amount of networth as of December 31, 2005 is proven to be
understated to the extent of thirty percent (30%) or more, in accordance
with the provisions of Section 3 hereof." Accordingly, Section 10
provides that amnesty taxpayers who willfully understate their net worth
shall be (a) liable for perjury under the Revised Penal Code; and (b)
subject to immediate tax fraud investigation in order to collect all taxes
due and to criminally prosecute those found to have willfully evaded
lawful taxes due.
Nevertheless, in this case we note that the OSG has already
Indicated27 that the CIR had not filed a case relative to the tax amnesty
application of CS Garment, from the time the documents were filed in
March 2008. Neither did the OSG mention that a third party had initiated
proceedings challenging the declared amount of net worth of the
amnesty taxpayer within the one-year period.
Taxpayers with pending tax cases are still qualified to avail themselves
of the tax amnesty program.
With respect to its last assertion, the OSG quotes the following
guidelines under BIR RMC 19-2008 to establish that CS Garment is
disqualified from availing itself of the tax amnesty program:28
A BASIC GUIDE ON THE TAX AMNESTY ACT OF 2007
55

The following is a basic guide for taxpayers who wish to avail of tax
amnesty pursuant of Republic Act No. 9480 (Tax Amnesty Act of 2007).
Who may avail of the amnesty?
xxxx
EXCEPT:
[x] Withholding agents with respect to their withholding tax liabilities
[x] Those with pending cases:
Under the jurisdiction of the PCGG
Involving violations of the Anti-Graft and Corrupt Practices Act
Involving violations of the Anti-Money Laundering Law
For tax evasion and other criminal offenses under the NIRC and/or the
RPC
[x] Issues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the
taxpayer.(e.g. Taxpayers who have failed to observe or follow BOI
and/or PEZA rules on entitlement to Income Tax Holiday Incentives and
other incentives)
[x] Cases involving issues ruled with finality by the Supreme Court prior
to the effectivity of R.A. 9480 (e.g. DST on Special Savings Account)
[x] Taxes passed-on and collected from customers for remittance to the
BIR
[x] Delinquent Accounts/Accounts Receivable considered as assets of
the BIR/Government, including self-assessed tax (Emphasis supplied)
To resolve the matter, we refer to the basic text of the Tax Amnesty
Law and its implementing rules and regulations, viz:
Republic Act No. 9480
SECTION 8. Exceptions. — The tax amnesty provided in Section 5
hereof shall not extend to the following persons or cases existing as of
the effectivity of this Act:
xxxx
(f) Tax cases subject of final and executory judgment by the courts.
DOF Order No. 29-07: Rules and Regulations to Implement R.A. 9480
SECTION 5. Exceptions. — The tax amnesty shall not extend to the
following persons or cases existing as of the effectivity of R.A. 9480:
xxxx
7. Tax cases subject of final and executory judgment by the courts.
(Emphases supplied)
We cull from the aforementioned provisions that neither the law nor the
implementing rules state that a court ruling that has not attained finality
would preclude the availment of the benefits of the Tax Amnesty Law.
Both R.A. 9480 and DOF Order No. 29-07 are quite precise in declaring
that
56
"[t]ax cases subject of final and executory judgment by the courts" are
the ones excepted from the benefits of the law. In fact, we have already
pointed out the erroneous interpretation of the law in Philippine Banking
Corporation (Now: Global Business Bank, Inc.) v. Commissioner of
Internal Revenue, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court
(even without finality) in favor of the BIR prior to amnesty availment of
the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced.
RA 9480 is specifically clear that the exceptions to the tax amnesty
program include "tax cases subject of final and executory judgment by
the courts." The present case has not become final and executory when
Metrobank availed of the tax amnesty program.29 (Emphasis supplied)
While tax amnesty, similar to a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the taxing
authority,30 it is also a well-settled doctrine31 that the rule-making
power of administrative agencies cannot be extended to amend or
expand statutory requirements or to embrace matters not originally
encompassed by the law.1âwphi1 Administrative regulations should
always be in accord with the provisions of the statute they seek to carry
into effect, and any resulting inconsistency shall be resolved in favor of
the basic law. We thus definitively declare that the exception "[i]ssues
and cases which were ruled by any court (even without finality) in favor
of the BIR prior to amnesty availment of the taxpayer" under BIR RMC
19-2008 is invalid, as the exception goes beyond the scope of the
provisions of the 2007 Tax Amnesty Law.32
see any need to further discuss the issue of the deficiency tax
assessments. CS Garment is now deemed to have been absolved of
its obligations and is already immune from the payment of taxes –
including the assessed deficiency in the payment of VAT, DST, and
income tax as affirmed by the CTA en banc – as well as of the additions
thereto (e.g., interests and surcharges). Furthermore, the tax amnesty
benefits include immunity from "the appurtenant civil, criminal, or
administrative penalties under the NIRC of 1997, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable
year 2005 and prior years."33
WHEREFORE, the instant Petition for Review is GRANTED. The 14
January 2008 Decision and 2 April 2008 Resolution of the Court of Tax
Appeals en banc in CTA EB Case No. 287 is hereby SET ASIDE, and
the remaining assessments for deficiency taxes for taxable year 1998
are hereby CANCELLED solely in the light of the availment by CS
Garment, Inc. of the tax amnesty program under Republic Act No. 9480.
SO ORDERED.

Considering the completion of the aforementioned requirements, we

find that petitioner has successfully availed itself of the tax amnesty
benefits granted under the Tax Amnesty Law. Therefore, we no longer

57

14. FERRER, Jr., vs. Bautista
G.R. No. 210551, June 30, 2015
PERALTA, J.:
Before this Court is a petition for certiorari under Rule 65 of the Rules
of Court with prayer for the issuance of a temporary restraining order
(TRO) seeking to declare unconstitutional and illegal Ordinance Nos.
SP-2095, S-2011 and SP-2235, S-2013 on the Socialized Housing Tax
and Garbage Fee, respectively, which are being imposed by the
respondents.
The Case
On October 17, 2011,1 respondent Quezon City Council enacted
Ordinance No. SP-2095, S-2011,2 or the Socialized Housing Tax of
Quezon City, Section 3 of which provides:
SECTION 3. IMPOSITION. A special assessment equivalent to one-
half percent (0.5%) on the assessed value of land in excess of One
Hundred Thousand Pesos (Php100,000.00) shall be collected by the
City Treasurer which shall accrue to the Socialized Housing Programs
of the Quezon City Government. The special assessment shall accrue
to the General Fund under a special account to be established for the
purpose.
Effective for five (5) years, the Socialized Housing Tax (SHT) shall be
utilized by the Quezon City Government for the following projects: (a)
land purchase/land banking; (b) improvement of current/existing
socialized housing facilities; (c) land development; (d) construction of
core houses, sanitary cores, medium-rise buildings and other similar
structures; and (e) financing of public-private partnership agreement of
the Quezon City Government and National Housing Authority (NHA)
with the private sector.3 Under certain conditions, a tax credit shall be
enjoyed by taxpayers regularly paying the special assessment:
SECTION 7. TAX CREDIT. Taxpayers dutifully paying the special
assessment tax as imposed by this ordinance shall enjoy a tax credit.
The tax credit may be availed of only after five (5) years of continue[d]
payment. Further, the taxpayer availing this tax credit must be a
taxpayer in good standing as certified by the City Treasurer and City
Assessor.
The tax credit to be granted shall be equivalent to the total amount of
the special assessment paid by the property owner.
Furthermore, only the registered owners may avail of the tax credit and
may not be continued by the subsequent property owners even if they
are buyers in good faith, heirs or possessor of a right in whatever legal
capacity over the subject property.4
On the other hand, Ordinance No. SP-2235, S-20135 was enacted on
December 16, 2013 and took effect ten days after when it was approved
by respondent City Mayor.6 The proceeds collected from the garbage
fees on residential properties shall be deposited solely and exclusively
in an earmarked special account under the general fund to be utilized
for garbage collections.7 Section 1 of the Ordinance set forth the
schedule and manner for the collection of garbage fees:
SECTION 1. The City Government of Quezon City in conformity with
and in relation to Republic Act No. 7160, otherwise known as the Local
Government Code of 1991 HEREBY IMPOSES THE FOLLOWING
SCHEDULE AND MANNER FOR THE ANNUAL COLLECTION OF
GARBAGE FEES, AS FOLLOWS:
58
On high-rise Condominium Units
a) High-rise Condominium � The Homeowners Association of high-
rise condominiums shall pay the annual garbage fee on the total size
of the entire condominium and socialized Housing Unit and an
additional garbage fee shall be collected based on area occupied for
every unit already sold or being amortized.
b) High-rise apartment units � Owners of high-rise apartment units
shall pay the annual garbage fee on the total lot size of the entire
apartment and an additional garbage fee based on the schedule
prescribed herein for every unit occupied.
The collection of the garbage fee shall accrue on the first day of January
and shall be paid simultaneously with the payment of the real property
tax, but not later than the first quarter installment.8 In case a household
owner refuses to pay, a penalty of 25% of the garbage fee due, plus an
interest of 2% per month or a fraction thereof, shall be charged.
Petitioner alleges that he is a registered co-owner of a 371-square-
meter residential property in Quezon City which is covered by Transfer
Certificate of Title (TCT) No. 216288, and that, on January 7, 2014, he
paid his realty tax which already included the garbage fee in the sum of
Php100.0.
The instant petition was filed on January 17, 2014. We issued a TRO
on February 5, 2014, which enjoined the enforcement of Ordinance
Nos. SP-2095 and SP-2235 and required respondents to comment on
the petition without necessarily giving due course thereto.
Respondents filed their Comment12 with urgent motion to dissolve the
TRO on February 17, 2014. Thereafter, petitioner filed a Reply and a
Memorandum on March 3, 2014 and September 8, 2014, respectively.
Procedural Matters
A.Propriety of a Petition for Certiorari
Respondents are of the view that this petition for certiorari is improper
since they are not tribunals, boards or officers exercising judicial or
quasi-judicial functions. Petitioner, however, counters that in enacting
Ordinance Nos. SP-2095 and SP-2235, the Quezon City Council
exercised quasi-judicial function because the ordinances ruled against
the property owners who must pay the SHT and the garbage fee,
exacting from them funds for basic essential public services that they
should not be held liable. Even if a Rule 65 petition is improper,
petitioner still asserts that this Court, in a number of cases like in
Rosario v. Court of Appeals,13 has taken cognizance of an improper
remedy in the interest of justice.
We agree that respondents neither acted in any judicial or quasi-judicial
capacity nor arrogated unto themselves any judicial or quasi-judicial
prerogatives.
A respondent is said to be exercising judicial function where he has the
power to determine what the law is and what the legal rights of the
parties are, and then undertakes to determine these questions and
adjudicate upon the rights of the parties.
Quasi-judicial function, on the other hand, is �a term which applies
to the actions, discretion, etc., of public administrative officers or bodies
required to investigate facts or ascertain the existence of facts, hold
hearings, and draw conclusions from them as a basis for their official
action and to exercise discretion of a judicial nature.�
59
Before a tribunal, board, or officer may exercise judicial or quasi-judicial
acts, it is necessary that there be a law that gives rise to some specific
rights of persons or property under which adverse claims to such rights
are made, and the controversy ensuing therefrom is brought before a
tribunal, board, or officer clothed with power and authority to determine
the law and adjudicate the respective rights of the contending parties.14
For a writ of certiorari to issue, the following requisites must concur: (1)
it must be directed against a tribunal, board, or officer exercising judicial
or quasi-judicial functions; (2) the tribunal, board, or officer must have
acted without or in excess of jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction; and (3) there is
no appeal or any plain, speedy, and adequate remedy in the ordinary
course of law. The enactment by the Quezon City Council of the
assailed ordinances was done in the exercise of its legislative, not
judicial or quasi-judicial, function. Under Republic Act (R.A.) No. 7160,
or the Local Government Code of 1991 (LGC), local legislative power
shall be exercised by the Sangguniang Panlungsod for the city.15 Said
law likewise is specific in providing that the power to impose a tax, fee,
or charge, or to generate revenue shall be exercised by the sanggunian
of the local government unit concerned through an appropriate
ordinance.
Also, although the instant petition is styled as a petition for certiorari, it
essentially seeks to declare the unconstitutionality and illegality of the
questioned ordinances. It, thus, partakes of the nature of a petition for
declaratory relief over which this Court has only appellate, not original,
jurisdiction.
Despite these, a petition for declaratory relief may be treated as one for
prohibition or mandamus, over which We exercise original jurisdiction,
in cases with far-reaching implications or one which raises
transcendental issues or questions that need to be resolved for the
public good.18 The judicial policy is that this Court will entertain direct
resort to it when the redress sought cannot be obtained in the proper
courts or when exceptional and compelling circumstances warrant
availment of a remedy within and calling for the exercise of Our primary
jurisdiction.
Section 2, Rule 65 of the Rules of Court lay down under what
circumstances a petition for prohibition may be filed:
SEC. 2. Petition for prohibition. - When the proceedings of any tribunal,
corporation, board, officer or person, whether exercising judicial, quasi-
judicial or ministerial functions, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion amounting to lack or
excess of jurisdiction, and there is no appeal or any other plain, speedy,
and adequate remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging the facts
with certainty and praying that judgment be rendered commanding the
respondent to desist from further proceeding in the action or matter
specified therein, or otherwise granting such incidental reliefs as law
and justice may require.
In a petition for prohibition against any tribunal, corporation, board, or
person � whether exercising judicial, quasi-judicial, or ministerial
functions � who has acted without or in excess of jurisdiction or with
grave abuse of discretion, the petitioner prays that judgment be
rendered, commanding the respondents to desist from further
proceeding in the action or matter specified in the petition. In this case,
petitioner's primary intention is to prevent respondents from
implementing Ordinance Nos. SP-2095 and SP-2235. Obviously, the
writ being sought is in the nature of a prohibition, commanding
desistance.
60
We consider that respondents City Mayor, City Treasurer, and City
Assessor are performing ministerial functions. A ministerial function is
one that an officer or tribunal performs in the context of a given set of
facts, in a prescribed manner and without regard for the exercise of his
or its own judgment, upon the propriety or impropriety of the act
done.20 Respondent Mayor, as chief executive of the city government,
exercises such powers and performs such duties and functions as
provided for by the LGC and other laws.21
Particularly, he has the duty to ensure that all taxes and other revenues
of the city are collected, and that city funds are applied to the payment
of expenses and settlement of obligations of the city, in accordance with
law or ordinance.22 On the other hand, under the LGC, all local taxes,
fees, and charges shall be collected by the provincial, city, municipal,
or barangay treasurer, or their duly-authorized deputies, while the
assessor shall take charge, among others, of ensuring that all laws and
policies governing the appraisal and assessment of real properties for
taxation purposes are properly executed.23 Anent the SHT, the
Department of Finance (DOF) Local Finance Circular No. 1-97, dated
April 16, 1997, is more specific:
6.3 The Assessorï office of the Id.ntified LGU shall:
immediately undertake an inventory of lands within its jurisdiction which
shall be subject to the levy of the Social Housing Tax (SHT) by the local
sanggunian concerned;
inform the affected registered owners of the effectivity of the SHT; a list
of the lands and registered owners shall also be posted in 3
conspicuous places in the city/municipality;
furnish the Treasurer�s office and the local sanggunian concerned
of the list of lands affected;
6.4 The Treasurer�s office shall:
collect the Social Housing Tax on top of the Real Property Tax, SEF
Tax and other special assessments;
report to the DOF, thru the Bureau of Local Government Finance, and
the Mayor�s office the monthly collections on Social Housing Tax
(SHT). An annual report should likewise be submitted to the HUDCC
on the total revenues raised during the year pursuant to Sec. 43, R.A.
7279 and the manner in which the same was disbursed.
Petitioner has adduced special and important reasons as to why direct
recourse to Us should be allowed. Aside from presenting a novel
question of law, this case calls for immediate resolution since the
challenged ordinances adversely affect the property interests of all
paying constituents of Quezon City. As well, this petition serves as a
test case for the guidance of other local government units (LGUs).
Indeed, the petition at bar is of transcendental importance warranting a
relaxation of the doctrine of hierarchy of courts. In Social Justice
Society (SJS) Officers, et al. v. Lim,24 the Court cited the case of
Senator Jaworski v. Phil. Amusement & Gaming Corp.,25 where We
ratiocinated:
Granting arguendo that the present action cannot be properly treated
as a petition for prohibition, the transcendental importance of the issues
involved in this case warrants that we set aside the technical defects
and take primary jurisdiction over the petition at bar. x x x This is in
accordance with the well-entrenched principle that rules of procedure
are not inflexible tools designed to hinder or delay, but to facilitate and
promote the administration of justice. Their strict and rigid application,
which would result in technicalities that tend to frustrate, rather than
promote substantial justice, must always be eschewed.26
61
B.Locus Standi of Petitioner
Respondents challenge petitioner�s legal standing to file this case
on the ground that, in relation to Section 3 of Ordinance No. SP-2095,
petitioner failed to allege his ownership of a property that has an
assessed value of more than Php100,000.00 and, with respect to
Ordinance No. SP-2335, by what standing or personality he filed the
case to nullify the same. According to respondents, the petition is not a
class suit, and that, for not having specifically alleged that petitioner
filed the case as a taxpayer, it could only be surmised whether he is a
party-in-interest who stands to be directly benefited or injured by the
judgment in this case.
It is a general rule that every action must be prosecuted or defended in
the name of the real party-in-interest, who stands to be benefited or
injured by the judgment in the suit, or the party entitled to the avails of
the suit.
Jurisprudence defines interest as "material interest, an interest in issue
and to be affected by the decree, as distinguished from mere interest
in the question involved, or a mere incidental interest. By real interest
is meant a present substantial interest, as distinguished from a mere
expectancy or a future, contingent, subordinate, or consequential
interest." "To qualify a person to be a real party-in-interest in whose
name an action must be prosecuted, he must appear to be the present
real owner of the right sought to be enforced."27
Legal standing� or locus standi calls for more than just a generalized
grievance.28 The concept has been defined as a personal and
substantial interest in the case such that the party has sustained or will
sustain direct injury as a result of the governmental act that is being
challenged.29 The gist of the question of standing is whether a party
alleges such personal stake in the outcome of the controversy as to
assure that concrete adverseness which sharpens the presentation of
issues upon which the court depends for illumination of difficult
constitutional questions.
A party challenging the constitutionality of a law, act, or statute must
show �not only that the law is invalid, but also that he has sustained
or is in immediate, or imminent danger of sustaining some direct injury
as a result of its enforcement, and not merely that he suffers thereby in
some indefinite way.� It must be shown that he has been, or is about
to be, denied some right or privilege to which he is lawfully entitled, or
that he is about to be subjected to some burdens or penalties by reason
of the statute complained of.
Tested by the foregoing, petitioner in this case clearly has legal
standing to file the petition. He is a real party-in-interest to assail the
constitutionality and legality of Ordinance Nos. SP-2095 and SP-2235
because respondents did not dispute that he is a registered co-owner
of a residential property in Quezon City and that he paid property tax
which already included the SHT and the garbage fee. He has
substantial right to seek a refund of the payments he made and to stop
future imposition. While he is a lone petitioner, his cause of action to
declare the validity of the subject ordinances is substantial and of
paramount interest to similarly situated property owners in Quezon City.
C.Litis Pendentia
Respondents move for the dismissal of this petition on the ground of
litis pendentia. They claim that, as early as February 22, 2012, a case
entitled Alliance of Quezon City Homeowners, Inc., et al., v. Hon.
Herbert Bautista, et al., docketed as Civil Case No. Q-12-7-820, has
been pending in the Quezon City Regional Trial Court, Branch 104,
which assails the legality of Ordinance No. SP-2095. Relying on City of
Makati, et al. v. Municipality (now City) of Taguig, et al.,32 respondents
62
assert that there is substantial identity of parties between the two cases
because petitioner herein and plaintiffs in the civil case filed their
respective cases as taxpayers of Quezon City.
For petitioner, however, respondents� contention is untenable since
he is not a party in Alliance and does not even have the remotest
identity or association with the plaintiffs in said civil case. Moreover,
respondents� arguments would deprive this Court of its jurisdiction
to determine the constitutionality of laws under Section 5, Article VIII of
the 1987 Constitution.
Litis pendentia is a Latin term which literally means �a pending
suit� and is variously referred to in some decisions as lis pendens
and auter action pendant.34 While it is normally connected with the
control which the court has on a property involved in a suit during the
continuance proceedings, it is more interposed as a ground for the
dismissal of a civil action pending in court.35 In Film Development
Council of the Philippines v. SM Prime Holdings, Inc.,36 We elucidated:
Litis pendentia, as a ground for the dismissal of a civil action, refers to
a situation where two actions are pending between the same parties for
the same cause of action, so that one of them becomes unnecessary
and vexatious. It is based on the policy against multiplicity of suit and
authorizes a court to dismiss a case motu proprio.
xxxx
The requisites in order that an action may be dismissed on the ground
of litis pendentia are: (a) the identity of parties, or at least such as
representing the same interest in both actions; (b) the identity of rights
asserted and relief prayed for, the relief being founded on the same
facts, and (c) the identity of the two cases such that judgment in one,
regardless of which party is successful, would amount to res judicata in
the other.
xxxx
The underlying principle of litis pendentia is the theory that a party is
not allowed to vex another more than once regarding the same subject
matter and for the same cause of action. This theory is founded on the
public policy that the same subject matter should not be the subject of
controversy in courts more than once, in order that possible conflicting
judgments may be avoided for the sake of the stability of the rights and
status of persons, and also to avoid the costs and expenses incident to
numerous suits.
Among the several tests resorted to in ascertaining whether two suits
relate to a single or common cause of action are: (1) whether the same
evidence would support and sustain both the first and second causes
of action; and (2) whether the defenses in one case may be used to
substantiate the complaint in the other.
The determination of whether there is an identity of causes of action for
purposes of litis pendentia is inextricably linked with that of res judicata,
each constituting an element of the other. In either case, both relate to
the sound practice of including, in a single litigation, the disposition of
all issues relating to a cause of action that is before a court.37
There is substantial identity of the parties when there is a community of
interest between a party in the first case and a party in the second case
albeit the latter was not impleaded in the first case.38 Moreover, the
fact that the positions of the parties are reversed, i.e., the plaintiffs in
the first case are the defendants in the second case or vice-versa, does
not negate the identity of parties for purposes of determining whether
the case is dismissible on the ground of litis pendentia.
63
In this case, it is notable that respondents failed to attach any pleading
connected with the alleged civil case pending before the Quezon City
trial court. Granting that there is substantial identity of parties between
said case and this petition, dismissal on the ground of litis pendentia
still cannot be had in view of the absence of the second and third
requisites. There is no way for Us to determine whether both cases are
based on the same set of facts that require the presentation of the same
evidence. Even if founded on the same set of facts, the rights asserted
and reliefs prayed for could be different. Moreover, there is no basis to
rule that the two cases are intimately related and/or intertwined with one
another such that the judgment that may be rendered in one, regardless
of which party would be successful, would amount to res judicata in the
other.
D. Failure to Exhaust Administrative Remedies
Respondents contend that petitioner failed to exhaust administrative
remedies for his non-compliance with Section 187 of the LGC, which
mandates:
Section 187. Procedure for Approval and Effectivity of Tax Ordinances
and Revenue Measures; Mandatory Public Hearings. � The
procedure for approval of local tax ordinances and revenue measures
shall be in accordance with the provisions of this Code: Provided, That
public hearings shall be conducted for the purpose prior to the
enactment thereof:
Provided, further, That any question on the constitutionality or legality
of tax ordinances or revenue measures may be raised on appeal within
thirty (30) days from the effectivity thereof to the Secretary of Justice
who shall render a decision within sixty (60) days from the date of
receipt of the appeal: Provided, however, That such appeal shall not
have the effect of suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee, or charge levied therein: Provided,
finally, That within thirty (30) days after receipt of the decision or the
lapse of the sixty-day period without the Secretary of Justice acting
upon the appeal, the aggrieved party may file appropriate proceedings
with a court of competent jurisdiction.
The provision, the constitutionality of which was sustained in Drilon v.
Lim,40 has been construed as mandatory41 considering that �
A municipal tax ordinance empowers a local government unit to impose
taxes. The power to tax is the most effective instrument to raise needed
revenues to finance and support the myriad activities of local
government units for the delivery of basic services essential to the
promotion of the general welfare and enhancement of peace, progress,
and prosperity of the people. Consequently, any delay in implementing
tax measures would be to the detriment of the public. It is for this reason
that protests over tax ordinances are required to be done within certain
time frames. x x x.42
The obligatory nature of Section 187 was underscored in Hagonoy
Market Vendor Asso. v. Municipality of Hagonoy:
x x x [T]he timeframe fixed by law for parties to avail of their legal
remedies before competent courts is not a �mere technicality�
that can be easily brushed aside. The periods stated in Section 187 of
the Local Government Code are mandatory. x x x Being its lifeblood,
collection of revenues by the government is of paramount importance.
The funds for the operation of its agencies and provision of basic
services to its inhabitants are largely derived from its revenues and
collections. Thus, it is essential that the validity of revenue measures is
not left uncertain for a considerable length of time. Hence, the law
provided a time limit for an aggrieved party to assail the legality of
revenue measures and tax ordinances.�44
64
Despite these cases, the Court, in Ongsuco, et al. v. Hon. Malones,45
held that there was no need for petitioners therein to exhaust
administrative remedies before resorting to the courts, considering that
there was only a pure question of law, the parties did not dispute any
factual matter on which they had to present evidence. Likewise, in
Cagayan Electric Power and Light Co., Inc. v. City of Cagayan de
Oro,46 We relaxed the application of the rules in view of the more
substantive matters. For the same reasons, this petition is an exception
to the general rule.
Substantive Issue
Petitioner asserts that the protection of real properties from informal
settlers and the collection of garbage are basic and essential duties and
functions of the Quezon City Government. By imposing the SHT and
the garbage fee, the latter has shown a penchant and pattern to collect
taxes to pay for public services that could be covered by its revenues
from taxes imposed on property, idle land, business, transfer,
amusement, etc., as well as the Internal Revenue Allotment (IRA) from
the National Government. For petitioner, it is noteworthy that
respondents did not raise the issue that the Quezon City Government
is in dire financial state and desperately needs money to fund housing
for informal settlers and to pay for garbage collection. In fact, it has not
denied that its revenue collection in 2012 is in the sum of P13.69 billion.
Moreover, the imposition of the SHT and the garbage fee cannot be
justified by the Quezon City Government as an exercise of its power to
create sources of income under Section 5, Article X of the 1987
Constitution.47 According to petitioner, the constitutional provision is
not a carte blanche for the LGU to tax everything under its territorial and
political jurisdiction as the provision itself admits of guidelines and
limitations.
Petitioner further claims that the annual property tax is an ad valorem
tax, a percentage of the assessed value of the property, which is
subject to revision every three (3) years in order to reflect an increase
in the market value of the property. The SHT and the garbage fee are
actually increases in the property tax which are not based on the
assessed value of the property or its reassessment every three years;
hence, in violation of Sections 232 and 233 of the LGC.
For their part, respondents relied on the presumption in favor of the
constitutionality of Ordinance Nos. SP-2095 and SP-2235, invoking
Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,49People v.
Siton, et al.,50 and Hon. Ermita v. Hon. Aldecoa-Delorino.51 They
argue that the burden of establishing the invalidity of an ordinance rests
heavily upon the party challenging its constitutionality. They insist that
the questioned ordinances are proper exercises of police power similar
to Telecom. & Broadcast Attys. of the Phils., Inc. v. COMELEC52 and
Social Justice Society (SJS), et al. v. Hon. Atienza, Jr.53 and that their
enactment finds basis in the social justice principle enshrined in Section
9,54 Article II of the 1987 Constitution.
As to the issue of publication, respondents argue that where the law
provides for its own effectivity, publication in the Official Gazette is not
necessary so long as it is not punitive in character, citing Balbuna, et
al. v. Hon. Secretary of Education, et al.55 and Askay v. Cosalan.56
Thus, Ordinance No. SP-2095 took effect after its publication, while
Ordinance No. SP-2235 became effective after its approval on
December 26, 2013.
Additionally, the parties articulate the following positions:
On the Socialized Housing Tax
65
Respondents emphasize that the SHT is pursuant to the social justice
principle found in Sections 1 and 2, Article XIII57 of the 1987
Constitution and Sections 2 (a)58 and 4359 of R.A. No. 7279, or the
�Urban Development and Housing Act of 1992 (UDHA).
Relying on Manila Race Horse Trainers Assn., Inc. v. De La Fuente,60
and Victorias Milling Co., Inc. v. Municipality of Victorias, etc.,61
respondents assert that Ordinance No. SP-2095 applies equally to all
real property owners without discrimination. There is no way that the
ordinance could violate the equal protection clause because real
property owners and informal settlers do not belong to the same class.
Ordinance No. SP-2095 is also not oppressive since the tax rate being
imposed is consistent with the UDHA. While the law authorizes LGUs
to collect SHT on properties with an assessed value of more than
P50,000.00, the questioned ordinance only covers properties with an
assessed value exceeding P100,000.00. As well, the ordinance
provides for a tax credit equivalent to the total amount of the special
assessment paid by the property owner beginning in the sixth (6th) year
of the effectivity of the ordinance.
On the contrary, petitioner claims that the collection of the SHT is
tantamount to a penalty imposed on real property owners due to the
failure of respondent Quezon City Mayor and Council to perform their
duty to secure and protect real property owners from informal settlers,
thereby burdening them with the expenses to provide funds for housing.
For petitioner, the SHT cannot be viewed as a �charity� from real
property owners since it is forced, not voluntary.
Also, petitioner argues that the collection of the SHT is a kind of class
legislation that violates the right of property owners to equal protection
of the laws since it favors informal settlers who occupy property not their
own and pay no taxes over law-abiding real property owners who pay
income and realty taxes.
Petitioner further contends that respondents� characterization of the
SHT as �nothing more than an advance payment on the real
property tax� has no statutory basis. Allegedly, property tax cannot
be collected before it is due because, under the LGC, chartered cities
are authorized to impose property tax based on the assessed value and
the general revision of assessment that is made every three (3) years.
As to the rationale of SHT stated in Ordinance No. SP-2095, which, in
turn, was based on Section 43 of the UDHA, petitioner asserts that
there is no specific provision in the 1987 Constitution stating that the
ownership and enjoyment of property bear a social function. And even
if there is, it is seriously doubtful and far-fetched that the principle
means that property owners should provide funds for the housing of
informal settlers and for home site development. Social justice and
police power, petitioner believes, does not mean imposing a tax on one,
or that one has to give up something, for the benefit of another. At best,
the principle that property ownership and enjoyment bear a social
function is but a reiteration of the Civil Law principle that property should
not be enjoyed and abused to the injury of other properties and the
community, and that the use of the property may be restricted by police
power, the exercise of which is not involved in this case.
Finally, petitioner alleges that 6 Bistekvilles will be constructed out of
the SHT collected. Bistek is the monicker of respondent City Mayor.
The Bistekvilles makes it clear, therefore, that politicians will take the
credit for the tax imposed on real property owners.
On the Garbage Fee
66
Respondents claim that Ordinance No. S-2235, which is an exercise of
police power, collects on the average from every household a garbage
fee in the meager amount of thirty-three (33) centavos per day
compared with the sum of P1,659.83 that the Quezon City Government
annually spends for every household for garbage collection and waste
management
In addition, there is no double taxation because the ordinance involves
a fee. Even assuming that the garbage fee is a tax, the same cannot
be a direct duplicate tax as it is imposed on a different subject matter
and is of a different kind or character. Based on Villanueva, et al. v. City
of Iloilo63 and Victorias Milling Co., Inc. v. Municipality of Victorias,
etc.,64 there is no �taxing twice� because the real property tax is
imposed on ownership based on its assessed value, while the garbage
fee is required on the domestic household. The only reference to the
property is the determination of the applicable rate and the facility of
collection.
Petitioner argues, however, that Ordinance No. S-2235 cannot be
justified as an exercise of police power. The cases of Calalang v.
Williams,65Patalinghug v. Court of Appeals,66 and Social Justice
Society (SJS), et al. v. Hon. Atienza, Jr.,67 which were cited by
respondents, are inapplicable since the assailed ordinance is a revenue
measure and does not regulate the disposal or other aspect of garbage.
The subject ordinance, for petitioner, is discriminatory as it collects
garbage fee only from domestic households and not from restaurants,
food courts, fast food chains, and other commercial dining places that
spew garbage much more than residential property owners.
Petitioner likewise contends that the imposition of garbage fee is
tantamount to double taxation because garbage collection is a basic
and essential public service that should be paid out from property tax,
business tax, transfer tax, amusement tax, community tax certificate,
other taxes, and the IRA of the Quezon City Government. To bolster
the claim, he states that the revenue collection of the Quezon City
Government reached Php13.69 billion in 2012. A small portion of said
amount could be spent for garbage collection and other essential
services.
It is further noted that the Quezon City Government already collects
garbage fee under Section 4768 of R.A. No. 9003, or the Ecological
Solid Waste Management Act of 2000, which authorizes LGUs to
impose fees in amounts sufficient to pay the costs of preparing,
adopting, and implementing a solid waste management plan, and that
LGUs have access to the Solid Waste Management (SWM) Fund
created under Section 4669 of the same law. Also, according to
petitioner, it is evident that Ordinance No. S-2235 is inconsistent with
R.A. No. 9003 for while the law encourages segregation, composting,
and recycling of waste, the ordinance only emphasizes the collection
and payment of garbage fee; while the law calls for an active
involvement of the barangay in the collection, segregation, and
recycling of garbage, the ordinance skips such mandate.
Lastly, in challenging the ordinance, petitioner avers that the garbage
fee was collected even if the required publication of its approval had not
yet elapsed. He notes that on January 7, 2014, he paid his realty tax
which already included the garbage fee.
The Court
Respondents correctly argued that an ordinance, as in every law, is
presumed valid.
An ordinance carries with it the presumption of validity. The question of
reasonableness though is open to judicial inquiry. Much should be left
67
thus to the discretion of municipal authorities. Courts will go slow in
writing off an ordinance as unreasonable unless the amount is so
excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or
confiscatory. A rule which has gained acceptance is that factors
relevant to such an inquiry are the municipal conditions as a whole and
the nature of the business made subject to imposition.70
For an ordinance to be valid though, it must not only be within the
corporate powers of the LGU to enact and must be passed according
to the procedure prescribed by law, it should also conform to the
following requirements: (1) not contrary to the Constitution or any
statute; (2) not unfair or oppressive; (3) not partial or discriminatory; (4)
not prohibit but may regulate trade; (5) general and consistent with
public policy; and (6) not unreasonable.71 As jurisprudence indicates,
the tests are divided into the formal (i.e., whether the ordinance was
enacted within the corporate powers of the LGU and whether it was
passed in accordance with the procedure prescribed by law), and the
substantive (i.e., involving inherent merit, like the conformity of the
ordinance with the limitations under the Constitution and the statutes,
as well as with the requirements of fairness and reason, and its
consistency with public policy).
An ordinance must pass muster under the test of constitutionality and
the test of consistency with the prevailing laws.73 If not, it is void.74
Ordinance should uphold the principle of the supremacy of the
Constitution.75 As to conformity with existing statutes, Batangas CATV,
Inc. v. Court of Appeals76 has this to say:
It is a fundamental principle that municipal ordinances are inferior in
status and subordinate to the laws of the state. An ordinance in conflict
with a state law of general character and statewide application is
universally held to be invalid. The principle is frequently expressed in
the declaration that municipal authorities, under a general grant of
power, cannot adopt ordinances which infringe the spirit of a state law
or repugnant to the general policy of the state. In every power to pass
ordinances given to a municipality, there is an implied restriction that
the ordinances shall be consistent with the general law. In the language
of Justice Isagani Cruz (ret.), this Court, in Magtajas vs. Pryce
Properties Corp., Inc., ruled that:
The rationale of the requirement that the ordinances should not
contravene a statute is obvious. Municipal governments are only agents
of the national government. Local councils exercise only delegated
legislative powers conferred on them by Congress as the national
lawmaking body. The delegate cannot be superior to the principal or
exercise powers higher than those of the latter. It is a heresy to suggest
that the local government units can undo the acts of Congress, from
which they have derived their power in the first place, and negate by
mere ordinance the mandate of the statute.
Municipal corporations owe their origin to, and derive their powers and
rights wholly from the legislature. It breathes into them the breath of life,
without which they cannot exist. As it creates, so it may destroy. As it
may destroy, it may abridge and control. Unless there is some
constitutional limitation on the right, the legislature might, by a single
act, and if we can suppose it capable of so great a folly and so great a
wrong, sweep from existence all of the municipal corporations in the
State, and the corporation could not prevent it. We know of no limitation
on the right so far as to the corporation themselves are concerned.
They are, so to phrase it, the mere tenants at will of the legislature.
This basic relationship between the national legislature and the local
government units has not been enfeebled by the new provisions in the
Constitution strengthening the policy of local autonomy. Without
68
meaning to detract from that policy, we here confirm that Congress
retains control of the local government units although in significantly
reduced degree now than under our previous Constitutions. The power
to create still includes the power to destroy. The power to grant still
includes the power to withhold or recall. True, there are certain notable
innovations in the Constitution, like the direct conferment on the local
government units of the power to tax, which cannot now be withdrawn
by mere statute. By and large, however, the national legislature is still
the principal of the local government units, which cannot defy its will or
modify or violate it.77
LGUs must be reminded that they merely form part of the whole; that
the policy of ensuring the autonomy of local governments was never
intended by the drafters of the 1987 Constitution to create an imperium
in imperio and install an intra-sovereign political subdivision
independent of a single sovereign state.78 �[M]unicipal corporations
are bodies politic and corporate, created not only as local units of local
self-government, but as governmental agencies of the state. The
legislature, by establishing a municipal corporation, does not divest the
State of any of its sovereignty; absolve itself from its right and duty to
administer the public affairs of the entire state; or divest itself of any
power over the inhabitants of the district which it possesses before the
charter was granted.�
LGUs are able to legislate only by virtue of a valid delegation of
legislative power from the national legislature; they are mere agents
vested with what is called the power of subordinate legislation.80
�Congress enacted the LGC as the implementing law for the
delegation to the various LGUs of the State�s great powers, namely:
the police power, the power of eminent domain, and the power of
taxation. The LGC was fashioned to delineate the specific parameters
and limitations to be complied with by each LGU in the exercise of these
delegated powers with the view of making each LGU a fully functioning
subdivision of the State subject to the constitutional and statutory
limitations.�
Specifically, with regard to the power of taxation, it is indubitably the
most effective instrument to raise needed revenues in financing and
supporting myriad activities of the LGUs for the delivery of basic
services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people.82 As
this Court opined in National Power Corp. v. City of Cabanatuan:
In recent years, the increasing social challenges of the times expanded
the scope of state activity, and taxation has become a tool to realize
social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare
and similar objectives. Taxation assumes even greater significance
with the ratification of the 1987 Constitution. Thenceforth, the power to
tax is no longer vested exclusively on Congress; local legislative bodies
are now given direct authority to levy taxes, fees and other charges
pursuant to Article X, Section 5 of the 1987 Constitution, viz:
�Section 5. Each Local Government unit shall have the power to
create its own sources of revenue, to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the local governments.�
This paradigm shift results from the realization that genuine
development can be achieved only by strengthening local autonomy
and promoting decentralization of governance. For a long time, the
country�s highly centralized government structure has bred a culture
of dependence among local government leaders upon the national
leadership. It has also �dampened the spirit of initiative, innovation
69
and imaginative resilience in matters of local development on the part
of local government leaders.�
The only way to shatter this culture of dependence is to give the LGUs
a wider role in the delivery of basic services, and confer them sufficient
powers to generate their own sources for the purpose. To achieve this
goal, Section 3 of Article X of the 1987 Constitution mandates Congress
to enact a local government code that will, consistent with the basic
policy of local autonomy, set the guidelines and limitations to this grant
of taxing powers x x x84
Fairly recently, We also stated in Pelizloy Realty Corporation v.
Province of Benguet85 that:
The rule governing the taxing power of provinces, cities, municipalities
and barangays is summarized in Icard v. City Council of Baguio:
It is settled that a municipal corporation unlike a sovereign state is
clothed with no inherent power of taxation. The charter or statute must
plainly show an intent to confer that power or the municipality, cannot
assume it. And the power when granted is to be construed in strictissimi
juris. Any doubt or ambiguity arising out of the term used in granting
that power must be resolved against the municipality. Inferences,
implications, deductions � all these � have no place in the
interpretation of the taxing power of a municipal corporation.
[Underscoring supplied]
xxxx
Per Section 5, Article X of the 1987 Constitution, �the power to tax
is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges.�
Nevertheless, such authority is �subject to such guidelines and
limitations as the Congress may provide.�
In conformity with Section 3, Article X of the 1987 Constitution,
Congress enacted Republic Act No. 7160, otherwise known as the
Local Government Code of 1991. Book II of the LGC governs local
taxation and fiscal matters.86
Indeed, LGUs have no inherent power to tax except to the extent that
such power might be delegated to them either by the basic law or by
the statute.87 �Under the now prevailing Constitution, where there
is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist although Congress may provide statutory limitations
and guidelines.
The basic rationale for the current rule is to safeguard the viability and
self-sufficiency of local government units by directly granting them
general and broad tax powers. Nevertheless, the fundamental law did
not intend the delegation to be absolute and unconditional; the
constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more autonomous,
the legislature must still see to it that (a) the taxpayer will not be over-
burdened or saddled with multiple and unreasonable impositions; (b)
each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be
unduly disturbed; and (d) local taxation will be fair, uniform, and just.
Subject to the provisions of the LGC and consistent with the basic policy
of local autonomy, every LGU is now empowered and authorized to
create its own sources of revenue and to levy taxes, fees, and charges
which shall accrue exclusively to the local government unit as well as
to apply its resources and assets for productive, developmental, or
welfare purposes, in the exercise or furtherance of their governmental
or proprietary powers and functions.89 The relevant provisions of the
70
LGC which establish the parameters of the taxing power of the LGUs
are as follows:
SECTION 130. Fundamental Principles. � The following
fundamental principles shall govern the exercise of the taxing and other
revenue-raising powers of local government units:
(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based as far as practicable on the taxpayer�s
ability to pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
(4) not be contrary to law, public policy, national economic policy, or in
restraint of trade;
(c) The collection of local taxes, fees, charges and other impositions
shall in no case be let to any private person;
(d) The revenue collected pursuant to the provisions of this Code shall
inure solely to the benefit of, and be subject to the disposition by, the
local government unit levying the tax, fee, charge or other imposition
unless otherwise specifically provided herein; and,
(e) Each local government unit shall, as far as practicable, evolve a
progressive system of taxation.
SECTION 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:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions
mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on
wharves, tonnage dues, and all other kinds of customs fees, charges
and dues except wharfage on wharves constructed and maintained by
the local government unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees, or charges in any form whatsoever
upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of
Investments as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges
or similar transactions on goods or services except as otherwise
provided herein;
71
(j) Taxes on the gross receipts of transportation contractors and
persons engaged in the transportation of passengers or freight by hire
and common carriers by air, land or water, except as provided in this
Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession
(l) Taxes, fees or charges for the registration of motor vehicles and for
the issuance of all kinds of licenses or permits for the driving thereof,
except tricycles;
(m) Taxes, fees, or other charges on Philippine products actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the �Cooperative Code of the Philippines�
respectively; and
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units.
SECTION 151. Scope of Taxing Powers. � Except as otherwise
provided in this Code, the city, may levy the taxes, fees, and charges
which the province or municipality may impose: Provided, however,
That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them and
distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum
rates allowed for the province or municipality by not more than fifty
percent (50%) except the rates of professional and amusement taxes.
SECTION 186. Power To Levy Other Taxes, Fees or Charges. �
Local government units may exercise the power to levy taxes, fees or
charges on any base or subject not otherwise specifically enumerated
herein or taxed under the provisions of the National Internal Revenue
Code, as amended, or other applicable laws: Provided, That the taxes,
fees, or charges shall not be unjust, excessive, oppressive, confiscatory
or contrary to declared national policy: Provided, further, That the
ordinance levying such taxes, fees or charges shall not be enacted
without any prior public hearing conducted for the purpose.
On the Socialized Housing Tax
Contrary to petitioner�s submission, the 1987 Constitution explicitly
espouses the view that the use of property bears a social function and
that all economic agents shall contribute to the common good.90 The
Court already recognized this in Social Justice Society (SJS), et al. v.
Hon. Atienza, Jr.:
Property has not only an individual function, insofar as it has to provide
for the needs of the owner, but also a social function insofar as it has
to provide for the needs of the other members of society. The principle
is this:
Police power proceeds from the principle that every holder of property,
however absolute and unqualified may be his title, holds it under the
implied liability that his use of it shall not be injurious to the equal
enjoyment of others having an equal right to the enjoyment of their
property, nor injurious to the right of the community. Rights of property,
like all other social and conventional rights, are subject to reasonable
limitations in their enjoyment as shall prevent them from being injurious,
and to such reasonable restraints and regulations established by law
as the legislature, under the governing and controlling power vested in
them by the constitution, may think necessary and expedient.92
72
Police power, which flows from the recognition that salus populi est
suprema lex (the welfare of the people is the supreme law), is the
plenary power vested in the legislature to make statutes and ordinances
to promote the health, morals, peace, education, good order or safety
and general welfare of the people.93 Property rights of individuals may
be subjected to restraints and burdens in order to fulfill the objectives
of the government in the exercise of police power. 94 In this jurisdiction,
it is well-entrenched that taxation may be made the implement of the
state�s police power.
Ordinance No. SP-2095 imposes a Socialized Housing Tax equivalent
to 0.5% on the assessed value of land in excess of Php100,000.00.
This special assessment is the same tax referred to in R.A. No. 7279
or the UDHA.96 The SHT is one of the sources of funds for urban
development and housing program.97 Section 43 of the law provides:
Sec. 43. Socialized Housing Tax. ïConsistent with the constitutional
principle that the ownership and enjoyment of property bear a social
function and to raise funds for the Program, all local government units
are hereby authorized to impose an additional one-half percent (0.5%)
tax on the assessed value of all lands in urban areas in excess of Fifty
thousand pesos (P50,000.00).
The rationale of the SHT is found in the preambular clauses of the
subject ordinance, to wit:
WHEREAS, the imposition of additional tax is intended to provide the
City Government with sufficient funds to initiate, implement and
undertake Socialized Housing Projects and other related preliminary
activities;
WHEREAS, the imposition of 0.5% tax will benefit the Socialized
Housing Programs and Projects of the City Government, specifically
the marginalized sector through the acquisition of properties for human
settlements;
WHEREAS, the removal of the urban blight will definitely increase fair
market value of properties in the city[.]
The above-quoted are consistent with the UDHA, which the LGUs are
charged to implement in their respective localities in coordination with
the Housing and Urban Development Coordinating Council, the
national housing agencies, the Presidential Commission for the Urban
Poor, the private sector, and other non-government organizations.98 It
is the declared policy of the State to undertake a comprehensive and
continuing urban development and housing program that shall, among
others, uplift the conditions of the underprivileged and homeless
citizens in urban areas and in resettlement areas, and provide for the
rational use and development of urban land in order to bring about,
among others, reduction in urban dysfunctions, particularly those that
adversely affect public health, safety and ecology, and access to land
and housing by the underprivileged and homeless citizens.99 Urban
renewal and resettlement shall include the rehabilitation and
development of blighted and slum areas100 and the resettlement of
program beneficiaries in accordance with the provisions of the UDHA.
Under the UDHA, socialized housing102 shall be the primary strategy
in providing shelter for the underprivileged and homeless.103 The LGU
or the NHA, in cooperation with the private developers and concerned
agencies, shall provide socialized housing or resettlement areas with
basic services and facilities such as potable water, power and
electricity, and an adequate power distribution system, sewerage
facilities, and an efficient and adequate solid waste disposal system;
and access to primary roads and transportation facilities.104 The
provisions for health, education, communications, security, recreation,
73
relief and welfare shall also be planned and be given priority for
implementation by the LGU and concerned agencies in cooperation
with the private sector and the beneficiaries themselves.
Moreover, within two years from the effectivity of the UDHA, the LGUs,
in coordination with the NHA, are directed to implement the relocation
and resettlement of persons living in danger areas such as esteros,
railroad tracks, garbage dumps, riverbanks, shorelines, waterways, and
other public places like sidewalks, roads, parks, and playgrounds.106
In coordination with the NHA, the LGUs shall provide relocation or
resettlement sites with basic services and facilities and access to
employment and livelihood opportunities sufficient to meet the basic
needs of the affected families.
Clearly, the SHT charged by the Quezon City Government is a tax
which is within its power to impose. Aside from the specific authority
vested by Section 43 of the UDHA, cities are allowed to exercise such
other powers and discharge such other functions and responsibilities
as are necessary, appropriate, or incidental to efficient and effective
provision of the basic services and facilities which include, among
others, programs and projects for low-cost housing and other mass
dwellings.108 The collections made accrue to its socialized housing
programs and projects.
The tax is not a pure exercise of taxing power or merely to raise
revenue; it is levied with a regulatory purpose. The levy is primarily in
the exercise of the police power for the general welfare of the entire
city. It is greatly imbued with public interest. Removing slum areas in
Quezon City is not only beneficial to the underprivileged and homeless
constituents but advantageous to the real property owners as well. The
situation will improve the value of the their property investments, fully
enjoying the same in view of an orderly, secure, and safe community,
and will enhance the quality of life of the poor, making them law-abiding
constituents and better consumers of business products.
Though broad and far-reaching, police power is subordinate to
constitutional limitations and is subject to the requirement that its
exercise must be reasonable and for the public good.109 In the words
of City of Manila v. Hon. Laguio, Jr.:
The police power granted to local government units must always be
exercised with utmost observance of the rights of the people to due
process and equal protection of the law. Such power cannot be
exercised whimsically, arbitrarily or despotically as its exercise is
subject to a qualification, limitation or restriction demanded by the
respect and regard due to the prescription of the fundamental law,
particularly those forming part of the Bill of Rights. Individual rights, it
bears emphasis, may be adversely affected only to the extent that may
fairly be required by the legitimate demands of public interest or public
welfare. Due process requires the intrinsic validity of the law in
interfering with the rights of the person to his life, liberty and property.
xxxx
To successfully invoke the exercise of police power as the rationale for
the enactment of the Ordinance, and to free it from the imputation of
constitutional infirmity, not only must it appear that the interests of the
public generally, as distinguished from those of a particular class,
require an interference with private rights, but the means adopted must
be reasonably necessary for the accomplishment of the purpose and
not unduly oppressive upon individuals. It must be evident that no other
alternative for the accomplishment of the purpose less intrusive of
private rights can work. A reasonable relation must exist between the
purposes of the police measure and the means employed for its
accomplishment, for even under the guise of protecting the public
74
interest, personal rights and those pertaining to private property will not
be permitted to be arbitrarily invaded.
Lacking a concurrence of these two requisites, the police measure shall
be struck down as an arbitrary intrusion into private rights � a
violation of the due process clause.111
As with the State, LGUs may be considered as having properly
exercised their police power only if there is a lawful subject and a lawful
method or, to be precise, if the following requisites are met: (1) the
interests of the public generally, as distinguished from those of a
particular class, require its exercise and (2) the means employed are
reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals.112ChanRoblesVirtualawlibrary
In this case, petitioner argues that the SHT is a penalty imposed on real
property owners because it burdens them with expenses to provide
funds for the housing of informal settlers, and that it is a class legislation
since it favors the latter who occupy properties which is not their own
and pay no taxes.
We disagree.
Equal protection requires that all persons or things similarly situated
should be treated alike, both as to rights conferred and responsibilities
imposed.113 The guarantee means that no person or class of persons
shall be denied the same protection of laws which is enjoyed by other
persons or other classes in like circumstances.114 Similar subjects
should not be treated differently so as to give undue favor to some and
unjustly discriminate against others.115 The law may, therefore, treat
and regulate one class differently from another class provided there are
real and substantial differences to distinguish one class from another.
An ordinance based on reasonable classification does not violate the
constitutional guaranty of the equal protection of the law. The
requirements for a valid and reasonable classification are: (1) it must
rest on substantial distinctions; (2) it must be germane to the purpose
of the law; (3) it must not be limited to existing conditions only; and (4)
it must apply equally to all members of the same class.
For the purpose of undertaking a comprehensive and continuing urban
development and housing program, the disparities between a real
property owner and an informal settler as two distinct classes are too
obvious and need not be discussed at length. The differentiation
conforms to the practical dictates of justice and equity and is not
discriminatory within the meaning of the Constitution. Notably, the
public purpose of a tax may legally exist even if the motive which
impelled the legislature to impose the tax was to favor one over
another.118 It is inherent in the power to tax that a State is free to select
the subjects of taxation.119 Inequities which result from a singling out
of one particular class for taxation or exemption infringe no
constitutional limitation.
Further, the reasonableness of Ordinance No. SP-2095 cannot be
disputed. It is not confiscatory or oppressive since the tax being
imposed therein is below what the UDHA actually allows. As pointed
out by respondents, while the law authorizes LGUs to collect SHT on
lands with an assessed value of more than P50,000.00, the questioned
ordinance only covers lands with an assessed value exceeding
P100,000.00. Even better, on certain conditions, the ordinance grants
a tax credit equivalent to the total amount of the special assessment
paid beginning in the sixth (6th) year of its effectivity. Far from being
obnoxious, the provisions of the subject ordinance are fair and just.
On the Garbage Fee
75
In the United States of America, it has been held that the authority of a
municipality to regulate garbage falls within its police power to protect
public health, safety, and welfare.121 As opined, the purposes and
policy underpinnings of the police power to regulate the collection and
disposal of solid waste are: (1) to preserve and protect the public health
and welfare as well as the environment by minimizing or eliminating a
source of disease and preventing and abating nuisances; and (2) to
defray costs and ensure financial stability of the system for the benefit
of the entire community, with the sum of all charges marshalled and
designed to pay for the expense of a systemic refuse disposal scheme.
Ordinances regulating waste removal carry a strong presumption of
validity.123 Not surprisingly, the overwhelming majority of U.S. cases
addressing a city's authority to impose mandatory garbage service and
fees have upheld the ordinances against constitutional and statutory
challenges.
A municipality has an affirmative duty to supervise and control the
collection of garbage within its corporate limits.125 The LGC
specifically assigns the responsibility of regulation and oversight of solid
waste to local governing bodies because the Legislature determined
that such bodies were in the best position to develop efficient waste
management programs.126 To impose on local governments the
responsibility to regulate solid waste but not grant them the authority
necessary to fulfill the same would lead to an absurd result.�127 As
held in one U.S. case:
x x x When a municipality has general authority to regulate a particular
subject matter, the manner and means of exercising those powers,
where not specifically prescribed by the legislature, are left to the
discretion of the municipal authorities. x x x Leaving the manner of
exercising municipal powers to the discretion of municipal authorities
"implies a range of reasonableness within which a municipality's
exercise of discretion will not be interfered with or upset by the
judiciary."128
In this jurisdiction, pursuant to Section 16 of the LGC and in the proper
exercise of its corporate powers under Section 22 of the same, the
Sangguniang Panlungsod of Quezon City, like other local legislative
bodies, is empowered to enact ordinances, approve resolutions, and
appropriate funds for the general welfare of the city and its
inhabitants.129 Section 16 of the LGC provides:
SECTION 16. General Welfare. � Every local government unit shall
exercise the powers expressly granted, those necessarily implied
therefrom, as well as powers necessary, appropriate, or incidental for
its efficient and effective governance, and those which are essential to
the promotion of the general welfare. Within their respective territorial
jurisdictions, local government units shall ensure and support, among
other things, the preservation and enrichment of culture, promote health
and safety, enhance the right of the people to a balanced ecology,
encourage and support the development of appropriate and self-reliant
scientific and technological capabilities, improve public morals,
enhance economic prosperity and social justice, promote full
employment among their residents, maintain peace and order, and
preserve the comfort and convenience of their inhabitants.
The general welfare clause is the delegation in statutory form of the
police power of the State to LGUs.130 The provisions related thereto
are liberally interpreted to give more powers to LGUs in accelerating
economic development and upgrading the quality of life for the people
in the community.131 Wide discretion is vested on the legislative
authority to determine not only what the interests of the public require
but also what measures are necessary for the protection of such
76
interests since the Sanggunian is in the best position to determine the
needs of its constituents.
One of the operative principles of decentralization is that, subject to the
provisions of the LGC and national policies, the LGUs shall share with
the national government the responsibility in the management and
maintenance of ecological balance within their territorial jurisdiction.133
In this regard, cities are allowed to exercise such other powers and
discharge such other functions and responsibilities as are necessary,
appropriate, or incidental to efficient and effective provision of the basic
services and facilities which include, among others, solid waste
disposal system or environmental management system and services or
facilities related to general hygiene and sanitation.134 R.A. No. 9003,
or the Ecological Solid Waste Management Act of 2000,135 affirms this
authority as it expresses that the LGUs shall be primarily responsible
for the implementation and enforcement of its provisions within their
respective jurisdictions while establishing a cooperative effort among
the national government, other local government units, non-
government organizations, and the private sector.
Necessarily, LGUs are statutorily sanctioned to impose and collect such
reasonable fees and charges for services rendered.137
�Charges� refer to pecuniary liability, as rents or fees against
persons or property, while �Fee� means a charge fixed by law or
ordinance for the regulation or inspection of a business or
activity.138ChanRoblesVirtualawlibrary
The fee imposed for garbage collections under Ordinance No. SP-2235
is a charge fixed for the regulation of an activity. The basis for this could
be discerned from the foreword of said Ordinance, to wit:
WHEREAS, Quezon City being the largest and premiere city in the
Philippines in terms of population and urban geographical areas, apart
from being competent and efficient in the delivery of public service,
apparently requires a big budgetary allocation in order to address the
problems relative and connected to the prompt and efficient delivery of
basic services such as the effective system of waste management,
public information programs on proper garbage and proper waste
disposal, including the imposition of waste regulatory measures;
WHEREAS, to help augment the funds to be spent for the city�s
waste management system, the City Government through the
Sangguniang Panlungsod deems it necessary to impose a schedule of
reasonable fees or charges for the garbage collection services for
residential (domestic household) that it renders to the public.
Certainly, as opposed to petitioner�s opinion, the garbage fee is not
a tax. In Smart Communications, Inc. v. Municipality of Malvar,
Batangas,139 the Court had the occasion to distinguish these two
concepts:
In Progressive Development Corporation v. Quezon City, the Court
declared that �if the generating of revenue is the primary purpose
and regulation is merely incidental, the imposition is a tax; but if
regulation is the primary purpose, the fact that incidentally revenue is
also obtained does not make the imposition a tax.�
In Victorias Milling Co., Inc. v. Municipality of Victorias, the Court
reiterated that the purpose and effect of the imposition determine
whether it is a tax or a fee, and that the lack of any standards for such
imposition gives the presumption that the same is a tax.
We accordingly say that the designation given by the municipal
authorities does not decide whether the imposition is properly a license
77
tax or a license fee. The determining factors are the purpose and effect
of the imposition as may be apparent from the provisions of the
ordinance. Thus, w]hen no police inspection, supervision, or regulation
is provided, nor any standard set for the applicant to establish, or that
he agrees to attain or maintain, but any and all persons engaged in the
business designated, without qualification or hindrance, may come, and
a license on payment of the stipulated sum will issue, to do business,
subject to no prescribed rule of conduct and under no guardian eye, but
according to the unrestrained judgment or fancy of the applicant and
licensee, the presumption is strong that the power of taxation, and not
the police power, is being exercised.
In Georgia, U.S.A., assessments for garbage collection services have
been consistently treated as a fee and not a tax.140 In another U.S.
case,141 the garbage fee was considered as a "service charge" rather
than a tax as it was actually a fee for a service given by the city which
had previously been provided at no cost to its citizens.
Hence, not being a tax, the contention that the garbage fee under
Ordinance No. SP-2235 violates the rule on double taxation142 must
necessarily fail.
Nonetheless, although a special charge, tax, or assessment may be
imposed by a municipal corporation, it must be reasonably
commensurate to the cost of providing the garbage service.143 To pass
judicial scrutiny, a regulatory fee must not produce revenue in excess
of the cost of the regulation because such fee will be construed as an
illegal tax when the revenue generated by the regulation exceeds the
cost of the regulation.
Petitioner argues that the Quezon City Government already collects
garbage fee under Section 47 of R.A. No. 9003, which authorizes LGUs
to impose fees in amounts sufficient to pay the costs of preparing,
adopting, and implementing a solid waste management plan, and that
it has access to the SWM Fund under Section 46 of the same law.
Moreover, Ordinance No. S-2235 is inconsistent with R.A. No. 9003,
because the ordinance emphasizes the collection and payment of
garbage fee with no concern for segregation, composting and recycling
of wastes. It also skips the mandate of the law calling for the active
involvement of the barangay in the collection, segregation, and
recycling of garbage.
We now turn to the pertinent provisions of R.A. No. 9003.
Under R.A. No. 9003, it is the declared policy of the State to adopt a
systematic, comprehensive and ecological solid waste management
program which shall, among others, ensure the proper segregation,
collection, transport, storage, treatment and disposal of solid waste
through the formulation and adoption of the best environmental
practices in ecological waste management.145 The law provides that
segregation and collection of solid waste shall be conducted at the
barangay level, specifically for biodegradable, compostable and
reusable wastes, while the collection of non-recyclable materials and
special wastes shall be the responsibility of the municipality or city.146
Mandatory segregation of solid wastes shall primarily be conducted at
the source, to include household, institutional, industrial, commercial
and agricultural sources.147
Segregation at source refers to a solid waste management practice of
separating, at the point of origin, different materials found in solid waste
in order to promote recycling and re-use of resources and to reduce the
volume of waste for collection and disposal.148 Based on Rule XVII of
the Department of Environment and Natural Resources (DENR)
Administrative Order No. 2001-34, Series of 2001,149 which is the
Implementing Rules and Regulations (IRR) of R.A. No. 9003,
78
barangays shall be responsible for the collection, segregation, and
recycling of biodegradable, recyclable, compostable and reusable
wastes.150 For the purpose, a Materials Recovery Facility (MRF),
which shall receive biodegradable wastes for composting and mixed
non-biodegradable wastes for final segregation, re-use and recycling,
is to be established in every barangay or cluster of barangays.
According to R.A. 9003, an LGU, through its local solid waste
management board, is mandated by law to prepare a 10-year solid
waste management plan consistent with the National Solid Waste
Management Framework.152 The plan shall be for the re-use, recycling
and composting of wastes generated in its jurisdiction; ensure the
efficient management of solid waste generated within its jurisdiction;
and place primary emphasis on implementation of all feasible re-use,
recycling, and composting programs while identifying the amount of
landfill and transformation capacity that will be needed for solid waste
which cannot be re-used, recycled, or composted.153 One of the
components of the solid waste management plan is source reduction:
(e) Source reduction � The source reduction component shall include
a program and implementation schedule which shows the methods by
which the LGU will, in combination with the recycling and composting
components, reduce a sufficient amount of solid waste disposed of in
accordance with the diversion requirements of Section 20.
The source reduction component shall describe the following:
(1) strategies in reducing the volume of solid waste generated at
source;
(2) measures for implementing such strategies and the resources
necessary to carry out such activities;
(3) other appropriate waste reduction technologies that may also be
considered, provided that such technologies conform with the
standards set pursuant to this Act;
(4) the types of wastes to be reduced pursuant to Section 15 of this Act;
(5) the methods that the LGU will use to determine the categories of
solid wastes to be diverted from disposal at a disposal facility through
re-use, recycling and composting; and
(6) new facilities and of expansion of existing facilities which will be
needed to implement re-use, recycling and composting.
The LGU source reduction component shall include the evaluation and
identification of rate structures and fees for the purpose of reducing the
amount of waste generated, and other source reduction strategies,
including but not limited to, programs and economic incentives provided
under Sec. 45 of this Act to reduce the use of non-recyclable materials,
replace disposable materials and products with reusable materials and
products, reduce packaging, and increase the efficiency of the use of
paper, cardboard, glass, metal, and other materials. The waste
reduction activities of the community shall also take into account,
among others, local capability, economic viability, technical
requirements, social concerns, disposition of residual waste and
environmental impact: Provided, That, projection of future facilities
needed and estimated cost shall be incorporated in the plan. x x x154
The solid waste management plan shall also include an implementation
schedule for solid waste diversion:
SEC. 20. Establishing Mandatory Solid Waste Diversion. � Each
LGU plan shall include an implementation schedule which shows that
within five (5) years after the effectivity of this Act, the LGU shall divert
at least 25% of all solid waste from waste disposal facilities through re-
79
use, recycling, and composting activities and other resource recovery
activities: Provided, That the waste diversion goals shall be increased
every three (3) years thereafter: Provided, further, That nothing in this
Section prohibits a local government unit from implementing re-use,
recycling, and composting activities designed to exceed the goal.
The baseline for the twenty-five percent (25%) shall be derived from the
waste characterization result155 that each LGU is mandated to
undertake.
In accordance with Section 46 of R.A. No. 9003, the LGUs are entitled
to avail of the SWM Fund on the basis of their approved solid waste
management plan. Aside from this, they may also impose SWM Fees
under Section 47 of the law, which states:
SEC. 47. Authority to Collect Solid Waste Management Fees � The
local government unit shall impose fees in amounts sufficient to pay the
costs of preparing, adopting, and implementing a solid waste
management plan prepared pursuant to this Act. The fees shall be
based on the following minimum factors:
(a) types of solid waste;
(b) amount/volume of waste; and
(c) distance of the transfer station to the waste management facility.
The fees shall be used to pay the actual costs incurred by the LGU in
collecting the local fees. In determining the amounts of the fees, an
LGU shall include only those costs directly related to the adoption and
implementation of the plan and the setting and collection of the local
fees.
Rule XVII of the IRR of R.A. No. 9003 sets forth the details:
Section 1. Power to Collect Solid Waste Management Fees. � The
Local SWM Board/Local SWM Cluster Board shall impose fees on the
SWM services provided for by the LGU and/or any authorized
organization or unit. In determining the amounts of the fees, a Local
SWM Board/Local SWM Cluster Board shall include only those costs
directly related to the adoption and implementation of the SWM Plan
and the setting and collection of the local fees. This power to impose
fees may be ceded to the private sector and civil society groups which
have been duly accredited by the Local SWM Board/Local SWM
Cluster Board; provided, the SWM fees shall be covered by a Contract
or Memorandum of Agreement between the respective board and the
private sector or civil society group.
The fees shall pay for the costs of preparing, adopting and
implementing a SWM Plan prepared pursuant to the Act. Further, the
fees shall also be used to pay the actual costs incurred in collecting the
local fees and for project sustainability.
Section 2. Basis of SWM Service Fees
Reasonable SWM service fees shall be computed based on but not
limited to the following minimum factors:
a) Types of solid waste to include special waste
b) amount/volume of waste
c) distance of the transfer station to the waste management facility
d) capacity or type of LGU constituency
e) cost of construction
f) cost of management
g) type of technology
80
Section 3. Collection of Fees. � Fees may be collected
corresponding to the following levels:
a) Barangay � The Barangay may impose fees for collection and
segregation of biodegradable, compostable and reusable wastes from
households, commerce, other sources of domestic wastes, and for the
use of Barangay MRFs. The computation of the fees shall be
established by the respective SWM boards. The manner of collection
of the fees shall be dependent on the style of administration of
respective Barangay Councils. However, all transactions shall follow
the Commission on Audit rules on collection of fees.
b) Municipality � The municipal and city councils may impose fees
on the barangay MRFs for the collection and transport of non-recyclable
and special wastes and for the disposal of these into the sanitary
landfill. The level and procedure for exacting fees shall be defined by
the Local SWM Board/Local SWM Cluster Board and supported by
LGU ordinances, however, payments shall be consistent with the
accounting system of government.
c) Private Sector/Civil Society Group � On the basis of the
stipulations of contract or Memorandum of Agreement, the private
sector or civil society group shall impose fees for collection, transport
and tipping in their SLFs. Receipts and invoices shall be issued to the
paying public or to the government.
From the afore-quoted provisions, it is clear that the authority of a
municipality or city to impose fees is limited to the collection and
transport of non-recyclable and special wastes and for the disposal of
these into the sanitary landfill. Barangays, on the other hand, have the
authority to impose fees for the collection and segregation of
biodegradable, compostable and reusable wastes from households,
commerce, other sources of domestic wastes, and for the use of
barangay MRFs. This is but consistent with Section 10 of R.A. No. 9003
directing that segregation and collection of biodegradable, compostable
and reusable wastes shall be conducted at the barangay level, while
the collection of non-recyclable materials and special wastes shall be
the responsibility of the municipality or city.
In this case, the alleged bases of Ordinance No. S-2235 in imposing
the garbage fee is the volume of waste currently generated by each
person in Quezon City, which purportedly stands at 0.66 kilogram per
day, and the increasing trend of waste generation for the past three
years.157 Respondents did not elaborate any further. The figure
presented does not reflect the specific types of wastes generated �
whether residential, market, commercial, industrial,
construction/demolition, street waste, agricultural, agro-industrial,
institutional, etc. It is reasonable, therefore, for the Court to presume
that such amount pertains to the totality of wastes, without any
distinction, generated by Quezon City constituents. To reiterate,
however, the authority of a municipality or city to impose fees extends
only to those related to the collection and transport of non-recyclable
and special wastes.
Granting, for the sake of argument, that the 0.66 kilogram of solid waste
per day refers only to non-recyclable and special wastes, still, We
cannot sustain the validity of Ordinance No. S-2235. It violates the
equal protection clause of the Constitution and the provisions of the
LGC that an ordinance must be equitable and based as far as
practicable on the taxpayer�s ability to pay, and not unjust,
excessive, oppressive, confiscatory.
In the subject ordinance, the rates of the imposable fee depend on land
or floor area and whether the payee is an occupant of a lot,
condominium, social housing project or apartment.
81
On high-rise Condominium Units
a) High-rise Condominium � The Homeowners Association of high
rise condominiums shall pay the annual garbage fee on the total size
of the entire condominium and socialized Housing Unit and an
additional garbage fee shall be collected based on area occupied for
every unit already sold or being amortized.
b) High-rise apartment units � Owners of high-rise apartment units
shall pay the annual garbage fee on the total lot size of the entire
apartment and an additional garbage fee based on the schedule
prescribed herein for every unit occupied.
For the purpose of garbage collection, there is, in fact, no substantial
distinction between an occupant of a lot, on one hand, and an occupant
of a unit in a condominium, socialized housing project or apartment, on
the other hand. Most likely, garbage output produced by these types of
occupants is uniform and does not vary to a large degree; thus, a similar
schedule of fee is both just and equitable.
The rates being charged by the ordinance are unjust and inequitable: a
resident of a 200 sq. m. unit in a condominium or socialized housing
project has to pay twice the amount than a resident of a lot similar in
size; unlike unit occupants, all occupants of a lot with an area of 200
sq. m. and less have to pay a fixed rate of Php100.00; and the same
amount of garbage fee is imposed regardless of whether the resident
is from a condominium or from a socialized housing project.
Indeed, the classifications under Ordinance No. S-2235 are not
germane to its declared purpose of �promoting shared responsibility
with the residents to attack their common mindless attitude in over-
consuming the present resources and in generating waste.�160
Instead of simplistically categorizing the payee into land or floor
occupant of a lot or unit of a condominium, socialized housing project
or apartment, respondent City Council should have considered factors
that could truly measure the amount of wastes generated and the
appropriate fee for its collection. Factors include, among others,
household age and size, accessibility to waste collection, population
density of the barangay or district, capacity to pay, and actual
occupancy of the property. R.A. No. 9003 may also be looked into for
guidance.
Under said law, SWM service fees may be computed based on
minimum factors such as types of solid waste to include special waste,
amount/volume of waste, distance of the transfer station to the waste
management facility, capacity or type of LGU constituency, cost of
construction, cost of management, and type of technology. With respect
to utility rates set by municipalities, a municipality has the right to
classify consumers under reasonable classifications based upon
factors such as the cost of service, the purpose for which the service or
the product is received, the quantity or the amount received, the
different character of the service furnished, the time of its use or any
other matter which presents a substantial difference as a ground of
distinction.161cralawlawlibrary
[A] lack of uniformity in the rate charged is not necessarily unlawful
discrimination. The establishment of classifications and the charging of
different rates for the several classes is not unreasonable and does not
violate the requirements of equality and uniformity. Discrimination to be
unlawful must draw an unfair line or strike an unfair balance between
those in like circumstances having equal rights and privileges.
Discrimination with respect to rates charged does not vitiate unless it is
arbitrary and without a reasonable fact basis or justification.162
82
On top of an unreasonable classification, the penalty clause of
Ordinance No. SP-2235, which states:
SECTION 3. Penalty Clause � A penalty of 25% of the garbage fee
due plus an interest of 2% per month or a fraction thereof (interest) shall
be against a household owner who refuses to pay the garbage fee
herein imposed.
lacks the limitation required by Section 168 of the LGC, which provides:
SECTION 168. Surcharges and Penalties on Unpaid Taxes, Fees, or
Charges. � The sanggunian may impose a surcharge not exceeding
twenty-five (25%) of the amount of taxes, fees or charges not paid on
time and an interest at the rate not exceeding two percent (2%) per
month of the unpaid taxes, fees or charges including surcharges, until
such amount is fully paid but in no case shall the total interest on the
unpaid amount or portion thereof exceed thirty-six (36) months.
(Emphasis supplied)
Finally, on the issue of publication of the two challenged ordinances.
Petitioner argues that the garbage fee was collected even if the
required publication of its approval had not yet elapsed. He notes that
he paid his realty tax on January 7, 2014 which already included the
garbage fee. Respondents counter that if the law provides for its own
effectivity, publication in the Official Gazette is not necessary so long
as it is not penal in nature. Allegedly, Ordinance No. SP-2095 took
effect after its publication while Ordinance No. SP-2235 became
effective after its approval on December 26, 2013.
The pertinent provisions of the LGC state:
SECTION 59. Effectivity of Ordinances or Resolutions. � (a) Unless
otherwise stated in the ordinance or the resolution approving the local
development plan and public investment program, the same shall take
effect after ten (10) days from the date a copy thereof is posted in a
bulletin board at the entrance of the provincial capitol or city, municipal,
or barangay hall, as the case may be, and in at least two (2) other
conspicuous places in the local government unit concerned.
(b) The secretary to the sanggunian concerned shall cause the posting
of an ordinance or resolution in the bulletin board at the entrance of the
provincial capitol and the city, municipal, or barangay hall in at least two
(2) conspicuous places in the local government unit concerned not later
than five (5) days after approval thereof.
The text of the ordinance or resolution shall be disseminated and
posted in Filipino or English and in the language or dialect understood
by the majority of the people in the local government unit concerned,
and the secretary to the sanggunian shall record such fact in a book
kept for the purpose, stating the dates of approval and posting.
(c) The gist of all ordinances with penal sanctions shall be published in
a newspaper of general circulation within the province where the local
legislative body concerned belongs. In the absence of any newspaper
of general circulation within the province, posting of such ordinances
shall be made in all municipalities and cities of the province where the
sanggunian of origin is situated.
(d) In the case of highly urbanized and independent component cities,
the main features of the ordinance or resolution duly enacted or
adopted shall, in addition to being posted, be published once in a local
newspaper of general circulation within the city: Provided, That in the
absence thereof the ordinance or resolution shall be published in any
newspaper of general circulation.
83
SECTION 188. Publication of Tax Ordinances and Revenue Measures. The temporary restraining order issued by the Court on February 5,
Within ten (10) days after their approval, certified true copies of all 2014 is LIFTED with respect to Ordinance No. SP-2095. In contrast,
provincial, city, and municipal tax ordinances or revenue measures respondents are PERMANENTLY ENJOINED from taking any further
shall be published in full for three (3) consecutive days in a newspaper action to enforce Ordinance No. SP. 2235. SO ORDERED.
of local circulation: Provided, however, That in provinces, cities and
municipalities where there are no newspapers of local circulation, the
same may be posted in at least two (2) conspicuous and publicly
accessible places. (Emphasis supplied)
On October 17, 2011, respondent Quezon City Council enacted
Ordinance No. SP-2095, which provides that it would take effect after
its publication in a newspaper of general circulation.163 On the other
hand, Ordinance No. SP-2235, which was passed by the City Council
on December 16, 2013, provides that it would be effective upon its
approval.164 Ten (10) days after its enactment, or on December 26,
2013, respondent City Mayor approved the same.
The case records are bereft of any evidence to prove petitioner�s
negative allegation that respondents did not comply with the posting
and publication requirements of the law. Thus, We are constrained not
to give credit to his unsupported claim.
WHEREFORE, the petition is PARTIALLY GRANTED. The
constitutionality and legality of Ordinance No. SP-2095, S-2011, or the
Socialized Housing Tax of Quezon City,is SUSTAINED for being
consistent with Section 43 of Republic Act No. 7279. On the other
hand, Ordinance No. SP-2235, S-2013, which collects an annual
garbage fee on all domestic households in Quezon City, is hereby
declared as UNCONSTITUTIONAL AND ILLEGAL. Respondents are
DIRECTED to REFUND with reasonable dispatch the sums of money
collected relative to its enforcement.

84

15. Oceanic Wireless Network. Inc. vs. CIR
G.R. No. 148380 December 9, 2005
AZCUNA, J.:
This is a Petition for Review on Certiorari seeking to reverse and set
aside the Decision of the Court of Appeals dated October 31, 2000, and
its Resolution dated May 3, 2001, in "Oceanic Wireless Network, Inc. v.
Commissioner of Internal Revenue" docketed as CA-G.R. SP No.
35581, upholding the Decision of the Court of Tax Appeals dismissing
the Petition for Review in CTA Case No. 4668 for lack of jurisdiction.
Petitioner Oceanic Wireless Network, Inc. challenges the authority of
the Chief of the Accounts Receivable and Billing Division of the Bureau
of Internal Revenue (BIR) National Office to decide and/or act with
finality on behalf of the Commissioner of Internal Revenue (CIR) on
protests against disputed tax deficiency assessments.
The facts of the case are as follows:
On March 17, 1988, petitioner received from the Bureau of Internal
Revenue (BIR) deficiency tax assessments for the taxable year 1984 in
the total amount of ₱8,644,998.71, broken down as follows:
Kind of Tax Assessment No. Amount
Deficiency Income Tax FAR-4-1984-88-001130 ₱8,381,354.00
Penalties for late payment FAR-4-1984-88-001131 3,000.00
of income and failure to
file quarterly returns
Deficiency Contractor’s FAR-4-1984-88-001132 29,849.06
Tax
Deficiency Fixed Tax FAR-4--88-001133 12,083.65
Deficiency Franchise Tax FAR-4—84-88-001134 ___227,712.00
T o t a l -------- ₱8,644,998.71
Petitioner filed its protest against the tax assessments and requested a
reconsideration or cancellation of the same in a letter to the BIR
Commissioner dated April 12, 1988.
Acting in behalf of the BIR Commissioner, then Chief of the BIR
Accounts Receivable and Billing Division, Mr. Severino B. Buot,
reiterated the tax assessments while denying petitioner’s request for
reinvestigation in a letter 1 dated January 24, 1991, thus:
"Note: Your request for re-investigation has been denied for failure to
submit the necessary supporting papers as per endorsement letter from
the office of the Special Operation Service dated 12-12-90."
Said letter likewise requested petitioner to pay the total amount of
₱8,644,998.71 within ten (10) days from receipt thereof, otherwise the
case shall be referred to the Collection Enforcement Division of the BIR
National Office for the issuance of a warrant of distraint and levy without
further notice.
Upon petitioner’s failure to pay the subject tax assessments within the
prescribed period, the Assistant Commissioner for Collection, acting for
the Commissioner of Internal Revenue, issued the corresponding
warrants of distraint and/or levy and garnishment. These were served
on petitioner on October 10, 1991 and October 17, 1991, respectively.2
On November 8, 1991, petitioner filed a Petition for Review with the
Court of Tax Appeals (CTA) to contest the issuance of the warrants to
85
enforce the collection of the tax assessments. This was docketed as prohibited from making the assessment or beginning distraint or levy or
CTA Case No. 4668. a proceeding in court and for sixty (60) days thereafter; when the
taxpayer requests for a reinvestigation which is granted by the
The CTA dismissed the petition for lack of jurisdiction in a decision
Commissioner; when the taxpayer cannot be located in the address
dated September 16, 1994, declaring that said petition was filed beyond
given by him in the return files upon which a tax is being assessed or
the thirty (30)-day period reckoned from the time when the demand
collected: Provided, That if the taxpayer inform the Commissioner of
letter of January 24, 1991 by the Chief of the BIR Accounts Receivable
any change of address, the running of the statute of limitations will not
and Billing Division was presumably received by petitioner, i.e., "within
be suspended; when the warrant of distraint and levy is duly served
a reasonable time from said date in the regular course of mail pursuant
upon the taxpayer, his authorized representative, or a member of his
to Section 2(v) of Rule 131 of the Rules of Court."3
household with sufficient discretion, and no property could located; and
The decision cited Surigao Electric Co., Inc. v. Court of Tax when the taxpayer is out of the Philippines. 6 (Underscoring supplied.)
Appeals4 wherein this Court considered a mere demand letter sent to
Petitioner filed a Motion for Reconsideration arguing that the demand
the taxpayer after his protest of the assessment notice as the final
letter of January 24, 1991 cannot be considered as the final decision of
decision of the Commissioner of Internal Revenue on the protest.
the Commissioner of Internal Revenue on its protest because the same
Hence, the filing of the petition on November 8, 1991 was held clearly
was signed by a mere subordinate and not by the Commissioner
beyond the reglementary period.5
himself.7
The court a quo likewise stated that the finality of the denial of the
With the denial of its motion for reconsideration, petitioner consequently
protest by petitioner against the tax deficiency assessments was
filed a Petition for Review with the Court of Appeals contending that
bolstered by the subsequent issuance of the warrants of distraint and/or
there was no final decision to speak of because the Commissioner had
levy and garnishment to enforce the collection of the deficiency taxes.
yet to make a personal determination as regards the merits of
The issuance was not barred by prescription because the mere filing of
petitioner’s case.8
the letter of protest by petitioner which was given due course by the
Bureau of Internal Revenue suspended the running of the prescription The Court of Appeals denied the petition in a decision dated October
period as expressly provided under the then Section 224 of the Tax 31, 2000, the dispositive portion of which reads:
Code:
"WHEREFORE, the petition is DISMISSED for lack of merit.
SEC. 224. Suspension of Running of the Statute of Limitations.
SO ORDERED."
– The running of the Statute of Limitations provided in Section 203 and
223 on the making of assessment and the beginning of distraint or levy Petitioner’s Motion for Reconsideration was likewise denied in a
or a proceeding in court for collection, in respect of any deficiency, shall resolution dated May 3, 2001.
be suspended for the period during which the Commissioner is

86
Hence, this petition with the following assignment of errors:9
I
THE HONORABLE RESPONDENT CA ERRED IN FINDING THAT
THE DEMAND LETTER ISSUED BY THE (THEN) ACCOUNTS
RECEIVABLE/BILLING DIVISION OF THE BIR NATIONAL OFFICE
WAS THE FINAL DECISION OF THE RESPONDENT CIR ON THE
DISPUTED ASSESSMENTS, AND HENCE CONSTITUTED THE
DECISION APPEALABLE TO THE HONORABLE RESPONDENT
CTA; AND,
II
THE HONORABLE RESPONDENT CA ERRED IN DECLARING THAT
THE DENIAL OF THE PROTEST OF THE SUBJECT ALLEGED
DEFICIENCY TAX ASSESSMENTS HAD LONG BECOME FINAL
AND EXECUTORY FOR FAILURE OF THE PETITIONER TO
INSTITUTE THE APPEAL FROM THE DEMAND LETTER OF THE
CHIEF OF THE ACCOUNTS RECEIVABLE/BILLING DIVISION, BIR
NATIONAL OFFICE, TO THE HONORABLE RESPONDENT CTA,
WITHIN THIRTY (30) DAYS FROM RECEIPT THEREOF.
Thus, the main issue is whether or not a demand letter for tax deficiency
assessments issued and signed by a subordinate officer who was
acting in behalf of the Commissioner of Internal Revenue, is deemed
final and executory and subject to an appeal to the Court of Tax
Appeals.
We rule in the affirmative.
A demand letter for payment of delinquent taxes may be considered a
decision on a disputed or protested assessment. The determination on
whether or not a demand letter is final is conditioned upon the language
used or the tenor of the letter being sent to the taxpayer.
We laid down the rule that the Commissioner of Internal Revenue
should always indicate to the taxpayer in clear and unequivocal
language what constitutes his final determination of the disputed
assessment, thus:
. . . we deem it appropriate to state that the Commissioner of Internal
Revenue should always indicate to the taxpayer in clear and
unequivocal language whenever his action on an assessment
questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of
Republic Act No. 1125, as amended. On the basis of his statement
indubitably showing that the Commissioner’s communicated action is
his final decision on the contested assessment, the aggrieved taxpayer
would then be able to take recourse to the tax court at the opportune
time. Without needless difficulty, the taxpayer would be able to
determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the
part of the taxpayer to continually delay the finality of the assessment –
and, consequently, the collection of the amount demanded as taxes –
by repeated requests for recomputation and reconsideration. On the
part of the Commissioner, this would encourage his office to conduct a
careful and thorough study of every questioned assessment and render
a correct and definite decision thereon in the first instance. This would
also deter the Commissioner from unfairly making the taxpayer grope
in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would
meet a pressing need for fair play, regularity, and orderliness in
administrative action.10
87
In this case, the letter of demand dated January 24, 1991,
unquestionably constitutes the final action taken by the Bureau of
Internal Revenue on petitioner’s request for reconsideration when it
reiterated the tax deficiency assessments due from petitioner, and
requested its payment. Failure to do so would result in the "issuance of
a warrant of distraint and levy to enforce its collection without further
notice."11 In addition, the letter contained a notation indicating that
petitioner’s request for reconsideration had been denied for lack of
supporting documents.
The above conclusion finds support in Commissioner of Internal
Revenue v. Ayala Securities Corporation,12 where we held:
The letter of February 18, 1963 (Exh. G), in the view of the Court, is
tantamount to a denial of the reconsideration or [respondent
corporation’s]…protest o[f] the assessment made by the petitioner,
considering that the said letter [was] in itself a reiteration of the demand
by the Bureau of Internal Revenue for the settlement of the assessment
already made, and for the immediate payment of the sum of
P758,687.04 in spite of the vehement protest of the respondent
corporation on April 21, 1961. This certainly is a clear indication of the
firm stand of petitioner against the reconsideration of the disputed
assessment…This being so, the said letter amount[ed] to a decision on
a disputed or protested assessment, and, there, the court a quo did not
err in taking cognizance of this case.
Similarly, in Surigao Electric Co., Inc v. Court of Tax Appeals,13 and
in CIR v. Union Shipping Corporation,14 we held:
". . . In this letter, the commissioner not only in effect demanded that
the petitioner pay the amount of ₱11,533.53 but also gave warning that
in the event it failed to pay, the said commissioner would be constrained
to enforce the collection thereof by means of the remedies provided by
law. The tenor of the letter, specifically the statement regarding the
resort to legal remedies, unmistakably indicate[d] the final nature of the
determination made by the commissioner of the petitioner’s deficiency
franchise tax liability."
The demand letter received by petitioner verily signified a character of
finality. Therefore, it was tantamount to a rejection of the request for
reconsideration. As correctly held by the Court of Tax Appeals, "while
the denial of the protest was in the form of a demand letter, the notation
in the said letter making reference to the protest filed by petitioner
clearly shows the intention of the respondent to make it as [his] final
decision."15
This now brings us to the crux of the matter as to whether said demand
letter indeed attained finality despite the fact that it was issued and
signed by the Chief of the Accounts Receivable and Billing Division
instead of the BIR Commissioner.
The general rule is that the Commissioner of Internal Revenue may
delegate any power vested upon him by law to Division Chiefs or to
officials of higher rank. He cannot, however, delegate the four powers
granted to him under the National Internal Revenue Code (NIRC)
enumerated in Section 7.
As amended by Republic Act No. 8424, Section 7 of the Code
authorizes the BIR Commissioner to delegate the powers vested in him
under the pertinent provisions of the Code to any subordinate official
with the rank equivalent to a division chief or higher, except the
following:
(a) The power to recommend the promulgation of rules and regulations
by the Secretary of Finance;
88
(b) The power to issue rulings of first impression or to reverse, revoke authorize the examination of any taxpayer and the assessment of the
or modify any existing ruling of the Bureau; correct amount of tax; Provided, however, That failure to file a return
shall not prevent the Commissioner from authorizing the examination
(c) The power to compromise or abate under Section 204(A) and (B) of
of any taxpayer.
this Code, any tax deficiency: Provided, however, that assessments
issued by the Regional Offices involving basic deficiency taxes of five The tax or any deficiency tax so assessed shall be paid upon notice
hundred thousand pesos (P500,000) or less, and minor criminal and demand from the Commissioner or from his duly authorized
violations as may be determined by rules and regulations to be representative. . . ." (Emphasis supplied)
promulgated by the Secretary of Finance, upon the recommendation of
Thus, the authority to make tax assessments may be delegated to
the Commissioner, discovered by regional and district officials, may be
subordinate officers. Said assessment has the same force and effect
compromised by a regional evaluation board which shall be composed
as that issued by the Commissioner himself, if not reviewed or revised
of the Regional Director as Chairman, the Assistant Regional Director,
by the latter such as in this case.16
heads of the Legal, Assessment and Collection Divisions and the
Revenue District Officer having jurisdiction over the taxpayer, as A request for reconsideration must be made within thirty (30) days from
members; and the taxpayer’s receipt of the tax deficiency assessment, otherwise, the
decision becomes final, unappealable and therefore, demandable. A
(d) The power to assign or reassign internal revenue officers to
tax assessment that has become final, executory and enforceable for
establishments where articles subject to excise tax are produced or
failure of the taxpayer to assail the same as provided in Section 228
kept.
can no longer be contested, thus:
It is clear from the above provision that the act of issuance of the
"SEC. 228. Protesting of Assessment. – When the Commissioner or
demand letter by the Chief of the Accounts Receivable and Billing
his duly authorized representative finds that proper taxes should be
Division does not fall under any of the exceptions that have been
assessed, he shall first notify the taxpayer of his findings…Such
mentioned as non-delegable.
assessment may be protested administratively by filing a request for
Section 6 of the Code further provides: reconsideration or reinvestigation within thirty (30) days from receipt of
the assessment in such form and manner as may be prescribed by
"SEC. 6. Power of the Commissioner to Make Assessments and
implementing rules and regulations. Within sixty (60) days from filing of
Prescribe Additional Requirements for Tax Administration and
the protest, all relevant supporting documents shall have been
Enforcement. –
submitted; otherwise, the assessment shall become final.
(A) Examination of Returns and Determination of Tax Due. - After a
If the protest is denied in whole or in part, or is not acted upon within
return has been filed as required under the provisions of this Code,
one hundred (180) days from submission of documents, the taxpayer
the Commissioner or his duly authorized representative may

89
adversely affected by the decision or inaction may appeal to the Court the petition was filed with the Court of Tax Appeals only on November
of Tax Appeals within thirty (30) days from receipt of the said decision, 8, 1991. Hence, the Court of Tax Appeals properly dismissed the
or from the lapse of the one hundred eighty (180) - day period; petition as the tax delinquency assessment had long become final and
otherwise, the decision shall become final, executory and executory.
demandable."
WHEREFORE, premises considered, the Decision of the Court of
Here, petitioner failed to avail of its right to bring the matter before the Appeals dated October 31, 2000 and its Resolution dated May 3, 2001
Court of Tax Appeals within the reglementary period upon the receipt in CA-G.R. SP No. 35581 are hereby AFFIRMED. The petition is
of the demand letter reiterating the assessed delinquent taxes and accordingly DENIED for lack of merit.
denying its request for reconsideration which constituted the final
SO ORDERED.
determination by the Bureau of Internal Revenue on petitioner’s protest.
Being a final disposition by said agency, the same would have been a
proper subject for appeal to the Court of Tax Appeals.
The rule is that for the Court of Tax Appeals to acquire jurisdiction, an
assessment must first be disputed by the taxpayer and ruled upon by
the Commissioner of Internal Revenue to warrant a decision from which
a petition for review may be taken to the Court of Tax Appeals. Where
an adverse ruling has been rendered by the Commissioner of Internal
Revenue with reference to a disputed assessment or a claim for refund
or credit, the taxpayer may appeal the same within thirty (30) days after
receipt thereof.17
We agree with the factual findings of the Court of Tax Appeals that the
demand letter may be presumed to have been duly directed, mailed
and was received by petitioner in the regular course of the mail in the
absence of evidence to the contrary. This is in accordance with Section
2(v), Rule 131 of the Rules of Court, and in this case, since the period
to appeal has commenced to run from the time the letter of demand
was presumably received by petitioner within a reasonable time after
January 24, 1991, the period of thirty (30) days to appeal the adverse
decision on the request for reconsideration had already lapsed when

90
16. Asia International Auctioneers, Inc. vs. CIR
G.R. No. 179115 : September 26, 2012
PERLAS-BERNABE, J.:
The Factual Antecedents
AIA is a duly organized corporation operating within the Subic Special
Economic Zone. It is engaged in the importation of used motor vehicles
and heavy equipment which it sells to the public through auction. On
August 25, 2004, AIA received from the CIR a Formal Letter of
Demand, dated July 9, 2004, containing an assessment for deficiency
value added tax (VAT) and excise tax in the amounts
of P 102,535,520.00 and P 4,334,715.00, respectively, or a total
amount of P 106,870,235.00, inclusive of penalties and interest, for
auction sales conducted on February 5, 6, 7, and 8, 2004.5ςrνll
AIA claimed that it filed a protest letter dated August 29, 2004 through
registered mail on August 30, 2004.6ςrνll It also submitted additional
supporting documents on September 24, 2004 and November 22,
2004.7ςrνll
The CIR failed to act on the protest, prompting AIA to file a petition for
review before the CTA on June 20, 2005,8ςrνll to which the CIR filed
its Answer on July 26, 2005.9ςrνll
On March 8, 2006, the CIR filed a motion to dismiss10ςrνll on the
ground of lack of jurisdiction citing the alleged failure of AIA to timely
file its protest which thereby rendered the assessment final and
executory. The CIR denied receipt of the protest letter dated August 29,
2004 claiming that it only received the protest letter dated September
24, 2004 on September 27, 2004, three days after the lapse of the 30-
day period prescribed in Section 22811ςrνll of the Tax Code.12ςrνll
In opposition to the CIRs motion to dismiss, AIA submitted the following
evidence to prove the filing and the receipt of the protest letter dated
August 29, 2004:
(1) the protest letter dated August 29, 2004 with attached Registry
Receipt No. 3824;13Ï‚
(2) a Certification dated November 15, 2005 issued by Wilfredo R. De
Guzman, Postman III, of the Philippine Postal Corporation of Olongapo
City, stating that Registered Letter No. 3824 dated August 30, 2004 ,
addressed to the CIR, was dispatched under Bill No. 45 Page 1 Line 11
on September 1, 2004 from Olongapo City to Quezon City;14
(3) a Certification dated July 5, 2006 issued by Acting Postmaster,
Josefina M. Hora, of the Philippine Postal Corporation-NCR, stating that
Registered Letter No. 3824 was delivered to the BIR Records Section
and was duly received by the authorized personnel on September 8,
2004;15ςrνll and
(4) a certified photocopy of the Receipt of Important Communication
Delivered issued by the BIR Chief of Records Division, Felisa U.
Arrojado, showing that Registered Letter No. 3824 was received by the
BIR.16ςrνll AIA also presented Josefina M. Hora and Felisa U.
Arrojado as witnesses to testify on the due execution and the contents
of the foregoing documents.
Ruling of the Court of Tax Appeals
After hearing both parties, the CTA First Division rendered the first
assailed Resolution dated November 20, 2006 granting the CIRs
motion to dismiss. Citing Republic v. Court of Appeals,17ςrνll it ruled
that "while a mailed letter is deemed received by the addressee in the
course of the mail, still, this is merely a disputable presumption, subject
to controversion, and a direct denial of the receipt thereof shifts the
91
burden upon the party favored by the presumption to prove that the
mailed letter indeed was received by the addressee."18ςrνll
The CTA First Division faulted AIA for failing to present the registry
return card of the subject protest letter. Moreover, it noted that the text
of the protest letter refers to a Formal Demand Letter dated June 9,
2004 and not the subject Formal Demand Letter dated July 9, 2004.
Furthermore, it rejected AIAs argument that the September 24, 2004
letter merely served as a cover letter to the submission of its supporting
documents pointing out that there was no mention therein of a prior
separate protest letter.19ςrνll
AIAs motion for reconsideration was subsequently denied by the CTA
First Division in its second assailed Resolution dated February 22,
2007. On appeal, the CTA En Banc in its Decision dated August 3, 2007
affirmed the ruling of the CTA First Division holding that AIAs evidence
was not sufficient to prove receipt by the CIR of the protest letter dated
August 24, 2004.
Hence, the instant petition.
Issue Before the Court
Both parties discussed the legal bases for AIAs tax liability, unmindful
of the fact that this case stemmed from the CTAs dismissal of AIAs
petition for review for failure to file a timely protest, without passing
upon the substantive merits of the case.
Relevantly, on January 30, 2008, AIA filed a Manifestation and Motion
with Leave of the Honorable Court to Defer or Suspend Further
Proceedings20ςrνll on the ground that it availed of the Tax Amnesty
Program under Republic Act 948021ςrνll (RA 9480), otherwise known
as the Tax Amnesty Act of 2007. On February 13, 2008, it submitted to
the Court a Certification of Qualification22ςrνll issued by the BIR on
February 5, 2008 stating that AIA "has availed and is qualified for Tax
Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA
9480.
With AIAs availment of the Tax Amnesty Program under RA 9480, the
Court is tasked to first determine its effects on the instant petition.
Ruling of the Court
A tax amnesty is a general pardon or the intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty of
violating a tax law. It partakes of an absolute 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.23ςrνll
A tax amnesty, much like a tax exemption, is never favored or
presumed in law. The grant of a tax amnesty, similar to a tax exemption,
must be construed strictly against the taxpayer and liberally in favor of
the taxing authority.24ςrνll
In 2007, RA 9480 took effect granting a tax amnesty to qualified
taxpayers for all national internal revenue taxes for the taxable year
2005 and prior years, with or without assessments duly issued therefor,
that have remained unpaid as of December 31, 2005.25ςrνll
The Tax Amnesty Program under RA 9480 may be availed of by any
person except those who are disqualified under Section 8 thereof, to
wit: Section 8. Exceptions. The tax amnesty provided in Section 5
hereof shall not extend to the following persons or cases existing as of
the effectivity of this Act:
(a) Withholding agents with respect to their withholding tax
liabilities;
92
(b) Those with pending cases falling under the jurisdiction of the
Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or unlawfully
acquired wealth or under the Anti-Graft and Corrupt Practices Act;
(d) Those with pending cases filed in court involving violation of the
Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion and other criminal
offenses under Chapter II of Title X of the National Internal Revenue
Code of 1997, as amended, and the felonies of frauds, illegal exactions
and transactions, and malversation of public funds and property under
Chapters III and IV of Title VII of the Revised Penal Code; and
(f) Tax cases subject of final and executory judgment by the
courts.(Emphasis supplied)
The CIR contends that AIA is disqualified under Section 8(a) of RA
9480 from availing itself of the Tax Amnesty Program because it is
"deemed" a withholding agent for the deficiency taxes. This argument
is untenable. The CIR did not assess AIA as a withholding agent that
failed to withhold or remit the deficiency VAT and excise tax to the BIR
under relevant provisions of the Tax Code. Hence, the argument that
AIA is "deemed" a withholding agent for these deficiency taxes is
fallacious.
Indirect taxes, like VAT and excise tax, are different from withholding
taxes. To distinguish, in indirect taxes, the incidence of taxation falls on
one person but the burden thereof can be shifted or passed on to
another person, such as when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it.26ςrνll On the other
hand, in case of withholding taxes, the incidence and burden of taxation
fall on the same entity, the statutory taxpayer. The burden of taxation is
not shifted to the withholding agent who merely collects, by withholding,
the tax due from income payments to entities arising from certain
transactions27and remits the same to the government. Due to this
difference, the deficiency VAT and excise tax cannot be "deemed" as
withholding taxes merely because they constitute indirect taxes.
Moreover, records support the conclusion that AIA was assessed not
as a withholding agent but, as the one directly liable for the said
deficiency taxes.28ςrνll
The CIR also argues that AIA, being an accredited investor/taxpayer
situated at the Subic Special Economic Zone, should have availed of
the tax amnesty granted under RA 939929ςrνll and not under RA 9480.
This is also untenable. RA 9399 was passed prior to the passage of RA
9480. RA 9399 does not preclude taxpayers within its coverage from
availing of other tax amnesty programs available or enacted in
futuro like RA 9480. More so, RA 9480 does not exclude from its
coverage taxpayers operating within special economic zones. As long
as it is within the bounds of the law, a taxpayer has the liberty to choose
which tax amnesty program it wants to avail.
Lastly, the Court takes judicial notice of the "Certification of
Qualification"30ςrνll issued by Eduardo A. Baluyut, BIR Revenue
District Officer, stating that AlA "has availed and is qualified for Tax
Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA
9480. In the absence of sufficient evidence proving that the certification
was issued in excess of authority, the presumption that it was issued in
the regular performance of the revenue district officer's official duty
stands. WHEREFORE, the petition is DENIED for
being MOOT and ACADEMIC in view of Asia International
Auctioneers, Inc.'s (AlA) availment of the Tax Amnesty Program under
]RA 9480. Accordingly, the outstanding deficiency taxes of AlA are
deemed fully settled. SO ORDERED.
93
17. RCBC vs. CIR
G.R. No. 170257 September 7, 2011
This is a petition for review on certiorari under Rule 45 seeking to set
aside the July 27, 2005 Decision1 and October 26, 2005 Resolution2
of the Court of Tax Appeals En Banc (CTA-En Banc) in C.T.A. E.B. No.
83 entitled "Rizal Commercial Banking Corporation v. Commissioner of
Internal Revenue."
THE FACTS
Petitioner Rizal Commercial Banking Corporation (RCBC) is a
corporation engaged in general banking operations. It seasonably filed
its Corporation Annual Income Tax Returns for Foreign Currency
Deposit Unit for the calendar years 1994 and 1995.3
On August 15, 1996, RCBC received Letter of Authority No. 133959
issued by then Commissioner of Internal Revenue (CIR) Liwayway
Vinzons-Chato, authorizing a special audit team to examine the books
of accounts and other accounting records for all internal revenue taxes
from January 1, 1994 to December 31, 1995.4
On January 23, 1997, RCBC executed two Waivers of the Defense of
Prescription Under the Statute of Limitations of the National Internal
Revenue Code covering the internal revenue taxes due for the years
1994 and 1995, effectively extending the period of the Bureau of
Internal Revenue (BIR) to assess up to December 31, 2000.5
Subsequently, on January 27, 2000, RCBC received a Formal Letter of
Demand together with Assessment Notices from the BIR for the
deficiency tax
Disagreeing with the said deficiency tax assessment, RCBC filed a
protest on February 24, 2000 and later submitted the relevant
documentary evidence to support it. Much later on November 20, 2000,
it filed a petition for review before the CTA, pursuant to Section 228 of
the 1997 Tax Code.7
On December 6, 2000, RCBC received another Formal Letter of
Demand with Assessment Notices dated October 20, 2000, following
the reinvestigation it requested, which drastically reduced the original
amount of deficiency taxes
On the same day, RCBC paid the following deficiency taxes as
assessed by the BIR. RCBC, however, refused to pay the following
assessments for deficiency onshore tax and documentary stamp tax
which remained to be the subjects of its petition for review:10
RCBC argued that the waivers of the Statute of Limitations which it
executed on January 23, 1997 were not valid because the same were
not signed or conformed to by the respondent CIR as required under
Section 222(b) of the Tax Code.11 As regards the deficiency FCDU
onshore tax, RCBC contended that because the onshore tax was
collected in the form of a final withholding tax, it was the borrower,
constituted by law as the withholding agent, that was primarily liable for
the remittance of the said tax.12
On December 15, 2004, the First Division of the Court of Tax Appeals
(CTA-First Division) promulgated its Decision13 which partially granted
the petition for review. It considered as closed and terminated the
assessments for deficiency income tax, deficiency gross receipts tax,
deficiency final withholding tax, deficiency expanded withholding tax,
and deficiency documentary stamp tax (not an industry issue) for 1994
94
and 1995.14 It, however, upheld the assessment for deficiency final tax
on FCDU onshore income and deficiency documentary stamp tax for
1994 and 1995 and ordered RCBC to pay the following amounts plus
20% delinquency tax:15
Unsatisfied, RCBC filed its Motion for Reconsideration on January 21,
2005, arguing that: (1) the CTA erred in its addition of the total amount
of deficiency taxes and the correct amount should only be ₱
132,654,261.69 and not ₱ 171,822,527.47; (2) the CTA erred in holding
that RCBC was estopped from questioning the validity of the waivers;
(3) it was the payor-borrower as withholding tax agent, and not RCBC,
who was liable to pay the final tax on FCDU, and (4) RCBC’s special
savings account was not subject to documentary stamp tax.16
In its Resolution17 dated April 11, 2005, the CTA-First Division
substantially upheld its earlier ruling, except for its inadvertence in the
addition of the total amount of deficiency taxes. As such, it modified its
earlier decision and ordered RCBC to pay the amount of ₱
132,654,261.69 plus 20% delinquency tax.18
RCBC elevated the case to the CTA-En Banc where it raised the
following issues:
I.
Whether or not the right of the respondent to assess deficiency onshore
tax and documentary stamp tax for taxable year 1994 and 1995 had
already prescribed when it issued the formal letter of demand and
assessment notices for the said taxable years.
II.
Whether or not petitioner is liable for deficiency onshore tax for taxable
year 1994 and 1995.
III.
Whether or not petitioner’s special savings account is subject to
documentary stamp tax under then Section 180 of the 1993 Tax
Code.19
The CTA-En Banc, in its assailed Decision, denied the petition for lack
of merit. It ruled that by receiving, accepting and paying portions of the
reduced assessment, RCBC bound itself to the new assessment,
implying that it recognized the validity of the waivers.20 RCBC could
not assail the validity of the waivers after it had received and accepted
certain benefits as a result of the execution of the said waivers.21 As
to the deficiency onshore tax, it held that because the payor-borrower
was merely designated by law to withhold and remit the said tax, it
would then follow that the tax should be imposed on RCBC as the
payee-bank.22 Finally, in relation to the assessment of the deficiency
documentary stamp tax on petitioner’s special savings account, it held
that petitioner’s special savings account was a certificate of deposit
and, as such, was subject to documentary stamp tax.23
Hence, this petition.
While awaiting the decision of this Court, RCBC filed its Manifestation
dated July 22, 2009, informing the Court that this petition, relative to the
DST deficiency assessment, had been rendered moot and academic
by its payment of the tax deficiencies on Documentary Stamp Tax
(DST) on Special Savings Account (SSA) for taxable years 1994 and
1995 after the BIR approved its applications for tax abatement.24
95

In its November 17, 2009 Comment to the Manifestation, the CIR
pointed out that the only remaining issues raised in the present petition
were those pertaining to RCBC’s deficiency tax on FCDU Onshore
Income for taxable years 1994 and 1995 in the aggregate amount of ₱
80,161,827.56 plus 20% delinquency interest per annum. The CIR
prayed that RCBC be considered to have withdrawn its appeal with
respect to the CTA-En Banc ruling on its DST on SSA deficiency for
taxable years 1994 and 1995 and that the questioned CTA decision
regarding RCBC’s deficiency tax on FCDU Onshore Income for the
same period be affirmed.25
THE ISSUES
Thus, only the following issues remain to be resolved by this Court:
Whether petitioner, by paying the other tax assessment covered by the
waivers of the statute of limitations, is rendered estopped from
questioning the validity of the said waivers with respect to the
assessment of deficiency onshore tax.26
and
Whether petitioner, as payee-bank, can be held liable for deficiency
onshore tax, which is mandated by law to be collected at source in the
form of a final withholding tax.27
THE COURT’S RULING
Petitioner is estopped from questioning the validity of the waivers
RCBC assails the validity of the waivers of the statute of limitations on
the ground that the said waivers were merely attested to by Sixto
Esquivias, then Coordinator for the CIR, and that he failed to indicate
acceptance or agreement of the CIR, as required under Section 223 (b)
of the 1977 Tax Code.28 RCBC further argues that the principle of
estoppel cannot be applied against it because its payment of the other
tax assessments does not signify a clear intention on its part to give up
its right to question the validity of the waivers.29
The Court disagrees.
Under Article 1431 of the Civil Code, the doctrine of estoppel is
anchored on the rule that "an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon." A party is precluded
from denying his own acts, admissions or representations to the
prejudice of the other party in order to prevent fraud and falsehood.30
Estoppel is clearly applicable to the case at bench. RCBC, through its
partial payment of the revised assessments issued within the extended
period as provided for in the questioned waivers, impliedly admitted the
validity of those waivers. Had petitioner truly believed that the waivers
were invalid and that the assessments were issued beyond the
prescriptive period, then it should not have paid the reduced amount of
taxes in the revised assessment. RCBC’s subsequent action effectively
belies its insistence that the waivers are invalid. The records show that
on December 6, 2000, upon receipt of the revised assessment, RCBC
immediately made payment on the uncontested taxes. Thus, RCBC is
estopped from questioning the validity of the waivers. To hold otherwise
and allow a party to gainsay its own act or deny rights which it had
96
previously recognized would run counter to the principle of equity which
this institution holds dear.31
Liability for Deficiency Onshore Withholding Tax
RCBC is convinced that it is the payor-borrower, as withholding agent,
who is directly liable for the payment of onshore tax, citing Section
2.57(A) of Revenue Regulations No. 2-98 which states:
(A) Final Withholding Tax. — Under the final withholding tax system the
amount of income tax withheld by the withholding agent is constituted
as a full and final payment of the income tax due from the payee on the
said income. The liability for payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case of his failure to withhold the
tax or in case of under withholding, the deficiency tax shall be collected
from the payor/withholding agent. The payee is not required to file an
income tax return for the particular income. (Emphasis supplied)
The petitioner is mistaken.
Before any further discussion, it should be pointed out that RCBC erred
in citing the abovementioned Revenue Regulations No. 2-98 because
the same governs collection at source on income paid only on or after
January 1, 1998. The deficiency withholding tax subject of this petition
was supposed to have been withheld on income paid during the taxable
years of 1994 and 1995. Hence, Revenue Regulations No. 2-98
obviously does not apply in this case.
In Chamber of Real Estate and Builders’ Associations, Inc. v. The
Executive Secretary,32 the Court has explained that the purpose of the
withholding tax system is three-fold: (1) to provide the taxpayer with a
convenient way of paying his tax liability; (2) to ensure the collection of
tax, and (3) to improve the government’s cashflow. Under the
withholding tax system, the payor is the taxpayer upon whom the tax is
imposed, while the withholding agent simply acts as an agent or a
collector of the government to ensure the collection of taxes.33
1avvphi1
It is, therefore, indisputable that the withholding agent is merely a tax
collector and not a taxpayer, as elucidated by this Court in the case of
Commissioner of Internal Revenue v. Court of Appeals,34 to wit:
In the operation of the withholding tax system, the withholding agent is
the payor, a separate entity acting no more than an agent of the
government for the collection of the tax in order to ensure its payments;
the payer is the taxpayer – he is the person subject to tax imposed by
law; and the payee is the taxing authority. In other words, the
withholding agent is merely a tax collector, not a taxpayer. Under the
withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the
taxpayer, because the income tax is still imposed on and due from the
latter. The agent is not liable for the tax as no wealth flowed into him –
he earned no income. The Tax Code only makes the agent personally
liable for the tax arising from the breach of its legal duty to withhold as
distinguished from its duty to pay tax since:
"the government’s cause of action against the withholding agent is not
for the collection of income tax, but for the enforcement of the
withholding provision of Section 53 of the Tax Code, compliance with
which is imposed on the withholding agent and not upon the
taxpayer."35 (Emphases supplied)
97
Based on the foregoing, the liability of the withholding agent is
independent from that of the taxpayer.1âwphi1 The former cannot be
made liable for the tax due because it is the latter who earned the
income subject to withholding tax. The withholding agent is liable only
insofar as he failed to perform his duty to withhold the tax and remit the
same to the government. The liability for the tax, however, remains with
the taxpayer because the gain was realized and received by him.
While the payor-borrower can be held accountable for its negligence in
performing its duty to withhold the amount of tax due on the transaction,
RCBC, as the taxpayer and the one which earned income on the
transaction, remains liable for the payment of tax as the taxpayer
shares the responsibility of making certain that the tax is properly
withheld by the withholding agent, so as to avoid any penalty that may
arise from the non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the
blame on the payor-borrower as the withholding agent. As such, it is
liable for payment of deficiency onshore tax on interest income derived
from foreign currency loans, pursuant to Section 24(e)(3) of the
National Internal Revenue Code of 1993:
Sec. 24. Rates of tax on domestic corporations.
xxxx
(e) Tax on certain incomes derived by domestic corporations
xxxx
(3) Tax on income derived under the Expanded Foreign Currency
Deposit System. – Income derived by a depository bank under the
expanded foreign currency deposit system from foreign currency
transactions with nonresidents, offshore banking units in the
Philippines, local commercial banks including branches of foreign
banks that may be authorized by the Central Bank to transact business
with foreign currency depository system units and other depository
banks under the expanded foreign currency deposit system shall be
exempt from all taxes, except taxable income from such transactions
as may be specified by the Secretary of Finance, upon
recommendation of the Monetary Board to be subject to the usual
income tax payable by banks: Provided, That interest income from
foreign currency loans granted by such depository banks under said
expanded system to residents (other than offshore banking units in the
Philippines or other depository banks under the expanded system) shall
be subject to a 10% tax. (Emphasis supplied)
As a final note, this Court has consistently held that findings and
conclusions of the CTA shall be accorded the highest respect and shall
be presumed valid, in the absence of any clear and convincing proof to
the contrary.36 The CTA, as a specialized court dedicated exclusively
to the study and resolution of tax problems, has developed an expertise
on the subject of taxation.37 As such, its decisions shall not be lightly
set aside on appeal, unless this Court finds that the questioned decision
is not supported by substantial evidence or there is a showing of abuse
or improvident exercise of authority on the part of the Tax Court.38
WHEREFORE, the petition is DENIED.
SO ORDERED.
98

18. Silkair (Singapore) Pte. Ltd., vs. CIR
G.R. No. 173594 February 6, 2008
CARPIO MORALES, J.:
Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation
organized under the laws of Singapore which has a Philippine
representative office, is an online international air carrier operating the
Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-
Singapore, and Singapore-Cebu-Singapore routes.
On December 19, 2001, Silkair filed with the Bureau of Internal
Revenue (BIR) a written application for the refund of P4,567,450.79
excise taxes it claimed to have paid on its purchases of jet fuel from
Petron Corporation from January to June 2000.1
As the BIR had not yet acted on the application as of December 26,
2001, Silkair filed a Petition for Review2 before the CTA
following Commissioner of Internal Revenue v. Victorias Milling Co.,
Inc., et al.3
Opposing the petition, respondent Commissioner on Internal Revenue
(CIR) alleged in his Answer that, among other things,
Petitioner failed to prove that the sale of the petroleum products was
directly made from a domestic oil company to the international
carrier. The excise tax on petroleum products is the direct liability of the
manufacturer/producer, and when added to the cost of the goods sold
to the buyer, it is no longer a tax but part of the price which the buyer
has to pay to obtain the article.4 (Emphasis and underscoring supplied)
By Decision of May 27, 2005, the Second Division of the CTA denied
Silkair’s petition on the ground that as the excise tax was imposed on
Petron Corporation as the manufacturer of petroleum products, any
claim for refund should be filed by the latter; and where the burden of
tax is shifted to the purchaser, the amount passed on to it is no longer
a tax but becomes an added cost of the goods purchased. Thus the
CTA discoursed:
The liability for excise tax on petroleum products that are being
removed from its refinery is imposed on the
manufacturer/producer (Section 130 of the NIRC of 1997). x x x
xxxx
While it is true that in the case of excise tax imposed on petroleum
products, the seller thereof may shift the tax burden to the buyer, the
latter is the proper party to claim for the refund in the case of exemption
from excise tax. Since the excise tax was imposed upon Petron
Corporation as the manufacturer of petroleum products, pursuant
to Section 130(A)(2), and that the corresponding excise taxes were
indeed, paid by it, . . . any claim for refund of the subject excise
taxes should be filed by Petron Corporation as the taxpayer
contemplated under the law. Petitioner cannot be considered as the
taxpayer because it merely shouldered the burden of the excise tax and
not the excise tax itself.
Therefore, the right to claim for the refund of excise taxes paid on
petroleum products lies with Petron Corporation who paid and remitted
the excise tax to the BIR. Respondent, on the other hand, may only
claim from Petron Corporation the reimbursement of the tax burden
shifted to the former by the latter. The excise tax partaking the nature
of an indirect tax, is clearly the liability of the manufacturer or seller who
has the option whether or not to shift the burden of the tax to the
purchaser. Where the burden of the tax is shifted to the
[purchaser], the amount passed on to it is no longer a tax but
becomes an added cost on the goods purchased which constitutes
99
a part of the purchase price. The incidence of taxation or the person
statutorily liable to pay the tax falls on Petron Corporation though the
impact of taxation or the burden of taxation falls on another person,
which in this case is petitioner Silkair.5 (Italics in the original; emphasis
and underscoring supplied)
Silkair filed a Motion for Reconsideration6 during the pendency of which
or on September 12, 2005 the Bengzon Law Firm entered its
appearance as counsel,7 without Silkair’s then-counsel of record
(Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or
"JGLaw") having withdrawn as such.
By Resolution8 of September 22, 2005, the CTA Second Division
denied Silkair’s motion for reconsideration. A copy of the Resolution
was furnished Silkair’s counsel JGLaw which received it on October 3,
2005.9
On October 13, 2005, JGLaw, with the conformity of Silkair, filed its
Notice of Withdrawal of Appearance.10 On even date, Silkair, through
the Bengzon Law Firm, filed a Manifestation/Motion11 stating:
Petitioner was formerly represented xxx by JIMENEZ GONZALES
LIWANAG BELLO VALDEZ CALUYA & FERNANDEZ (JGLaw).
1. On 24 August 2005, petitioner served notice to JGLaw of its decision
to cease all legal representation handled by the latter on behalf of the
petitioner. Petitioner also requested JGLaw to make arrangements for
the transfer of all files relating to its legal representation on behalf of
petitioner to the undersigned counsel. x x x
2. The undersigned counsel was engaged to act as counsel for the
petitioner in the above-entitled case; and thus, filed its entry of
appearance on 12 September 2005. x x x
3. The undersigned counsel, through petitioner, has received
information that the Honorable Court promulgated a Resolution on
petitioner’s Motion for Reconsideration. To date, the undersigned
counsel has yet to receive an official copy of the above-mentioned
Resolution. In light of the foregoing, undersigned counsel hereby
respectfully requests for an official copy of the Honorable Court’s
Resolution on petitioner’s Motion for Reconsideration x x
x.12 (Underscoring supplied)
On October 14, 2005, the Bengzon Law Firm received its requested
copy of the September 22, 200513 CTA Second Division Resolution.
Thirty-seven days later or on October 28, 2005, Silkair, through said
counsel, filed a Motion for Extension of Time to File Petition for
Review14 before the CTA En Banc which gave it until November 14,
2005 to file a petition for review.
On November 11, 2005, Silkair filed another Motion for Extension of
Time.15 On even date, the Bengzon Law Firm informed the CTA of its
withdrawal of appearance as counsel for Silkair with the information,
that Silkair would continue to be represented by Atty. Teodoro A.
Pastrana, who used to be with the firm but who had become a partner
of the Pastrana and Fallar Law Offices.16
The CTA En Banc granted Silkair’s second Motion for Extension of
Time, giving Silkair until November 24, 2005 to file its petition for review.
On November 17, 2005, Silkair filed its Petition for Review17 before the
CTA En Banc.
By Resolution of May 19,2006, the CTA En Banc dismissed 18 Silkair’s
petition for review for having been filed out of time in this wise:
A petitioner is given a period of fifteen (15) days from notice of award,
judgment, final order or resolution, or denial of motion for new trial or
100
reconsideration to appeal to the proper forum, in this case, the CTA En
Banc. This is clear from both Section 11 and Section 9 of Republic
Act No. 9282 x x x.
xxxx
The petitioner, through its counsel of record Jimenez, Gonzalez,
L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices, received
the Resolution dated September 22, 2005 on October 3, 2005. At that
time, the petitioner had two counsels of record, namely, Jimenez,
Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices
and The Bengzon Law Firm which filed its Entry of Appearance on
September 12, 2005. However, as of said date, Atty. Mary Jane B.
Austria-Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez,
Caluya & Fernandez Law Offices was still the counsel of record
considering that the Notice of Withdrawal of Appearance signed by Atty.
Mary Jane B. Austria-Delgado was filed only on October 13, 2005 or
ten (10) days after receipt of the September 22, 2005 Resolution of the
Court’s Second Division.
This notwithstanding, Section 2 of Rule 13 of the Rules of
Court provides that if any party has appeared by counsel, service upon
him shall be made upon his counsel or one of them, unless service
upon the party himself is ordered by the Court. Where a party is
represented by more than one counsel of record, "notice to any one of
the several counsel on record is equivalent to notice to all the
counsel (Damasco vs. Arrieta, et. al., 7 SCRA 224)." Considering that
petitioner, through its counsel of record, had received the September
22, 2005 Resolution as early as October 3, 2005, it had only until
October 18, 2005 within which to file its Petition for Review. Petitioner
only managed to file the Petition for Review with the Court En Banc on
November 17, 2005 or [after] thirty (30) days had lapsed from the final
date of October 18, 2005 to appeal.
The argument that it requested Motions for Extension of Time on
October 28, 2005 or ten (10) days from the appeal period and the
second Motion for Extension of Time to file its Petition for Review on
November 11, 2005 and its allowance by the CTA En
Banc notwithstanding, the questioned Decision is no longer appealable
for failure to timely file the necessary Petition for Review.19 (Emphasis
in the original)
In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C.
Castañeda, Jr. posited that Silkair is not the proper party to claim the
tax refund.
Silkair filed a Motion for Reconsideration21 which the CTA En Banc
denied.22 Hence, the present Petition for Review23 which raises the
following issues:
I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH
THE HONORABLE COURT OF TAX APPEALS EN BANC
WAS TIMELY FILED.
II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL
SYSTEM, WHETHER OR NOT PETITIONER SHOULD
BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS OF
TECHNICALITY.
III. ASSUMING THE HONORABLE SUPREME COURT WOULD
HOLD THAT THE FILING OF THE PETITITON FOR REVIEW WITH
THE HONORABLE COURT OF TAX APPEALS EN BANC WAS
TIMELY, WHETHER OR NOT THE PETITIONER IS THE PROPER
PARTY TO CLAIM FOR REFUND OR TAX CREDIT.24 (Underscoring
supplied)
101
Silkair posits that "the instant case does not involve a situation where
the petitioner was represented by two (2) counsels on record, such that
notice to the former counsel would be held binding on the petitioner, as
in the case of Damasco v. Arrieta, etc., et al.25 x x x heavily relied upon
by the respondent";26 and that "the case of Dolores De Mesa Abad v.
Court of Appeals27 has more appropriate application to the present
case."28
In Dolores De Mesa Abad, the trial court issued an order of November
19, 1974 granting the therein private respondents’ Motion for
Annulment of documents and titles. The order was received by the
therein petitioner’s counsel of record, Atty. Escolastico R. Viola, on
November 22, 1974 prior to which or on July 17, 1974, Atty. Vicente
Millora of the Millora, Tobias and Calimlim Law Office had filed an
"Appearance and Manifestation." Atty. Millora received a copy of the
trial court’s order on December 9, 1974. On January 4, 1975, the
therein petitioners, through Atty. Ernesto D. Tobias also of the Millora,
Tobias and Calimlim Law Office, filed their Notice of Appeal and Cash
Appeal Bond as well as a Motion for Extension of the period to file a
Record on Appeal.
They filed the Record on Appeal on January 24, 1975. The trial court
dismissed the appeal for having been filed out of time, which was
upheld by the Court of Appeals on the ground that the period within
which to appeal should be counted from November 22, 1974, the date
Atty. Viola received a copy of the November 19, 1974 order. The
appellate court held that Atty. Viola was still the counsel of record, he
not having yet withdrawn his appearance as counsel for the therein
petitioners. On petition for certiorari,29 this Court held
x x x [R]espondent Court reckoned the period of appeal from the time
petitioners’ original counsel, Atty. Escolastico R. Viola, received the
Order granting the Motion for Annulment of documents and titles on
November 22, 1974. But as petitioners stress, Atty. Vicente Millora of
the Millora, Tobias and Calimlim Law Office had filed an "Appearance
and Manifestation" on July 16, 1974. Where there may have been no
specific withdrawal by Atty. Escolastico R. Viola, for which he should
be admonished, by the appearance of a new counsel, it can be said
that Atty. Viola had ceased as counsel for petitioners. In fact, Orders
subsequent to the aforesaid date were already sent by the trial Court to
the Millora, Tobias and Calimlim Law Office and not to Atty. Viola.
Under the circumstances, December 9, 1974 is the controlling date of
receipt by petitioners’ counsel and from which the period of appeal from
the Order of November 19, 1974 should be reckoned. That being the
case, petitioner’s x x x appeal filed on January 4, 1975 was timely
filed.30 (Underscoring supplied)
The facts of Dolores De Mesa Abad are not on all fours with those of
the present case. In any event, more recent jurisprudence holds that in
case of failure to comply with the procedure established by Section 26,
Rule 13831 of the Rules of Court re the withdrawal of a lawyer as a
counsel in a case, the attorney of record is regarded as the counsel
who should be served with copies of the judgments, orders and
pleadings.32 Thus, where no notice of withdrawal or substitution of
counsel has been shown, notice to counsel of record is, for all
purposes, notice to the client.33 The court cannot be expected to itself
ascertain whether the counsel of record has been changed.34
In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance
on October 13, 200535 after the Bengzon Law Firm had entered its
appearance. While Silkair claims it dismissed JGLaw as its counsel as
early as August 24, 2005, the same was communicated to the CTA only
on October 13, 2005.36 Thus, JGLaw was still Silkair’s counsel of record
102
as of October 3, 2005 when a copy of the September 22, 2005
resolution of the CTA Second Division was served on it. The service
upon JGLaw on October 3, 2005 of the September 22, 2005 resolution
of CTA Second Division was, therefore, for all legal intents and
purposes, service to Silkair, and the CTA correctly reckoned the period
of appeal from such date.
TECHNICALITY ASIDE, on the merits, the petition just the same fails.
Silkair bases its claim for refund or tax credit on Section 135 (b) of the
NIRC of 1997 which reads
Sec. 135. Petroleum Products sold to International Carriers and
Exempt Entities of Agencies. – Petroleum products sold to the
following are exempt from excise tax:
xxxx
(b) Exempt entities or agencies covered by tax treaties, conventions,
and other international agreements for their use and
consumption: Provided, however, That the country of said foreign
international carrier or exempt entities or agencies exempts from similar
taxes petroleum products sold to Philippine carriers, entities or
agencies; x x x
x x x x,
and Article 4(2) of the Air Transport Agreement between the
Government of the Republic of the Philippines and the Government of
the Republic of Singapore (Air Transport Agreement between RP and
Singapore) which reads
Fuel, lubricants, spare parts, regular equipment and aircraft stores
introduced into, or taken on board aircraft in the territory of one
Contracting party by, or on behalf of, a designated airline of the other
Contracting Party and intended solely for use in the operation of the
agreed services shall, with the exception of charges corresponding to
the service performed, be exempt from the same customs duties,
inspection fees and other duties or taxes imposed in the territories of
the first Contracting Party , even when these supplies are to be used
on the parts of the journey performed over the territory of the
Contracting Party in which they are introduced into or taken on board.
The materials referred to above may be required to be kept under
customs supervision and control.
The proper party to question, or seek a refund of, an indirect tax is the
statutory taxpayer, the person on whom the tax is imposed by law and
who paid the same even if he shifts the burden thereof to
another.37 Section 130 (A) (2) of the NIRC provides that "[u]nless
otherwise specifically allowed, the return shall be filed and the excise
tax paid by the manufacturer or producer before removal of domestic
products from place of production." Thus, Petron Corporation, not
Silkair, is the statutory taxpayer which is entitled to claim a refund based
on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport
Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax,
the additional amount billed to Silkair for jet fuel is not a tax but part of
the price which Silkair had to pay as a purchaser.38
Silkair nevertheless argues that it is exempt from indirect taxes because
the Air Transport Agreement between RP and Singapore grants
exemption "from the same customs duties, inspection fees and other
duties or taxes imposed in the territory of the first Contracting Party."39 It
invokes Maceda v. Macaraig, Jr.40 which upheld the claim for tax credit
or refund by the National Power Corporation (NPC) on the ground that
the NPC is exempt even from the payment of indirect taxes.
103
Silkairs’s argument does not persuade. In Commissioner of Internal cannot, without a clear showing of legislative intent, be construed as
Revenue v. Philippine Long Distance Telephone Company,41 this Court including indirect taxes. Statutes granting tax exemptions must be
clarified the ruling in Maceda v. Macaraig, Jr., viz: construed in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority, 43 and if an exemption is found to exist, it must
It may be so that in Maceda vs. Macaraig, Jr., the Court held that an
not be enlarged by construction.44
exemption from "all taxes" granted to the National Power Corporation
(NPC) under its charter includes both direct and indirect taxes. But far WHEREFORE, the petition is DENIED.
from providing PLDT comfort, Maceda in fact supports the case of
Costs against petitioner.
herein petitioner, the correct lesson of Maceda being that an exemption
from "all taxes" excludes indirect taxes, unless the exempting statute, SO ORDERED
like NPC’s charter, is so couched as to include indirect tax from the
exemption. Wrote the Court:
x x x However, the amendment under Republic Act No. 6395
enumerated the details covered by the exemption. Subsequently, P.D.
380, made even more specific the details of the exemption of NPC to
cover, among others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No. 938 [NPC’s
amended charter] amended the tax exemption by simplifying the same
law in general terms. It succinctly exempts NPC from "all forms of taxes,
duties[,] fees…"
The use of the phrase "all forms" of taxes demonstrates the intention of
the law to give NPC all the tax exemptions it has been enjoying before…
xxxx
It is evident from the provisions of P.D. No. 938 that its purpose is to
maintain the tax exemption of NPC from all forms of taxes including
indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to
attain its goals. (Italics in the original; emphasis supplied)42
The exemption granted under Section 135 (b) of the NIRC of 1997 and
Article 4(2) of the Air Transport Agreement between RP and Singapore

104
19. Planters Products, Inc. vs. Fertiphil Corp
G.R. No. 166006 March 14, 2008
REYES, R.T., J.:
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations
incorporated under Philippine laws.3 They are both engaged in the
importation and distribution of fertilizers, pesticides and agricultural
chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his
legislative powers, issued LOI No. 1465 which provided, among others,
for the imposition of a capital recovery component (CRC) on the
domestic sale of all grades of fertilizers in the Philippines.4 The LOI
provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its
fertilizer pricing formula a capital contribution component of not less
than ₱10 per bag. This capital contribution shall be collected until
adequate capital is raised to make PPI viable. Such capital contribution
shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it sold
in the domestic market to the Fertilizer and Pesticide Authority (FPA).
FPA then remitted the amount collected to the Far East Bank and Trust
Company, the depositary bank of PPI. Fertiphil paid ₱6,689,144 to FPA
from July 8, 1985 to January 24, 1986.6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition
of the ₱10 levy. With the return of democracy, Fertiphil demanded from
PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused
to accede to the demand.7
Fertiphil filed a complaint for collection and damages8 against FPA and
PPI with the RTC in Makati. It questioned the constitutionality of LOI
No. 1465 for being unjust, unreasonable, oppressive, invalid and an
unlawful imposition that amounted to a denial of due process of
law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned
corporation, which used the proceeds to maintain its monopoly of the
fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of
the State in ensuring the stability of the fertilizer industry in the country.
It also averred that Fertiphil did not sustain any damage from the LOI
because the burden imposed by the levy fell on the ultimate consumer,
not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of
Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against the defendant Planters
Product, Inc., ordering the latter to pay the former:
1) the sum of ₱6,698,144.00 with interest at 12% from the time of
judicial demand;
2) the sum of ₱100,000 as attorney’s fees;
105
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the ₱10 CRC was an exercise of the
State’s inherent power of taxation, the RTC invalidated the levy for
violating the basic principle that taxes can only be levied for public
purpose, viz.:
It is apparent that the imposition of ₱10 per fertilizer bag sold in the
country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the state
is plenary. Comprehensive and supreme, the principal check upon its
abuse resting in the responsibility of the members of the legislature to
their constituents. However, there are two kinds of limitations on the
power of taxation: the inherent limitations and the constitutional
limitations.
One of the inherent limitations is that a tax may be levied only for public
purposes:
The power to tax can be resorted to only for a constitutionally valid
public purpose. By the same token, taxes may not be levied for purely
private purposes, for building up of private fortunes, or for the redress
of private wrongs. They cannot be levied for the improvement of private
property, or for the benefit, and promotion of private enterprises, except
where the aid is incident to the public benefit. It is well-settled principle
of constitutional law that no general tax can be levied except for the
purpose of raising money which is to be expended for public use. Funds
cannot be exacted under the guise of taxation to promote a purpose
that is not of public interest. Without such limitation, the power to tax
could be exercised or employed as an authority to destroy the economy
of the people. A tax, however, is not held void on the ground of want of
public interest unless the want of such interest is clear. (71 Am. Jur. pp.
371-372)
In the case at bar, the plaintiff paid the amount of ₱6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the ₱10 per bag of
fertilizer sold imposition under LOI 1465 which, in turn, remitted the
amount to the defendant Planters Products, Inc. thru the latter’s
depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI
1465 the plaintiff, Fertiphil Corporation, which is a private domestic
corporation, became poorer by the amount of ₱6,698,144.00 and the
defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of ₱6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-
quoted jurisprudence, it is quite evident that LOI 1465 insofar as it
imposes the amount of ₱10 per fertilizer bag sold in the country and
orders that the said amount should go to the defendant Planters
Product, Inc. is unlawful because it violates the mandate that a tax can
be levied only for a public purpose and not to benefit, aid and promote
a private enterprise such as Planters Product, Inc.12
PPI moved for reconsideration but its motion was denied.13 PPI then
filed a notice of appeal with the RTC but it failed to pay the requisite
appeal docket fee. In a separate but related proceeding, this
Court14 allowed the appeal of PPI and remanded the case to the CA for
proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the following fallo:
106
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award of
attorney’s fees is hereby DELETED.15
In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise
its power to judicially determine the constitutionality of the subject
statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the
courts will not resolve the constitutionality of a law (Lim v. Pacquing,
240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political
departments are valid, absent a clear and unmistakable showing to the
contrary.
However, the courts are not precluded from exercising such power
when the following requisites are obtaining in a controversy before it:
First, there must be before the court an actual case calling for the
exercise of judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must
have standing to challenge. Fourth, the question of constitutionality
must have been raised at the earliest opportunity; and lastly, the issue
of constitutionality must be the very lis mota of the case (Integrated Bar
of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals that the
instant action is founded on the claim that the levy imposed was an
unlawful and unconstitutional special assessment. Consequently, the
requisite that the constitutionality of the law in question be the very lis
mota of the case is present, making it proper for the trial court to rule
on the constitutionality of LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was issued
under the police power of the state, it is still unconstitutional because it
did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy
imposed under the said law was an invalid exercise of the State’s power
of taxation inasmuch as it violated the inherent and constitutional
prescription that taxes be levied only for public purposes. It reasoned
out that the amount collected under the levy was remitted to the
depository bank of PPI, which the latter used to advance its private
interest.
On the other hand, appellant submits that the subject statute’s passage
was a valid exercise of police power. In addition, it disputes the court a
quo’s findings arguing that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation
created by law to hold in trust for millions of farmers, the stock
ownership of PPI.
Of the three fundamental powers of the State, the exercise of police
power has been characterized as the most essential, insistent and the
least limitable of powers, extending as it does to all the great public
needs. It may be exercised as long as the activity or the property sought
to be regulated has some relevance to public welfare (Constitutional
Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set
by the Constitution, which requires the concurrence of a lawful subject
107
and a lawful method. Thus, our courts have laid down the test to
determine the validity of a police measure as follows: (1) the interests
of the public generally, as distinguished from those of a particular class,
requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v.
Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial court’s
holding LOI 1465 unconstitutional. To be sure, ensuring the continued
supply and distribution of fertilizer in the country is an undertaking
imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the
public welfare. The government’s commitment to support the
successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statute’s
impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the country’s farmers
or even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction
where none is needed. When a statute’s public purpose is spoiled by
private interest, the use of police power becomes a travesty which must
be struck down for being an arbitrary exercise of government power. To
rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private individuals.17
The CA did not accept PPI’s claim that the levy imposed under LOI No.
1465 was for the benefit of Planters Foundation, Inc., a foundation
created to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation
created by law to hold in trust for millions of farmers, the stock
ownership of PFI on the strength of Letter of Undertaking (LOU) issued
by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by
the Secretary of Justice in an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic
shall cause FPA to include in its fertilizer pricing formula a capital
recovery component, the proceeds of which will be used initially for the
purpose of funding the unpaid portion of the outstanding capital stock
of Planters presently held in trust by Planters Foundation, Inc. (Planters
Foundation), which unpaid capital is estimated at approximately ₱206
million (subject to validation by Planters and Planters Foundation) (such
unpaid portion of the outstanding capital stock of Planters being
hereafter referred to as the ‘Unpaid Capital’), and subsequently for such
capital increases as may be required for the continuing viability of
Planters.
The capital recovery component shall be in the minimum amount of
₱10 per bag, which will be added to the price of all domestic sales of
fertilizer in the Philippines by any importer and/or fertilizer mother
company. In this connection, the Republic hereby acknowledges that
the advances by Planters to Planters Foundation which were applied to
the payment of the Planters shares now held in trust by Planters
Foundation, have been assigned to, among others, the Creditors.
Accordingly, the Republic, through FPA, hereby agrees to deposit the
proceeds of the capital recovery component in the special trust account
designated in the notice dated April 2, 1985, addressed by counsel for
108
the Creditors to Planters Foundation. Such proceeds shall be deposited
by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and
collected until payment in full of (a) the Unpaid Capital and/or (b) any
shortfall in the payment of the Subsidy Receivables, (c) any carrying
cost accruing from the date hereof on the amounts which may be
outstanding from time to time of the Unpaid Capital and/or the Subsidy
Receivables and (d) the capital increases contemplated in paragraph 2
hereof. For the purpose of the foregoing clause (c), the ‘carrying cost’
shall be at such rate as will represent the full and reasonable cost to
Planters of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations." (Records, pp. 42-43)
Appellant’s proposition is open to question, to say the least. The LOU
issued by then Prime Minister Virata taken together with the Justice
Secretary’s Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of farmers.
Unfortunately for appellant, in the absence of sufficient evidence to
establish its claims, this Court is constrained to rely on what is explicitly
provided in LOI 1465 – that one of the primary aims in imposing the
levy is to support the successful rehabilitation and continued viability of
PPI.18
PPI moved for reconsideration but its motion was denied.19 It then filed
the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE
COLLATERALLY ATTACKED AND BE DECREED VIA A DEFAULT
JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY
LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE
CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO
STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY
LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR
STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION
PURSUANT TO THE EXERCISE OF TAXATION AND POLICE
POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT WAS REMITTED TO THE GOVERNMENT, AND
BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE
AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND
CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF
"OPERATIVE FACT" PRIOR TO ANY DECLARATION OF
UNCONSTITUTIONALITY OF LOI 1465.
IV
109
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE
ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT
CASE.20 (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the
jurisdiction of the RTC to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of
standing is a mere procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the
constitutionality of LOI No. 1465 because it does not have a "personal
and substantial interest in the case or will sustain direct injury as a result
of its enforcement."21 It asserts that Fertiphil did not suffer any damage
from the CRC imposition because "incidence of the levy fell on the
ultimate consumer or the farmers themselves, not on the seller fertilizer
company."22
We cannot agree. The doctrine of locus standi or the right of
appearance in a court of justice has been adequately discussed by this
Court in a catena of cases. Succinctly put, the doctrine requires a
litigant to have a material interest in the outcome of a case. In private
suits, locus standi requires a litigant to be a "real party in interest," which
is defined as "the party who stands to be benefited or injured by the
judgment in the suit or the party entitled to the avails of the suit." 23
In public suits, this Court recognizes the difficulty of applying the
doctrine especially when plaintiff asserts a public right on behalf of the
general public because of conflicting public policy issues. 24 On one
end, there is the right of the ordinary citizen to petition the courts to be
freed from unlawful government intrusion and illegal official action. At
the other end, there is the public policy precluding excessive judicial
interference in official acts, which may unnecessarily hinder the delivery
of basic public services.
In this jurisdiction, We have adopted the "direct injury test" to determine
locus standi in public suits. In People v. Vera,25 it was held that a person
who impugns the validity of a statute must have "a personal and
substantial interest in the case such that he has sustained, or will
sustain direct injury as a result." The "direct injury test" in public suits is
similar to the "real party in interest" rule for private suits under Section
2, Rule 3 of the 1997 Rules of Civil Procedure.26
Recognizing that a strict application of the "direct injury" test may
hamper public interest, this Court relaxed the requirement in cases of
"transcendental importance" or with "far reaching implications." Being
a mere procedural technicality, it has also been held that locus standi
may be waived in the public interest.27
Whether or not the complaint for collection is characterized as a private
or public suit, Fertiphil has locus standi to file it. Fertiphil suffered a
direct injury from the enforcement of LOI No. 1465. It was required, and
it did pay, the ₱10 levy imposed for every bag of fertilizer sold on the
domestic market. It may be true that Fertiphil has passed some or all of
the levy to the ultimate consumer, but that does not disqualify it from
attacking the constitutionality of the LOI or from seeking a refund. As
seller, it bore the ultimate burden of paying the levy. It faced the
possibility of severe sanctions for failure to pay the levy. The fact of
payment is sufficient injury to Fertiphil.
110
Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The levy
certainly rendered the fertilizer products of Fertiphil and other domestic
sellers much more expensive. The harm to their business consists not
only in fewer clients because of the increased price, but also in adopting
alternative corporate strategies to meet the demands of LOI No. 1465.
Fertiphil and other fertilizer sellers may have shouldered all or part of
the levy just to be competitive in the market. The harm occasioned on
the business of Fertiphil is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the
liberal policy consistently adopted by this Court on locus standi must
apply. The issues raised by Fertiphil are of paramount public
importance. It involves not only the constitutionality of a tax law but,
more importantly, the use of taxes for public purpose. Former President
Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing
private company. This is clear from the text of the LOI. PPI is expressly
named in the LOI as the direct beneficiary of the levy. Worse, the levy
was made dependent and conditional upon PPI becoming financially
viable. The LOI provided that "the capital contribution shall be collected
until adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of
the statute. It is Our constitutional duty to squarely resolve the issue as
the final arbiter of all justiciable controversies. The doctrine of standing,
being a mere procedural technicality, should be waived, if at all, to
adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was
adequately raised in the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the
constitutionality of the LOI. It asserts that the constitutionality of the LOI
cannot be collaterally attacked in a complaint for
collection.28 Alternatively, the resolution of the constitutional issue is not
necessary for a determination of the complaint for collection.29
Fertiphil counters that the constitutionality of the LOI was adequately
pleaded in its complaint. It claims that the constitutionality of LOI No.
1465 is the very lis mota of the case because the trial court cannot
determine its claim without resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the constitutionality
of a statute, presidential decree or an executive order. This is clear from
Section 5, Article VIII of the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as
the law or the Rules of Court may provide, final judgments and orders
of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree,
proclamation, order, instruction, ordinance, or regulation is in question.
(Underscoring supplied)
In Mirasol v. Court of Appeals,31 this Court recognized the power of the
RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a statute,
111
presidential decree, or executive order. The Constitution vests the Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was
power of judicial review or the power to declare a law, treaty, properly and adequately raised in the complaint for collection filed with
international or executive agreement, presidential decree, order, the RTC. The pertinent portions of the complaint allege:
instruction, ordinance, or regulation not only in this Court, but in all
6. The CRC of ₱10 per bag levied under LOI 1465 on domestic sales
Regional Trial Courts.32
of all grades of fertilizer in the Philippines, is unlawful, unjust, uncalled
In the recent case of Equi-Asia Placement, Inc. v. Department of for, unreasonable, inequitable and oppressive because:
Foreign Affairs,33 this Court reiterated:
xxxx
There is no denying that regular courts have jurisdiction over cases
(c) It favors only one private domestic corporation, i.e., defendant PPPI,
involving the validity or constitutionality of a rule or regulation issued by
and imposed at the expense and disadvantage of the other fertilizer
administrative agencies. Such jurisdiction, however, is not limited to the
importers/distributors who were themselves in tight business situation
Court of Appeals or to this Court alone for even the regional trial courts
and were then exerting all efforts and maximizing management and
can take cognizance of actions assailing a specific rule or set of rules
marketing skills to remain viable;
promulgated by administrative bodies. Indeed, the Constitution vests
the power of judicial review or the power to declare a law, treaty, xxxx
international or executive agreement, presidential decree, order,
(e) It was a glaring example of crony capitalism, a forced program
instruction, ordinance, or regulation in the courts, including the regional
through which the PPI, having been presumptuously masqueraded as
trial courts.34
"the" fertilizer industry itself, was the sole and anointed beneficiary;
Judicial review of official acts on the ground of unconstitutionality may
7. The CRC was an unlawful; and unconstitutional special assessment
be sought or availed of through any of the actions cognizable by courts
and its imposition is tantamount to illegal exaction amounting to a denial
of justice, not necessarily in a suit for declaratory relief. Such review
of due process since the persons of entities which had to bear the
may be had in criminal actions, as in People v. Ferrer35 involving the
burden of paying the CRC derived no benefit therefrom; that on the
constitutionality of the now defunct Anti-Subversion law, or in ordinary
contrary it was used by PPI in trying to regain its former despicable
actions, as in Krivenko v. Register of Deeds36 involving the
monopoly of the fertilizer industry to the detriment of other distributors
constitutionality of laws prohibiting aliens from acquiring public lands.
and importers.38 (Underscoring supplied)
The constitutional issue, however, (a) must be properly raised and
presented in the case, and (b) its resolution is necessary to a The constitutionality of LOI No. 1465 is also the very lis mota of the
determination of the case, i.e., the issue of constitutionality must be the complaint for collection. Fertiphil filed the complaint to compel PPI to
very lis mota presented.37 refund the levies paid under the statute on the ground that the law

112
imposing the levy is unconstitutional. The thesis is that an
unconstitutional law is void. It has no legal effect. Being void, Fertiphil
had no legal obligation to pay the levy. Necessarily, all levies duly paid
pursuant to an unconstitutional law should be refunded under the civil
code principle against unjust enrichment. The refund is a mere
consequence of the law being declared unconstitutional. The RTC
surely cannot order PPI to refund Fertiphil if it does not declare the LOI
unconstitutional. It is the unconstitutionality of the LOI which triggers
the refund. The issue of constitutionality is the very lis mota of the
complaint with the RTC.
The ₱10 levy under LOI No. 1465 is an exercise of the power of
taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling
against the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police
power or the power of taxation. It claims that the LOI was implemented
for the purpose of assuring the fertilizer supply and distribution in the
country and for benefiting a foundation created by law to hold in trust
for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was
enacted to give benefit to a private company. The levy was imposed to
pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI
is enacted under the police power, it is still unconstitutional because it
did not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for validity.
Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the
general welfare,39 while the power of taxation is the power to levy taxes
to be used for public purpose. The main purpose of police power is the
regulation of a behavior or conduct, while taxation is revenue
generation. The "lawful subjects" and "lawful means" tests are used to
determine the validity of a law enacted under the police power. 40 The
power of taxation, on the other hand, is circumscribed by inherent and
constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise
by the State of its taxation power. While it is true that the power of
taxation can be used as an implement of police power,41 the primary
purpose of the levy is revenue generation. If the purpose is primarily
revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax.42
In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a
vehicle registration fee is not an exercise by the State of its police
power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123
and Section 61 of the Land Transportation and Traffic Code that the
legislative intent and purpose behind the law requiring owners of
vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. x
x x Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz
v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if
113
revenue is, at least, one of the real and substantial purposes, then the
exaction is properly called a tax. Such is the case of motor vehicle
registration fees. The same provision appears as Section 59(b) in the
Land Transportation Code. It is patent therefrom that the legislators had
in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or fee."
x x x Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an
"additional" tax. Rep. Act 4136 also speaks of other "fees" such as the
special permit fees for certain types of motor vehicles (Sec. 10) and
additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the
Code as taxes like the motor vehicle registration fee and chauffeurs’
license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec.
61.44 (Underscoring supplied)
The ₱10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the seller
or the ultimate consumer. It increased the price of a bag of fertilizer by
as much as five percent.45 A plain reading of the LOI also supports the
conclusion that the levy was for revenue generation. The LOI expressly
provided that the levy was imposed "until adequate capital is raised to
make PPI viable."
Taxes are exacted only for a public purpose. The ₱10 levy is
unconstitutional because it was not for a public purpose. The levy was
imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes
are exacted only for a public purpose. They cannot be used for purely
private purposes or for the exclusive benefit of private persons.46 The
reason for this is simple. The power to tax exists for the general welfare;
hence, implicit in its power is the limitation that it should be used only
for a public purpose. It would be a robbery for the State to tax its citizens
and use the funds generated for a private purpose. As an old United
States case bluntly put it: "To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow
it upon favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the forms
of law and is called taxation."47
The term "public purpose" is not defined. It is an elastic concept that
can be hammered to fit modern standards. Jurisprudence states that
"public purpose" should be given a broad interpretation. It does not only
pertain to those purposes which are traditionally viewed as essentially
government functions, such as building roads and delivery of basic
services, but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government functions,
the inherent requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax law. When a
tax law is only a mask to exact funds from the public when its true intent
is to give undue benefit and advantage to a private enterprise, that law
will not satisfy the requirement of "public purpose."
114
The purpose of a law is evident from its text or inferable from other fertilizer to pay the levy is made indefinite. They are required to
secondary sources. Here, We agree with the RTC and that CA that the continuously pay the levy until adequate capital is raised for PPI.
levy imposed under LOI No. 1465 was not for a public purpose.
Third, the RTC and the CA held that the levies paid under the LOI were
First, the LOI expressly provided that the levy be imposed to benefit directly remitted and deposited by FPA to Far East Bank and Trust
PPI, a private company. The purpose is explicit from Clause 3 of the Company, the depositary bank of PPI.49 This proves that PPI benefited
law, thus: from the LOI. It is also proves that the main purpose of the law was to
give undue benefit and advantage to PPI.
3. The Administrator of the Fertilizer Pesticide Authority to include in its
fertilizer pricing formula a capital contribution component of not less Fourth, the levy was used to pay the corporate debts of PPI. A reading
than ₱10 per bag. This capital contribution shall be collected until of the Letter of Understanding50 dated May 18, 1985 signed by then
adequate capital is raised to make PPI viable. Such capital contribution Prime Minister Cesar Virata reveals that PPI was in deep financial
shall be applied by FPA to all domestic sales of fertilizers in the problem because of its huge corporate debts. There were pending
Philippines.48 (Underscoring supplied) petitions for rehabilitation against PPI before the Securities and
Exchange Commission. The government guaranteed payment of PPI’s
It is a basic rule of statutory construction that the text of a statute should
debts to its foreign creditors. To fund the payment, President Marcos
be given a literal meaning. In this case, the text of the LOI is plain that
issued LOI No. 1465. The pertinent portions of the letter of
the levy was imposed in order to raise capital for PPI. The framers of
understanding read:
the LOI did not even hide the insidious purpose of the law. They were
cavalier enough to name PPI as the ultimate beneficiary of the taxes Republic of the Philippines
levied under the LOI. We find it utterly repulsive that a tax law would
Office of the Prime Minister
expressly name a private company as the ultimate beneficiary of the
taxes to be levied from the public. This is a clear case of crony Manila
capitalism.
LETTER OF UNDERTAKING
Second, the LOI provides that the imposition of the ₱10 levy was
May 18, 1985
conditional and dependent upon PPI becoming financially "viable." This
suggests that the levy was actually imposed to benefit PPI. The LOI TO: THE BANKING AND FINANCIAL INSTITUTIONS
notably does not fix a maximum amount when PPI is deemed financially LISTED IN ANNEX A HERETO WHICH ARE
"viable." Worse, the liability of Fertiphil and other domestic sellers of CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

115
Gentlemen: ("Planters Foundation"), which unpaid capital is estimated at
approximately ₱206 million (subject to validation by Planters and
This has reference to Planters which is the principal importer and
Planters Foundation) such unpaid portion of the outstanding capital
distributor of fertilizer, pesticides and agricultural chemicals in the
stock of Planters being hereafter referred to as the "Unpaid Capital"),
Philippines. As regards Planters, the Philippine Government confirms
and subsequently for such capital increases as may be required for the
its awareness of the following: (1) that Planters has outstanding
continuing viability of Planters.
obligations in foreign currency and/or pesos, to the Creditors, (2)
that Planters is currently experiencing financial difficulties, and (3) xxxx
that there are presently pending with the Securities and Exchange
The capital recovery component shall continue to be charged and
Commission of the Philippines a petition filed at Planters’ own behest
collected until payment in full of (a) the Unpaid Capital and/or (b) any
for the suspension of payment of all its obligations, and a separate
shortfall in the payment of the Subsidy Receivables, (c) any carrying
petition filed by Manufacturers Hanover Trust Company, Manila
cost accruing from the date hereof on the amounts which may be
Offshore Branch for the appointment of a rehabilitation receiver for
outstanding from time to time of the Unpaid Capital and/or the Subsidy
Planters.
Receivables, and (d) the capital increases contemplated in paragraph
In connection with the foregoing, the Republic of the Philippines (the 2 hereof. For the purpose of the foregoing clause (c), the "carrying cost"
"Republic") confirms that it considers and continues to consider shall be at such rate as will represent the full and reasonable cost to
Planters as a major fertilizer distributor. Accordingly, for and in Planters of servicing its debts, taking into account both its peso and
consideration of your expressed willingness to consider and participate foreign currency-denominated obligations.
in the effort to rehabilitate Planters, the Republic hereby manifests its
REPUBLIC OF THE PHILIPPINES
full and unqualified support of the successful rehabilitation and
continuing viability of Planters, and to that end, hereby binds and By:
obligates itself to the creditors and Planters, as follows:
(signed)
xxxx CESAR E. A. VIRATA
2. Upon the effective date of this Letter of Undertaking, the Republic Prime Minister and Minister of Finance51
shall cause FPA to include in its fertilizer pricing formula a capital
It is clear from the Letter of Understanding that the levy was imposed
recovery component, the proceeds of which will be used initially for the
precisely to pay the corporate debts of PPI. We cannot agree with PPI
purpose of funding the unpaid portion of the outstanding capital stock
that the levy was imposed to ensure the stability of the fertilizer industry
of Planters presently held in trust by Planters Foundation, Inc.
in the country. The letter of understanding and the plain text of the LOI

116
clearly indicate that the levy was exacted for the benefit of a private
corporation.
All told, the RTC and the CA did not err in holding that the levy imposed
under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed
to comply with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power;
it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of
the State, it would still be invalid for failing to comply with the test of
"lawful subjects" and "lawful means." Jurisprudence states the test as
follows: (1) the interest of the public generally, as distinguished from
those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals.52
For the same reasons as discussed, LOI No. 1695 is invalid because it
did not promote public interest. The law was enacted to give undue
advantage to a private corporation. We quote with approval the CA
ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial court’s
holding LOI 1465 unconstitutional.1awphil To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by which
LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The government’s commitment to support
the successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statute’s
impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the country’s farmers
or even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction
where none is needed. When a statute’s public purpose is spoiled by
private interest, the use of police power becomes a travesty which must
be struck down for being an arbitrary exercise of government power. To
rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private individuals.
(Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of
operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465
is declared unconstitutional. It banks on the doctrine of operative fact,
which provides that an unconstitutional law has an effect before being
declared unconstitutional. PPI wants to retain the levies paid under LOI
No. 1465 even if it is subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will
be entertained on appeal, unless it has been raised in the court a
quo.53 PPI did not raise the applicability of the doctrine of operative fact
with the RTC and the CA. It cannot belatedly raise the issue with Us in
order to extricate itself from the dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that
an unconstitutional law is void. It produces no rights, imposes no duties
and affords no protection. It has no legal effect. It is, in legal
contemplation, inoperative as if it has not been passed.54 Being void,
Fertiphil is not required to pay the levy. All levies paid should be
117
refunded in accordance with the general civil code principle against performance by another comes into possession of something at the
unjust enrichment. The general rule is supported by Article 7 of the Civil expense of the latter without just or legal ground shall return the same
Code, which provides: to him." We cannot allow PPI to profit from an unconstitutional law.
Justice and equity dictate that PPI must refund the amounts paid by
ART. 7. Laws are repealed only by subsequent ones, and their violation
Fertiphil.
or non-observance shall not be excused by disuse or custom or practice
to the contrary. WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.
When the courts declare a law to be inconsistent with the Constitution,
the former shall be void and the latter shall govern. SO ORDERED.
The doctrine of operative fact, as an exception to the general rule, only
applies as a matter of equity and fair play.55 It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior
to a determination of unconstitutionality is an operative fact and may
have consequences which cannot always be ignored. The past cannot
always be erased by a new judicial declaration.56
The doctrine is applicable when a declaration of unconstitutionality will
impose an undue burden on those who have relied on the invalid law.
Thus, it was applied to a criminal case when a declaration of
unconstitutionality would put the accused in double jeopardy57 or would
put in limbo the acts done by a municipality in reliance upon a law
creating it.58
Here, We do not find anything iniquitous in ordering PPI to refund the
amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from
the levy. It was proven during the trial that the levies paid were remitted
and deposited to its bank account. Quite the reverse, it would be
inequitable and unjust not to order a refund. To do so would unjustly
enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code
explicitly provides that "every person who, through an act of

118

20. Dela Llana vs. COA Chairperson, GR No. 180989, February 7,
2012
SERENO, J.:
This is a Petition for Certiorari under Rule 65 of the Rules of Court with
a prayer for the issuance of a temporary restraining order pursuant to
Section 7, Article IX-D of the 1987 Constitution, seeking to annul and
set aside Commission on Audit (COA) Circular No. 89-299, which lifted
its system of pre-audit of government financial transactions.
Statement of the Facts and the Case
On 26 October 1982, the COA issued Circular No. 82-195, lifting the
system of pre-audit of government financial transactions, albeit with
certain exceptions. The circular affirmed the state policy that all
resources of the government shall be managed, expended or utilized in
accordance with law and regulations, and safeguarded against loss or
wastage through illegal or improper disposition, with a view to ensuring
efficiency, economy and effectiveness in the operations of government.
Further, the circular emphasized that the responsibility to ensure faithful
adherence to the policy rested directly with the chief or head of the
government agency concerned. The circular was also designed to
further facilitate or expedite government transactions without impairing
their integrity.
After the change in administration due to the February 1986 revolution,
grave irregularities and anomalies in the government’s financial
transactions were uncovered. Hence, on 31 March 1986, the COA
issued Circular No. 86-257, which reinstated the pre-audit of selected
government transactions. The selective pre-audit was perceived to be
an effective, although temporary, remedy against the said anomalies.
With the normalization of the political system and the stabilization of
government operations, the COA saw it fit to issue Circular No. 89-299,
which again lifted the pre-audit of government transactions of national
government agencies (NGAs) and government-owned or -controlled
corporations (GOCCs). The rationale for the circular was, first, to
reaffirm the concept that fiscal responsibility resides in management as
embodied in the Government Auditing Code of the Philippines; and,
second, to contribute to accelerating the delivery of public services and
improving government operations by curbing undue bureaucratic red
tape and ensuring facilitation of government transactions, while
continuing to preserve and protect the integrity of these transactions.
Concomitant to the lifting of the pre-audit of government transactions of
NGAs and GOCCs, Circular No. 89-299 mandated the installation,
implementation and monitoring of an adequate internal control system,
which would be the direct responsibility of the government agency
head.
Circular No. 89-299 further provided that the pre-audit activities
retained by the COA as therein outlined shall no longer be a pre-
requisite to the implementation or prosecution of projects and the
payment of claims. The COA aimed to henceforth focus its efforts on
the post-audit of financial accounts and transactions, as well as on the
assessment and evaluation of the adequacy and effectivity of the
agency’s fiscal control process. However, the circular did not include
the financial transactions of local government units (LGUs) in its
coverage.
119
The COA later issued Circular No. 94-006 on 17 February 1994 and
Circular No. 95-006 on 18 May 1995. Both circulars clarified and
expanded the total lifting of pre-audit activities on all financial
transactions of NGAs, GOCCs, and LGUs. The remaining audit
activities performed by COA auditors would no longer be pre-requisites
to the implementation or prosecution of projects, perfection of contracts,
payment of claims, and/or approval of applications filed with the
agencies.1
It also issued COA Circular No. 89-299, as amended by Circular No.
89-299A, which in Section 3.2 provides:
3.2 Whenever circumstances warrant, however, such as where the
internal control system of a government agency is inadequate, This
Commission may reinstitute pre-audit or adopt such other control
measures, including temporary or special pre-audit, as are necessary
and appropriate to protect the funds and property of the agency.
On 18 May 2009, COA issued Circular No. 2009-002, which reinstituted
the selective pre-audit of government transactions in view of the rising
incidents of irregular, illegal, wasteful and anomalous disbursements of
huge amounts of public funds and disposals of public property. Two
years later, or on 22 July 2011, COA issued Circular No. 2011-002,
which lifted the pre-audit of government transactions implemented by
Circular No. 2009-002. In its assessment, subsequent developments
had shown heightened vigilance of government agencies in
safeguarding their resources.
In the interregnum, on 3 May 2006, petitioner dela Llana wrote to the
COA regarding the recommendation of the Senate Committee on
Agriculture and Food that the Department of Agriculture set up an
internal pre-audit service. On 18 July 2006, the COA replied to
petitioner, informing him of the prior issuance of Circular No. 89-299.2
The 18 July 2006 reply of the COA further emphasized the required
observance of Administrative Order No. 278 dated 8 June 1992, which
directed the strengthening of internal control systems of government
offices through the installation of an internal audit service (IAS).
On 15 January 2008, petitioner filed this Petition for Certiorari under
Rule 65. He alleges that the pre-audit duty on the part of the COA
cannot be lifted by a mere circular, considering that pre-audit is a
constitutional mandate enshrined in Section 2 of Article IX-D of the
1987 Constitution.3 He further claims that, because of the lack of pre-
audit by COA, serious irregularities in government transactions have
been committed, such as the ₱728-million fertilizer fund scam,
irregularities in the ₱550-million call center laboratory project of the
Commission on Higher Education, and many others.
On 22 February 2008, public respondents filed their Comment4 on the
Petition. They argue therein that the Petition must be dismissed, as it is
not proper for a petition for certiorari, considering that (1) there is no
allegation showing that the COA exercised judicial or quasi-judicial
functions when it promulgated Circular No. 89-299; and (2) there is no
convincing explanation showing how the promulgation of the circular
was done with grave abuse of discretion. Further, the Petition is
allegedly defective in form, in that there is no discussion of material
dates as to when petitioner received a copy of the circular; there is no
factual background of the case; and petitioner failed to attach a certified
true copy of the circular. In any case, public respondents aver that the
circular is valid, as the COA has the power under the 1987 Constitution
to promulgate it.
120
On 9 May 2008, petitioner filed his Reply5 to the Comment.
On 17 June 2008, this Court resolved to require the parties to submit
their respective memoranda. On 12 September 2008, public
respondents submitted their Memorandum.6 On 15 September 2008,
Amethya dela Llana-Koval, daughter of petitioner, manifested to the
Court his demise on 8 July 2008 and moved that she be allowed to
continue with the Petition and substitute for him. Her motion for
substitution was granted by this Court in a Resolution dated 7 October
2008. On 5 January 2009, petitioner, substituted by his daughter,7 filed
his Memorandum.8
The main issue for our resolution in this Petition is whether or not
petitioner is entitled to the extraordinary writ of certiorari.
Procedural Issues
Technical Defects of the Petition
Public respondents correctly allege that petitioner failed to attach a
certified true copy of the assailed Order, and that the Petition lacked a
statement of material dates. In view, however, of the serious matters
dealt with in this Petition, this Court opts to tackle the merits thereof
with least regard to technicalities. A perusal of the Petition shows that
the factual background of the case, although brief, has been sufficiently
alleged by petitioner.
Standing
This Petition has been filed as a taxpayer’s suit.
A taxpayer is deemed to have the standing to raise a constitutional
issue when it is established that public funds from taxation have been
disbursed in alleged contravention of the law or the Constitution.9
Petitioner claims that the issuance of Circular No. 89-299 has led to the
dissipation of public funds through numerous irregularities in
government financial transactions. These transactions have allegedly
been left unchecked by the lifting of the pre-audit performed by COA,
which, petitioner argues, is its Constitutional duty. Thus, petitioner has
standing to file this suit as a taxpayer, since he would be adversely
affected by the illegal use of public money.
Propriety of Certiorari
Public respondents aver that a petition for certiorari is not proper in this
case, as there is no indication that the writ is directed against a tribunal,
a board, or an officer exercising judicial or quasi-judicial functions, as
required in certiorari proceedings.10 Conversely, petitioner for his part
claims that certiorari is proper under Section 7, Article IX-A of the 1987
Constitution, which provides in part:
Section 7. x x x. Unless otherwise provided by this Constitution or by
law, any decision, order, or ruling of each Commission may be brought
to the Supreme Court on certiorari by the aggrieved party within thirty
days from receipt of a copy thereof.
Petitioner is correct in that decisions and orders of the COA are
reviewable by the court via a petition for certiorari. However, these refer
to decisions and orders which were rendered by the COA in its quasi-
judicial capacity. Circular No. 89-299 was promulgated by the COA
under its quasi-legislative or rule-making powers. Hence, Circular No.
89-299 is not reviewable by certiorari.
121
Neither is a petition for prohibition appropriate in this case. A petition
for prohibition is filed against any tribunal, corporation, board, or person
— whether exercising judicial, quasi-judicial, or ministerial functions —
who has acted without or in excess of jurisdiction or with grave abuse
of discretion, and the petitioner prays that judgment be rendered,
commanding the respondent to desist from further proceeding in the
action or matter specified in the petition.11 However, prohibition only
lies against judicial or ministerial functions, but not against legislative or
quasi-legislative functions.12
Nonetheless, this Court has in the past seen fit to step in and resolve
petitions despite their being the subject of an improper remedy, in view
of the public importance of the issues raised therein.13 In this case,
petitioner avers that the conduct of pre-audit by the COA could have
prevented the occurrence of the numerous alleged irregularities in
government transactions that involved substantial amounts of public
money. This is a serious allegation of a grave deficiency in observing a
constitutional duty if proven correct.
This Court can use its authority to set aside errors of practice or
technicalities of procedure, including the aforementioned technical
defects of the Petition, and resolve the merits of a case with such
serious allegations of constitutional breach. Rules of procedure were
promulgated to provide guidelines for the orderly administration of
justice, not to shackle the hand that dispenses it.14
Substantive Issues
The 1987 Constitution has made the COA the guardian of public funds,
vesting it with broad powers over all accounts pertaining to government
revenues and expenditures and the use of public funds and property,
including the exclusive authority to define the scope of its audit and
examination; to establish the techniques and methods for the review;
and to promulgate accounting and auditing rules and regulations.15 Its
exercise of its general audit power is among the constitutional
mechanisms that give life to the check and balance system inherent in
our form of government.16
Petitioner claims that the constitutional duty of COA includes the duty
to conduct pre-audit.1âwphi1 A pre-audit is an examination of financial
transactions before their consumption or payment.17 It seeks to
determine whether the following conditions are present: (1) the
proposed expenditure complies with an appropriation law or other
specific statutory authority; (2) sufficient funds are available for the
purpose; (3) the proposed expenditure is not unreasonable or
extravagant, and the unexpended balance of appropriations to which it
will be charged is sufficient to cover the entire amount of the
expenditure; and (4) the transaction is approved by the proper authority
and the claim is duly supported by authentic underlying evidence.18 It
could, among others, identify government agency transactions that are
suspicious on their face prior to their implementation and prior to the
disbursement of funds.
Petitioner anchors his argument on Section 2 of Article IX-D of the 1987
Constitution, which reads as follows:
Section 2.
1. The Commission on Audit shall have the power, authority, and duty
to examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any of its
122
subdivisions, agencies, or instrumentalities, including government-
owned or controlled corporations with original charters, and on a post-
audit basis:
a. constitutional bodies, commissions and offices that have been
granted fiscal autonomy under this Constitution;
b. autonomous state colleges and universities;
c. other government-owned or controlled corporations and their
subsidiaries; and
d. such non-governmental entities receiving subsidy or equity, directly
or indirectly, from or through the Government, which are required by
law or the granting institution to submit to such audit as a condition of
subsidy or equity. However, where the internal control system of the
audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary
and appropriate to correct the deficiencies. It shall keep the general
accounts of the Government and, for such period as may be provided
by law, preserve the vouchers and other supporting papers pertaining
thereto.
2. The Commission shall have exclusive authority, subject to the
limitations in this Article, to define the scope of its audit and
examination, establish the techniques and methods required therefor,
and promulgate accounting and auditing rules and regulations,
including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures
or uses of government funds and properties. (Emphasis supplied)
He claims that under the first paragraph quoted above, government
transactions must undergo a pre-audit, which is a COA duty that cannot
be lifted by a mere circular.
We find for public respondents.
Petitioner’s allegations find no support in the aforequoted Constitutional
provision. There is nothing in the said provision that requires the COA
to conduct a pre-audit of all government transactions and for all
government agencies. The only clear reference to a pre-audit
requirement is found in Section 2, paragraph 1, which provides that a
post-audit is mandated for certain government or private entities with
state subsidy or equity and only when the internal control system of an
audited entity is inadequate. In such a situation, the COA may adopt
measures, including a temporary or special pre-audit, to correct the
deficiencies.
Hence, the conduct of a pre-audit is not a mandatory duty that this Court
may compel the COA to perform. This discretion on its part is in line
with the constitutional pronouncement that the COA has the exclusive
authority to define the scope of its audit and examination. When the
language of the law is clear and explicit, there is no room for
interpretation, only application.19 Neither can the scope of the provision
be unduly enlarged by this Court.
WHEREFORE, premises considered, the Petition is DISMISSED.
SO ORDERED.
123
21. CIR vs. St. Lukes Medical Center, Inc.
G.R. No. 195909 September 26, 2012
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule
45 of the Rules of Court assailing the Decision of 19 November 2010
of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1
March 2011 in CTA Case No. 6746. This Court resolves this case on a
pure question of law, which involves the interpretation of Section 27(B)
vis-à-vis Section 30(E) and (G) of the National Internal Revenue Code
of the Philippines (NIRC), on the income tax treatment of proprietary
non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a
non-stock and non-profit corporation. Under its articles of incorporation,
among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit
Christian, benevolent, charitable and scientific hospital which shall give
curative, rehabilitative and spiritual care to the sick, diseased and
disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may
be freely and individually contracted by patients;
(b) To provide a career of health science education and provide medical
services to the community through organized clinics in such specialties
as the facilities and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and
promotion of health as well as provide facilities for scientific and medical
researches which, in the opinion of the Board of Trustees, may be
justified by the facilities, personnel, funds, or other requirements that
are available;
(d) To cooperate with organized medical societies, agencies of both
government and private sector; establish rules and regulations
consistent with the highest professional ethics;
xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed
St. Luke's deficiency taxes amounting to ₱76,063,116.06 for 1998,
comprised of deficiency income tax, value-added tax, withholding tax
on compensation and expanded withholding tax. The BIR reduced the
amount to ₱63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the
BIR against the deficiency tax assessments. The BIR did not act on the
protest within the 180-day period under Section 228 of the NIRC. Thus,
St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which
imposes a 10% preferential tax rate on the income of proprietary non-
profit hospitals, should be applicable to St. Luke's. According to the BIR,
Section 27(B), introduced in 1997, "is a new provision intended to
amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of
the 1997 Tax Code x x x." 5 It is a specific provision which prevails over
the general exemption on income tax granted under Section 30(E) and
(G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes.
124
Moreover, the hospital's board of trustees, officers and employees
directly benefit from its profits and assets. St. Luke's had total revenues
of ₱1,730,367,965 or approximately ₱1.73 billion from patient services
in 1998. 7
St. Luke's contended that the BIR should not consider its total
revenues, because its free services to patients was ₱218,187,498 or
65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income
does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30(E) and (G) of
the NIRC. It argued that the making of profit per se does not destroy its
income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates
its arguments before the CTA that Section 27(B) applies to St. Luke's.
The petition raises the sole issue of whether the enactment of Section
27(B) takes proprietary non-profit hospitals out of the income tax
exemption under Section 30 of the NIRC and instead, imposes a
preferential rate of 10% on their taxable income. The BIR prays that St.
Luke's be ordered to pay ₱57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late
payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on
the treatment and withholding of a part of its income, 9 as well as the
payment of surcharge and delinquency interest. There is no ground for
this Court to undertake such a factual review. Under the
Constitution 10 and the Rules of Court, 11 this Court's review power is
generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails
to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the
CTA First Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is
hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT
assessment issued by respondent against petitioner in the amount of
₱110,000.00 is hereby CANCELLED and WITHDRAWN. However,
petitioner is hereby ORDERED to PAY deficiency income tax and
deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum
of ₱6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent
(20%) delinquency interest on the total amount of ₱6,275,370.38
counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En
Banc to be paid, arose from the failure of St. Luke's to prove that part
of its income in 1998 (declared as "Other Income-Net") 14 came from
charitable activities. The CTA cancelled the remainder of the
₱63,113,952.79 deficiency assessed by the BIR based on the 10% tax
rate under Section 27(B) of the NIRC, which the CTA En Banc held was
not applicable to St. Luke's. 15
125
The CTA ruled that St. Luke's is a non-stock and non-profit charitable
institution covered by Section 30(E) and (G) of the NIRC. This ruling
would exempt all income derived by St. Luke's from services to its
patients, whether paying or non-paying. The CTA reiterated its earlier
decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under
its articles of incorporation and various documents 17 identifying St.
Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v.
Pasay City, 18 which states that "a charitable institution does not lose its
charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are
required to do so, where funds derived in this manner are devoted to
the charitable purposes of the institution x x x." 19 The generation of
income from paying patients does not per se destroy the charitable
nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of
Internal Revenue, 20 which ruled that the old NIRC (Commonwealth Act
No. 466, as amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be subject
thereto, because of the existence of x x x net income." 22 The NIRC of
1997 substantially reproduces the provision on charitable institutions of
the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College
declared: "[E]very responsible organization must be run to at least
insure its existence, by operating within the limits of its own resources,
especially its regular income. In other words, it should always strive,
whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to
St. Luke's. 24 The CTA explained that to apply the 10% preferential rate,
Section 27(B) requires a hospital to be "non-profit." On the other hand,
Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to
the CTA, this is unique in the present tax code, indicating an intent to
exempt this type of charitable organization from income tax. Section
27(B) does not require that the hospital be "non-stock." The CTA stated,
"it is clear that non-stock, non-profit hospitals operated exclusively for
charitable purpose are exempt from income tax on income received by
them as such, applying the provision of Section 30(E) of the NIRC of
1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax
in 1998 under Section 27(B) of the NIRC, which imposes a preferential
tax rate of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in
G.R. No. 195960 because the petition raises factual issues. Under
Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only
questions of law which must be distinctly set forth." St. Luke's cites
Martinez v. Court of Appeals 26 which permits factual review "when the
Court of Appeals [in this case, the CTA] manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St.
Luke's itself stated that the CTA "disregarded the testimony of [its]
126
witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of
overlooking or failing to consider relevant evidence. The CTA obviously
considered the evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case and found
no other evidence aside from the self-serving affidavit executed by [the]
witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is
liable to pay the 25% surcharge under Section 248(A)(3) of the NIRC.
There is "[f]ailure to pay the deficiency tax within the time prescribed for
its payment in the notice of assessment[.]" 30 St. Luke's is also liable to
pay 20% delinquency interest under Section 249(C)(3) of the
NIRC. 31 As explained by the CTA En Banc, the amount of
₱6,275,370.38 in the dispositive portion of the CTA First Division
Decision includes only deficiency interest under Section 249(A) and (B)
of the NIRC and not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect
of the introduction of Section 27(B) in the NIRC of 1997 vis-à-vis
Section 30(E) and (G) on the income tax exemption of charitable and
social welfare institutions. The 10% income tax rate under Section
27(B) specifically pertains to proprietary educational institutions and
proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously
enjoyed under Section 27(E) of the NIRC of 1977, which is now
substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary
educational institutions and hospitals which are non-profit shall pay a
tax of ten percent (10%) on their taxable income except those covered
by Subsection (D) hereof: Provided, That if the gross income from
unrelated trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity' means
any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function. A
'proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports (DECS),
or the Commission on Higher Education (CHED), or the Technical
Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and regulations. (Emphasis
supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the
NIRC. It contends that it is a charitable institution and an organization
promoting social welfare. The arguments of St. Luke's focus on the
wording of Section 30(E) exempting from income tax non-stock, non-
profit charitable institutions. 34 St. Luke's asserts that the legislative
intent of introducing Section 27(B) was only to remove the exemption
for "proprietary non-profit" hospitals. 35 The relevant provisions of
Section 30 state:
127
SEC. 30. Exemptions from Tax on Corporations. - The following
organizations shall not be taxed under this Title in respect to income
received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code. (Emphasis
supplied)
The Court partly grants the petition of the BIR but on a different ground.
We hold that Section 27(B) of the NIRC does not remove the income
tax exemption of proprietary non-profit hospitals under Section 30(E)
and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the
other hand, can be construed together without the removal of such tax
exemption. The effect of the introduction of Section 27(B) is to subject
the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions 36 and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10% preferential
rate under Section 27(B) instead of the ordinary 30% corporate rate
under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals are
that they must be proprietary and non-profit. "Proprietary" means
private, following the definition of a "proprietary educational institution"
as "any private school maintained and administered by private
individuals or groups" with a government permit. "Non-profit" means no
net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of
Internal Revenue v. Club Filipino Inc. de Cebu, 37 this Court considered
as non-profit a sports club organized for recreation and entertainment
of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for
overhead expenses and improving its golf course. 38 The club was non-
profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it
was not charitable. The Court defined "charity" in Lung Center of the
Philippines v. Quezon City 40 as "a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either
by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by]
otherwise lessening the burden of government." 41 A non-profit club for
the benefit of its members fails this test. An organization may be
128
considered as non-profit if it does not distribute any part of its income
to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities conducted
for profit is taxable, as expressly provided in the last paragraph of
Section 30.
To be a charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. The issue in Lung Center
concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by
appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by the
law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the
constitutional provision that "[n]o law granting any tax exemption shall
be passed without the concurrence of a majority of all the Members of
Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the
collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption from
real property taxes. This ruling uses the same premise as Hospital de
San Juan 45 and Jesus Sacred Heart College 46 which says that
receiving income from paying patients does not destroy the charitable
nature of a hospital.
As a general principle, a charitable institution does not lose its character
as such and its exemption from taxes simply because it derives income
from paying patients, whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the money received
is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the
persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the property.
The Constitution provides that "[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." 48 The test of exemption is not
strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that the
Lung Center of the Philippines did not lose its charitable character when
it used a portion of its lot for commercial purposes. The effect of failing
to meet the use requirement is simply to remove from the tax exemption
that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property
taxes. In the NIRC, Congress decided to extend the exemption to
129
income taxes. However, the way Congress crafted Section 30(E) of the
NIRC is materially different from Section 28(3), Article VI of the
Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution
must be devoted "exclusively" for charitable purposes. The organization
of the institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents. Section 30(E)
of the NIRC specifically requires that the corporation or association be
non-stock, which is defined by the Corporation Code as "one where no
part of its income is distributable as dividends to its members, trustees,
or officers" 49 and that any profit "obtain[ed] as an incident to its
operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was
organized." 50 However, under Lung Center, any profit by a charitable
institution must not only be plowed back "whenever necessary or
proper," but must be "devoted or used altogether to the charitable
object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular
activities. Section 30(E) of the NIRC requires that these operations be
exclusive to charity. There is also a specific requirement that "no part
of [the] net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person." The use of lands,
buildings and improvements of the institution is but a part of its
operations.
There is no dispute that St. Luke's is organized as a non-stock and non-
profit charitable institution. However, this does not automatically
exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity,
a charitable institution is not ipso facto tax exempt. To be exempt from
real property taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes,
Section 30(E) of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires
that the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the
words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their
activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code. (Emphasis
supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt
charitable institution conducts "any" activity for profit, such activity is not
130
tax exempt even as its not-for-profit activities remain tax exempt. This REVENUES FROM SERVICES TO ₱1,730,367,965.00
paragraph qualifies the requirements in Section 30(E) that the "[n]on- PATIENTS
stock corporation or association [must be] organized and operated
exclusively for x x x charitable x x x purposes x x x." It likewise qualifies
the requirement in Section 30(G) that the civic organization must be OPERATING EXPENSES
"operated exclusively" for the promotion of social welfare.
Professional care of patients ₱1,016,608,394.00
Thus, even if the charitable institution must be "organized and operated
exclusively" for charitable purposes, it is nevertheless allowed to Administrative 287,319,334.00
engage in "activities conducted for profit" without losing its tax exempt
status for its not-for-profit activities. The only consequence is that the
Household and Property 91,797,622.00
"income of whatever kind and character" of a charitable institution "from
any of its activities conducted for profit, regardless of the disposition
₱1,395,725,350.00
made of such income, shall be subject to tax." Prior to the introduction
of Section 27(B), the tax rate on such income from for-profit activities
was the ordinary corporate rate under Section 27(A). With the INCOME FROM OPERATIONS ₱334,642,615.00 100%
introduction of Section 27(B), the tax rate is now 10%.
Free Services -218,187,498.00 -
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services
65.20%
to paying patients. It cannot be disputed that a hospital which receives
approximately ₱1.73 billion from paying patients is not an institution
INCOME FROM OPERATIONS, Net ₱116,455,117.00 34.80%
"operated exclusively" for charitable purposes. Clearly, revenues from
of FREE SERVICES
paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared ₱1,730,367,965 as "Revenues from OTHER INCOME 17,482,304.00
Services to Patients" in contrast to its "Free Services" expenditure of
₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed
the following "calculation" to support its claim that 65.20% of its "income EXCESS OF REVENUES OVER ₱133,937,421.00
after expenses was allocated to free or charitable services" in 1998. 53 EXPENSES

131
In Lung Center, this Court declared:
"[e]xclusive" is defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and "exclusively" is
defined, "in a manner to exclude; as enjoying a privilege exclusively." x
x x The words "dominant use" or "principal use" cannot be substituted
for the words "used exclusively" without doing violence to the
Constitution and the law. Solely is synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated
exclusively" without violating the NIRC. Services to paying patients are
activities conducted for profit. They cannot be considered any other
way. There is a "purpose to make profit over and above the cost" of
services. 55 The ₱1.73 billion total revenues from paying patients is not
even incidental to St. Luke's charity expenditure of ₱218,187,498 for
non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is
65.20% of its operating income in 1998. However, if a part of the
remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is "devoted or used
altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely
for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income
from activities for profit is taxable "regardless of the disposition made
of such income."
Jesus Sacred Heart College declared that there is no official legislative
record explaining the phrase "any activity conducted for profit."
However, it quoted a deposition of Senator Mariano Jesus Cuenco, who
was a member of the Committee of Conference for the Senate, which
introduced the phrase "or from any activity conducted for profit."
The question was whether having a hospital is essential to an
educational institution like the College of Medicine of the University of
Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then
it should be subject to income tax. He said that this was one of the
reasons Congress inserted the phrase "or any activity conducted for
profit."
The question in Jesus Sacred Heart College involves an educational
institution. 58 However, it is applicable to charitable institutions because
Senator Cuenco's response shows an intent to focus on the activities
of charitable institutions. Activities for profit should not escape the reach
of taxation. Being a non-stock and non-profit corporation does not, by
this reason alone, completely exempt an institution from tax. An
institution cannot use its corporate form to prevent its profitable
activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated
exclusively" for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but
also on the clear and plain text of Section 30(E) and (G). Section 30(E)
and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does
not lose its tax exemption if it earns income from its for-profit activities.
Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary
132
corporate rate but now at the preferential 10% rate pursuant to Section dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's
27(B). Medical Center, Inc. is ORDERED TO PAY the deficiency income tax
in 1998 based on the 10% preferential income tax rate under Section
A tax exemption is effectively a social subsidy granted by the State
27(B) of the National Internal Revenue Code. However, it is not liable
because an exempt institution is spared from sharing in the expenses
for surcharges and interest on such deficiency income tax under
of government and yet benefits from them. Tax exemptions for
Sections 248 and 249 of the National Internal Revenue Code. All other
charitable institutions should therefore be limited to institutions
parts of the Decision and Resolution of the Court of Tax Appeals are
beneficial to the public and those which improve social welfare. A profit-
AFFIRMED.
making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.1âwphi1 The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is
DENIED for violating Section 1, Rule 45 of the Rules of Court.
St. Luke's fails to meet the requirements under Section 30(E) and (G)
of the NIRC to be completely tax exempt from all its income. However, SO ORDERED.
it remains a proprietary non-profit hospital under Section 27(B) of the
NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC. However, St. Luke's has good reasons to
rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke's is "a corporation for purely charitable and social welfare
purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier,
Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good
faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement
the tax law, are sufficient justification to delete the imposition of
surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in
G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of
Tax Appeals En Banc dated 19 November 2010 and its Resolution

133
22. Alta Vista Golf & Country Club vs. City of Cebu
G.R. No. 180235, January 20, 2016
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari of the Resolution1
dated March 14, 2007 and the Order2 dated October 3, 2007 of the
Regional Trial Court (RTC), Cebu City, Branch 9 in Civil Case No. CEB-
31988, dismissing the Petition for Injunction, Prohibition, Mandamus,
Declaration of Nullity of Closure Order, Declaration of Nullity of
Assessment, and Declaration of Nullity of Section 42 of Cebu City Tax
Ordinance, with Prayer for Temporary Restraining Order and Writ of
Preliminary Injunction3 filed by petitioner Alta Vista Golf and Country
Club against respondents City of Cebu (Cebu City), then Cebu City
Mayor Tomas R. Osmeña (Osmeña), and then Cebu City Treasurer
Teresita Camarillo (Camarillo).
Petitioner is a non-stock and non-profit corporation operating a golf
course in Cebu City.
On June 21, 1993, the Sangguniang Panlungsod of Cebu City enacted
City Tax Ordinance No. LXIX, otherwise known as the "Revised
Omnibus Tax Ordinance of the City of Cebu" (Revised Omnibus Tax
Ordinance).
Section 42 of the said tax ordinance on amusement tax was amended
by City Tax Ordinance Nos. LXXXII4 and LXXXIV5 (which were
enacted by the Sangguniang Panlungsod of Cebu City on December 2,
1996 and April 20, 1998, respectively6) to read as follows:
Section 42. Rate of Tax. - There shall be paid to the Office of the City
Treasurer by the proprietors, lessees or operators of theaters, cinemas,
concert halls, circuses and other similar places of entertainment, an
amusement tax at the rate of thirty percent (30%), golf courses and polo
grounds at the rate of twenty percent (20%), of their gross receipts on
entrance, playing green, and/or admission fees;
PROVIDED, HOWEVER, That in case of movie premieres or gala
shows for the benefit of a charitable institution/foundation or any
government institution where higher admission fees are charged, the
aforementioned rate of thirty percent (30%) shall be levied against the
gross receipts based on the regular admission fees, subject to the
approval of the Sangguniang Panlungsod;
PROVIDED FURTHER, That in case payment of the amusement tax is
made promptly on or before the date hereinbelow prescribed, a rebate
of five percent (5%) on the aforementioned gross receipts shall be given
to the proprietors, lessees or operators of theaters;
PROVIDED FURTHERMORE, that as an incentive to theater operators
who own the real property and/or building where the theater is located,
an additional one percent (1%) rebate shall be given to said
operator/real property owner concerned for as long as their
theater/movie houses are then (10) years old or older or the theater or
movie house is located at the city's redevelopment area bounded on
the north by Gen. Maxilom Street up to the port area; on the south by
V. Rama Avenue up to San Nicolas area; and on the west by B.
Rodriguez St. and General Maxilom Avenue;
134
PROVIDED FINALLY, that the proceeds of this additional one percent
(1%) rebate shall be used by the building/property owner-theater
operator to modernize their theater facilities. (Emphases supplied.)
In an Assessment Sheet7 dated August 6, 1998, prepared by Cebu City
Assessor Sandra I. Po, petitioner was originally assessed deficiency
business taxes, fees, and other charges for the year 1998, in the total
amount of P3,820,095.68, which included amusement tax on its golf
course amounting to P2,612,961.24 based on gross receipts of
P13,064,806.20.
Through the succeeding years, respondent Cebu City repeatedly
attempted to collect from petitioner its deficiency business taxes, fees,
and charges for 1998, a substantial portion of which consisted of the
amusement tax on the golf course. Petitioner steadfastly refused to pay
the amusement tax arguing that the imposition of said tax by Section
42 of the Revised Omnibus Tax Ordinance, as amended, was irregular,
improper, and illegal.
Petitioner reasoned that under the Local Government Code,
amusement tax can only be imposed on operators of theaters, cinemas,
concert halls, or places where one seeks to entertain himself by seeing
or viewing a show or performance. Petitioner further cited the ruling in
Philippine Basketball Association (PBA) v. Court of Appeals9 that under
Presidential Decree No. 231, otherwise known as the Local Tax Code
of 1973, the province could only impose amusement tax on admission
from the proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses, and other places of amusement, but not
professional basketball games. Professional basketball games did not
fall under the same category as theaters, cinematographs, concert
halls, and circuses as the latter basically belong to artistic forms of
entertainment while the former catered to sports and gaming.
Through a letter dated October 11, 2005, respondent Camarillo sought
to collect once more from petitioner deficiency business taxes, fees,
and charges for the year 1998, totaling P2,981,441.52.
Petitioner, through counsel, wrote respondent Camarillo a letter11
dated October 17, 2005 still disputing the amusement tax assessment
on its golf course for 1998 for being illegal. Petitioner, in a subsequent
letter dated November 30, 2005, proposed that:
While the question of the legality of the amusement tax on golf courses
is still unresolved, may we propose that Alta Vista Golf and Country
Club settle first the other assessments contained in your Assessment
Sheet issued on October 11, 2005.
At this early stage, we also request that pending resolution of the
legality of the amusement tax imposition on golf courses in [the Revised
Omnibus Tax Ordinance, as amended], Alta Vista Golf and Country
Club be issued the required Mayor's and/or Business Permit.
Respondent Camarillo treated the letter dated October 17, 2005 of
petitioner as a Protest of Assessment and rendered on December 5,
2005 her ruling denying said Protest on the following grounds: (a) a
more thorough and comprehensive reading of the PBA case would
reveal that the Court actually ruled therein that PBA was liable to pay
amusement tax, but to the national government, not the local
government; (b) Section 42 of the Revised Omnibus Tax Ordinance, as
amended, enjoyed the presumption of constitutionality and petitioner
failed to avail itself of the remedy under Section 187 of the Local
Government Code to challenge the legality or validity of Section 42 of
135
the Revised Omnibus Tax Ordinance, as amended, by filing an appeal
with the Secretary of Justice within 30 days from effectivity of said
ordinance; and (c) the Office of the City Attorney issued a letter dated
July 9, 2004 affirming respondent Camarillo's position that petitioner
was liable to pay amusement tax on its golf course.13 Ultimately,
respondent Camarillo held:
WHEREFORE, upon consideration of the legal grounds as above-
mentioned, we reiterate our previous stand on the validity of the
ASSESSMENT SHEET pertaining to the Tax Deficiencies for CY 1998
and this ruling serve as the FINAL DEMAND for immediate settlement
and payment of your amusement tax liabilities and/or delinquencies
otherwise we will constrained (sic) the non-issuance of a Mayor's
Business Permit for nonpayment of the said deficiency on amusement
tax and/or other tax liabilities as well as to file the appropriate filing of
administrative and judicial remedies for the collection of the said tax
liability and the letter treated as a Protest of Assessment that was duly
submitted before this office is hereby DENIED.14chanrobleslaw
Shortly after, on January 12, 2006, petitioner was served with a Closure
Order15 dated December 28, 2005 issued by respondent City Mayor
Osmefia. According to the Closure Order, petitioner committed blatant
violations of the laws and Cebu City Ordinances, to wit:
Operating a business without a business permit for five (5) years, from
year 2001-2005, in relation to Chapters I and II and the penalty clauses
under Sections 4, 6, 8, 66 (f) and 114 of the City Tax Ordinance No. 69,
otherwise known as the REVISED CITY TAX ORDINANCE OF THE
CITY OF CEBU, as amended by CO. 75;
Nonpayment of deficiency on Business Taxes and Fees amounting to
Seventeen Thousand Four Hundred Ninety-Nine Pesos and Sixty-Four
Centavos (Php17,499.64), as adjusted, despite repeated demands in
violation [of] Sections 4 and 8 of City Tax Ordinance No. 69, as
amended;
Nonpayment of deficiency on Amusement Tax and the penalties
relative therewith totaling Two Million Nine Hundred Fifty-Three
Thousand Five Hundred Eighty-Six Pesos and Eighty-Six Centavos
(Php2,953,586.86) in violation of Sections 4 and 8 in relation to Section
42 of City Tax Ordinance No. 69, as amended, business permit-
violation of the Article 172, Revised Penal Code of the Philippines.
(Emphases supplied.)
The Closure Order established respondent Mayor Osmeña's authority
for issuance of the same and contained the following directive:
As the chief executive of the City, the Mayor has the power and duty to:
Enforce all laws and ordinances relative to the governance of the city x
x x and, in addition to the foregoing, shall x x x Issue such executive
orders for the faithful and appropriate enforcement and execution of
laws and ordinances x x x. These are undeniable in the LOCAL
GOVERNMENT CODE, Section 455, par. (2) and par. (2)(iii).
Not only that, these powers can be exercised under the general welfare
clause of the Code, particularly Section 16 thereof, where it is
irrefutable that "every government unit shall exercise the powers
expressly granted, those necessarily implied therefrom, as well as
powers necessary, appropriate, or incidental of its efficient and effective
governance, and those which are essential to the promotion of the
general welfare."
136
This CLOSURE ORDER precisely satisfies these legal precedents.
Hence now, in view whereof, your business establishment is hereby
declared closed in direct contravention of the above-specified laws and
city ordinances. Please cease and desist from further operating your
business immediately upon receipt of this order.
This closure order is without prejudice to the constitutional/statutory
right of the City to file criminal cases against corporate officers, who act
for and its behalf, for violations of Section 114 of the REVISED CITY
TAX ORDINANCE OF THE CITY OF CEBU and Section 516 of the
LOCAL GOVERNMENT CODE, with penalties of imprisonment and/or
fine.
FOR STRICT AND IMMEDIATE COMPLIANCE.
The foregoing developments prompted petitioner to file with the RTC
on January 13, 2006 a Petition for Injunction, Prohibition, Mandamus,
Declaration of Nullity of Closure Order, Declaration of Nullity of
Assessment, and Declaration of Nullity of Section 42 of Cebu City Tax
Ordinance, with Prayer for Temporary Restraining Order and Writ of
Preliminary Injunction, against respondents, which was docketed as
Civil Case No. CEB-31988.17 Petitioner eventually filed an Amended
Petition on January 19, 2006.18 Petitioner argued that the Closure
Order is unconstitutional as it had been summarily issued in violation of
its right to due process; a city mayor has no power under the Local
Government Code to deny the issuance of a business permit and order
the closure of a business for nonpayment of taxes; Section 42 of the
Revised Omnibus Tax Ordinance, as amended, is null and void for
being ultra vires or beyond the taxing authority of respondent Cebu City,
and consequently, the assessment against petitioner for amusement
tax for 1998 based on said Section 42 is illegal and unconstitutional;
and assuming arguendo that respondent Cebu City has the power to
impose amusement tax on petitioner, such tax for 1998 already
prescribed and could no longer be enforced.
Respondents filed a Motion to Dismiss based on the grounds of (a) lack
of jurisdiction of the RTC over the subject matter; (b) non-exhaustion of
administrative remedies; (c) noncompliance with Section 187 of the
Local Government Code, which provides the procedure and
prescriptive periods for challenging the validity of a local tax ordinance;
(d) noncompliance with Section 252 of the Local Government Code and
Section 75 of Republic Act No. 3857, otherwise known as the Revised
Charter of the City of Cebu, requiring payment under protest of the tax
assessed; and (e) failure to establish the authority of Ma. Theresa Ozoa
(Ozoa) to institute the case on behalf of petitioner.
In its Opposition to the Motion to Dismiss, petitioner countered that the
RTC, a court of general jurisdiction, could take cognizance of its Petition
in Civil Case No. CEB-31988, which not only involved the issue of
legality or illegality of a tax ordinance, but also sought the declaration
of nullity of the Closure Order and the issuance of writs of injunction
and prohibition. Petitioner likewise asserted that Section 195 of the
Local Government Code on the protest of assessment does, not require
payment under protest. Section 252 of the same Code invoked by
respondents applies only to real property taxes. In addition, petitioner
maintained that its Petition in Civil Case No. CEB-31988 could not be
barred by prescription. There is nothing in the Local Government Code
that could deprive the courts of the power to determine the
constitutionality or validity of a tax ordinance due to prescription. It is
the constitutional duty of the courts to pass upon the validity of a tax
ordinance and such duty cannot be limited or restricted.
137
Petitioner further contended that there is no need for exhaustion of
administrative remedies given that the issues involved are purely legal;
the notice of closure is patently illegal for having been issued without
due process; and there is an urgent need for judicial intervention.
Lastly, petitioner pointed out that there were sufficient allegations in the
Petition that its filing was duly authorized by petitioner. At any rate,
petitioner already attached to its Opposition its Board Resolution No.
104 authorizing Ozoa to file a case to nullify the Closure Order. Thus,
petitioner prayed for the denial of the Motion to Dismiss.
Respondents, in their Rejoinder to Petitioner's Opposition to the Motion
to Dismiss,21 asserted that the Closure Order was just a necessary
consequence of the nonpayment by petitioner of the amusement tax
assessed against it. The Revised Omnibus Tax Ordinance of
respondent Cebu City directs that no permit shall be issued to a
business enterprise which made no proper payment of tax and,
correspondingly, no business enterprise may be allowed to operate or
continue to operate without a business permit.
The fundamental issue in the case was still the nonpayment by
petitioner of amusement tax. Respondents relied on Reyes v. Court of
Appeals,22 in which the Court categorically ruled that the prescriptive
periods fixed in Section 187 of the Local Government Code are
mandatory and prerequisites before seeking redress from a competent
court. Section 42 of the Revised Omnibus Tax Ordinance, as amended,
was passed on April 20, 1998, so the institution by petitioner of Civil
Case No. CEB-31988 before the RTC on January 13, 2006 - without
payment under protest of the assessed amusement tax and filing of an
appeal before the Secretary of Justice within 30 days from the effectivity
of the Ordinance - was long barred by prescription.
After filing by the parties of their respective Memorandum, the RTC
issued an Order23 dated March 16, 2006 denying the prayer of
petitioner for issuance of a Temporary Restraining Order (TRO). The
RTC found that when the business permit of petitioner expired and it
was operating without a business permit, it ceased to have a legal right
to do business. The RTC affirmed respondent Mayor Osmeña's
authority to issue or grant business licenses and permits pursuant to
the police power inherent in his office; and such authority to issue or
grant business licenses and permits necessarily included the authority
to suspend or revoke or even refuse the issuance of the said business
licenses and permits in case of violation of the conditions for the
issuance of the same. The RTC went on to hold that:
[Petitioner] was given opportunities to be heard when it filed a protest
[of] the assessment which was subsequently denied. To the mind of
this court, this already constitutes the observance of due process and
that [petitioner] had already been given the opportunity to be heard.
Due process and opportunity to be heard does not necessarily mean
winning the argument in one's favor but to be given the fair chance to
explain one's side or views with regards [to] the matter in issue, which
in this case is the legality of the tax assessment.
It is therefore clear that when this case was filed, [petitioner] had no
more legal right in its favor for the courts to protect. It would have been
a different story altogether had [petitioner] paid the tax assessment for
the green fees even under protest and despite payment and
[respondent] Mayor refused the issuance of the business permit
because all the requisites for the issuance of the said permit are all
complied with.24chanroblesvirtuallawlibrary
138
On March 20, 2006, petitioner paid under protest to respondent Cebu
City, through respondent Camarillo, the assessed amusement tax, plus
penalties, interest, and surcharges, in the total amount of
P2,750,249.17.25cralawred
Since the parties agreed that the issues raised in Civil Case No. CEB-
31988 were all legal in nature, the RTC already considered the case
submitted for resolution after the parties filed their respective
Memorandum.26chanroblesvirtuallawlibrary
On March 14, 2007, the RTC issued a Resolution granting the Motion
to Dismiss of respondents. Quoting from Reyes and Hagonoy Market
Vendor Association v. Municipality of Hagonoy, Bulacan,27 the RTC
sustained the position of respondents that Section 187 of the Local
Government Code is mandatory. Thus, the RTC adjudged:
From the above cited cases, it can be gleaned that the period in the
filing of the protests is important. In other words, it is the considered
opinion of this court [that] when a taxpayer questions the validity of a
tax ordinance passed by a local government legislative body, a different
procedure directed in Section 187 is to be followed. The reason for this
could be because the tax ordinance is clearly different from a law
passed by Congress. The local government code has set several
limitations on the taxing power of the local government legislative
bodies including the issue of what should be taxed.
In this case, since the Petitioner failed to comply with the procedure
outlined in Section 187 of the Local Government Code and the fact that
this case was filed way beyond the period to file a case in court, then
this court believes that the action must fail.
Because of the procedural infirmity in bringing about this case to the
court, then the substantial issue of the propriety of imposing
amusement taxes on the green fees could no longer be determined.
WHEREFORE, in view of the aforegoing, this case is hereby
DISMISSED.28chanrobleslaw
The RTC denied the Motion for Reconsideration of petitioner in an
Order dated October 3, 2007.
Petitioner is presently before the Court on pure questions of law, viz.:
WHETHER OR NOT THE POWER OF JUDICIAL REVIEW OVER THE
VALIDITY OF A LOCAL TAX ORDINANCE HAS BEEN RESTRICTED
BY SECTION 187 OF THE LOCAL GOVERNMENT CODE.
WHETHER OR NOT THE CITY OF CEBU OR ANY LOCAL
GOVERNMENT CAN VALIDLY IMPOSE AMUSEMENT TAX TO THE
ACT OF PLAYING GOLF.29
There is merit in the instant Petition.
The RTC judgment on pure questions of law may be directly
appealed to this Court via a petition for review on certiorari.
Even before the RTC, the parties already acknowledged that the case
between them involved only questions of law; hence, they no longer
presented evidence and agreed to submit the case for resolution upon
submission of their respective memorandum.
139
It is incontestable that petitioner may directly appeal to this Court from
the judgment of the RTC on pure questions of law via its Petition for
Review on Certiorari. Rule 41, Section 2(c) of the Rules of Court
provides that "[i]n all cases where only questions of law are raised or
involved, the appeal shall be to the Supreme Court by petition for review
on certiorari in accordance with Rule 45." As the Court declared in
Bonifacio v. Regional Trial Court of Makati, Branch 14930:
The established policy of strict observance of the judicial hierarchy of
courts, as a rule, requires that recourse must first be made to the lower-
ranked court exercising concurrent jurisdiction with a higher court. A
regard for judicial hierarchy clearly indicates that petitions for the
issuance of extraordinary writs against first level courts should be filed
in the RTC and those against the latter should be filed in the Court of
Appeals. The rule is not iron-clad, however, as it admits of certain
exceptions.
Thus, a strict application of the rule is unnecessary when cases brought
before the appellate courts do not involve factual but purely legal
questions. (Citations omitted.)
"A question of law exists when the doubt or controversy concerns the
correct application of law or jurisprudence to a certain set of facts; or
when the issue does not call for an examination of the probative value
of the evidence presented, the truth or falsehood of facts being
admitted[;]" and it may be brought directly before this Court, the
undisputed final arbiter of all questions of law.
The present case is an exception to Section 187 of the Local
Government Code and the doctrine of exhaustion of
administrative remedies.
Section 187 of the Local Government Code reads:
Sec. 187. Procedure for Approval and Effectivity of Tax Ordinances and
Revenue Measures; Mandatory Public Hearings. - The procedure for
approval of local tax ordinances and revenue measures shall be in
accordance with the provisions of this Code: Provided, That public
hearings shall be conducted for the purpose prior to the enactment
thereof: Provided, further, That any question on the constitutionality or
legality of tax ordinances or revenue measures may be raised on
appeal within thirty (30) days from the effectivity thereof to the Secretary
of Justice who shall render a decision within sixty (60) days from the
date of receipt of the appeal: Provided, however, That such appeal shall
not have the effect of suspending the effectivity of the ordinance and
the accrual and payment of the tax, fee, or charge levied therein:
Provided, finally, That within thirty (30) days after receipt of the decision
or the lapse of the sixty-day period without the Secretary of Justice
acting upon the appeal, the aggrieved party may file appropriate
proceedings with a court of competent jurisdiction.
Indeed, the Court established in Reyes that the aforequoted provision
is a significant procedural requisite and, therefore, mandatory:
Clearly, the law requires that the dissatisfied taxpayer who questions
the validity or legality of a tax ordinance must file his appeal to the
Secretary of Justice, within 30 days from effectivity thereof. In case the
Secretary decides the appeal, a period also of 30 days is allowed for
an aggrieved party to go to court. But if the Secretary does not act
thereon, after the lapse of 60 days, a party could already proceed to
seek relief in court. These three separate periods are clearly given for
compliance as a prerequisite before seeking redress in a competent
140
court. Such statutory periods are set to prevent delays as well as
enhance the orderly and speedy discharge of judicial functions. For this
reason the courts construe these provisions of statutes as mandatory.
A municipal tax ordinance empowers a local government unit to impose
taxes. The power to tax is the most effective instrument to raise needed
revenues to finance and support the myriad activities of local
government units for the delivery of basic services essential to the
promotion of the general welfare and enhancement of peace, progress,
and prosperity of the people. Consequently, any delay in implementing
tax measures would be to the detriment of the public. It is for this reason
that protests over tax ordinances are required to be done within certain
time frames. In the instant case, it is our view that the failure of
petitioners to appeal to the Secretary of Justice within 30 days as
required by Sec. 187 of R.A. 7160 is fatal to their cause.32 (Citations
omitted.)
The Court further affirmed in Hagonoy that:
At this point, it is apropos to state that the timeframe fixed by law for
parties to avail of their legal remedies before competent courts is not a
"mere technicality" that can be easily brushed aside. The periods stated
in Section 187 of the Local Government Code are mandatory.
Ordinance No. 28 is a revenue measure adopted by the municipality of
Hagonoy to fix and collect public market stall rentals. Being its lifeblood,
collection of revenues by the government is of paramount importance.
The funds for the operation of its agencies and provision of basic
services to its inhabitants are largely derived from its revenues and
collections. Thus, it is essential that the validity of revenue measures is
not left uncertain for a considerable length of time. Hence, the law
provided a time limit for an aggrieved party to assail the legality of
revenue measures and tax ordinances.33 (Citations omitted.)
Nevertheless, in later cases, the Court recognized exceptional
circumstances that justify noncompliance by a taxpayer with Section
187 of the Local Government Code.
The Court ratiocinated in Ongsuco v. Malones,34 thus:
It is true that the general rule is that before a party is allowed to seek
the intervention of the court, he or she should have availed himself or
herself of all the means of administrative processes afforded him or her.
Hence, if resort to a remedy within the administrative machinery can
still be made by giving the administrative officer concerned every
opportunity to decide on a matter that comes within his or her
jurisdiction, then such remedy should be exhausted first before the
court's judicial power can be sought. The premature invocation of the
intervention of the court is fatal to one's cause of action. The doctrine
of exhaustion of administrative remedies is based on practical and legal
reasons. The availment of administrative remedy entails lesser
expenses and provides for a speedier disposition of controversies.
Furthermore, the courts of justice, for reasons of comity and
convenience, will shy away from a dispute until the system of
administrative redress has been completed and complied with, so as to
give the administrative agency concerned every opportunity to correct
its error and dispose of the case. However, there are several exceptions
to this rule.
The rule on the exhaustion of administrative remedies is intended to
preclude a court from arrogating unto itself the authority to resolve a
controversy, the jurisdiction over which is initially lodged with an
141
administrative body of special competence. Thus, a case where the
issue raised is a purely legal question, well within the competence; and
the jurisdiction of the court and not the administrative agency, would
clearly constitute an exception. Resolving questions of law, which
involve the interpretation and application of laws, constitutes essentially
an exercise of judicial power that is exclusively allocated to the
Supreme Court and such lower courts the Legislature may establish.
In this case, the parties are not disputing any factual matter on which
they still need to present evidence. The sole issue petitioners raised
before the RTC in Civil Case No. 25843 was whether Municipal
Ordinance No. 98-01 was valid and enforceable despite the absence,
prior to its enactment, of a public hearing held in accordance with Article
276 of the Implementing Rules and Regulations of the Local
Government Code. This is undoubtedly a pure question of law, within
the competence and jurisdiction of the RTC to resolve.
Paragraph 2(a) of Section 5, Article VIII of the Constitution, expressly
establishes the appellate jurisdiction of this Court, and impliedly
recognizes the original jurisdiction of lower courts over cases involving
the constitutionality or validity of an ordinance:
Section 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify or affirm on appeal or certiorari, as
the law or the Rules of Court may provide, final judgments and orders
of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree,
proclamation, order, instruction, ordinance, or regulation is in question.
In J.M. Tuason and Co., Inc. v. Court of Appeals, Ynot v. Intermediate
Appellate Court, and Commissioner of Internal Revenue v. Santos, the
Court has affirmed the jurisdiction of the RTC to resolve questions of
constitutionality and validity of laws (deemed to include local
ordinances) in the first instance, without deciding questions which
pertain to legislative policy. (Emphases supplied, citations omitted.)
In Cagayan Electric Power and Light Co., Inc. (CEPALCO) v. City of
Cagayan De Oro,35 the Court initially conceded that as in Reyes, the
failure of taxpayer CEPALCO to appeal to the Secretary of Justice
within the statutory period of 30 days from the effectivity of the
ordinance should have been fatal to its cause. However, the Court
purposefully relaxed the application of the rules in view of the more
substantive matters.
Similar to Ongsuco and CEPALCO, the case at bar constitutes an
exception to the general rule. Not only does the instant Petition raise
pure questions of law, but it also involves substantive matters
imperative for the Court to resolve.
Section 42 of the Revised Omnibus Tax Ordinance, as amended,
imposing amusement tax on golf courses is null and void as it is
beyond the authority of respondent Cebu City to enact under the
Local Government Code.
The Local Government Code authorizes the imposition by local
government units of amusement tax under Section 140, which provides:
142
Sec. 140. Amusement Tax. - (a) The province may levy an amusement
tax to be collected from the proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses, boxing stadia, and other
places of amusement at a rate of not more than thirty percent (30%) of
the gross receipts from admission fees.
(b) In the case of theaters or cinemas, the tax shall first be deducted
and withheld by their proprietors, lessees, or operators and paid to the
provincial treasurer before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the
cinematographic films.
(c) The holding of operas, concerts, dramas, recitals, painting, and art
exhibitions, flower shows, musical programs, literary and oratorical
presentations, except pop, rock, or similar concerts shall be exempt
from the payment of the tax hereon imposed.
(d) The sangguniang panlalawigan may prescribe the time, manner,
terms and conditions for the payment of tax. In case of fraud or failure
to pay the tax, the sangguniang panlalawigan may impose such
surcharges, interests and penalties as it may deem appropriate.
(e) The proceeds from the amusement tax shall be shared equally by
the province and the municipality where such amusement places are
located. (Emphasis supplied.)
"Amusement places," as defined in Section 131 (c) of the Local
Government Code, "include theaters, cinemas, concert halls, circuses
and other places of amusement where one seeks admission to
entertain oneself by seeing or viewing the show or performance."
The pronouncements of the Court in Pelizloy Realty Corporation v. The
Province of Benguet36 are of particular significance to this case. The
Court, in Pelizloy Realty, declared null and void the second paragraph
of Article X, Section 59 of the Benguet Provincial Code, in so far as it
imposes amusement taxes on admission fees to resorts, swimming
pools, bath houses, hot springs, and tourist spots. Applying the principle
of ejusdem generis, as well as the ruling in the PBA case, the Court
expounded on the authority of local government units to impose
amusement tax under Section 140, in relation to Section 131(c), of the
Local Government Code, as follows:
Under the principle of ejusdem generis, "where a general word or
phrase follows an enumeration of particular and specific words of the
same class or where the latter follow the former, the general word or
phrase is to be construed to include, or to be restricted to persons,
things or cases akin to, resembling, or of the same kind or class as
those specifically mentioned."
The purpose and rationale of the principle was explained by the Court
in National Power Corporation v. Angas as
follows:ChanRoblesVirtualawlibrary
The purpose of the rule on ejusdem generis is to give effect to both the
particular and general words, by treating the particular words as
indicating the class and the general words as including all that is
embraced in said class, although not specifically named by the
particular words. This is justified on the ground that if the lawmaking
body intended the general terms to be used in their unrestricted sense,
it would have not made an enumeration of particular subjects but would
have used only general terms. [2 Sutherland, Statutory Construction,
3rd ed., pp. 395-400].
143
In Philippine Basketball Association v. Court of Appeals, the Supreme
Court had an opportunity to interpret a starkly similar provision or the
counterpart provision of Section 140 of the LGC in the Local Tax Code
then in effect. Petitioner Philippine Basketball Association (PBA)
contended that it was subject to the imposition by LGUs of amusement
taxes (as opposed to amusement taxes imposed by the national
government). In support of its contentions, it cited Section 13 of
Presidential Decree No. 231, otherwise known as the Local Tax Code
of 1973, (which is analogous to Section 140 of the LGC) providing the
following:
Section 13. Amusement tax on admission. — The province shall
impose a tax on admission to be collected from the proprietors, lessees,
or operators of theaters, cinematographs, concert halls, circuses and
other places of amusement xxx.
Applying the principle of ejusdem generis, the Supreme Court rejected
PBA's assertions and noted that:
[I]n determining the meaning of the phrase 'other places of amusement',
one must refer to the prior enumeration of theaters, cinematographs,
concert halls and circuses with artistic expression as their common
characteristic. Professional basketball games do not fall under the
same category as theaters, cinematographs, concert halls and circuses
as the latter basically belong to artistic forms of entertainment while the
former caters to sports and gaming.
However, even as the phrase 'other places of amusement' was already
clarified in Philippine Basketball Association, Section 140 of the LGC
adds to the enumeration of 'places of amusement' which may properly
be subject to amusement tax. Section 140 specifically mentions 'boxing
stadia' in addition to "theaters, cinematographs, concert halls [and]
circuses" which were already mentioned in PD No. 231. Also, 'artistic
expression' as a characteristic does not pertain to 'boxing stadia'.
In the present case, the Court need not embark on a laborious effort at
statutory construction. Section 131 (c) of the LGC already provides a
clear definition of 'amusement places':
xxxx
Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia
are bound by a common typifying characteristic in that they are all
venues primarily for the staging of spectacles or the holding of public
shows, exhibitions, performances, and other events meant to be viewed
by an audience. Accordingly, 'other places of amusement' must be
interpreted in light of the typifying characteristic of being venues "where
one seeks admission to entertain oneself by seeing or viewing the show
or performances" or being venues primarily used to stage spectacles or
hold public shows, exhibitions, performances, and other events meant
to be viewed by an audience.
As defined in The New Oxford American Dictionary, 'show' means "a
spectacle or display of something, typically an impressive one"; while
'performance' means "an act of staging or presenting a play, a conceit,
or other form of entertainment." As such, the ordinary definitions of the
words 'show' and 'performance' denote not only visual engagement
(i.e., the seeing or viewing of things) but also active doing (e.g.,
displaying, staging or presenting) such that actions are manifested to,
and (correspondingly) perceived by an audience.
Considering these, it is clear that resorts, swimming pools, bath houses,
hot springs and tourist spots cannot be considered venues primarily
144
"where one seeks admission to entertain oneself by seeing or viewing
the show or performances". While it is true that they may be venues
where people are visually engaged, they are not primarily venues for
their proprietors or operators to actively display, stage or present shows
and/or performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist
spots do not belong to the same category or class as theaters, cinemas,
concert halls, circuses, and boxing stadia. It follows that they cannot be
considered as among the 'other places of amusement' contemplated by
Section 140 of the LGC and which may properly be subject to
amusement taxes.37 (Emphases supplied, citations omitted.)
In light of Pelizloy Realty, a golf course cannot be considered a place
of amusement. As petitioner asserted, people do not enter a golf course
to see or view a show or performance. Petitioner also, as proprietor or
operator of the golf course, does not actively display, stage, or present
a show or performance. People go to a golf course to engage
themselves in a physical sport activity, i.e., to play golf; the same
reason why people go to a gym or court to play badminton or tennis or
to a shooting range for target practice, yet there is no showing herein
that such gym, court, or shooting range is similarly considered an
amusement place subject to amusement tax. There is no basis for
singling out golf courses for amusement tax purposes from other places
where people go to play sports. This is in contravention of one of the
fundamental principles of local taxation: that the "[taxation shall be
uniform in each local government unit."38 Uniformity of taxation, like
the kindred concept of equal protection, requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in
privileges and liabilities.39chanroblesvirtuallawlibrary
Not lost on the Court is its declaration in Manila Electric Co. v. Province
of Laguna40 that under the 1987 Constitution, "where there is neither
a grant nor a prohibition by statute, the tax power [of local government
units] must be deemed to exist although Congress may provide
statutory limitations and guidelines." Section 186 of the Local
Government Code also expressly grants local government units the
following residual power to tax:
Sec. 186. Power to Levy Other Taxes, Fees, or Charges. - Local
government units may exercise the power to levy taxes, fees, or
charges on any base or subject not otherwise specifically enumerated
herein or taxed under the provisions of the National Internal Revenue
Code, as amended, or other applicable laws: Provided, that the taxes,
fees, or charges shall not be unjust, excessive, oppressive, confiscatory
or contrary to declared national policy: Provided, further, That the
ordinance levying such taxes, fees or charges shall not be enacted
without any prior public hearing conducted for the purpose. (Emphasis
supplied.)
Respondents, however, cannot claim that Section 42 of the Revised
Omnibus Tax Ordinance, as amended, imposing amusement tax on
golf courses, was enacted pursuant to the residual power to tax of
respondent Cebu City. A local government unit may exercise its
residual power to tax when there is neither a grant nor a prohibition by
statute; or when such taxes, fees, or charges are not otherwise
specifically enumerated in the Local Government Code, National
Internal Revenue Code, as amended, or other applicable laws. In the
present case, Section 140, in relation to Section 131(c), of the Local
Government Code already explicitly and clearly cover amusement tax
and respondent Cebu City must exercise its authority to impose
145
amusement tax within the limitations and guidelines as set forth in said
statutory provisions.

WHEREFORE, in view of all the foregoing, the Court GRANTS the

instant Petition, and REVERSES and SETS ASIDE the Resolution
dated March 14, 2007 and the Order dated October 3, 2007 of the
Regional Trial Court, Cebu City, Branch 9 in Civil Case No. CEB-31988.

The Court DECLARES NULL and VOID the following: (a) Section 42 of
the Revised Omnibus Tax Ordinance of the City of Cebu, as amended
by City Tax Ordinance Nos. LXXXII and LXXXIV, insofar as it imposes
amusement tax of 20% on the gross receipts on entrance, playing
green, and/or admission fees of golf courses; (b) the tax assessment
against petitioner for amusement tax on its golf course for the year 1998
in the amount of Pl,373,761.24, plus surcharges and interest pertaining
to said amount, issued by the Office of the City Treasurer, City of Cebu;
and (c) the Closure Order dated December 28, 2005 issued against
Alta Vista Golf and Country Club by the Office of the Mayor, City of
Cebu. The Court also ORDERS the City of Cebu to refund to Alta Vista
Golf and Country Club the amusement tax, penalties, surcharge, and
interest paid under protest by the latter in the total amount of
P2,750,249.17 or to apply the same amount as tax credit against
existing or future tax liability of said Club.

SO ORDERED

146

23. CIR vs. Nippon Express (Phils.) Corp
G.R. No. 212920, September 16, 2015
PERLAS-BERNABE, J.:
The Facts
Nippon is a domestic corporation duly organized and existing under
Philippine laws which is primarily engaged in the business of freight
forwarding, namely, in the international and domestic air and sea freight
and cargo forwarding, hauling, carrying, handling, distributing, loading,
and unloading general cargoes and all classes of goods, wares, and
merchandise, and the operation of container depots, warehousing,
storage, hauling, and packing facilities.6
It is a Value-Added Tax (VAT) registered entity with Tax Identification
No. VAT Registration No. 004-669-434-000.7 As such, it filed its
quarterly VAT returns for the year 2002 on April 25, 2002, July 25, 2002,
October 25, 2002, and January 27, 2003, respectively. 8 It maintained
that during the said period it incurred input VAT attributable to its zero-
rated sales in the amount of P28,405,167.60, from which only
P3,760,660.74 was applied as tax credit, thus, reflecting refundable
excess input VAT in the amount of P24,644,506.86.9
On April 22, 2004, Nippon filed an administrative claim for refund 10 of
its unutilized input VAT in the amount of P24,644,506.86 for the year
2002 before the Bureau of Internal Revenue (BIR).11 A day later, or on
April 23, 2004, it filed a judicial claim for tax refund, by way of petition
for review,12 before the CTA, docketed as CTA Case No. 6967.13
For its part, petitioner the Commissioner of Internal Revenue (CIR)
asserted, inter alia, that the amounts being claimed by Nippon as
unutilized input VAT were not properly documented, hence, should be
denied.14
Proceedings Before the CTA Division
In a Decision15 dated August 10, 2011, the CTA Division partially
granted Nippon's claim for tax refund, and thereby ordered the CIR to
issue a tax credit certificate in the reduced amount of P2,614,296.84,
representing its unutilized input VAT which was attributable to its zero-
rated sales.16 It found that while Nippon timely filed its administrative
and judicial claims within the two (2)-year prescriptive period,17 it,
however, failed to show that the recipients of its services - which, in this
case, were mostly Philippine Economic Zone Authority registered
enterprises - were non-residents "doing business outside the
Philippines." Accordingly, it concluded that Nippon's purported sales
therefrom could not qualify as zero-rated sales, hence, the reduction in
the amount of tax credit certificate claimed.18
Before its receipt of the August 10, 2011 Decision, or on August 12,
2011, Nippon filed a motion to withdraw,19 considering that the BIR,
acting on its administrative claim, already issued a tax credit certificate
in the amount of P21,675,128.91 on July 27, 2011 (July 27, 2011 Tax
Credit Certificate).
Separately, the CIR moved for reconsideration20 of the August 10, 2011
Decision and filed its comment/opposition21 to Nippon's motion to
withdraw, claiming that: (a) the CTA Division had already resolved the
factual issue pertaining to Nippon's entitlement to a tax credit certificate,
which, after trial, was proven to be only in the amount of P2,614,296.84;
(b) the issuance of the July 27, 2011 Tax Credit Certificate was bereft
of factual and legal bases, and prejudicial to the interest of the
government; and (c) Nippon's motion to withdraw was "tantamount to
147
[a] withdrawal and abandonment of its [mjotion for [reconsideration also
filed in this case."22
Thereafter, Nippon, which maintained that it only had notice of the
August 10, 2011 Decision on August 16, 2011, 23 likewise sought for
reconsideration,24 praying that the CTA Division set aside its August 10,
2011 Decision and render judgment ordering the CIR to issue a tax
credit certificate in the full amount of P24,644,506.86, or in the
alternative, grant its motion to withdraw.
In a Resolution dated July 31, 2012,26 the CTA Division granted
Nippon's motion to withdraw and, thus, considered the case closed and
terminated.27 It found that pursuant to Revenue Memorandum
Circular No. 49-03 (RMC No. 49-03) dated August 15, 2003, Nippon
correctly availed of the proper remedy notwithstanding the
promulgation of the August 10, 2011 Decision. It added that in
approving the withdrawal of Nippon's petition for review, it exercised its
discretionary authority under Section 3, Rule 50 of the Rules of Court
after due consideration of the reasons proffered by Nippon, namely: (a)
that the parties had already arrived at a reasonable settlement of the
issues; (b) further legal and related costs would be avoided; and (c) the
court's time and resources would be saved.28
Aggrieved, the CIR elevated29 its case to the CTA En Banc.
The CTA En Banc Ruling
In a Decision30 dated December 18, 2013, the CTA En Banc affirmed
the July 31, 2012 Resolution of the CTA Division granting Nippon's
motion to withdraw.31 It debunked the CIR's assertions that Nippon
failed to comply with the requirements set forth in RMC No. 49-03 - i.e.,
that Nippon failed to notify the BIR that it agreed with its findings and to
file the necessary motion before the CTA Division prior to the
promulgation of its Decision -noting that RMC No. 49-03 did not
expressly require a taxpayer to inform the BIR of its assent nor
prescribe a definite period for filing a motion to withdraw. It also
observed that the CIR did not deny the existence and issuance of the
July 27, 2011 Tax Credit Certificate. In this regard, the same may be
taken judicial notice of, and the need for its formal offer dispensed
with.32
The CIR moved for partial reconsideration33 which was, however,
denied by the CTA En Banc in a Resolution34 dated June 10, 2014;
hence, this petition.
The Issue Before the Court
The core issue in this case is whether the CTA properly granted
Nippon's motion to withdraw.
The Court's Ruling
The petition is meritorious.
A perusal of the Revised Rules of the Court of Tax Appeals35 (RRCTA)
reveals the lack of provisions governing the procedure for the
withdrawal of pending appeals before the CTA. Hence, pursuant to
Section 3, Rule 1 of the RRCTA, the Rules of Court shall suppletorily
apply:
Sec. 3. Applicability of the Rules of Court. - The Rules of Court in the
Philippines shall apply suppletorily to these Rules.
Rule 50 of the Rules of Court - an adjunct rule to the appellate
procedure in the CA under Rules 42, 43, 44, and 46 of the Rules of
148
Court which are equally adopted in the RRCTA36 - states that when the
case is deemed submitted for resolution, withdrawal of appeals made
after the filing of the appellee's brief may still be allowed in the discretion
of the court:
RULE 50 DISMISSAL OF APPEAL
xxxx
Section 3. Withdrawal of appeal. � An appeal may be withdrawn as
of right at any time before the filing of the appellee's brief. Thereafter,
the withdrawal may be allowed in the discretion of the
court. (Emphasis supplied)
Impelled by the BIR's supervening issuance of the July 27, 2011 Tax
Credit Certificate, Nippon filed a motion to withdraw the case, proffering
that:
Having arrived at a reasonable settlement of the issues with the
[CIR]/BIR, and to avoid incurring further legal and related costs, not to
mention the time and resources of [the CTA], [Nippon] most respectfully
moves for the withdrawal of its Petition for Review.37
Finding the aforementioned grounds to be justified, the CTA Division
allowed the withdrawal of Nippon's appeal thereby ordering the case
closed and terminated, notwithstanding the fact that the said motion
was filed after the promulgation of its August 10, 2011 Decision.
While it is true that the CTA Division has the prerogative to grant a
motion to withdraw under the authority of the foregoing legal provisions,
the attendant circumstances in this case should have incited it to act
otherwise.
First, it should be pointed out that the August 10, 2011 Decision was
rendered by the CTA Division after a full-blown hearing in which the
parties had already ventilated their claims. Thus, the findings contained
therein were the results of an exhaustive study of the pleadings and a
judicious evaluation of the evidence submitted by the parties, as well
as the report of the commissioned certified public accountant. In Reyes
v. Commission on Elections,38 the Court only noted, and did not grant,
a motion to withdraw the petition filed after it had already acted on said
petition, ratiocinating in the following wise:
It may well be in order to remind petitioner that jurisdiction, once
acquired, is not lost upon the instance of the parties, but continues until
the case is terminated. When petitioner filed her Petition
for Certiorari jurisdiction vested in the Court and, in fact, the Court
exercised such jurisdiction when it acted on the petition. Such
jurisdiction cannot be lost by the unilateral withdrawal of the petition by
petitioner.39
The primary reason, however, that militates against the granting of the
motion to withdraw is the fact that the CTA Division, in its August 10,
2011 Decision, had already determined that Nippon was only entitled
to refund the reduced amount of P2,614,296.84 since it failed to prove
that the recipients of its services were non-residents "doing business
outside the Philippines"; hence, Nippon's purported sales therefrom
could not qualify as zero-rated sales, necessitating the reduction in the
amount of refund claimed. Markedly different from this is the BIR's
determination that Nippon should receive P21,675,128.91 as per the
July 27, 2011 Tax Credit Certificate, which is, in
all, P19,060,832.07 larger than the amount found due by the CTA
Division. Therefore, as aptly pointed out by Associate Justice Teresita
J. Leonardo-De Castro during the deliberations on this case, the
massive discrepancy alone between the administrative and judicial
149
determinations of the amount to be refunded to Nippon should have
already raised a red flag to the CTA Division. Clearly, the interest of the
government, and, more significantly, the public, will be greatly
prejudiced by the erroneous grant of refund - at a substantial amount
at that - in favor of Nippon. Hence, under these circumstances, the CTA
Division should not have granted the motion to withdraw.
Court of Tax Appeals En Banc in CTA EB Case No. 924 are
hereby SET ASIDE. The Decision dated August 10, 2011 of the Court
of Tax Appeals Third Division in CTA Case No. 6967 is REINSTATED,
without prejudice, however, to the right of either party to appeal the
same in accordance with the Revised Rules of the Court of Tax
Appeals.

In this relation, it deserves mentioning that the CIR is not estopped from SO ORDERED.
assailing the validity of the July 27, 2011 Tax Credit Certificate which
was issued by her subordinates in the BIR. In matters of taxation, the
government cannot be estopped by the mistakes, errors or omissions
of its agents for upon it depends the ability of the government to serve
the people for whose benefit taxes are collected.40

Finally, the Court has observed that based on the records, Nippon's
administrative claim for the first taxable quarter of 2002 which closed
on March 31, 2002 was already time-barred41 for being filed on April
22, 2004, or beyond the two (2)-year prescriptive period pursuant to
Section 112(A)42 of the National Internal Revenue Code of 1997.
Although prescription was not raised as an issue, it is well-settled that
if the pleadings or the evidence on record show that the claim is barred
by prescription, the Court may motu proprio order its dismissal on said
ground.43

All told, the CTA committed a reversible error in granting Nippon's

motion to withdraw. The August 10, 2011 Decision of the CTA Division
should therefore be reinstated, without prejudice, however, to the right
of either party to appeal the same in accordance with the RRCTA.

WHEREFORE, the petition is GRANTED. The Decision dated

December 18, 2013 and the Resolution dated June 10, 2014 of the

150

24. British American Tobacco, Inc. vs. Camacho
G.R. No. 163583 August 20, 2008
YNARES-SANTIAGO, J.:
This petition for review assails the validity of: (1) Section 145 of the
National Internal Revenue Code (NIRC), as recodified by Republic Act
(RA) 8424; (2) RA 9334, which further amended Section 145 of the
NIRC on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003,
and 22-2003; and (4) Revenue Memorandum Order No. 6-2003.
Petitioner argues that the said provisions are violative of the equal
protection and uniformity clauses of the Constitution.
RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142
of the NIRC, as Amended and For Other Purposes," took effect on
January 1, 1997. In the same year, Congress passed RA 8424 or The
Tax Reform Act of 1997, re-codifying the NIRC. Section 142 was
renumbered as Section 145 of the NIRC.
Paragraph (c) of Section 145 provides for four tiers of tax rates based
on the net retail price per pack of cigarettes. To determine the
applicable tax rates of existing cigarette brands, a survey of the net
retail prices per pack of cigarettes was conducted as of October 1,
1996, the results of which were embodied in Annex "D" of the NIRC as
the duly registered, existing or active brands of cigarettes.
Paragraph (c) of Section 145, 1 states –
SEC. 145. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be Thirteen
pesos and forty-four centavos (P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed
Ten pesos (10.00) per pack, the tax shall be Eight pesos and ninety-six
centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty
centavos (P6.50) per pack, the tax shall be Five pesos and sixty
centavos (P5.60) per pack;
(4) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be One peso
and twelve centavos (P1.12) per pack.
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of this Act shall be taxed under the
highest classification of any variant of that brand.
xxxx
New brands shall be classified according to their current net retail price.
151

For the above purpose, net retail price shall mean the price at which
the cigarette is sold on retail in 20 major supermarkets in Metro Manila
(for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the value-added tax.
For brands which are marketed only outside Metro Manila, the net retail
price shall mean the price at which the cigarette is sold in five major
supermarkets in the region excluding the amount intended to cover the
applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average net
retail price as of October 1, 1996, as set forth in Annex "D" of this Act,
shall remain in force until revised by Congress. (Emphasis supplied)
As such, new brands of cigarettes shall be taxed according to their
current net retail price while existing or "old" brands shall be taxed
based on their net retail price as of October 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue (BIR) issued
Revenue Regulations No. 1-97,2 which classified the existing brands of
cigarettes as those duly registered or active brands prior to January 1,
1997. New brands, or those registered after January 1, 1997, shall be
initially assessed at their suggested retail price until such time that the
appropriate survey to determine their current net retail price is
conducted. Pertinent portion of the regulations reads –
SECTION 2. Definition of Terms.
xxxx
3. Duly registered or existing brand of cigarettes – shall include duly
registered, existing or active brands of cigarettes, prior to January 1,
1997.
xxxx
6. New Brands – shall mean brands duly registered after January 1,
1997 and shall include duly registered, inactive brands of cigarette not
sold in commercial quantity before January 1, 1997.
Section 4. Classification and Manner of Taxation of Existing Brands,
New Brands and Variant of Existing Brands.
xxxx
B. New Brand
New brands shall be classified according to their current net retail price.
In the meantime that the current net retail price has not yet been
established, the suggested net retail price shall be used to determine
the specific tax classification. Thereafter, a survey shall be conducted
in 20 major supermarkets or retail outlets in Metro Manila (for brands of
cigarette marketed nationally) or in five (5) major supermarkets or retail
outlets in the region (for brands which are marketed only outside Metro
Manila) at which the cigarette is sold on retail in reams/cartons, three
(3) months after the initial removal of the new brand to determine the
actual net retail price excluding the excise tax and value added tax
which shall then be the basis in determining the specific tax
classification. In case the current net retail price is higher than the
suggested net retail price, the former shall prevail. Any difference in
152
specific tax due shall be assessed and collected inclusive of increments
as provided for by the National Internal Revenue Code, as amended.
In June 2001, petitioner British American Tobacco introduced into the
market Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol
Lights cigarettes, with a suggested retail price of P9.90 per pack.3
Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brands were
initially assessed the excise tax at P8.96 per pack.
On February 17, 2003, Revenue Regulations No. 9-2003,4 amended
Revenue Regulations No. 1-97 by providing, among others, a periodic
review every two years or earlier of the current net retail price of new
brands and variants thereof for the purpose of establishing and
updating their tax classification, thus:
For the purpose of establishing or updating the tax classification of new
brands and variant(s) thereof, their current net retail price shall be
reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless
earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new
brands shall remain in force until the same is altered or changed
through the issuance of an appropriate Revenue Regulations.
Pursuant thereto, Revenue Memorandum Order No. 6-20035 was
issued on March 11, 2003, prescribing the guidelines and procedures
in establishing current net retail prices of new brands of cigarettes and
alcohol products.
Subsequently, Revenue Regulations No. 22-20036 was issued on
August 8, 2003 to implement the revised tax classification of certain
new brands introduced in the market after January 1, 1997, based on
the survey of their current net retail price. The survey revealed that
Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol
Lights, are sold at the current net retail price of P22.54, P22.61 and
P21.23, per pack, respectively.7 Respondent Commissioner of the
Bureau of Internal Revenue thus recommended the applicable tax rate
of P13.44 per pack inasmuch as Lucky Strike’s average net retail price
is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the Regional Trial
Court (RTC) of Makati, Branch 61, a petition for injunction with prayer
for the issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction, docketed as Civil Case No. 03-1032. Said
petition sought to enjoin the implementation of Section 145 of the NIRC,
Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue
Memorandum Order No. 6-2003 on the ground that they discriminate
against new brands of cigarettes, in violation of the equal protection and
uniformity provisions of the Constitution.
Respondent Commissioner of Internal Revenue filed an Opposition8 to
the application for the issuance of a TRO. On September 4, 2003, the
trial court denied the application for TRO, holding that the courts have
no authority to restrain the collection of taxes.9 Meanwhile, respondent
Secretary of Finance filed a Motion to Dismiss,10 contending that the
petition is premature for lack of an actual controversy or urgent
necessity to justify judicial intervention.
In an Order dated March 4, 2004, the trial court denied the motion to
dismiss and issued a writ of preliminary injunction to enjoin the
implementation of Revenue Regulations Nos. 1-97, 9-2003, 22-2003
and Revenue Memorandum Order No. 6-2003.11 Respondents filed a
153
Motion for Reconsideration12 and Supplemental Motion for
Reconsideration.13 At the hearing on the said motions, petitioner and
respondent Commissioner of Internal Revenue stipulated that the only
issue in this case is the constitutionality of the assailed law, order, and
regulations.14
On May 12, 2004, the trial court rendered a decision15 upholding the
constitutionality of Section 145 of the NIRC, Revenue Regulations Nos.
1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003.
The trial court also lifted the writ of preliminary injunction. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the instant Petition is hereby
DISMISSED for lack of merit. The Writ of Preliminary Injunction
previously issued is hereby lifted and dissolved.
SO ORDERED.16
Petitioner brought the instant petition for review directly with this Court
on a pure question of law.
While the petition was pending, RA 9334 (An Act Increasing The Excise
Tax Rates Imposed on Alcohol And Tobacco Products, Amending For
The Purpose Sections 131, 141, 143, 144, 145 and 288 of the NIRC of
1997, As Amended), took effect on January 1, 2005. The statute,
among others,–
(1) increased the excise tax rates provided in paragraph (c) of Section
145;
(2) mandated that new brands of cigarettes shall initially be classified
according to their suggested net retail price, until such time that their
correct tax bracket is finally determined under a specified period and,
after which, their classification shall remain in force until revised by
Congress;
(3) retained Annex "D" as tax base of those surveyed as of October 1,
1996 including the classification of brands for the same products which,
although not set forth in said Annex "D," were registered on or before
January 1, 1997 and were being commercially produced and marketed
on or after October 1, 1996, and which continue to be commercially
produced and marketed after the effectivity of this Act. Said
classification shall remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes introduced
between the period January 2, 199717 to December 31, 2003, such
that said cigarettes shall remain in the classification under which the
BIR has determined them to belong as of December 31, 2003, until
revised by Congress.
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine. – There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:
154
(1) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos
(P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos
(P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos
(P2.72) per pack.
(2) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty
centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35)
per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos
(P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos
(P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos
(P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed
Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos
(10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos
(P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos
(P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos
(P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen
centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos
(P28.30) per pack.
xxxx
155
New brands, as defined in the immediately following paragraph, shall
initially be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity
of R.A. No. 8240.
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported
cigarettes are intended by the manufacturer or importer to be sold on
retail in major supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with regional
markets. At the end of three (3) months from the product launch, the
Bureau of Internal Revenue shall validate the suggested net retail price
of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand
of cigarette, as defined above, shall be classified. After the end of
eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against
the net retail price as of the time of revalidation in order to finally
determine the correct tax bracket under which a particular new brand
of cigarettes shall be classified; Provided however, That brands of
cigarettes introduced in the domestic market between January 1, 1997
[should be January 2, 1997] and December 31, 2003 shall remain in
the classification under which the Bureau of Internal Revenue has
determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised except by an act of
Congress.
Net retail price, as determined by the Bureau of Internal Revenue
through a price survey to be conducted by the Bureau of Internal
Revenue itself, or the National Statistics Office when deputized for the
purpose by the Bureau of Internal Revenue, shall mean the price at
which the cigarette is sold in retail in at least twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable
excise tax and the value-added tax. For brands which are marketed
only outside Metro Manila, the "net retail price" shall mean the price at
which the cigarette is sold in at least five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise tax
and value-added tax.
The classification of each brand of cigarettes based on its average net
retail price as of October 1, 1996, as set forth in Annex "D", including
the classification of brands for the same products which, although not
set forth in said Annex "D", were registered and were being
commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the
effectivity of this Act, shall remain in force until revised by Congress.
(Emphasis added)
Under RA 9334, the excise tax due on petitioner’s products was
increased to P25.00 per pack. In the implementation thereof,
respondent Commissioner assessed petitioner’s importation of 911,000
packs of Lucky Strike cigarettes at the increased tax rate of P25.00 per
pack, rendering it liable for taxes in the total sum of P22,775,000.00.18
Hence, petitioner filed a Motion to Admit Attached Supplement19 and
a Supplement20 to the petition for review, assailing the constitutionality
of RA 9334 insofar as it retained Annex "D" and praying for a downward
classification of Lucky Strike products at the bracket taxable at P8.96
per pack. Petitioner contended that the continued use of Annex "D" as
156
the tax base of existing brands of cigarettes gives undue protection to
said brands which are still taxed based on their price as of October
1996 notwithstanding that they are now sold at the same or even at a
higher price than new brands like Lucky Strike. Thus, old brands of
cigarettes such as Marlboro and Philip Morris which, like Lucky Strike,
are sold at or more than P22.00 per pack, are taxed at the rate of
P10.88 per pack, while Lucky Strike products are taxed at P26.06 per
pack.
In its Comment to the supplemental petition, respondents, through the
Office of the Solicitor General (OSG), argued that the passage of RA
9334, specifically the provision imposing a legislative freeze on the
classification of cigarettes introduced into the market between January
2, 1997 and December 31, 2003, rendered the instant petition
academic. The OSG claims that the provision in Section 145, as
amended by RA 9334, prohibiting the reclassification of cigarettes
introduced during said period, "cured’ the perceived defect of Section
145 considering that, like the cigarettes under Annex "D," petitioner’s
brands and other brands introduced between January 2, 1997 and
December 31, 2003, shall remain in the classification under which the
BIR has placed them and only Congress has the power to reclassify
them.
On March 20, 2006, Philip Morris Philippines Manufacturing
Incorporated filed a Motion for Leave to Intervene with attached
Comment-in-Intervention.21 This was followed by the Motions for
Leave to Intervene of Fortune Tobacco Corporation,22 Mighty
Corporation, 23 and JT International, S.A., with their respective
Comments-in-Intervention. The Intervenors claim that they are parties-
in-interest who stand to be affected by the ruling of the Court on the
constitutionality of Section 145 of the NIRC and its Annex "D" because
they are manufacturers of cigarette brands which are included in the
said Annex. Hence, their intervention is proper since the protection of
their interest cannot be addressed in a separate proceeding.
According to the Intervenors, no inequality exists because cigarettes
classified by the BIR based on their net retail price as of December 31,
2003 now enjoy the same status quo provision that prevents the BIR
from reclassifying cigarettes included in Annex "D." It added that the
Court has no power to pass upon the wisdom of the legislature in
retaining Annex "D" in RA 9334; and that the nullification of said Annex
would bring about tremendous loss of revenue to the government,
chaos in the collection of taxes, illicit trade of cigarettes, and cause
decline in cigarette demand to the detriment of the farmers who depend
on the tobacco industry.
Intervenor Fortune Tobacco further contends that petitioner is estopped
from questioning the constitutionality of Section 145 and its
implementing rules and regulations because it entered into the cigarette
industry fully aware of the existing tax system and its consequences.
Petitioner imported cigarettes into the country knowing that its
suggested retail price, which will be the initial basis of its tax
classification, will be confirmed and validated through a survey by the
BIR to determine the correct tax that would be levied on its cigarettes.
Moreover, Fortune Tobacco claims that the challenge to the validity of
the BIR issuances should have been brought by petitioner before the
Court of Tax Appeals (CTA) and not the RTC because it is the CTA
which has exclusive appellate jurisdiction over decisions of the BIR in
tax disputes.
157
On August 7, 2006, the OSG manifested that it interposes no objection
to the motions for intervention.24 Therefore, considering the substantial
interest of the intervenors, and in the higher interest of justice, the Court
admits their intervention.
Before going into the substantive issues of this case, we must first
address the matter of jurisdiction, in light of Fortune Tobacco’s
contention that petitioner should have brought its petition before the
Court of Tax Appeals rather than the regional trial court.
The jurisdiction of the Court of Tax Appeals is defined in Republic Act
No. 1125, as amended by Republic Act No. 9282. Section 7 thereof
states, in pertinent part:
Sec. 7. Jurisdiction. — The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees
or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws administered by the
Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code
provides a specific period of action, in which case the inaction shall be
deemed a denial; xxx.25
While the above statute confers on the CTA jurisdiction to resolve tax
disputes in general, this does not include cases where the
constitutionality of a law or rule is challenged. Where what is assailed
is the validity or constitutionality of a law, or a rule or regulation issued
by the administrative agency in the performance of its quasi-legislative
function, the regular courts have jurisdiction to pass upon the same.
The determination of whether a specific rule or set of rules issued by
an administrative agency contravenes the law or the constitution is
within the jurisdiction of the regular courts. Indeed, the Constitution
vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation in the courts, including the regional
trial courts. This is within the scope of judicial power, which includes the
authority of the courts to determine in an appropriate action the validity
of the acts of the political departments. Judicial power includes the duty
of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting
to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.26
In Drilon v. Lim,27 it was held:
We stress at the outset that the lower court had jurisdiction to consider
the constitutionality of Section 187, this authority being embraced in the
general definition of the judicial power to determine what are the valid
and binding laws by the criterion of their conformity to the fundamental
law. Specifically, B.P. 129 vests in the regional trial courts jurisdiction
158
over all civil cases in which the subject of the litigation is incapable of
pecuniary estimation, even as the accused in a criminal action has the
right to question in his defense the constitutionality of a law he is
charged with violating and of the proceedings taken against him,
particularly as they contravene the Bill of Rights. Moreover, Article X,
Section 5(2), of the Constitution vests in the Supreme Court appellate
jurisdiction over final judgments and orders of lower courts in all cases
in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct
attack on the constitutionality of Section 145(C) of the NIRC, as
amended, and the validity of its implementing rules and regulations. In
fact, the RTC limited the resolution of the subject case to the issue of
the constitutionality of the assailed provisions. The determination of
whether the assailed law and its implementing rules and regulations
contravene the Constitution is within the jurisdiction of regular courts.
The Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation in the courts,
including the regional trial courts.28 Petitioner, therefore, properly filed
the subject case before the RTC.
We come now to the issue of whether petitioner is estopped from
assailing the authority of the Commissioner of Internal Revenue.
Fortune Tobacco raises this objection by pointing out that when
petitioner requested the Commissioner for a ruling that its Lucky Strike
Soft Pack cigarettes was a "new brand" rather than a variant of an
existing brand, and thus subject to a lower specific tax rate, petitioner
executed an undertaking to comply with the procedures under existing
regulations for the assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the authority of
the Commissioner of Internal Revenue, cannot later on turn around
when the ruling is adverse to it.
Estoppel, an equitable principle rooted in natural justice, prevents
persons from going back on their own acts and representations, to the
prejudice of others who have relied on them.29 The principle is codified
in Article 1431 of the Civil Code, which provides:
Through estoppel, an admission or representation is rendered
conclusive upon the person making it and cannot be denied or
disproved as against the person relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of the Rules of
Court, viz:
Sec. 2. Conclusive presumptions. — The following are instances of
conclusive presumptions:
(a) Whenever a party has by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any litigation arising out
of such declaration, act or omission be permitted to falsify it.
The elements of estoppel are: first, the actor who usually must have
knowledge, notice or suspicion of the true facts, communicates
something to another in a misleading way, either by words, conduct or
silence; second, the other in fact relies, and relies reasonably or
159
justifiably, upon that communication; third, the other would be harmed
materially if the actor is later permitted to assert any claim inconsistent
with his earlier conduct; and fourth, the actor knows, expects or
foresees that the other would act upon the information given or that a
reasonable person in the actor's position would expect or foresee such
action.30
In the early case of Kalalo v. Luz,31 the elements of estoppel, as related
to the party to be estopped, are: (1) conduct amounting to false
representation or concealment of material facts; or at least calculated
to convey the impression that the facts are other than, and inconsistent
with, those which the party subsequently attempts to assert; (2) intent,
or at least expectation that this conduct shall be acted upon by, or at
least influence, the other party; and (3) knowledge, actual or
constructive, of the real facts.
We find that petitioner was not guilty of estoppel. When it made the
undertaking to comply with all issuances of the BIR, which at that time
it considered as valid, petitioner did not commit any false
misrepresentation or misleading act. Indeed, petitioner cannot be
faulted for initially undertaking to comply with, and subjecting itself to
the operation of Section 145(C), and only later on filing the subject case
praying for the declaration of its unconstitutionality when the
circumstances change and the law results in what it perceives to be
unlawful discrimination. The mere fact that a law has been relied upon
in the past and all that time has not been attacked as unconstitutional
is not a ground for considering petitioner estopped from assailing its
validity. For courts will pass upon a constitutional question only when
presented before it in bona fide cases for determination, and the fact
that the question has not been raised before is not a valid reason for
refusing to allow it to be raised later.32
Now to the substantive issues.
To place this case in its proper context, we deem it necessary to first
discuss how the assailed law operates in order to identify, with
precision, the specific provisions which, according to petitioner, have
created a grossly discriminatory classification scheme between old and
new brands. The pertinent portions of RA 8240, as amended by RA
9334, are reproduced below for ready reference:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine. – There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three centavos
(P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven centavos
(P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two centavos
(P2.72) per pack.
160
(2) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty
centavos (P6.50) per pack, the tax shall be:
Effective on January 1, 2005, Six pesos and thirty-five centavos (P6.35)
per pack;
Effective on January 1, 2007, Six pesos and seventy-four centavos
(P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen centavos
(P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fifty-six centavos
(P7.56) per pack.
(3) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed
Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Ten pesos and thirty-five centavos
(10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight centavos
(P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three centavos
(P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per pack.
(4) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be:
Effective on January 1, 2005, Twenty-five pesos (P25.00) per pack;
Effective on January 1, 2007, Twenty-six pesos and six centavos
(P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and sixteen
centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and thirty centavos
(P28.30) per pack.
xxxx
New brands, as defined in the immediately following paragraph, shall
initially be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity
of R.A. No. 8240.
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported
cigarettes are intended by the manufacturer or importer to be sold on
retail in major supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with regional
markets. At the end of three (3) months from the product launch, the
Bureau of Internal Revenue shall validate the suggested net retail price
of the new brand against the net retail price as defined herein and
161
determine the correct tax bracket under which a particular new brand
of cigarette, as defined above, shall be classified. After the end of
eighteen (18) months from such validation, the Bureau of Internal
Revenue shall revalidate the initially validated net retail price against
the net retail price as of the time of revalidation in order to finally
determine the correct tax bracket under which a particular new brand
of cigarettes shall be classified; Provided however, That brands of
cigarettes introduced in the domestic market between January 1, 1997
[should be January 2, 1997] and December 31, 2003 shall remain in
the classification under which the Bureau of Internal Revenue has
determined them to belong as of December 31, 2003. Such
classification of new brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised except by an act of
Congress.
Net retail price, as determined by the Bureau of Internal Revenue
through a price survey to be conducted by the Bureau of Internal
Revenue itself, or the National Statistics Office when deputized for the
purpose by the Bureau of Internal Revenue, shall mean the price at
which the cigarette is sold in retail in at least twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable
excise tax and the value-added tax. For brands which are marketed
only outside Metro Manila, the "net retail price" shall mean the price at
which the cigarette is sold in at least five (5) major supermarkets in the
region excluding the amount intended to cover the applicable excise tax
and value-added tax.
The classification of each brand of cigarettes based on its average net
retail price as of October 1, 1996, as set forth in Annex "D", including
the classification of brands for the same products which, although not
set forth in said Annex "D", were registered and were being
commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the
effectivity of this Act, shall remain in force until revised by Congress.
As can be seen, the law creates a four-tiered system which we may
refer to as the low-priced,33 medium-priced,34 high-priced,35 and
premium-priced36 tax brackets. When a brand is introduced in the
market, the current net retail price is determined through the
aforequoted specified procedure. The current net retail price is then
used to classify under which tax bracket the brand belongs in order to
finally determine the corresponding excise tax rate on a per pack basis.
The assailed feature of this law pertains to the mechanism where, after
a brand is classified based on its current net retail price, the
classification is frozen and only Congress can thereafter reclassify the
same. From a practical point of view, Annex "D" is merely a by-product
of the whole mechanism and philosophy of the assailed law. That is,
the brands under Annex "D" were also classified based on their current
net retail price, the only difference being that they were the first ones
so classified since they were the only brands surveyed as of October
1, 1996, or prior to the effectivity of RA 8240 on January 1, 1997.37
Due to this legislative classification scheme, it is possible that over time
the net retail price of a previously classified brand, whether it be a brand
under Annex "D" or a new brand classified after the effectivity of RA
8240 on January 1, 1997, would increase (due to inflation, increase of
production costs, manufacturer’s decision to increase its prices, etc.) to
a point that its net retail price pierces the tax bracket to which it was
previously classified.38 Consequently, even if its present day net retail
price would make it fall under a higher tax bracket, the previously
classified brand would continue to be subject to the excise tax rate
162
under the lower tax bracket by virtue of the legislative classification
freeze.
Petitioner claims that this is what happened in 2004 to the Marlboro and
Philip Morris brands, which were permanently classified under Annex
"D." As of October 1, 1996, Marlboro had net retail prices ranging from
P6.78 to P6.84 while Philip Morris had net retail prices ranging from
P7.39 to P7.48. Thus, pursuant to RA 8240,39 Marlboro and Philip
Morris were classified under the high-priced tax bracket and subjected
to an excise tax rate of P8.96 per pack. Petitioner then presented
evidence showing that after the lapse of about seven years or sometime
in 2004, Marlboro’s and Philip Morris’ net retail prices per pack both
increased to about P15.59.40
This meant that they would fall under the premium-priced tax bracket,
with a higher excise tax rate of P13.44 per pack,41 had they been
classified based on their 2004 net retail prices. However, due to the
legislative classification freeze, they continued to be classified under
the high-priced tax bracket with a lower excise tax rate. Petitioner
thereafter deplores the fact that its Lucky Strike Filter, Lucky Strike
Lights, and Lucky Strike Menthol Lights cigarettes, introduced in the
market sometime in 2001 and validated by a BIR survey in 2003, were
found to have net retail prices of P11.53, P11.59 and P10.34,42
respectively, which are lower than those of Marlboro and Philip Morris.
However, since petitioner’s cigarettes were newly introduced brands in
the market, they were taxed based on their current net retail prices and,
thus, fall under the premium-priced tax bracket with a higher excise tax
rate of P13.44 per pack. This unequal tax treatment between Marlboro
and Philip Morris, on the one hand, and Lucky Strike, on the other, is
the crux of petitioner’s contention that the legislative classification
freeze violates the equal protection and uniformity of taxation clauses
of the Constitution.
It is apparent that, contrary to its assertions, petitioner is not only
questioning the undue favoritism accorded to brands under Annex "D,"
but the entire mechanism and philosophy of the law which freezes the
tax classification of a cigarette brand based on its current net retail
price. Stated differently, the alleged discrimination arising from the
legislative classification freeze between the brands under Annex "D"
and petitioner’s newly introduced brands arose only because the former
were classified based on their "current" net retail price as of October 1,
1996 and petitioner’s newly introduced brands were classified based
on their "current" net retail price as of 2003. Without this corresponding
freezing of the classification of petitioner’s newly introduced brands
based on their current net retail price, it would be impossible to
establish that a disparate tax treatment occurred between the Annex
"D" brands and petitioner’s newly introduced brands.
This clarification is significant because, under these circumstances, a
declaration of unconstitutionality would necessarily entail nullifying the
whole mechanism of the law and not just Annex "D." Consequently, if
the assailed law is declared unconstitutional on equal protection
grounds, the entire method by which a brand of cigarette is classified
would have to be invalidated. As a result, no method to classify brands
under Annex "D" as well as new brands would be left behind and the
whole Section 145 of the NIRC, as amended, would become
inoperative.43
To simplify the succeeding discussions, we shall refer to the whole
mechanism and philosophy of the assailed law which freezes the tax
classification of a cigarette brand based on its current net retail price
163
and which, thus, produced different classes of brands based on the time
of their introduction in the market (starting with the brands in Annex "D"
since they were the first brands so classified as of October 1, 1996) as
the classification freeze provision.44
As thus formulated, the central issue is whether or not the classification
freeze provision violates the equal protection and uniformity of taxation
clauses of the Constitution.
In Sison, Jr. v. Ancheta,45 this Court, through Chief Justice Fernando,
explained the applicable standard in deciding equal protection and
uniformity of taxation challenges:
Now for equal protection. The applicable standard to avoid the charge
that there is a denial of this constitutional mandate whether the assailed
act is in the exercise of the police power or the power of eminent domain
is to demonstrate "that the governmental act assailed, far from being
inspired by the attainment of the common weal was prompted by the
spirit of hostility, or at the very least, discrimination that finds no support
in reason. It suffices then that the laws operate equally and uniformly
on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in
the privileges conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed.
For the principle is that equal protection and security shall be given to
every person under circumstances, which if not identical are analogous.
If law be looks upon in terms of burden or charges, those that fall within
a class should be treated in the same fashion, whatever restrictions
cast on some in the group equally binding on the rest." That same
formulation applies as well to taxation measures. The equal protection
clause is, of course, inspired by the noble concept of approximating the
ideal of the laws's benefits being available to all and the affairs of men
being governed by that serene and impartial uniformity, which is of the
very essence of the idea of law.
There is, however, wisdom, as well as realism, in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is
not a disembodied equality. The Fourteenth Amendment enjoins 'the
equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of
policy arising out of specific difficulties, addressed to the attainment of
specific ends by the use of specific remedies. The Constitution does
not require things which are different in fact or opinion to be treated in
law as though they were the same." Hence the constant reiteration of
the view that classification if rational in character is allowable. As a
matter of fact, in a leading case of Lutz v. Araneta, this Court, through
Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in
the power to tax that a state be free to select the subjects of taxation,
and it has been repeatedly held that 'inequalities which result from a
singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'"
Petitioner likewise invoked the kindred concept of uniformity. According
to the Constitution: "The rule of taxation shall be uniform and equitable."
This requirement is met according to Justice Laurel in Philippine Trust
Company v. Yatco, decided in 1940, when the tax "operates with the
same force and effect in every place where the subject may be found."
He likewise added: "The rule of uniformity does not call for perfect
uniformity or perfect equality, because this is hardly attainable." The
problem of classification did not present itself in that case. It did not
arise until nine years later, when the Supreme Court held: "Equality and
164
uniformity in taxation means that all taxable articles or kinds of property
of the same class shall be taxed at the same rate. The taxing power
has the authority to make reasonable and natural classifications for
purposes of taxation, . . . As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of
justice and equity" it "is not discriminatory within the meaning of this
clause and is therefore uniform." There is quite a similarity then to the
standard of equal protection for all that is required is that the tax
"applies equally to all persons, firms and corporations placed in similar
situation."46 (Emphasis supplied)
In consonance thereto, we have held that "in our jurisdiction, the
standard and analysis of equal protection challenges in the main have
followed the ‘rational basis’ test, coupled with a deferential attitude to
legislative classifications and a reluctance to invalidate a law unless
there is a showing of a clear and unequivocal breach of the
Constitution."47 Within the present context of tax legislation on sin
products which neither contains a suspect classification nor impinges
on a fundamental right, the rational-basis test thus finds application.
Under this test, a legislative classification, to survive an equal protection
challenge, must be shown to rationally further a legitimate state
interest.48 The classifications must be reasonable and rest upon some
ground of difference having a fair and substantial relation to the object
of the legislation.49 Since every law has in its favor the presumption of
constitutionality, the burden of proof is on the one attacking the
constitutionality of the law to prove beyond reasonable doubt that the
legislative classification is without rational basis.50 The presumption of
constitutionality can be overcome only by the most explicit
demonstration that a classification is a hostile and oppressive
discrimination against particular persons and classes, and that there is
no conceivable basis which might support it.51
A legislative classification that is reasonable does not offend the
constitutional guaranty of the equal protection of the laws. The
classification is considered valid and reasonable provided that: (1) it
rests on substantial distinctions; (2) it is germane to the purpose of the
law; (3) it applies, all things being equal, to both present and future
conditions; and (4) it applies equally to all those belonging to the same
class.52
The first, third and fourth requisites are satisfied. The classification
freeze provision was inserted in the law for reasons of practicality and
expediency. That is, since a new brand was not yet in existence at the
time of the passage of RA 8240, then Congress needed a uniform
mechanism to fix the tax bracket of a new brand. The current net retail
price, similar to what was used to classify the brands under Annex "D"
as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of
the tax classifications now expressly applies not just to Annex "D"
brands but to newer brands introduced after the effectivity of RA 8240
on January 1, 1997 and any new brand that will be introduced in the
future.53 (However, as will be discussed later, the intent to apply the
freezing mechanism to newer brands was already in place even prior
to the amendments introduced by RA 9334 to RA 8240.) This does not
explain, however, why the classification is "frozen" after its
determination based on current net retail price and how this is germane
to the purpose of the assailed law. An examination of the legislative
history of RA 8240 provides interesting answers to this question.
RA 8240 was the first of three parts in the Comprehensive Tax Reform
Package then being pushed by the Ramos Administration. It was
165
enacted with the following objectives stated in the Sponsorship Speech
of Senator Juan Ponce Enrile (Senator Enrile), viz:
First, to evolve a tax structure which will promote fair competition
among the players in the industries concerned and generate buoyant
and stable revenue for the government.
Second, to ensure that the tax burden is equitably distributed not only
amongst the industries affected but equally amongst the various levels
of our society that are involved in various markets that are going to be
affected by the excise tax on distilled spirits, fermented liquor, cigars
and cigarettes.
In the case of firms engaged in the industries producing the products
that we are about to tax, this means relating the tax burden to their
market share, not only in terms of quantity, Mr. President, but in terms
of value.
In case of consumers, this will mean evolving a multi-tiered rate
structure so that low-priced products are subject to lower tax rates and
higher-priced products are subject to higher tax rates.
Third, to simplify the tax administration and compliance with the tax
laws that are about to unfold in order to minimize losses arising from
inefficiencies and tax avoidance scheme, if not outright tax evasion.54
In the initial stages of the crafting of the assailed law, the Department
of Finance (DOF) recommended to Congress a shift from the then
existing ad valorem taxation system to a specific taxation system with
respect to sin products, including cigarettes. The DOF noted that the
ad valorem taxation system was a source of massive tax leakages
because the taxpayer was able to evade paying the correct amount of
taxes through the undervaluation of the price of cigarettes using various
marketing arms and dummy corporations. In order to address this
problem, the DOF proposed a specific taxation system where the
cigarettes would be taxed based on volume or on a per pack basis
which was believed to be less susceptible to price manipulation. The
reason was that the BIR would only need to monitor the sales volume
of cigarettes, from which it could easily compute the corresponding tax
liability of cigarette manufacturers. Thus, the DOF suggested the use
of a three-tiered system which operates in substantially the same
manner as the four-tiered system under RA 8240 as earlier discussed.
The proposal of the DOF was embodied in House Bill (H.B.) No. 6060,
the pertinent portions of which states—
SEC. 142. Cigars and cigarettes.—
(c) Cigarettes packed by machine.— There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the manufacturer’s or importer’s wholesale price (net of excise tax
and value-added tax) per pack exceeds four pesos and twenty
centavos (P4.20), the tax shall be seven pesos and fifty centavos
(P7.50);
(2) If the manufacturer’s or importer’s wholesale price (net of excise tax
and value-added tax) per pack exceeds three pesos and ninety
centavos (P3.90) but does not exceed four pesos and twenty centavos
(P4.20), the tax shall be five pesos and fifty centavos (P5.50): provided,
that after two (2) years from the effectivity of this Act, cigarettes
166
otherwise subject to tax under this subparagraph shall be taxed under
subparagraph (1) above.
(3) If the manufacturer’s or importer’s wholesale price (net of excise tax
and value-added tax) per pack does not exceeds three pesos and
ninety centavos (P3.90), the tax rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes packed by
machine to be introduced in the domestic market after the effectivity of
this Act, shall be taxed under paragraph (c)(1) hereof.
The rates of specific tax on cigars and cigarettes under paragraphs (a),
(b), and (c) hereof, including the price levels for purposes of classifying
cigarettes packed by machine, shall be revised upward two (2) years
after the effectivity of this Act and every two years thereafter by the
Commissioner of Internal Revenue, subject to the approval of the
Secretary of Finance, taking into account the movement of the
consumer price index for cigars and cigarettes as established by the
National Statistics Office: provided, that the increase in taxes and/or
price levels shall be equal to the present change in such consumer
price index for the two-year period: provided, further, that the President,
upon the recommendation of the Secretary of Finance, may suspend
or defer the adjustment in price levels and tax rates when the interest
of the national economy and general welfare so require, such as the
need to obviate unemployment, and economic and social dislocation:
provided, finally, that the revised price levels and tax rates authorized
herein shall in all cases be rounded off to the nearest centavo and shall
be in force and effect on the date of publication thereof in a newspaper
of general circulation. x x x (Emphasis supplied)
What is of particular interest with respect to the proposal of the DOF is
that it contained a provision for the periodic adjustment of the excise
tax rates and tax brackets, and a corresponding periodic resurvey and
reclassification of cigarette brands based on the increase in the
consumer price index as determined by the Commissioner of Internal
Revenue subject to certain guidelines. The evident intent was to
prevent inflation from eroding the value of the excise taxes that would
be collected from cigarettes over time by adjusting the tax rate and tax
brackets based on the increase in the consumer price index. Further,
under this proposal, old brands as well as new brands introduced
thereafter would be subjected to a resurvey and reclassification based
on their respective values at the end of every two years in order to align
them with the adjustment of the excise tax rate and tax brackets due to
the movement in the consumer price index.55
Of course, we now know that the DOF proposal, insofar as the periodic
adjustment of tax rates and tax brackets, and the periodic resurvey and
reclassification of cigarette brands are concerned, did not gain approval
from Congress. The House and Senate pushed through with their own
versions of the excise tax system on beers and cigarettes both
denominated as H.B. No. 7198. For convenience, we shall refer to the
bill deliberated upon by the House as the House Version and that of the
Senate as the Senate Version.
The House’s Committee on Ways and Means, then chaired by
Congressman Exequiel B. Javier (Congressman Javier), roundly
rejected the DOF proposal. Instead, in its Committee Report submitted
to the plenary, it proposed a different excise tax system which used a
specific tax as a basic tax with an ad valorem comparator. Further, it
deleted the proposal to have a periodic adjustment of tax rates and the
167
tax brackets as well as periodic resurvey and reclassification of
cigarette brands, to wit:
The rigidity of the specific tax system calls for the need for frequent
congressional intervention to adjust the tax rates to inflation and to keep
pace with the expanding needs of government for more revenues. The
DOF admits this flaw inherent in the tax system it proposed. Hence, to
obviate the need for remedial legislation, the DOF is asking Congress
to grant to the Commissioner the power to revise, one, the specific tax
rates: and two, the price levels of beer and cigarettes. What the DOF is
asking, Mr. Speaker, is for Congress to delegate to the Commissioner
of Internal Revenue the power to fix the tax rates and classify the
subjects of taxation based on their price levels for purposes of fixing the
tax rates. While we sympathize with the predicament of the DOF, it is
not for Congress to abdicate such power. The power sought to be
delegated to be exercised by the Commissioner of Internal Revenue is
a legislative power vested by the Constitution in Congress pursuant to
Section 1, Article VI of the Constitution. Where the power is vested,
there it must remain— in Congress, a body of representatives elected
by the people. Congress may not delegate such power, much less
abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally permissible,
to the Commissioner of Internal Revenue is fraught with ethical
implications. The debates on how much revenue will be raised, how
much money will be taken from the pockets of taxpayers, will inexorably
shift from the democratic Halls of Congress to the secret and non-
transparent corridors of unelected agencies of government, the
Department of Finance and the Bureau of Internal Revenue, which are
not accountable to our people. We cannot countenance the shift for
ethical reasons, lest we be accused of betraying the trust reposed on
this Chamber by the people. x x x
A final point on this proposal, Mr. Speaker, is the exercise of the taxing
power of the Commissioner of Internal Revenue which will be triggered
by inflation rates based on the consumer price index. Simply stated, Mr.
Speaker, the specific tax rates will be fixed by the Commissioner
depending on the price levels of beers and cigarettes as determined by
the consumers’ price index. This is a novel idea, if not necessarily weird
in the field of taxation. What if the brewer or the cigarette manufacturer
sells at a price below the consumers’ price index? Will it be taxed on
the basis of the consumer’s price index which is over and above its
wholesale or retail price as the case may be? This is a weird form of
exaction where the tax is based not on what the brewer or manufacturer
actually realized but on an imaginary wholesale or retail price. This
amounts to a taxation based on presumptive price levels and renders
the specific tax a presumptive tax. We hope, the DOF and the BIR will
also honor a presumptive tax payment.
Moreover, specific tax rates based on price levels tied to consumer’s
price index as proposed by the DOF engenders anti-trust concerns. The
proposal if enacted into law will serve as a barrier to the entry of new
players in the beer and cigarette industries which are presently
dominated by shared monopolies. A new player in these industries will
be denied business flexibility to fix its price levels to promote its product
and penetrate the market as the price levels are dictated by the
consumer price index. The proposed tax regime, Mr. Speaker, will
merely enhance the stranglehold of the oligopolies in the beer and
cigarette industries, thus, reversing the government’s policy of
dismantling monopolies and combinations in restraint of trade.56
168

For its part, the Senate’s Committee on Ways and Means, then chaired
by Senator Juan Ponce Enrile (Senator Enrile), developed its own
version of the excise tax system on cigarettes. The Senate Version
consisted of a four-tiered system and, interestingly enough, contained
a periodic excise tax rate and tax bracket adjustment as well as a
periodic resurvey and reclassification of brands provision ("periodic
adjustment and reclassification provision," for brevity) to be conducted
by the DOF in coordination with the BIR and the National Statistics
Office based on the increase in the consumer price index— similar to
the one proposed by the DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code, as
amended, is hereby further amended to read as follows:
"SEC. 142. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:
(1) If the net retail price (excluding the excise tax and the value-added
tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve
pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value-added
tax) exceeds Six pesos and fifty centavos (P6.50) per pack, the tax shall
be Eight pesos (P8.00) per pack;
(3) If the net retail price (excluding the excise tax and the value-added
tax) is Five pesos (P5.00) up to Six pesos and fifty centavos (P6.50)
per pack, the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added
tax) is below Five pesos (P5.00) per pack, the tax shall be One peso
(P1.00) per pack.
Variants of existing brands of cigarettes which are introduced in the
domestic market after the effectivity of this Act shall be taxed under the
highest classification of any variant of that brand.
xxx
The rates of specific tax on cigars and cigarettes under subparagraph
(a), (b) and (c) hereof, including the net retail prices for purposes of
classification, shall be adjusted on the sixth of January three years after
the effectivity of this Act and every three years thereafter. The
adjustment shall be in accordance with the inflation rate measured by
the average increase in the consumer price index over the three-year
period. The adjusted tax rates and net price levels shall be in force on
the eighth of January.
Within the period hereinabove mentioned, the Secretary of Finance
shall direct the conduct of a survey of retail prices of each brand of
cigarettes in coordination with the Bureau of Internal Revenue and the
National Statistics Office.
For purposes of this Section, net retail price shall mean the price at
which the cigarette is sold on retail in 20 major supermarkets in Metro
Manila (for brands of cigarettes marketed nationally), excluding the
169
amount intended to cover the applicable excise tax and the value-
added tax. For brands which are marketed only outside Metro Manila,
the net retail price shall mean the price at which the cigarette is sold in
five major supermarkets in the region excluding the amount intended to
cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes in the initial year of
implementation of this Act shall be based on its average net retail price
as of October 1, 1996. The said classification by brand shall remain in
force until January 7, 2000.
New brands shall be classified according to their current net retail
price.57 (Emphasis supplied)
During the period of interpellations, the late Senator Raul S. Roco
(Senator Roco) expressed doubts as to the legality and wisdom of
putting a periodic adjustment and reclassification provision:
Senator Enrile: This will be the first time that a tax burden will be allowed
to be automatically adjusted upwards based on a system of indexing
tied up with the Consumers Price Index (CPI). Although I must add that
we have adopted a similar system in adjusting the personal tax
exemption from income tax of our individual taxpayers.
Senator Roco: They are not exactly the same, Mr. President. But even
then, we do note that this the first time we are trying to put an automatic
adjustment. My concern is, why do we propose now this automatic
adjustment? What is the reason that impels the committee? Maybe we
can be enlightened and maybe we shall embrace it forthwith. But what
is the reason?
Senator Enrile: Mr. President, we will recall that in the House of
Representatives, it has adopted a tax proposal on these products
based on a specific tax as a basic tax with an ad valorem comparator.
The Committee on Ways and Means of the Senate has not seen it fit to
adopt this system, but it recognized the possibility that there may be an
occasion where the price movement in the country might unwarrantedly
move upwards, in which case, if we peg the government to a specific
tax rate of P6.30, P9.30 and P12.30 for beer, since we are talking of
beer, 58 the government might lose in the process.
In order to consider the interest of the government in this, Mr. President,
and in order to obviate the possibility that some of these products
categorized under the different tiers with different specific tax rates from
moving upwards and piercing their own tiers and thereby expose
themselves to an incremental tax of higher magnitude, it was felt that
we should adopt a system where, in spite of any escalation in the price
of these products in the future, the tax rates could be adjusted upwards
so that none of these products would leave their own tier. That was the
basic principle under which we crafted this portion of the tax proposal.
Senator Roco: Mr. President, we certainly share the judgment of the
distinguished gentleman as regards the comparator provision in the
House of Representatives and we appreciate the reasons given. But
we are under the impression that the House also, aside from the
comparator, has an adjustment clause that is fixed. It has fixed rates for
the adjustment. So that one of the basic differences between the
Senate proposed version now and the House version is that, the House
of Representatives has manifested its will and judgment as regards the
tax to which we will adjust, whereas the Senate version relegates
fundamentally that judgment to the Department of Finance.
170
Senator Enrile: That is correct, Mr. President, because we felt that in
imposing a fixed adjustment, we might be fixing an amount that is either
too high or too low. We cannot foresee the economic trends in this
country over a period of two years, three years, let alone ten years. So
we felt that a mechanism ought to be adopted in order to serve the
interest of the government, the interest of the producers, and the
interest of the consuming public.
Senator Roco: This is where, Mr. President, my policy difficulties start.
Under the Constitution— I think it is Article VI, Section 24, and it was
the distinguished chairman of the Committee on Ways and Means who
made this Chamber very conscious of this provision— revenue
measures and tariff measures shall originate exclusively from the
House of Representatives.
The reason for this, Mr. President, is, there is a long history why the
House of Representatives must originate judgments on tax. The House
members represent specific districts. They represent specific
constituencies, and the whole history of parliamentarism, the whole
history of Congress as an institution is founded on the proposition that
the direct representatives of the people must speak about taxes.
Mr. President, while the Senate can concur and can introduce
amendments, the proposed change here is radical. This is the policy
difficulty that I wish to clarify with the gentleman because the judgment
call now on the amount of tax to be imposed is not coming from
Congress. It is shifted to the Department of Finance. True, the
Secretary of Finance may have been the best finance officer two years
ago and now the best finance officer in Asia, but that does not make
him qualified to replace the judgment call of the House of
Representatives. That is my first difficulty.
Senator Enrile: Mr. President, precisely the law, in effect, authorizes
this rate beforehand. The computation of the rate is the only thing that
was left to the Department of Finance as a tax implementor of
Congress. This is not unusual because we have already, as I said,
adopted a system similar to this. If we adjust the personal exemption of
an individual taxpayer, we are in effect adjusting the applicable tax rate
to him.
Senator Roco: But the point I was trying to demonstrate, Mr. President,
is that we depart precisely from the mandate of the Constitution that
judgment on revenue must emanate from Congress. Here, it is shifted
to the Department of Finance for no visible or patent reason insofar as
I could understand. The only difference is, who will make the judgment?
Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering sooner than I
should. My understanding of the Constitution is that all revenue
measures must emanate from the House. That is all the Constitution
says.
Now, it does not say that the judgment call must belong to the House.
The judgment call can belong both to the House and to the Senate. We
can change whatever proposal the House did. Precisely, we are now
crafting a measure, and we are saying that this is the rate subject to an
adjustment which we also provide. We are not giving any unusual
power to the Secretary of Finance because we tell him, "This is the
formula that you must adopt in arriving at the adjustment so that you do
not have to come back to us."59
Apart from his doubts as to the legality of the delegation of taxing power
to the DOF and BIR, Senator Roco also voiced out his concern about
171
the possible abuse and corruption that will arise from the periodic
adjustment and reclassification provision. Continuing—
Senator Roco: Mr. President, if that is the argument, that the
distinguished gentleman has a different legal interpretation, we will then
now examine the choice. Because his legal interpretation is different
from mine, then the issues becomes: Is it more advantageous that this
judgment be exercised by the House? Should we not concur or modify
in terms of the exercise by the House of its power or are we better off
giving this judgment call to the Department of Finance?
Let me now submit, Mr. President, that in so doing, it is more
advantageous to fix the rate so that even if we modify the rates
identified by Congress, it is better and less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to demonstrate
to us how this will be done? On page 8, lines 5 to 9, there is a provision
here as to when the Secretary of Finance shall direct the conduct of
survey of retail prices of each brand of fermented liquor in coordination
with the Bureau of Internal Revenue and the National Statistics Office.
These offices are not exactly noted, Mr. President, for having been
sanctified by the Holy Spirit in their noble intentions. x x x60 (Emphasis
supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that during the two-
year period, the Secretary of Finance shall direct the conduct of the
survey. How? When? Which retail prices and what brand shall he
consider? When he coordinates with the Bureau of Internal Revenue,
what is the Bureau of Internal Revenue supposed to be doing? What is
the National Statistics Office supposed to be doing, and under what
guides and standards?
May the gentleman wish to demonstrate how this will be done? My
point, Mr. President, is, by giving the Secretary of Finance, the BIR and
the National Statistics Office discretion over a two-year period will invite
corruption and arbitrariness, which is more dangerous than letting the
House of Representatives and this Chamber set the adjustment rate.
Why not set the adjustment rate? Why should Congress not exercise
that judgment now? x x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the Chairman consider
choosing the judgment of this Chamber and the House of
Representatives over a delegated judgment of the Department of
Finance.
Again, it is not to say that I do not trust the Department of Finance. It
has won awards, and I also trust the undersecretary. But that is beside
the point. Tomorrow, they may not be there.61 (Emphasis supplied)
This point was further dissected by the two senators. There was a
genuine difference of opinion as to which system— one with a fixed
excise tax rate and classification or the other with a periodic adjustment
of excise tax rate and reclassification— was less susceptible to abuse,
as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of these
products from the viewpoint of exerted pressures because of the
172
understandable impact of this measure on the pockets of the major
players producing these products, the committee felt that perhaps to
lessen such pressures, it is best that we now establish a norm where
the tax will be adjusted without incurring too much political controversy
as has happened in the case of this proposal.
Senator Roco: But that is exactly the same reason we say we must rely
upon Congress because Congress, if it is subjected to pressure, at least
balances off because of political factors.
When the Secretary of Finance is now subjected to pressure, are we
saying that the Secretary of Finance and the Department of Finance is
better-suited to withstand the pressure? Or are we saying "Let the
Finance Secretary decide whom to yield"?
I am saying that the temptation and the pressure on the Secretary of
Finance is more dangerous and more corruption-friendly than
ascertaining for ourselves now a fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may not agree
with this representation, but in my humble opinion, this formulation is
less susceptible to pressure because there is a definite point of
reference which is the consumer price index, and that consumer price
index is not going to be used only for this purpose. The CPI is used for
a national purpose, and there is less possibility of tinkering with it.62
Further, Senator Roco, like Congressman Javier, expressed the view
that the periodic adjustment and reclassification provision would create
an anti-competitive atmosphere. Again, Senators Roco and Enrile had
genuine divergence of opinions on this matter, to wit:
Senator Roco: x x x On the marketing level, an adjustment clause may,
in fact, be disadvantageous to both companies, whether it is the Lucio
Tan companies or the San Miguel companies. If we have to adjust our
marketing position every two years based on the adjustment clause,
the established company may survive, but the new ones will have
tremendous difficulty. Therefore, this provision tends to indicate an
anticompetitive bias.
It is good for San Miguel and the Lucio Tan companies, but the new
companies— assuming there may be new companies and we want to
encourage them because of the old point of liberalization— will be at a
disadvantage under this situation. If this observation will find receptivity
in the policy consideration of the distinguished Gentleman, maybe we
can also further, later on, seek amendments to this automatic
adjustment clause in some manner.
Senator Enrile: Mr. President, I cannot foresee any anti-
competitiveness of this provision with respect to a new entrant, because
a new entrant will not just come in without studying the market. He is a
lousy businessman if he will just come in without studying the market.
If he comes in, he will determine at what retail price level he will market
his product, and he will be coming under any of the tiers depending
upon his net retail price. Therefore, I do not see how this particular
provision will affect a new entrant.
Senator Roco: Be that as it may, Mr. President, we obviously will not
resort to debate until this evening, and we will have to look for other
ways of resolving the policy options.
Let me just close that particular area of my interpellation, by
summarizing the points we were hoping could be clarified.
173

1. That the automatic adjustment clause is at best questionable in law.
2. It is corruption-friendly in the sense that it shifts the discretion from
the House of Representatives and this Chamber to the Secretary of
Finance, no matter how saintly he may be.
3. There is,— although the judgment call of the gentleman disagrees—
to our view, an anticompetitive situation that is geared at…63
After these lengthy exchanges, it appears that the views of Senator
Enrile were sustained by the Senate Body because the Senate Version
was passed on Third Reading without substantially altering the periodic
adjustment and reclassification provision.
It was actually at the Bicameral Conference Committee level where the
Senate Version underwent major changes. The Senate Panel prevailed
upon the House Panel to abandon the basic excise tax rate and ad
valorem comparator as the means to determine the applicable excise
tax rate. Thus, the Senate’s four-tiered system was retained with minor
adjustments as to the excise tax rate per tier. However, the House
Panel prevailed upon the Senate Panel to delete the power of the DOF
and BIR to periodically adjust the excise tax rate and tax brackets, and
periodically resurvey and reclassify the cigarette brands based on the
increase in the consumer price index.
In lieu thereof, the classification of existing brands based on their
average net retail price as of October 1, 1996 was "frozen" and a fixed
across-the-board 12% increase in the excise tax rate of each tier after
three years from the effectivity of the Act was put in place. There is a
dearth of discussion in the deliberations as to the applicability of the
freezing mechanism to new brands after their classification is
determined based on their current net retail price. But a plain reading
of the text of RA 8240, even before its amendment by RA 9334, as well
as the previously discussed deliberations would readily lead to the
conclusion that the intent of Congress was to likewise apply the freezing
mechanism to new brands. Precisely, Congress rejected the proposal
to allow the DOF and BIR to periodically adjust the excise tax rate and
tax brackets as well as to periodically resurvey and reclassify cigarettes
brands which would have encompassed old and new brands alike.
Thus, it would be absurd for us to conclude that Congress intended to
allow the periodic reclassification of new brands by the BIR after their
classification is determined based on their current net retail price. We
shall return to this point when we tackle the second issue.
In explaining the changes made at the Bicameral Conference
Committee level, Senator Enrile, in his report to the Senate plenary,
noted that the fixing of the excise tax rates was done to avoid
confusion.64 Congressman Javier, for his part, reported to the House
plenary the reasons for fixing the excise tax rate and freezing the
classification, thus:
Finally, this twin feature, Mr. Speaker, fixed specific tax rates and frozen
classification, rejects the Senate version which seeks to abdicate the
power of Congress to tax by pegging the rates as well as the
classification of sin products to consumer price index which practically
vests in the Secretary of Finance the power to fix the rates and to
classify the products for tax purposes.65 (Emphasis supplied)
Congressman Javier later added that the frozen classification was
intended to give stability to the industry as the BIR would be prevented
from tinkering with the classification since it would remain unchanged
174
despite the increase in the net retail prices of the previously classified
brands.66 This would also assure the industry players that there would
be no new impositions as long as the law is unchanged.67
From the foregoing, it is quite evident that the classification freeze
provision could hardly be considered arbitrary, or motivated by a hostile
or oppressive attitude to unduly favor older brands over newer brands.
Congress was unequivocal in its unwillingness to delegate the power to
periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify the cigarette brands based on the
increase in the consumer price index to the DOF and the BIR. Congress
doubted the constitutionality of such delegation of power, and likewise,
considered the ethical implications thereof. Curiously, the classification
freeze provision was put in place of the periodic adjustment and
reclassification provision because of the belief that the latter would
foster an anti-competitive atmosphere in the market. Yet, as it is, this
same criticism is being foisted by petitioner upon the classification
freeze provision.
To our mind, the classification freeze provision was in the main the
result of Congress’s earnest efforts to improve the efficiency and
effectivity of the tax administration over sin products while trying to
balance the same with other state interests. In particular, the
questioned provision addressed Congress’s administrative concerns
regarding delegating too much authority to the DOF and BIR as this will
open the tax system to potential areas for abuse and corruption.
Congress may have reasonably conceived that a tax system which
would give the least amount of discretion to the tax implementers would
address the problems of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that,
under the DOF proposal and the Senate Version, the periodic
reclassification of brands would tempt the cigarette manufacturers to
manipulate their price levels or bribe the tax implementers in order to
allow their brands to be classified at a lower tax bracket even if their net
retail prices have already migrated to a higher tax bracket after the
adjustment of the tax brackets to the increase in the consumer price
index. Presumably, this could be done when a resurvey and
reclassification is forthcoming. As briefly touched upon in the
Congressional deliberations, the difference of the excise tax rate
between the medium-priced and the high-priced tax brackets under RA
8240, prior to its amendment, was P3.36. For a moderately popular
brand which sells around 100 million packs per year, this easily
translates to P336,000,000.68 The incentive for tax avoidance, if not
outright tax evasion, would clearly be present. Then again, the tax
implementers may use the power to periodically adjust the tax rate and
reclassify the brands as a tool to unduly oppress the taxpayer in order
for the government to achieve its revenue targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system
for sin products to remove these potential areas of abuse and
corruption from both the side of the taxpayer and the government.
Without doubt, the classification freeze provision was an integral part of
this overall plan. This is in line with one of the avowed objectives of the
assailed law "to simplify the tax administration and compliance with the
tax laws that are about to unfold in order to minimize losses arising from
inefficiencies and tax avoidance scheme, if not outright tax evasion."69
RA 9334 did not alter this classification freeze provision of RA 8240. On
the contrary, Congress affirmed this freezing mechanism by clarifying
the wording of the law. We can thus reasonably conclude, as the
deliberations on RA 9334 readily show, that the administrative concerns
175
in tax administration, which moved Congress to enact the classification
freeze provision in RA 8240, were merely continued by RA 9334.
Indeed, administrative concerns may provide a legitimate, rational
basis for legislative classification.70 In the case at bar, these
administrative concerns in the measurement and collection of excise
taxes on sin products are readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential
areas for abuse and corruption from the tax administration of sin
products, the legislative deliberations also show that the classification
freeze provision was intended to generate buoyant and stable revenues
for government. With the frozen tax classifications, the revenue inflow
would remain stable and the government would be able to predict with
a greater degree of certainty the amount of taxes that a cigarette
manufacturer would pay given the trend in its sales volume over time.
The reason for this is that the previously classified cigarette brands
would be prevented from moving either upward or downward their tax
brackets despite the changes in their net retail prices in the future and,
as a result, the amount of taxes due from them would remain
predictable. The classification freeze provision would, thus, aid in the
revenue planning of the government.71
All in all, the classification freeze provision addressed Congress’s
administrative concerns in the simplification of tax administration of sin
products, elimination of potential areas for abuse and corruption in tax
collection, buoyant and stable revenue generation, and ease of
projection of revenues. Consequently, there can be no denial of the
equal protection of the laws since the rational-basis test is amply
satisfied.
Going now to the contention of petitioner that the classification freeze
provision unduly favors older brands over newer brands, we must first
contextualize the basis of this claim. As previously discussed, the
evidence presented by the petitioner merely showed that in 2004,
Marlboro and Philip Morris, on the one hand, and Lucky Strike, on the
other, would have been taxed at the same rate had the classification
freeze provision been not in place. But due to the operation of the
classification freeze provision, Lucky Strike was taxed higher. From
here, petitioner generalizes that this differential tax treatment arising
from the classification freeze provision adversely impacts the fairness
of the playing field in the industry, particularly, between older and newer
brands. Thus, it is virtually impossible for new brands to enter the
market.
Petitioner did not, however, clearly demonstrate the exact extent of
such impact. It has not been shown that the net retail prices of other
older brands previously classified under this classification system have
already pierced their tax brackets, and, if so, how this has affected the
overall competition in the market. Further, it does not necessarily follow
that newer brands cannot compete against older brands because price
is not the only factor in the market as there are other factors like
consumer preference, brand loyalty, etc. In other words, even if the
newer brands are priced higher due to the differential tax treatment, it
does not mean that they cannot compete in the market especially since
cigarettes contain addictive ingredients so that a consumer may be
willing to pay a higher price for a particular brand solely due to its unique
formulation.
It may also be noted that in 2003, the BIR surveyed 29 new brands72
that were introduced in the market after the effectivity of RA 8240 on
January 1, 1997, thus negating the sweeping generalization of
176
petitioner that the classification freeze provision has become an
insurmountable barrier to the entry of new brands. Verily, where there
is a claim of breach of the due process and equal protection clauses,
considering that they are not fixed rules but rather broad standards,
there is a need for proof of such persuasive character as would lead to
such a conclusion. Absent such a showing, the presumption of validity
must prevail.73
Be that as it may, petitioner’s evidence does suggest that, at least in
2004, Philip Morris and Marlboro, older brands, would have been taxed
at the same rate as Lucky Strike, a newer brand, due to certain
conditions (i.e., the increase of the older brands’ net retail prices
beyond the tax bracket to which they were previously classified after
the lapse of some time) were it not for the classification freeze
provision. It may be conceded that this has adversely affected, to a
certain extent, the ability of petitioner to competitively price its newer
brands vis-à-vis the subject older brands. Thus, to a limited extent, the
assailed law seems to derogate one of its avowed objectives, i.e.
promoting fair competition among the players in the industry. Yet, will
this occurrence, by itself, render the assailed law unconstitutional on
equal protection grounds?
We answer in the negative.
Whether Congress acted improvidently in derogating, to a limited
extent, the state’s interest in promoting fair competition among the
players in the industry, while pursuing other state interests regarding
the simplification of tax administration of sin products, elimination of
potential areas for abuse and corruption in tax collection, buoyant and
stable revenue generation, and ease of projection of revenues through
the classification freeze provision, and whether the questioned
provision is the best means to achieve these state interests, necessarily
go into the wisdom of the assailed law which we cannot inquire into,
much less overrule. The classification freeze provision has not been
shown to be precipitated by a veiled attempt, or hostile attitude on the
part of Congress to unduly favor older brands over newer brands. On
the contrary, we must reasonably assume, owing to the respect due a
co-equal branch of government and as revealed by the Congressional
deliberations, that the enactment of the questioned provision was
impelled by an earnest desire to improve the efficiency and effectivity
of the tax administration of sin products. For as long as the legislative
classification is rationally related to furthering some legitimate state
interest, as here, the rational-basis test is satisfied and the
constitutional challenge is perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide, after a law
is passed by Congress, which state interest is superior over another, or
which method is better suited to achieve one, some or all of the state’s
interests, or what these interests should be in the first place. This policy-
determining power, by constitutional fiat, belongs to Congress as it is
its function to determine and balance these interests or choose which
ones to pursue. Time and again we have ruled that the judiciary does
not settle policy issues. The Court can only declare what the law is and
not what the law should be. Under our system of government, policy
issues are within the domain of the political branches of government
and of the people themselves as the repository of all state power.74
Thus, the legislative classification under the classification freeze
provision, after having been shown to be rationally related to achieve
certain legitimate state interests and done in good faith, must, perforce,
end our inquiry.
177
Concededly, the finding that the assailed law seems to derogate, to a
limited extent, one of its avowed objectives (i.e. promoting fair
competition among the players in the industry) would suggest that, by
Congress’s own standards, the current excise tax system on sin
products is imperfect. But, certainly, we cannot declare a statute
unconstitutional merely because it can be improved or that it does not
tend to achieve all of its stated objectives.75 This is especially true for
tax legislation which simultaneously addresses and impacts multiple
state interests.76 Absent a clear showing of breach of constitutional
limitations, Congress, owing to its vast experience and expertise in the
field of taxation, must be given sufficient leeway to formulate and
experiment with different tax systems to address the complex issues
and problems related to tax administration. Whatever imperfections that
may occur, the same should be addressed to the democratic process
to refine and evolve a taxation system which ideally will achieve most,
if not all, of the state’s objectives.
In fine, petitioner may have valid reasons to disagree with the policy
decision of Congress and the method by which the latter sought to
achieve the same. But its remedy is with Congress and not this Court.
As succinctly articulated in Vance v. Bradley:77
The Constitution presumes that, absent some reason to infer antipathy,
even improvident decisions will eventually be rectified by the
democratic process, and that judicial intervention is generally
unwarranted no matter how unwisely we may think a political branch
has acted. Thus, we will not overturn such a statute unless the varying
treatment of different groups or persons is so unrelated to the
achievement of any combination of legitimate purposes that we can
only conclude that the legislature's actions were irrational.78
We now tackle the second issue.
Petitioner asserts that Revenue Regulations No. 1-97, as amended by
Revenue Regulations No. 9-2003, Revenue Regulations No. 22-2003
and Revenue Memorandum Order No. 6-2003, are invalid insofar as
they empower the BIR to reclassify or update the classification of new
brands of cigarettes based on their current net retail prices every two
years or earlier. It claims that RA 8240, even prior to its amendment by
RA 9334, did not authorize the BIR to conduct said periodic resurvey
and reclassification.
The questioned provisions are found in the following sections of the
assailed issuances:
(1) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-
97, as amended by Section 2 of Revenue Regulations 9-2003, viz:
For the purpose of establishing or updating the tax classification of new
brands and variant(s) thereof, their current net retail price shall be
reviewed periodically through the conduct of survey or any other
appropriate activity, as mentioned above, every two (2) years unless
earlier ordered by the Commissioner. However, notwithstanding any
increase in the current net retail price, the tax classification of such new
brands shall remain in force until the same is altered or changed
through the issuance of an appropriate Revenue Regulations.
(2) Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers
Assistance Division II) II(b) of Revenue Memorandum Order No. 6-
2003, insofar as pertinent to cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
178
1. The conduct of survey covered by this Order, for purposes of
determining the current retail prices of new brands of cigarettes and
alcohol products introduced in the market on or after January 1, 1997,
shall be undertaken in the following instances:
xxxx
b. For reclassification of new brands of said excisable products that
were introduced in the market after January 1, 1997.
xxxx
4. The determination of the current retail prices of new brands of the
aforesaid excisable products shall be initiated as follows:
xxxx
b. After the lapse of the prescribed two-year period or as the
Commissioner may otherwise direct, the appropriate tax reclassification
of these brands based on the current net retail prices thereof shall be
determined by a survey to be conducted upon a written directive by the
Commissioner.
For this purpose, a memorandum order to the Assistant Commissioner,
Large Taxpayers Service, Heads, Excise Tax Areas, and Regional
Directors of all Revenue Regions, except Revenue Region Nos. 4, 5, 6,
7, 8 and 9, shall be issued by the Commissioner for the submission of
the list of major supermarkets/retail outlets where the above excisable
products are being sold, as well as the list of selected revenue officers
who shall be designated to conduct the said activity(ies).
xxxx
6. The results of the survey conducted in Revenue Region Nos. 4 to 9
shall be submitted directly to the Chief, LT Assistance Division II (LTAD
II), National Office for consolidation. On the other hand, the results of
the survey conducted in Revenue Regions other than Revenue Region
Nos. 4 to 9, shall be submitted to the Office of the Regional Director for
regional consolidation. The consolidated regional survey, together with
the accomplished survey forms shall be transmitted to the Chief, LTAD
II for national consolidation within three (3) days from date of actual
receipt from the survey teams. The LTAD II shall be responsible for the
evaluation and analysis of the submitted survey forms and the
preparation of the recommendation for the updating/revision of the tax
classification of each brand of cigarettes and alcohol products. The said
recommendation, duly validated by the ACIR, LTS, shall be submitted
to the Commissioner for final review within ten (10) days from the date
of actual receipt of complete reports from all the surveying Offices.
7. Upon final review by the Commissioner of the revised tax
classification of the different new brands of cigarettes and alcohol
products, the appropriate revenue regulations shall be prepared and
submitted for approval by the Secretary of Finance.
xxxx
III. PROCEDURES
xxxx
Large Taxpayers Assistance Division II
179

xxxx
1. Perform the following preparatory procedures on the identification of
brands to be surveyed, supermarkets/retail outlets where the survey
shall be conducted, and the personnel selected to conduct the survey.
xxxx
b. On the tax reclassification of new brands
i. Submit a master list of registered brands covered by the survey
pursuant to the provisions of Item II.2 of this Order containing the
complete description of each brand, existing net retail price and the
corresponding tax rate thereof.
ii. Submit to the ACIR, LTS, a list of major supermarkets/retail outlets
within the territorial jurisdiction of the concerned revenue regions where
the survey will be conducted to be used as basis in the issuance of
Mission Orders. Ensure that the minimum number of establishments to
be surveyed, as prescribed under existing revenue laws and
regulations, is complied with. In addition, the names and designations
of revenue officers selected to conduct the survey shall be clearly
indicated opposite the names of the establishments to be surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on January 1,
1997, the BIR issued Revenue Regulations No. 1-97, dated December
13, 1996, which mandates a one-time classification only.79 Upon their
launch, new brands shall be initially taxed based on their suggested net
retail price. Thereafter, a survey shall be conducted within three (3)
months to determine their current net retail prices and, thus, fix their
official tax classifications. However, the BIR made a turnaround by
issuing Revenue Regulations No. 9-2003, dated February 17, 2003,
which partly amended Revenue Regulations No. 1-97, by authorizing
the BIR to periodically reclassify new brands (i.e., every two years or
earlier) based on their current net retail prices. Thereafter, the BIR
issued Revenue Memorandum Order No. 6-2003, dated March 11,
2003, prescribing the guidelines on the implementation of Revenue
Regulations No. 9-2003. This was patent error on the part of the BIR
for being contrary to the plain text and legislative intent of RA 8240.
It is clear that the afore-quoted portions of Revenue Regulations No. 1-
97, as amended by Section 2 of Revenue Regulations 9-2003, and
Revenue Memorandum Order No. 6-2003 unjustifiably emasculate the
operation of Section 145 of the NIRC because they authorize the
Commissioner of Internal Revenue to update the tax classification of
new brands every two years or earlier subject only to its issuance of the
appropriate Revenue Regulations, when nowhere in Section 145 is
such authority granted to the Bureau. Unless expressly granted to the
BIR, the power to reclassify cigarette brands remains a prerogative of
the legislature which cannot be usurped by the former.
More importantly, as previously discussed, the clear legislative intent
was for new brands to benefit from the same freezing mechanism
accorded to Annex "D" brands. To reiterate, in enacting RA 8240,
Congress categorically rejected the DOF proposal and Senate Version
which would have empowered the DOF and BIR to periodically adjust
the excise tax rate and tax brackets, and to periodically resurvey and
reclassify cigarette brands. (This resurvey and reclassification would
have naturally encompassed both old and new brands.) It would thus,
180
be absurd for us to conclude that Congress intended to allow the
periodic reclassification of new brands by the BIR after their
classification is determined based on their current net retail price while
limiting the freezing of the classification to Annex "D" brands.
Incidentally, Senator Ralph G. Recto expressed the following views
during the deliberations on RA 9334, which later amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed to adopt a
specific tax system [under R.A. 8240], when Congress did not index the
brackets, and Congress did not index the rates but only provided for a
one rate increase in the year 2000, we shifted from ad valorem which
was based on value to a system of specific which is based on volume.
Congress then, in effect, determined the classification based on the
prices at that particular period of time and classified these products
accordingly.
Of course, Congress then decided on what will happen to the new
brands or variants of existing brands. To favor government, a variant
would be classified as the highest rate of tax for that particular brand.
In case of a new brand, Mr. President, then the BIR should classify
them. But I do not think it was the intention of Congress then to give the
BIR the authority to reclassify them every so often. I do not think it was
the intention of Congress to allow the BIR to classify a new brand every
two years, for example, because it will be arbitrary for the BIR to do so.
x x x80 (Emphasis supplied)
For these reasons, the amendments introduced by RA 9334 to RA
8240, insofar as the freezing mechanism is concerned, must be seen
merely as underscoring the legislative intent already in place then, i.e.
new brands as being covered by the freezing mechanism after their
classification based on their current net retail prices.
Unfortunately for petitioner, this result will not cause a downward
reclassification of Lucky Strike. It will be recalled that petitioner
introduced Lucky Strike in June 2001. However, as admitted by
petitioner itself, the BIR did not conduct the required market survey
within three months from product launch. As a result, Lucky Strike was
never classified based on its actual current net retail price. Petitioner
failed to timely seek redress to compel the BIR to conduct the requisite
market survey in order to fix the tax classification of Lucky Strike. In the
meantime, Lucky Strike was taxed based on its suggested net retail
price of P9.90 per pack, which is within the high-priced tax bracket. It
was only after the lapse of two years or in 2003 that the BIR conducted
a market survey which was the first time that Lucky Strike’s actual
current net retail price was surveyed and found to be from P10.34 to
P11.53 per pack, which is within the premium-priced tax bracket. The
case of petitioner falls under a situation where there was no
reclassification based on its current net retail price which would have
been invalid as previously explained. Thus, we cannot grant petitioner’s
prayer for a downward reclassification of Lucky Strike because it was
never reclassified by the BIR based on its actual current net retail price.
It should be noted though that on August 8, 2003, the BIR issued
Revenue Regulations No. 22-2003 which implemented the revised tax
classifications of new brands based on their current net retail prices
through the market survey conducted pursuant to Revenue Regulations
No. 9-2003. Annex "A" of Revenue Regulations No. 22-2003 lists the
result of the market survey and the corresponding recommended tax
classification of the new brands therein aside from Lucky Strike.
However, whether these other brands were illegally reclassified based
on their actual current net retail prices by the BIR must be determined
on a case-to-case basis because it is possible that these brands were
181
classified based on their actual current net retail price for the first time
in the year 2003 just like Lucky Strike. Thus, we shall not make any
pronouncement as to the validity of the tax classifications of the other
brands listed therein.
Finally, it must be noted that RA 9334 introduced changes in the
manner by which the current net retail price of a new brand is
determined and how its classification is permanently fixed, to wit:
New brands, as defined in the immediately following paragraph, shall
initially be classified according to their suggested net retail price.
New brands shall mean a brand registered after the date of effectivity
of R.A. No. 8240 [on January 1, 1997].
Suggested net retail price shall mean the net retail price at which new
brands, as defined above, of locally manufactured or imported
cigarettes are intended by the manufacture or importer to be sold on
retail in major supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with regional
markets. At the end of three (3) months from the product launch, the
Bureau of Internal Revenue shall validate the suggested net retail price
of the new brand against the net retail price as defined herein and
determine the correct tax bracket under which a particular new brand
of cigarette, as defined above, shall be classified.
After the end of eighteen (18) months from such validation, the Bureau
of Internal Revenue shall revalidate the initially validated net retail price
against the net retail price as of the time of revalidation in order to finally
determine the correct tax bracket under which a particular new brand
of cigarettes shall be classified; Provided however, That brands of
cigarettes introduced in the domestic market between January 1, 1997
and December 31, 2003 shall remain in the classification under which
the Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands and brands
introduced between January 1, 1997 and December 31, 2003 shall not
be revised except by an act of Congress. (Emphasis supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue Memorandum
Order No. 6-2003 should be deemed modified by the above provisions
from the date of effectivity of RA 9334 on January 1, 2005.
In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No.
1-97, as amended by Section 2 of Revenue Regulations 9-2003, and
Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, as
pertinent to cigarettes packed by machine, are invalid insofar as they
grant the BIR the power to reclassify or update the classification of new
brands every two years or earlier. Further, these provisions are deemed
modified upon the effectivity of RA 9334 on January 1, 2005 insofar as
the manner of determining the permanent classification of new brands
is concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA 9334, and its
implementing rules and regulations violate the General Agreement on
Tariffs and Trade (GATT) of 1947, as amended, specifically, Paragraph
2, Article III, Part II:
2. The products of the territory of any contracting party imported into
the territory of any other contracting party shall not be subject, directly
or indirectly, to internal taxes or other internal charges of any kind in
182
excess of those applied, directly or indirectly, to like domestic products.
Moreover, no contracting party shall otherwise apply internal taxes or
other internal charges to imported or domestic products in a manner
contrary to the principles set forth in paragraph 1.
It claims that it is the duty of this Court to correct, in favor of the GATT,
whatever inconsistency exists between the assailed law and the GATT
in order to prevent triggering the international dispute settlement
mechanism under the GATT-WTO Agreement.
We disagree.
The classification freeze provision uniformly applies to all newly
introduced brands in the market, whether imported or locally
manufactured. It does not purport to single out imported cigarettes in
order to unduly favor locally produced ones. Further, petitioner’s
evidence was anchored on the alleged unequal tax treatment between
old and new brands which involves a different frame of reference vis-à-
vis local and imported products. Petitioner has, therefore, failed to
clearly prove its case, both factually and legally, within the parameters
of the GATT.
At any rate, even assuming arguendo that petitioner was able to prove
that the classification freeze provision violates the GATT, the outcome
would still be the same. The GATT is a treaty duly ratified by the
Philippine Senate and under Article VII, Section 2181 of the
Constitution, it merely acquired the status of a statute.82 Applying the
basic principles of statutory construction in case of irreconcilable
conflict between statutes, RA 8240, as amended by RA 9334, would
prevail over the GATT either as a later enactment by Congress or as a
special law dealing with the taxation of sin products. Thus, in Abbas v.
Commission on Elections,83 we had occasion to explain:
Petitioners premise their arguments on the assumption that the Tripoli
Agreement is part of the law of the land, being a binding international
agreement. The Solicitor General asserts that the Tripoli Agreement is
neither a binding treaty, not having been entered into by the Republic
of the Philippines with a sovereign state and ratified according to the
provisions of the 1973 or 1987 Constitutions, nor a binding international
agreement.
We find it neither necessary nor determinative of the case to rule on the
nature of the Tripoli Agreement and its binding effect on the Philippine
Government whether under public international or internal Philippine
law. In the first place, it is now the Constitution itself that provides for
the creation of an autonomous region in Muslim Mindanao. The
standard for any inquiry into the validity of R.A. No. 6734 would
therefore be what is so provided in the Constitution.
Thus, any conflict between the provisions of R.A. No. 6734 and the
provisions of the Tripoli Agreement will not have the effect of enjoining
the implementation of the Organic Act. Assuming for the sake of
argument that the Tripoli Agreement is a binding treaty or international
agreement, it would then constitute part of the law of the land. But as
internal law it would not be superior to R.A. No. 6734, an enactment of
the Congress of the Philippines, rather it would be in the same class as
the latter [SALONGA, PUBLIC INTERNATIONAL LAW 320 (4th ed.,
1974), citing Head Money Cases, 112 U.S. 580 (1884) and Foster v.
Nelson, 2 Pet. 253 (1829)]. Thus, if at all, R.A. No. 6734 would be
amendatory of the Tripoli Agreement, being a subsequent law. Only a
determination by this Court that R.A. No. 6734 contravenes the
183
Constitution would result in the granting of the reliefs sought. (Emphasis
supplied)

WHEREFORE, the petition is PARTIALLY GRANTED and the decision

of the Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-
1032, is AFFIRMED with MODIFICATION. As modified, this Court
declares that:

(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is
CONSTITUTIONAL; and that

(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-

97, as amended by Section 2 of Revenue Regulations 9-2003, and
Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar as
pertinent to cigarettes packed by machine, are INVALID insofar as they
grant the BIR the power to reclassify or update the classification of new
brands every two years or earlier.

SO ORDERED.

184