G.R. No.

176667

November 22, 2007

ERICSSON TELECOMMUNICATIONS, INC., petitioner,

vs.
CITY OF PASIG, represented by its City Mayor, Hon. Vicente P. Eusebio, et al. *, respondents.
AUSTRIA-MARTINEZ, J.:
Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in Pasig City, is
engaged in the design, engineering, and marketing of telecommunication facilities/system. In an
Assessment Notice dated October 25, 2000 issued by the City Treasurer of Pasig City, petitioner
was assessed a business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00
and P4,993,682.00, respectively, based on its gross revenues as reported in its audited financial
statements for the years 1997 and 1998. Petitioner filed a Protest dated December 21, 2000,
claiming that the computation of the local business tax should be based on gross receipts and not
on gross revenue.
The City of Pasig (respondent) issued another Notice of Assessment to petitioner on November 19,
2001, this time based on business tax deficiencies for the years 2000 and 2001, amounting
to P4,665,775.51 andP4,710,242.93, respectively, based on its gross revenues for the years 1999
and 2000. Again, petitioner filed a Protest on January 21, 2002, reiterating its position that the local
business tax should be based on gross receiptsand not gross revenue.
Respondent denied petitioner's protest and gave the latter 30 days within which to appeal the
denial. This prompted petitioner to file a petition for review1 with the Regional Trial Court (RTC) of
Pasig, Branch 168, praying for the annulment and cancellation of petitioner's deficiency local
business taxes totaling P17,262,205.66.
Respondent and its City Treasurer filed a motion to dismiss on the grounds that the court had no
jurisdiction over the subject matter and that petitioner had no legal capacity to sue. The RTC
denied the motion in an Order dated December 3, 2002 due to respondents' failure to include a
notice of hearing. Thereafter, the RTC declared respondents in default and allowed petitioner to
present evidence ex- parte.
In a Decision2 dated March 8, 2004, the RTC canceled and set aside the assessments made by
respondent and its City Treasurer. The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff
and ordering defendants to CANCEL and SET ASIDE Assessment Notice dated October
25, 2000 and Notice of Assessment dated November 19, 2001.
SO ORDERED.3
On appeal, the Court of Appeals (CA) rendered its Decision4 dated November 20, 2006, the
dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby ordered SET ASIDE and a new
one entered DISMISSING the plaintiff/appellee's complaint WITHOUT PREJUDICE.
SO ORDERED.5

The CA sustained respondent's claim that the petition filed with the RTC should have been
dismissed due to petitioner's failure to show that Atty. Maria Theresa B. Ramos (Atty. Ramos),
petitioner's Manager for Tax and Legal Affairs and the person who signed the Verification and
Certification of Non-Forum Shopping, was duly authorized by the Board of Directors.
Its motion for reconsideration having been denied in a Resolution6 dated February 9, 2007,
petitioner now comes before the Court via a Petition for Review on Certiorari under Rule 45 of the
Rules of Court, on the following grounds:
(1) THE COURT OF APPEALS ERRED IN DISMISSING THE CASE FOR LACK OF
SHOWING THAT THE SIGNATORY OF THE VERIFICATION/ CERTIFICATION IS NOT
SPECIFICALLY AUTHORIZED FOR AND IN BEHALF OF PETITIONER.
(2) THE COURT OF APPEALS ERRED IN GIVING DUE COURSE TO RESPONDENT'S
APPEAL, CONSIDERING THAT IT HAS NO JURISDICTION OVER THE SAME, THE
MATTERS TO BE RESOLVED BEING PURE QUESTIONS OF LAW, JURISDICTION
OVER WHICH IS VESTED ONLY WITH THIS HONORABLE COURT.
(3) ASSUMING THE COURT OF APPEALS HAS JURISDICTION OVER
RESPONDENT'S APPEAL, SAID COURT ERRED IN NOT DECIDING ON THE MERITS
OF THE CASE FOR THE SPEEDY DISPOSITION THEREOF, CONSIDERING THAT
THE DEFICIENCY LOCAL BUSINESS TAX ASSESSMENTS ISSUED BY
RESPONDENT ARE CLEARLY INVALID AND CONTRARY TO THE PROVISIONS OF
THE PASIG REVENUE CODE AND THE LOCAL GOVERNMENT CODE. 7
After receipt by the Court of respondent's complaint and petitioner's reply, the petition is given due
course and considered ready for decision without the need of memoranda from the parties.
The Court grants the petition.
First, the complaint filed by petitioner with the RTC was erroneously dismissed by the CA for failure
of petitioner to show that its Manager for Tax and Legal Affairs, Atty. Ramos, was authorized by the
Board of Directors to sign the Verification and Certification of Non-Forum Shopping in behalf of the
petitioner corporation.
Time and again, the Court, under special circumstances and for compelling reasons, sanctioned
substantial compliance with the rule on the submission of verification and certification against nonforum shopping.8
In General Milling Corporation v. National Labor Relations Commission,9 the Court deemed as
substantial compliance the belated attempt of the petitioner to attach to the motion for
reconsideration the board resolution/secretary's certificate, stating that there was no attempt on the
part of the petitioner to ignore the prescribed procedural requirements.
In Shipside Incorporated v. Court of Appeals,10 the authority of the petitioner's resident manager to
sign the certification against forum shopping was submitted to the CA only after the latter dismissed
the petition. The Court considered the merits of the case and the fact that the petitioner
subsequently submitted a secretary's certificate, as special circumstances or compelling reasons
that justify tempering the requirements in regard to the certificate of non-forum shopping.11

There were also cases where there was complete non-compliance with the rule on certification
against forum shopping and yet the Court proceeded to decide the case on the merits in order to
serve the ends of substantial justice.12

Third, the dismissal of the appeal, in effect, would have sustained the RTC Decision ordering
respondent to cancel the Assessment Notices issued by respondent, and therefore, would have
rendered moot and academic the issue of whether the local business tax on contractors should be
based on gross receipts or gross revenues.

In the present case, petitioner submitted a Secretary's Certificate signed on May 6, 2002, whereby
Atty. Ramos was authorized to file a protest at the local government level and to "sign, execute and
deliver any and all papers, documents and pleadings relative to the said protest and to do and
perform all such acts and things as may be necessary to effect the foregoing."13

However, the higher interest of substantial justice dictates that this Court should resolve the same,
to evade further repetition of erroneous interpretation of the law,16 for the guidance of the bench
and bar.

Applying the foregoing jurisprudence, the subsequent submission of the Secretary's Certificate and
the substantial merits of the petition, which will be shown forthwith, justify a relaxation of the rule.

As earlier stated, the substantive issue in this case is whether the local business tax on contractors
should be based on gross receipts or gross revenue.

Second, the CA should have dismissed the appeal of respondent as it has no jurisdiction over the
case since the appeal involves a pure question of law. The CA seriously erred in ruling that the
appeal involves a mixed question of law and fact necessitating an examination and evaluation of
the audited financial statements and other documents in order to determine petitioner's tax base.

Respondent assessed deficiency local business taxes on petitioner based on the latter's gross
revenue as reported in its financial statements, arguing that gross receipts is synonymous with
gross earnings/revenue, which, in turn, includes uncollected earnings. Petitioner, however,
contends that only the portion of the revenues which were actually and constructively received
should be considered in determining its tax base.

There is a question of law when the doubt or difference is on what the law is on a certain state of
facts. On the other hand, there is a question of fact when the doubt or difference is on the truth or
falsity of the facts alleged.14For a question to be one of law, the same must not involve an
examination of the probative value of the evidence presented by the litigants or any of them. The
resolution of the issue must rest solely on what the law provides on the given set of circumstances.
Once it is clear that the issue invites a review of the evidence presented, the question posed is one
of fact. Thus, the test of whether a question is one of law or of fact is not the appellation given to
such question by the party raising the same; rather, it is whether the appellate court can determine
the issue raised without reviewing or evaluating the evidence, in which case, it is a question of law;
otherwise it is a question of fact.15
There is no dispute as to the veracity of the facts involved in the present case. While there is an
issue as to the correct amount of local business tax to be paid by petitioner, its determination will
not involve a look into petitioner's audited financial statements or documents, as these are not
disputed; rather, petitioner's correct tax liability will be ascertained through an interpretation of the
pertinent tax laws, i.e., whether the local business tax, as imposed by the Pasig City Revenue
Code (Ordinance No. 25-92) and the Local Government Code of 1991, should be based on gross
receipts, and not on gross revenue which respondent relied on in computing petitioner's local
business tax deficiency. This, clearly, is a question of law, and beyond the jurisdiction of the CA.

Respondent is authorized to levy business taxes under Section 143 in relation to Section 151 of the
Local Government Code.
Insofar as petitioner is concerned, the applicable provision is subsection (e), Section 143 of the
same Code covering contractors and other independent contractors, to wit:
SEC. 143. Tax on Business. - The municipality may impose taxes on the following
businesses:
xxxx
(e) On contractors and other independent contractors, in accordance with the following
schedule:

With gross receipts for the preceding calendar

year in the amount of:

Section 2(c), Rule 41 of the Rules of Court provides that in all cases where questions of law are
raised or involved, the appeal shall be to this Court by petition for review on certiorari under Rule
45.

xxxx
(Emphasis supplied)

Thus, as correctly pointed out by petitioner, the appeal before the CA should have been dismissed,
pursuant to Section 5(f), Rule 56 of the Rules of Court, which provides:
Sec. 5. Grounds for dismissal of appeal.- The appeal may be dismissed motu proprio or
on motion of the respondent on the following grounds:

Amount of Tax Per

Annum

The above provision specifically refers to gross receipts which is defined under Section 131 of the
Local Government Code, as follows:

xxxx

xxxx

(f) Error in the choice or mode of appeal.

(n) "Gross Sales or Receipts" include the total amount of money or its equivalent
representing the contract price, compensation or service fee, including the amount
charged or materials supplied with the services and the deposits or advance payments
actually or constructively received during the taxable quarter for the services performed

xxxx

or to be performed for another person excluding discounts if determinable at the time of

sales, sales return, excise tax, and value-added tax (VAT);
xxxx
The law is clear. Gross receipts include money or its equivalent actually or constructively received
in consideration of services rendered or articles sold, exchanged or leased, whether actual or
constructive.
In Commissioner of Internal Revenue v. Bank of Commerce,17 the Court interpreted gross
receipts as including those which were actually or constructively received, viz.:
Actual receipt of interest income is not limited to physical receipt. Actual receipt
may either be physical receipt or constructive receipt. When the depository bank
withholds the final tax to pay the tax liability of the lending bank, there is prior to the
withholding a constructive receipt by the lending bank of the amount withheld. From the
amount constructively received by the lending bank, the depository bank deducts the
final withholding tax and remits it to the government for the account of the lending
bank. Thus, the interest income actually received by the lending bank, both physically
and constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that the
amount of the tax withheld comes from the income earned by the taxpayer. Since the
amount of the tax withheld constitutes income earned by the taxpayer, then that amount
manifestly forms part of the taxpayer's gross receipts. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the government in payment of
his tax liability. The amount withheld indubitably comes from income of the taxpayer, and
thus forms part of his gross receipts. (Emphasis supplied)
Further elaboration was made by the Court in Commissioner of Internal Revenue v. Bank of the
Philippine Islands,18 in this wise:
Receipt of income may be actual or constructive. We have held that the withholding
process results in the taxpayer's constructive receipt of the income withheld, to wit:
By analogy, we apply to the receipt of income the rules
on actual and constructive possession provided in Articles 531 and 532 of our Civil Code.

The last means of acquiring possession under Article 531 refers to juridical
actsthe acquisition of possession by sufficient titleto which the law gives
the force of acts of possession. Respondent argues that only items of
income actually received should be included in its gross receipts. It claims that
since the amount had already been withheld at source, it did not have actual
receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the acquisition of
the right of possession is through the proper acts and legal formalities
established therefor. The withholding process is one such act. There may not
be actual receipt of the income withheld; however, as provided for in Article
532, possession by any person without any power whatsoever shall be
considered as acquired when ratified by the person in whose name the act of
possession is executed.
In our withholding tax system, possession is acquired by the payor as the
withholding agent of the government, because the taxpayer ratifies the very
act of possession for the government. There is thus constructive receipt. The
processes of bookkeeping and accounting for interest on deposits and yield on
deposit substitutes that are subjected to FWT are indeedfor legal purposes
tantamount to delivery, receipt or remittance.19
Revenue Regulations No. 16-2005 dated September 1, 200520 defined and gave examples of
"constructive receipt", to wit:
SEC. 4. 108-4. Definition of Gross Receipts. -- x x x
"Constructive receipt" occurs when the money consideration or its equivalent is placed
at the control of the person who rendered the service without restrictions by the payor.
The following are examples of constructive receipts:
(1) deposit in banks which are made available to the seller of services without
restrictions;
(2) issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof by the seller as payment for services rendered; and
(3) transfer of the amounts retained by the payor to the account of the contractor.

Under Article 531:

"Possession is acquired by the material occupation of a thing or the exercise
of a right, or by the fact that it is subject to the action of our will, or by the
proper acts and legal formalities established for acquiring such right."
Article 532 states:
"Possession may be acquired by the same person who is to enjoy it, by his
legal representative, by his agent, or by any person without any power
whatever; but in the last case, the possession shall not be considered as
acquired until the person in whose name the act of possession was executed
has ratified the same, without prejudice to the juridical consequences
of negotiorum gestio in a proper case."

There is, therefore, constructive receipt, when the consideration for the articles sold, exchanged or
leased, or the services rendered has already been placed under the control of the person who sold
the goods or rendered the services without any restriction by the payor.
In contrast, gross revenue covers money or its equivalent actually or constructively
received, including the value of services rendered or articles sold, exchanged or leased, the
payment of which is yet to be received. This is in consonance with the International Financial
Reporting Standards,21 which defines revenue as the gross inflow of economic benefits
(cash, receivables, and other assets) arising from the ordinary operating activities of an enterprise
(such as sales of goods, sales of services, interest, royalties, and dividends),22 which is measured
at the fair value of the consideration received or receivable.23
As aptly stated by the RTC:

"[R]evenue from services rendered is recognized when services have been performed
and are billable." It is "recorded at the amount received or expected to be received."
(Section E [17] of the Statements of Financial Accounting Standards No. 1).24

Sec. 119. Tax on banks and non-bank financial intermediaries. There shall be collected a tax on
gross receipts derived from sources within the Philippines by all banks and non-bank financial
intermediaries in accordance with the following schedule:

In petitioner's case, its audited financial statements reflect income or revenue which accrued to it
during the taxable period although not yet actually or constructively received or paid. This is
because petitioner uses the accrual method of accounting, where income is reportable when all the
events have occurred that fix the taxpayer's right to receive the income, and the amount can be
determined with reasonable accuracy; the right to receive income, and not the actual receipt,
determines when to include the amount in gross income.25

(a) On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived.
Short-term maturity not in excess of two (2) years . . . . . . . . 5%
Medium-term maturity over two (2)
years but not exceeding four (4) years . . . . . . . . . . . . . . . . . . . 3%

The imposition of local business tax based on petitioner's gross revenue will inevitably result in the
constitutionally proscribed double taxation taxing of the same person twice by the same
jurisdiction for the same thing26 inasmuch as petitioner's revenue or income for a taxable year will
definitely include its gross receipts already reported during the previous year and for which local
business tax has already been paid.
Thus, respondent committed a palpable error when it assessed petitioner's local business tax
based on its gross revenue as reported in its audited financial statements, as Section 143 of the
Local Government Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax
should be computed based on gross receipts.

Long term maturity

(i) Over four (4) years but
not exceeding seven (7) years . . . . . . . . . . . . . . . . . . . . . 1%
(ii) Over seven (7) years . . . . . . . . . . . . . . . . . . . . . . . . . . 0%
(b) On dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0%
(c) On royalties, rentals of property, real or personal,
profits from exchange and all other items treated as gross
income under Section 28 of this Code . . . . . . . . . . . . . . . . . . . . . . . . . 5%

WHEREFORE, the petition is GRANTED. The Decision dated November 20, 2006 and Resolution
dated February 9, 2007 issued by the Court of Appeals are SET ASIDE, and the Decision dated
March 8, 2004 rendered by the Regional Trial Court of Pasig, Branch 168 is REINSTATED.

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru

SO ORDERED.

shall be applied accordingly.

pretermination, then the maturity period shall be reckoned to end as of the date of pretermination
for purposes of classifying the transaction as short, medium or long term and the correct rate of tax
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided

G.R. No. 147375

June 26, 2006

on persons performing similar banking activities.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

As a domestic corporation, the interest earned by respondent Bank of the Philippine Islands (BPI)

vs.

from deposits and similar arrangements are subjected to a final withholding tax of 20%.

BANK OF THE PHILIPPINE ISLANDS, Respondent.

Consequently, the interest income it receives on amounts that it lends out are always net of the

DECISION

20% withheld tax. As a bank, BPI is furthermore liable for a 5% gross receipts tax on all its income.

TINGA, J.:

For the four (4) quarters of the year 1996, BPI computed its 5% gross receipts tax payments by

At issue is the question of whether the 20% final tax on a banks passive income, withheld from the

including in its tax base the 20% final tax on interest income that had been withheld and remitted

bank at source, still forms part of the banks gross income for the purpose of computing its gross

directly to the Bureau of Internal Revenue (BIR).

receipts tax liability. Both the Court of Tax Appeals (CTA) and the Court of Appeals answered in the

On 30 January 1996, the CTA rendered a decision in Asian Bank Corporation v. Commissioner of

negative. We reverse, in favor of petitioner, following our ruling in China Banking Corporation v.

Internal Revenue,5 holding that the 20% final tax withheld on a banks interest income did not form

Court of Appeals.1

part of its taxable gross receipts for the purpose of computing gross receipts tax.

A brief background of the tax law involved is in order.

BPI wrote the BIR a letter dated 15 July 1998 citing the CTA Decision in Asian Bank and requesting

Domestic corporate taxpayers, including banks, are levied a 20% final withholding tax on bank

a refund of alleged overpayment of taxes representing 5% gross receipts taxes paid on the 20%

deposits under Section 24(e)(1)2 in relation to Section 50(a)3 of Presidential Decree No. 1158,

final tax withheld at source.

otherwise known as the National Internal Revenue Code of 1977 ("Tax Code"). Banks are also

Inaction by the BIR on this request prompted BPI to file a Petition for Review against the

liable for a tax on gross receipts derived from sources within the Philippines under Section 1194 of

Commissioner of Internal Revenue (Commissioner) with the CTA on 19 January 1999. Conceding

the Tax Code, which provides, thus:

its claim for the first three quarters of the year as having been barred by prescription, BPI only
claimed alleged overpaid taxes for the final quarter of 1996.

Following its own doctrine in Asian Bank, the CTA rendered a Decision,6 holding that the 20% final

The Tax Code does not provide a definition of the term "gross receipts."13 Accordingly, the term is

tax withheld did not form part of the respondents taxable gross receipts and that gross receipts

properly understood in its plain and ordinary meaning14 and must be taken to comprise of the entire

taxes paid thereon are refundable. However, it found that only P13,843,455.62 in withheld final

receipts without any deduction.15 We, thus, made the following disquisition in Bank of Commerce:16

taxes were substantiated by BPI; it awarded a refund of the 5% gross receipts tax paid thereon in

The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire,

the amount of P692,172.78.

total, without deduction." A common definition is "without deduction." "Gross" is also defined as
7

On appeal, the Court of Appeals promulgated a Decision affirming the CTA. It cited this Courts

"taking in the whole; having no deduction or abatement; whole, total as opposed to a sum

decision inCommissioner of Internal Revenue v. Tours Specialists, Inc.,8 in which we held that the

consisting of separate or specified parts." Gross is the antithesis of net. Indeed, in China Banking

"gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to

Corporation v. Court of Appeals, the Court defined the term in this wise:

the taxpayer which do not belong to them and do not redound to the taxpayers benefit" in

As commonly understood, the term "gross receipts" means the entire receipts without any

concluding that "it would be unjust and confiscatory to include the withheld 20% final tax in the tax

deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to

base for purposes of computing the gross receipts tax since the amount corresponding to said 20%

net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on

final tax was not received by the taxpayer and the latter derived no benefit therefrom." 9

gross receipts, unless the law itself makes an exception. As explained by the Supreme Court of

The Court of Appeals also held that Section 4(e) of Revenue Regulations No. 12-80 mandates the

Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc.,

deduction of the final tax paid on interest income in computing the tax base for the gross receipts

Highly refined and technical tax concepts have been developed by the accountant and legal

tax. Section 4(e) provides, thus:

technician primarily because of the impact of federal income tax legislation. However, this in no

Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other

way should affect or control the normal usage of words in the construction of our statutes; and we

non-bank financial intermediaries, not performing quasi-banking activities. The rates of taxes to

see nothing that would require us not to include the proceeds here in question in the gross receipts

be imposed on the gross receipts of such financial institutions shall be based on all items of income

allocation unless statutorily such inclusion is prohibited. Under the ordinary basic methods of

actually received. Mere accrual shall not be considered, but once payment is received on such

handling accounts, the term gross receipts, in the absence of any statutory definition of the term,

accrual or in case of prepayment, then the amount actually received shall be included in the tax

must be taken to include the whole total gross receipts without any deductions, x x x. [Citations

base of such financial institutions, as provided hereunder. (Emphasis supplied.)

omitted] (Emphasis supplied)"

The present Petition for Review filed by the Commissioner seeks to annul the adverse Decisions of

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

the CTA and the Court of Appeals and raises the sole issue of whether the 20% final tax withheld

The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have been

on a banks passive income should be included in the computation of the gross receipts tax.

and was there used as the direct antithesis of the word "net." In its usual and ordinary meaning

In assailing the findings of the lower courts, the Commissioner makes the following arguments: (1)

"gross receipts" of a business is the whole and entire amount of the receipts without deduction, x x

the term "gross receipts" must be applied in its ordinary meaning; (2) there is no provision in the

x. On the contrary, "net receipts" usually are the receipts which remain after deductions are made

Tax Code or any special laws that excludes the 20% final tax in computing the tax base of the 5%

from the gross amount thereof of the expenses and cost of doing business, including fixed charges

gross receipts tax; (3) Revenue Regulations No. 12-80, Section 4(e), is inapplicable in the instant

and depreciation. Gross receipts become net receipts after certain proper deductions are made

case; and (4) income need not actually be received to form part of the taxable gross receipts.

from the gross. And in the use of the words "gross receipts," the instant ordinance, of course,

Additionally, petitioner points out that the CTA Asian Bank case cited by petitioner BPI has already

precluded plaintiff from first deducting its costs and expenses of doing business, etc., in arriving at

been superseded by the CTA decisions in Standard Chartered Bank v. Commissioner of Internal

the higher base figure upon which it must pay the 5% tax under this ordinance. (Emphasis

Revenue and Far East Bank and Trust Company v. Commissioner of Internal Revenue, both

supplied)

promulgated on 16 November 2001.

Absent a statutory definition, the term "gross receipts" is understood in its plain and ordinary

The issues raised by the Commissioner have already been ruled upon in his favor by this Court
10

meaning. Words in a statute are taken in their usual and familiar signification, with due regard to

in China Banking Corporation v. Court of Appeals and reiterated in Commissioner of Internal

their general and popular use. The Supreme Court of Hawaii held in Bishop Trust Company v.

Revenue v. Solidbank Corporation11and more recently in Commissioner of Internal Revenue v.

Burns that

12

Bank of Commerce. Consequently, the petition must be granted.

x x x It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of

the legislature, the language used therein is to be taken in the generally accepted and usual sense.

Courts will presume that the words in a statute were used to express their meaning in common

However, we agree with the Commissioner that BPIs asserted right under Section 4(e) of Revenue

usage. This principle is equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)

Regulations No. 12-80 presents a misconstruction of the provision. While, indeed, the provision

Additionally, we held in Solidbank, to wit:17"[W]e note that US cases have persuasive effect in our

states that "[t]he rates of taxes to be imposed on the gross receipts of such financial institutions

jurisdiction, because Philippine income tax law is patterned after its US counterpart.

shall be based on all items of income actually received," it goes on to distinguish actual receipt

"[G]ross receipts with respect to any period means the sum of: (a) The total amount received or

from accrual, i.e., that "[m]ere accrual shall not be considered, but once payment is received

accrued during such period from the sale, exchange, or other disposition of x x x other property of

on such accrual or in case of prepayment, then the amount actually received shall be

a kind which would properly be included in the inventory of the taxpayer if on hand at the close of

included in the tax base of such financial institutions x x x."

the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary

Section 4(e) recognizes that income could be recognized by the taxpayer either at the time of its

course of its trade or business, and (b) The gross income, attributable to a trade or business,

actual receipt or its accrual,24 depending on the accounting method used by the taxpayer,25 but

regularly carried on by the taxpayer, received or accrued during such period x x x."

establishes the rule that, for purposes of gross receipts tax, interest income is taxable upon actual

"x x x [B]y gross earnings from operations x x x was intended all operations x x x including

receipt of the income, as opposed to the time of its accrual. Section 4(e) does not exclude accrued

incidental, subordinate, and subsidiary operations, as well as principal operations."

interest income from gross receipts but merely postpones its inclusion until actual payment of the

"When we speak of the gross earnings of a person or corporation, we mean the entire earnings or

interest to the lending bank, thus mandating that "[m]ere accrual shall not be considered, but once

receipts of such person or corporation from the business or operations to which we refer."

payment is received on such accrual or in case of prepayment, then the amount actually received

From these cases, "gross receipts"] refer to the total, as opposed to the net, income. These are

shall be included in the tax base of such financial institutions x x x."26

therefore the total receipts before any deduction for the expenses of management. Websters New

Even if Section 4(e) had been properly construed, it still cannot be the basis for deducting the

International Dictionary, in fact, defines gross as "whole or entire."

income tax withheld since Section 4(e) has been superseded by Section 7 of Revenue Regulations

The legislative intent to apply the term in its ordinary meaning may also be surmised from a

No. 17-84, which states, thus:

historical perspective of the levy on gross receipts. From the time the gross receipts tax on banks

SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes.

18

was first imposed in 1946 under R.A. No. 39 and throughout its successive reenactments, the

(a) The interest earned on Philippine Currency bank deposits and yield from deposit

legislature has not established a definition of the term "gross receipts." Absent a statutory definition

substitutes subjected to the withholding taxes in accordance with these regulations need

of the term, the BIR had consistently applied it in its ordinary meaning, i.e., without deduction. On

not be included in the gross income in computing the depositor's/investor's income tax

the presumption that the legislature is familiar with the contemporaneous interpretation of a statute

liability in accordance with the provision of Section 29(b), (c) and (d) of the National Internal

given by the administrative agency tasked to enforce the statute, subsequent legislative

Revenue Code, as amended.

reenactments of the subject levy sans a definition of the term "gross receipts" reflect that the BIRs

(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for

application of the term carries out the legislative purpose.

19

purposes of imposing the withholding taxes in accordance with these regulations shall be allowed

Furthermore, Section 119 (a)20 of the Tax Code expressly includes interest income as part of the

as interest expense deductible for purposes of computing taxable net income of the payor.

base income from which the gross receipts tax on banks is computed. This express inclusion of

(c) If the recipient of the above-mentioned items of income are financial institutions, the

interest income in taxable gross receipts creates a presumption that the entire amount of the

same shall be included as part of the tax base upon which the gross receipt tax is

interest income, without any deduction, is subject to the gross receipts tax.21

imposed. (Emphasis supplied.)

The exclusion of the 20% final tax on passive income from the taxpayers tax base is effectively a

The provision categorically provides that if the recipient of interest subjected to withholding

tax exemption, the application of which is highly disfavored.22 The rule is that whoever claims an

taxes is a financial institution, the interest shall be included as part of the tax base upon

23

exemption must justify this right by the clearest grant of organic or statute law. Like the other

which the gross receipts tax is imposed.

banks who have asserted a right tantamount

The implied repeal of Section 4(e) is undeniable. Section 4(e) imposes the gross receipts tax only

to exception under these circumstances, BPI has failed to present a clear statutory basis for its

on all items of income actually received, as opposed to their mere accrual, while Section 7 of

claim to take away the interest income withheld from the purview of the levy on gross tax receipts.

Revenue Regulations No. 17-84 includes all interest income (whether actual or accrued) in

Bereft of a clear statutory basis on which to hinge its claim, BPIs view, as adopted by the Court of

computing the gross receipts tax.27 Section 4(e) of Revenue Regulations No. 12-80 was

Appeals, is that Section 4(e) of Revenue Regulations No. 12-80 establishes the exclusion of the

superseded by the later rule, because Section 4(e) thereof is not restated in Revenue Regulations

20% final tax withheld from the banks taxable gross receipts.

No. 17-84.28 Clearly, then, the current revenue regulations requires interest income, whether
actually received or merely accrued, to form part of the banks taxable gross receipts.

29

The cases cited by BPI, Commissioner of Internal Revenue v. Tours Specialists,

Inc.32 and Commissioner of Internal Revenue v. Manila Jockey Club, Inc.,33 in which this Court held

The Commissioner correctly controverts the conclusion made by the Court of Appeals that it would

that "gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted

be "unjust and confiscatory to include the withheld 20% final tax in the tax base for purposes of

to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit,"34 only

computing the gross receipts tax since the amount corresponding to said 20% final tax was not

further substantiate the fact that BPI benefited from the withheld amounts.

received by the taxpayer and the latter derived no benefit therefrom."

30

In Tours Specialists and Manila Jockey Club, the taxable entities held the subject monies not as

Receipt of income may be actual or constructive. We have held that the withholding process results

income earned but as mere trustees. As such, they held the money entrusted to them but which

in the taxpayers constructive receipt of the income withheld, to wit:

neither belonged to them nor redounded to their benefit. On the other hand, BPI cannot be

By analogy, we apply to the receipt of income the rules on actual and constructive possession

considered as a mere trustee; it is the actual owner of the funds. As owner thereof, it was BPIs tax

provided in Articles 531 and 532 of our Civil Code.

obligation to the government that was extinguished upon the withholding agents remittance of the

Under Article 531:

20% final tax. We elucidated on BPIs ownership of the funds in China Banking, to wit:

"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the

Manila Jockey Club does not support CBCs contention but rather the Commissioners proposition.

fact that it is subject to the action of our will, or by the proper acts and legal formalities established

The Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but

for acquiring such right."

merely held by it in trust did not form part of Manila Jockey Clubs gross receipts. Conversely,

Article 532 states:

receipts owned by the Manila Jockey Club would form part of its gross receipts.

"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by

In the instant case, CBC owns the interest income which is the source of payment of the

his agent, or by any person without any power whatever; but in the last case, the possession shall

final withholding tax. The government subsequently becomes the owner of the money

not be considered as acquired until the person in whose name the act of possession was executed

constituting the final tax when CBC pays the final withholding tax to extinguish its

has ratified the same, without prejudice to the juridical consequences of negotiorum gestio in a

obligation to the government. This is the consideration for the transfer of ownership of the

proper case."

money from CBC to the government. Thus, the amount constituting the final tax, being

The last means of acquiring possession under Article 531 refers to juridical actsthe acquisition of

originally owned by CBC as part of its interest income, should form part of its taxable gross

possession by sufficient titleto which the law gives the force of acts of possession. Respondent

receipts.

argues that only items of income actually received should be included in its gross receipts. It claims

In Commissioner v. Tours Specialists, Inc., the Court excluded from gross receipts money

that since the amount had already been withheld at source, it did not have actual receipt thereof.

entrusted by foreign tour operators to Tours Specialists to pay the hotel accommodation of tourists

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of

booked in various local hotels. The Court declared that Tours Specialists did not own such

possession is through the proper acts and legal formalities established therefor. The withholding

entrusted funds and thus the funds were not subject to the 3% contractors tax payable by Tours

process is one such act. There may not be actual receipt of the income withheld; however, as

Specialists. The Court held:

provided for in Article 532, possession by any person without any power whatsoever shall be

x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts

considered as acquired when ratified by the person in whose name the act of possession is

entrusted to the taxpayer which do not belong to them and do not redound to the taxpayers

executed.

benefit; and it is not necessary that there must be a law or regulation which would exempt such

In our withholding tax system, possession is acquired by the payor as the withholding

monies and receipts within the meaning of gross receipts under the Tax Code.

agent of the government, because the taxpayer ratifies the very act of possession for the

x x x [T]he room charges entrusted by the foreign travel agencies to the private respondent do not

government. There is thus constructive receipt. The processes of bookkeeping and

form part of its gross receipts within the definition of the Tax Code. The said receipts never

accounting for interest on deposits and yield on deposit substitutes that are subjected to

belonged to the private respondent. The private respondent never benefited from their payment to

FWT are indeedfor legal purposestantamount to delivery, receipt or

the local hotels. x x x [T]his arrangement was only to accommodate the foreign travel agencies.

remittance.31 (Emphasis supplied.)

Unless otherwise provided by law, ownership is essential in determining whether interest

Thus, BPI constructively received income by virtue of its acquiescence to the extinguishment of its

income forms part of taxable gross receipts. Ownership is the circumstance that makes

20% final tax liability when the withholding agents remitted BPIs income to the government.

interest income part of the taxable gross receipts of the taxpayer. When the taxpayer

Consequently, it received the amounts corresponding to the 20% final tax and benefited therefrom.

acquires ownership of money representing interest, the money constitutes income or

in the territory. Subjecting interest income to a 20% FWT and including it in the computation of the

receipt of the taxpayer.

5% GRT is clearly not double taxation.37

In contrast, the trustee or agent does not own the money received in trust and such money does

Clearly, therefore, despite the fact that that interest income is taxed twice, there is no double

not constitute income or receipt for which the trustee or agent is taxable. This is a fundamental

taxation present in this case.

concept in taxation. Thus, funds received by a money remittance agency for transfer and delivery

An interpretation of the tax laws and relevant jurisprudence shows that the tax on interest income

to the beneficiary do not constitute income or gross receipts of the money remittance agency.

of banks withheld at source is included in the computation of their gross receipts tax base.

Similarly, a travel agency that collects ticket fares for an airline does not include the ticket fare in its

WHEREFORE, the Petition is GRANTED. The assailed Decisions of the Court of Appeals and the

gross income or receipts. In these cases, the money remittance agency or travel agency does not

Court of Tax Appeals are REVERSED AND SET ASIDE. Petitioner Commissioner of Internal

acquire ownership of the funds received.35 (Emphasis supplied.)

Revenues denial of respondent Bank of Philippine Islands claim for refund is SUSTAINED. No

BPI argues that to include the 20% final tax withheld in its gross receipts tax base would be to tax

costs.

twice its passive income and would constitute double taxation. Granted that interest income is

SO ORDERED.

being taxed twice, this, however, does not amount to double taxation. There is no double taxation if

G.R. No. 127105 June 25, 1999

the law imposes two different taxes on the same income, business or property.

36

In Solidbank, we

COMMISSIONER OF INTERNAL REVENUE, petitioner,

ruled, thus:

vs.

Double taxation means taxing the same property twice when it should be taxed only once; that is,

S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

"x x x taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious
when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct

GONZAGA-REYES, J.:

duplicate taxation," the two taxes must be imposed on the same subject matter, for the same

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside

purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period;

the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming

and they must be of the same kind or character.

the decision of the Court of Tax Appeals in CTA Case No. 5136.

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT

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

[Final Withholding Tax] is the passive income generated in the form of interest on deposits and

[Respondent], a domestic corporation organized and operating under the Philippine laws, entered

yield on deposit substitutes, while the subject matter of the GRT [Gross Receipts Tax] is the

into a license agreement with SC Johnson and Son, United States of America (USA), a non-

privilege of engaging in the business of banking.

resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise

the right to use the trademark, patents and technology owned by the latter including the right to

rather than a property tax. It is not an income tax, unlike the FWT. In fact, we have already held

manufacture, package and distribute the products covered by the Agreement and secure

that one can be taxed for engaging in business and further taxed differently for the income derived

assistance in management, marketing and production from SC Johnson and Son, U. S. A.

therefrom. Akin to our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are

The said License Agreement was duly registered with the Technology Transfer Board of the Bureau

assessed under different provisions.

of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh.

Second, although both taxes are national in scope because they are imposed by the same taxing

"A").

authoritythe national government under the Tax Codeand operate within the same Philippine

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son,

jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different.

USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax

The FWT is deducted and withheld as soon as the income is earned, and is paid after

on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the

every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor

total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings).

withheld, but is paid only after every taxable quarter in which it is earned.

On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to

a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts

withholding, while the GRT is a percentage tax not subject to withholding.

attending [respondent's] case fall squarely within the same circumstances under which

In short, there is no double taxation, because there is no taxing twice, by the same taxing authority,

said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the

within the same jurisdiction, for the same purpose, in different taxing periods, some of the property

Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We

therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only

PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX

subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty

TREATY.

[Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]"

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the

(Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund of

"most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on

P963,266.00 was computed as follows:

royalties derived by a resident of the United States from sources within the Philippines only if the

Gross 25% 10%

circumstances of the resident of the United States are similar to those of the resident of West

Month/ Royalty Withholding Withholding

Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided

Year Fee Tax Paid Tax Balance

under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax

Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax

July 1992 559,878 139,970 55,988 83,982

Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of

August 567,935 141,984 56,794 85,190

royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause

September 595,956 148,989 59,596 89,393

cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to

October 634,405 158,601 63,441 95,161

the payment of a tax, or royalty remittances for that matter, these must necessarily refer to

November 620,885 155,221 62,089 93,133

circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's invocation of

December 383,276 95,819 36,328 57,491

the "most favored nation" clause is in the nature of a claim for exemption from the application of the

Jan 1993 602,451 170,630 68,245 102,368

regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against

February 565,845 141,461 56,585 84,877

it.

March 547,253 136,813 54,725 82,088

In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied

April 660,810 165,203 66,081 99,122

(1) because it contains a defective certification against forum shopping as required under SC

May 603,076 150,769 60,308 90,461

Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her

P6,421,770 P1,605,443 P642,177 P963,266

counsel; and (2) that the "most favored nation" clause under the RP-US Tax Treaty refers to
1

royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the

======== ======== ======== ========

phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son,

matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow

Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the

the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein

case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on

the country of residence of such taxpayer is also a party thereto, subject to the basic condition that

royalty payments from July 1992 to May 1993.

the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and

under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same

ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of

kind paid under similar circumstances". S.C. Johnson also contends that the Commissioner is

P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to

estopped from insisting on her interpretation that the phrase "paid under similar circumstances"

May, 1993.

refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals

Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the

which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the

Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which

petition and affirming in toto the CTA ruling. 3

stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant

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

to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said

issue:

ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant to

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS

Section 246 of the National Internal Revenue Code.

ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed
by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular

No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the

With respect to the merits of this petition, the main point of contention in this appeal is the

requirement that the certification should be signed by petitioner and not by counsel does not apply

interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be

to petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner

imposed by the Philippines upon royalties received by a non-resident foreign corporation. The

reiterates that even if the phrase "paid under similar circumstances" embodied in the most favored

provision states insofar as pertinent

nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the

that

presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would

1) Royalties derived by a resident of one of the Contracting States from sources within the other

constitute a material circumstance to such payment and would be determinative of the said

Contracting State may be taxed by both Contracting States.

clause's application.1wphi1.nt

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

We address first the objection raised by private respondent that the certification against forum

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

shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor

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

General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.

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

SC Circular No. 28-91 provides:

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation

SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT

registered with the Philippine Board of Investments and engaged in preferred areas of activities;

AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF

and

PETITIONS AND COMPLAINTS

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under

TO: xxx xxx xxx

similar circumstances to a resident of a third State.

The attention of the Court has been called to the filing of multiple petitions and complaints involving

xxx xxx xxx

the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the

(emphasis supplied)

result that said courts, tribunals or agencies have to resolve the same issues.

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals,

entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-

the petitioner aside from complying with pertinent provisions of the Rules of Court and existing

Germany Tax Treaty which provides:

circulars, must certify under oath to all of the following facts or undertakings: (a) he has not

(2) However, such royalties may also be taxed in the Contracting State in which they arise, and

theretofore commenced any other action or proceeding involving the same issues in the Supreme

according to the law of that State, but the tax so charged shall not exceed:

Court, the Court of Appeals, or any tribunal or

xxx xxx xxx

agency; . . .

b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for

patent, trademark, design or model, plan, secret formula or process, or from the use of or the right

the summary dismissal of the multiple petitions or complaints; . . .

to use, industrial, commercial, or scientific equipment, or for information concerning industrial,

The circular expressly requires that a certificate of non-forum shopping should be attached to

commercial or scientific experience.

petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No.

For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation

28-91 applies only to original actions and not to appeals as in the instant case is not supported by

of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the

the text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result

Philippines, only apply if the contract giving rise to such royalties has been approved by the

in the same issue being resolved by different courts.

Philippine competent authorities.

Anent the requirement that the party, not counsel, must certify under oath that he has not

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the

commenced any other action involving the same issues in this Court or the Court of Appeals or any

gross amount of such royalties against German income and corporation tax for the taxes payable

other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the

in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such

only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter

treaty. Article 24 of the RP-Germany Tax Treaty states

12, title III, Book IV of the 1987 Administrative Code to be represented only by the Solicitor

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

General, the certification executed by the OSG in this case constitutes substantial compliance with

xxx xxx xxx

Circular No. 28-91.

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be

for the reason that the phrase "paid under similar circumstances" is followed by the phrase "to a

allowed as a credit against German income and corporation tax payable in respect of the following

resident of a third state". The respondent court held that "Words are to be understood in the

items of income arising in the Republic of the Philippines, the tax paid under the laws of the

context in which they are used", and since what is paid to a resident of a third state is not a tax but

Philippines in accordance with this Agreement on:

a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same

xxx xxx xxx

kind paid under similar circumstances.

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

The above construction is based principally on syntax or sentence structure but fails to take into

xxx xxx xxx

account the purpose animating the treaty provisions in point. To begin with, we are not aware of

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

any law or rule pertinent to the payment of royalties, and none has been brought to our attention,

be

which provides for the payment of royalties under dissimilar circumstances. The tax rates on

xxx xxx xxx

royalties and the circumstances of payment thereof are the same for all the recipients of such

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph

royalties and there is no disparity based on nationality in the circumstances of such payment. 6 On

2 of Article 12, 20 percent of the gross amount of such royalties.

the other hand, a cursory reading of the various tax treaties will show that there is no similarity in

xxx xxx xxx

the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under

between the contracting parties.8 As will be shown later, this dissimilarity is true particularly in the

circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a

treaties between the Philippines and the United States and between the Philippines and West

20 percent matching credit in the former convention and private respondent cannot invoke the

Germany.

concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has

Petitioner's position is explained thus:

entered into for the avoidance of double taxation. 9 The purpose of these international agreements

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on

is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer

income from sources within the Philippines is allowed as a credit against German income and

avoid simultaneous taxation in two different jurisdictions.10 More precisely, the tax conventions are

corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or

drafted with a view towards the elimination of international juridical double taxation, which is

15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit

defined as the imposition of comparable taxes in two or more states on the same taxpayer in

shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German

respect of the same subject matter and for identical periods.

resident from sources within the Philippines arising from the use of, or the right to use, any patent,

away with double taxation is of encourage the free flow of goods and services and the movement

trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount

of capital, technology and persons between countries, conditions deemed vital in creating robust

of said royalty under certain conditions. The rate of 10% is imposed if credit against the German

and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and

income and corporation tax on said royalty is allowed in favor of the German resident. That means

reasonable international investment climate and the protection against double taxation is crucial in

the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the

creating such a climate. 13

income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften

Double taxation usually takes place when a person is resident of a contracting state and derives

the impact of double taxation by different jurisdictions.

income from, or owns capital in, the other contracting state and both states impose tax on that

The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West

income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods.

Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under

First, it sets out the respective rights to tax of the state of source or situs and of the state of

similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most

residence with regard to certain classes of income or capital. In some cases, an exclusive right to

favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the

tax is conferred on one of the contracting states; however, for other items of income or capital, both

provisions of the RP-US Tax Treaty.

11

The apparent rationale for doing

states are given the right to tax, although the amount of tax that may be imposed by the state of

The petition is meritorious.

source is limited. 14

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court

The second method for the elimination of double taxation applies whenever the state of source is

of Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US

given a full or limited right to tax together with the state of residence. In this case, the treaties make

Tax Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax,

it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are

two methods of relief the exemption method and the credit method. In the exemption method,

provision with respect to relief for double taxation, does not provide for similar crediting of 20% of

the income or capital which is taxable in the state of source or situs is exempted in the state of

the gross amount of royalties paid. Said Article 23 reads:

residence, although in some instances it may be taken into account in determining the rate of tax

Article 23

applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method,

Relief from double taxation

although the income or capital which is taxed in the state of source is still taxable in the state of

Double taxation of income shall be avoided in the following manner:

residence, the tax paid in the former is credited against the tax levied in the latter. The basic

1) In accordance with the provisions and subject to the limitations of the law of the United States

difference between the two methods is that in the exemption method, the focus is on the income or

(as it may be amended from time to time without changing the general principle thereof), the United

capital itself, whereas the credit method focuses upon the tax.

15

States shall allow to a citizen or resident of the United States as a credit against the United States

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines

tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United

will give up a part of the tax in the expectation that the tax given up for this particular investment is

States corporation owning at least 10 percent of the voting stock of a Philippine corporation from

not taxed by the other

which it receives dividends in any taxable year, shall allow credit for the appropriate amount of

country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar

taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with

circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily

respect to the profits out of which such dividends are paid. Such appropriate amount shall be

contemplated "circumstances that are tax-related".

based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the

In the case at bar, the state of source is the Philippines because the royalties are paid for the right

limitations (for the purpose of limiting the credit to the United States tax on income from sources

to use property or rights, i.e. trademarks, patents and technology, located within the

within the Philippines or on income from sources outside the United States) provided by United

Philippines.

17

The United States is the state of residence since the taxpayer, S. C. Johnson and

States law for the taxable year. . . .

Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of

The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2)

source are both permitted to tax the royalties, with a restraint on the tax that may be collected by

(b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text

the state of source.

18

Furthermore, the method employed to give relief from double taxation is the

in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign

allowance of a tax credit to citizens or residents of the United States (in an appropriate amount

investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure

based upon the taxes paid or accrued to the Philippines) against the United States tax, but such

higher than what was collected in the Philippines.

amount shall not exceed the limitations provided by United States law for the taxable year. 19 Under

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have

Article 13 thereof, the Philippines may impose one of three rates 25 percent of the gross amount

ends to be achieved and that the general purpose is a more important aid to the meaning of a law

of the royalties; 15 percent when the royalties are paid by a corporation registered with the

than any rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be

Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of

accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a

Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances

reasonable or liberal construction which will best effectuate its purpose.

to a resident of a third state.

on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the

ordinary meaning to be given to the terms of the treaty in their context and in the light of its object

concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if

and

the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are

purpose. 22

paid under similar circumstances. This would mean that private respondent must prove that the

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors

RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes

to invest in the Philippines a crucial economic goal for developing countries.

imposable upon royalties earned from sources within the Philippines as those allowed to their

double taxation conventions would be thwarted if such treaties did not provide for effective

German counterparts under the RP-Germany Tax Treaty.

measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax

the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the

crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against

Philippines, there should be a concomitant commitment on the part of the state of residence to

German income and corporation tax of 20% of the gross amount of royalties paid under the law of

grant some form of tax relief, whether this be in the form of a tax credit or exemption.

the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart

the tax which could have been collected by the Philippine government will simply be collected by

21

The Vienna Convention

23

The goal of

24

Otherwise,

another state, defeating the object of the tax treaty since the tax burden imposed upon the investor

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7,

would remain unrelieved. If the state of residence does not grant some form of tax relief to the

1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals

investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a

are hereby SET ASIDE.

favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it

SO ORDERED.

would be better to impose the regular rate rather than lose much-needed revenues to another

G.R. No. 131359 May 5, 1999

country.

MANILA ELECTRIC COMPANY, petitioner,

At the same time, the intention behind the adoption of the provision on "relief from double taxation"

vs.

in the two tax treaties in question should be considered in light of the purpose behind the most

PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial Treasurer of

favored nation clause.

Laguna,respondents.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other

VITUG, J.:

countries. 25 The most favored nation clause is intended to establish the principle of equality of

On various dates, certain municipalities of the Province of Laguna, including, Bian, Sta. Rosa,

international treatment by providing that the citizens or subjects of the contracting nations may

San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued

enjoy the privileges accorded by either party to those of the most favored nation.

26

The essence of

resolutions through their respective municipal councils granting franchise in favor of petitioner

the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in

Manila Electric Company ("MERALCO") for the supply of electric light, heat and power within their

another tax treaty to which the country of residence of such taxpayer is also a party provided that

concerned areas. On 19 January 1983, MERALCO was likewise granted a franchise by the

the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty

National Electrification Administration to operate an electric light and power service in the

under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of

Municipality of Calamba, Laguna.

the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of

On 12 September 1991, Republic Act No. 7160, otherwise known as the "Local Government Code

trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the

of 1991," was enacted to take effect on 01 January 1992 enjoining local government units to create

absence of a matching credit (20% for royalties) would derogate from the design behind the most

their own sources of revenue and to levy taxes, fees and charges, subject to the limitations

grant equality of international treatment since the tax burden laid upon the income of the investor is

expressed therein, consistent with the basic policy of local autonomy. Pursuant to the provisions of

not the same in the two countries. The similarity in the circumstances of payment of taxes is a

the Code, respondent province enacted Laguna Provincial Ordinance No. 01-92, effective 01

condition for the enjoyment of most favored nation treatment precisely to underscore the need for

January 1993, providing, in part, as follows:

equality of treatment.

Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax

a rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include

credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West

both cash sales and sales on account realized during the preceding calendar year within this

Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted

province, including the territorial limits on any city located in the province.

under the latter treaty for the reason that there is no payment of taxes on royalties under similar

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to

circumstances.

MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in

amounted to P19,520.628.42, under protest. A formal claim for refund was thereafter sent by

derogation of sovereign authority and to be construed strictissimi juris against the person or entity

MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid and

27

claiming the exemption. The burden of proof is upon him who claims the exemption in his favor

continued to pay to the National Government pursuant to P.D. 551 already included the franchise

and he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private

tax imposed by the Provincial Tax Ordinance. MERALCO, contended that the imposition of a

respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there

franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned

is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid

MERALCO, contravened the provisions of Section 1 of P.D. 551 which read:

under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable
by all grantees of franchises to generate, distribute and sell electric current for light, heat and

power shall be two per cent (2%) of their gross receipts received from the sale of electric current

decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the

and from transactions incident to the generation, distribution and sale of electric current.

different local government units their powers, responsibilities, and resources, and provide for the

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly

qualifications, election, appointment and removal, term, salaries, powers and functions, and duties

authorized representative on or before the twentieth day of the month following the end of each

of local officials, and all other matters relating to the organization and operation of the local units.

calendar quarter or month, as may be provided in the respective franchise or pertinent municipal

xxx xxx xxx

regulation and shall, any provision of the Local Tax Code or any other law to the contrary

Sec. 5. Each local government unit shall have the power to create its own sources of revenues and

notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any

to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may

national or local authority on earnings, receipts, income and privilege of generation, distribution and

provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall

sale of electric current.

accrue exclusively to the local governments.

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with

Jose D. Lina relied on a more recent law, i.e. Republic Act No. 7160 or the Local Government

a similar delegation of revenue making powers to local governments.

Code of 1991, than the old decree invoked by petitioner.

Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and local

On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta. Cruz,

government units instead derived their tax powers under a limited statutory authority. Whereas,

Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary injunction

then, the delegation of tax powers granted at that time by statute to local governments was

and/or temporary restraining order, against the Province of Laguna and also Benito R. Balazo in his

confined and defined (outside of which the power was deemed withheld), the present constitutional

capacity as the Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which

rule (starting with the 1973 Constitution), however, would broadly confer such tax powers subject

petitioner MERALCO had priorly made a formal request for refund, petitioner thereafter likewise

only to specific exceptions that the law might prescribe.

made additional payments under protest on various dates totaling P27,669,566.91.

Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute,

The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and

the tax power must be deemed to exist although Congress may provide statutory limitations and

concluded:

guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is

of local government units by directly granting them general and broad tax powers. Nevertheless,

hereby rendered in favor of the defendants and against the plaintiff, by:

the fundamental law did not intend the delegation to be absolute and unconditional; the

1. Ordering the dismissal of the Complaint; and

constitutional objective obviously is to ensure that, while the local government units are being

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable and

strengthened and made more autonomous, 6 the legislature must still see to it that (a) the taxpayer

enforceable.

will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local

In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:

government unit will have its fair share of available resources; (c) the resources of the national

1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance

government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.

No. 01-92, insofar as petitioner is concerned, is violative of the non-impairment clause of the

The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions

Constitution and Section 1 of Presidential Decree No. 551.

of the now repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into

2. Whether Republic Act No. 7160, otherwise known Local Government Code of 1991, has

law by Presidential Decree

repealed, amended or modified Presidential Decree No. 551.

No. 231 7 pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The

3. Whether the doctrine of administrative remedies is applicable in this case.

1991 Code explicitly authorizes provincial governments, notwithstanding "any exemption granted

The petition lacks merit.

by any law or other special law, . . . (to) impose a tax on businesses enjoying a franchise." Section

Prefatorily, it might be well to recall that local governments do not have the inherent power to

137 thereof provides:

tax except to the extent that such power might be delegated to them either by the basic law or by

Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special

statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has

law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding

been given in favor of local government units. Thus:

fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year

Sec. 3. The Congress shall enact a local government code which shall provide for a more

based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly

responsive and accountable local government structure instituted through a system of

started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital

investment. In the succeeding calendar year, regardless of when the business started to operate,

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the

the tax shall be based on the gross receipts for the preceding calendar year, or any fraction

franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila

thereof, as provided herein. (Underscoring supplied for emphasis)

Railroad from payment of internal revenue tax for its importations of coal and oil under Act No.

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax

2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil.

powers to local government units, the Local Government Code has effectively withdrawn under

224).

Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497)

states:

justified the exemption of the Philippine Railway Company from payment of the tax on its corporate

Sec. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax

franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine

exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or

Railway Co vs. Collector of Internal Revenue, 91 Phil. 35).

juridical, including government-owned or controlled corporations, except local water districts,

Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant

cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and

Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato

educational institutions,are hereby withdrawn upon the effectivity of this Code. (Underscoring

(Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

supplied for emphasis)

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was

The Code, in addition, contains a general repealing clause in its Section 534; thus:

required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as

Sec. 534. Repealing Clause. . . .

amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G.

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and

[No. 4]. 1068). This Court pointed out that such exemption is part of the inducement for the

administrative regulations, or part or parts thereof which are inconsistent with any of the provisions

acceptance of the franchise and the rendition of public service by the grantee.

of this Code are hereby repealed or modified accordingly. (Underscoring supplied for emphasis)

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V.

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos, 9 the Court upheld the

Reyes, et al., 13 the Court has held that the phrase in lieu of all taxes "have to give way to the

withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International

peremptory language of the Local Government Code specifically providing for the withdrawal of

Airport Authority. The Court ratiocinated:

such exemptions, privileges," and that "upon the effectivity of the Local Government Code all

. . . These policy considerations are consistent with the State policy to ensure autonomy to local

exemptions except only as provided therein can no longer be invoked by MERALCO to disclaim

governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy

liability for the local tax." In fine, the Court has viewed its previous rulings as laying stress more on

to enable them to attain their fullest development as self-reliant communities and make them

the legislative intent of the amendatory law whether the tax exemption privilege is to be

effective partners in the attainment of national goals. The power to tax is the most effective

withdrawn or not rather than on whether the law can withdraw, without violating the Constitution,

instrument to raise needed revenues to finance and support myriad activities if local government

the tax exemption or not.

units for the delivery of basic services essential to the promotion of the general welfare and the

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises

enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall

as being in the nature of contracts and a part of the inducement for carrying on the franchise, these

that the original reasons for the withdrawal of tax exemption privileges granted to government-

exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax

owned and controlled corporations and all other units of government were that such privilege

exemptions, in the real sense of the term and where the non-impairment clause of the Constitution

resulted in serious tax base erosion and distortions in the tax treatment of similarity situated

can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those

enterprises, and there was a need for these entities to share in the requirements of development,

contained in government bonds or debentures, lawfully entered into by them under enabling laws in

fiscal or otherwise, by paying the taxes and other charges due from them.

10

which the government, acting in its private capacity, sheds its cloak of authority and waives its

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province
of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;

11

thus:

governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts. 14 These contractual tax exemptions, however, are not to be confused with

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or

tax exemptions granted under franchises. A franchise partakes the nature of a grant which is

collected by any authority" found in the franchise of the Visayan Electric Company was held to

beyond the purview of the non-impairment clause of the Constitution. 15 Indeed, Article XII, Section

exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of

11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is

the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)

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

Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of

and when the common good so requires.

local application, and private bills shall originate exclusively in the House of Representatives, but

WHEREFORE, the instant petition is hereby DISMISSED. No costs.1wphi1.nt

the Senate may propose or concur with amendments.

SO ORDERED.

He contends that since the Constitution vests the authority to enact revenue bills in Congress, the

G.R. No. 101273 July 3, 1992

President may not assume such power by issuing Executive Orders Nos. 475 and 478 which are in

CONGRESSMAN ENRIQUE T. GARCIA (Second District of Bataan), petitioner,

the nature of revenue-generating measures.

vs.

Petitioner further argues that Executive Orders No. 475 and 478 contravene Section 401 of the

THE EXECUTIVE SECRETARY, THE COMMISSIONER OF CUSTOMS, THE NATIONAL

Tariff and Customs Code, which Section authorizes the President, according to petitioner, to

ECONOMIC AND DEVELOPMENT AUTHORITY, THE TARIFF COMMISSION, THE SECRETARY

increase, reduce or remove tariff duties or to impose additional duties only when necessary to

OF FINANCE, and THE ENERGY REGULATORY BOARD, respondents.

protect local industries or products but not for the purpose of raising additional revenue for the
government.

FELICIANO, J.:

Thus, petitioner questions first the constitutionality and second the legality of Executive Orders

On 27 November 1990, the President issued Executive Order No. 438 which imposed, in addition

Nos. 475 and 478, and asks us to restrain the implementation of those Executive Orders. We will

to any other duties, taxes and charges imposed by law on all articles imported into the Philippines,

examine these questions in that order.

an additional duty of five percent (5%) ad valorem. This additional duty was imposed across the

Before doing so, however, the Court notes that the recent promulgation of Executive Order No. 507

board on all imported articles, including crude oil and other oil products imported into the

did not render the instant Petition moot and academic. Executive Order No. 517 which is dated 30

Philippines. This additional duty was subsequently increased from five percent (5%) ad valorem to

April 1992 provides as follows:

nine percent (9%) ad valorem by the promulgation of Executive Order No. 443, dated 3 January

Sec. 1. Lifting of the Additional Duty. The additional duty in the nature of ad valorem imposed on

1991.

all imported articles prescribed by the provisions of Executive Order No. 443, as amended, is

On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the

hereby lifted; Provided, however, that the selected articles covered by HS Heading Nos. 27.09 and

process required by the Tariff and Customs Code for the imposition of a specific levy on crude oil

27.10 of Section 104 of the Tariff and Customs Code, as amended, subject of Annex "A" hereof,

and other petroleum products, covered by HS Heading Nos. 27.09, 27.10 and 27.11 of Section 104

shall continue to be subject to the additional duty of nine (9%) percent ad valorem.

of the Tariff and Customs Code as amended. Accordingly, the Tariff Commission, following the

Under the above quoted provision, crude oil and other oil products continue to be subject to the

procedure set forth in Section 401 of the Tariff and Customs Code, scheduled a public hearing to

additional duty of nine percent (9%) ad valorem under Executive Order No. 475 and to the special

give interested parties an opportunity to be heard and to present evidence in support of their

duty of P0.95 per liter of imported crude oil and P1.00 per liter of imported oil products under

respective positions.

Executive Order No. 478.

Meantime, Executive Order No. 475 was issued by the President, on 15 August 1991 reducing the

Turning first to the question of constitutionality, under Section 24, Article VI of the Constitution, the

rate of additional duty on all imported articles from nine percent (9%) to five percent (5%) ad

enactment of appropriation, revenue and tariff bills, like all other bills is, of course, within the

valorem, except in the cases of crude oil and other oil products which continued to be subject to

province of the Legislative rather than the Executive Department. It does not follow, however, that

the additional duty of nine percent (9%) ad valorem.

therefore Executive Orders Nos. 475 and 478, assuming they may be characterized as revenue

Upon completion of the public hearings, the Tariff Commission submitted to the President a "Report

measures, are prohibited to the President, that they must be enacted instead by the Congress of

on Special Duty on Crude Oil and Oil Products" dated 16 August 1991, for consideration and

the Philippines. Section 28(2) of Article VI of the Constitution provides as follows:

appropriate action. Seven (7) days later, the President issued Executive Order No. 478, dated 23

(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to

August 1991, which levied (in addition to the aforementioned additional duty of nine percent

such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonage

(9%) ad valorem and all other existing ad valorem duties) a special duty of P0.95 per liter or

and wharfage dues, and other duties or imposts within the framework of the national development

P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil products.

program of the Government. (Emphasis supplied)

In the present Petition for Certiorari, Prohibition and Mandamus, petitioner assails the validity of

There is thus explicit constitutional permission 1 to Congress to authorize the President "subject to

Executive Orders Nos. 475 and 478. He argues that Executive Orders Nos. 475 and 478 are

such limitations and restrictions is [Congress] may impose" to fix "within specific limits" "tariff rates .

violative of Section 24, Article VI of the 1987 Constitution which provides as follows:

. . and other duties or imposts . . ."

The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections

c. The power of the President to increase or decrease rates of import duty within the limits fixed in

104 and 401, the pertinent provisions thereof. These are the provisions which the President

subsection "a" shall include the authority to modify the form of duty. In modifying the form of duty,

explicitly invoked in promulgating Executive Orders Nos. 475 and 478. Section 104 of the Tariff and

the corresponding ad valorem or specific equivalents of the duty with respect to imports from the

Customs Code provides in relevant part:

principal competing foreign country for the most recent representative period shall be used as

Sec. 104. All tariff sections, chapters, headings and subheadings and the rates of import duty

bases.

under Section 104 of Presidential Decree No. 34 and all subsequent amendments issued under

d. The Commissioner of Customs shall regularly furnish the Commission a copy of all customs

Executive Orders and Presidential Decrees are hereby adopted and form part of this Code.

import entries as filed in the Bureau of Customs. The Commission or its duly authorized

There shall be levied, collected, and paid upon all imported articles the rates of duty indicated in

representatives shall have access to, and the right to copy all liquidated customs import entries and

the Section under this section except as otherwise specifically provided for in this Code: Provided,

other documents appended thereto as finally filed in the Commission on Audit.

that, the maximum rate shall not exceed one hundred per cent ad valorem.

e. The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this

The rates of duty herein provided or subsequently fixed pursuant to Section Four Hundred One of

section.

this Code shall be subject to periodic investigation by the Tariff Commission and may be revised by

f. Any Order issued by the President pursuant to the provisions of this section shall take effect thirty

the President upon recommendation of the National Economic and Development Authority.

(30) days after promulgation, except in the imposition of additional duty not exceeding ten (10) per

xxx xxx xxx

cent ad valorem which shall take effect at the discretion of the President. (Emphasis supplied)

(Emphasis supplied)

Petitioner, however, seeks to avoid the thrust of the delegated authorizations found in Sections 104

Section 401 of the same Code needs to be quoted in full:

and 401 of the Tariff and Customs Code, by contending that the President is authorized to act

Sec. 401. Flexible Clause.

under the Tariff and Customs Code only "to protect local industries and products for the sake of the

a. In the interest of national economy, general welfare and/or national security, and subject to the

national economy, general welfare and/or national security." 2 He goes on to claim that:

limitations herein prescribed, the President, upon recommendation of the National Economic and

E.O. Nos. 478 and 475 having nothing to do whatsoever with the protection of local industries and

Development Authority (hereinafter referred to as NEDA), is hereby empowered: (1) to increase,

products for the sake of national economy, general welfare and/or national security. On the

reduce or remove existing protective rates of import duty (including any necessary change in

contrary, they work in reverse, especially as to crude oil, an essential product which we do not

classification). The existing rates may be increased or decreased but in no case shall the reduced

have to protect, since we produce only minimal quantities and have to import the rest of what we

rate of import duty be lower than the basic rate of ten (10) per cent ad valorem, nor shall the

need.

increased rate of import duty be higher than a maximum of one hundred (100) per cent ad valorem;

These Executive Orders are avowedly solely to enable the government to raise government

(2) to establish import quota or to ban imports of any commodity, as may be necessary; and (3) to

finances, contrary to Sections 24 and 28 (2) of Article VI of the Constitution, as well as to Section

impose an additional duty on all imports not exceeding ten (10) per cent ad valorem, whenever

401 of the Tariff and Customs Code. 3 (Emphasis in the original)

necessary; Provided, That upon periodic investigations by the Tariff Commission and

The Court is not persuaded. In the first place, there is nothing in the language of either Section 104

recommendation of the NEDA, the President may cause a gradual reduction of protection levels

or of 401 of the Tariff and Customs Code that suggest such a sharp and absolute limitation of

granted in Section One hundred and four of this Code, including those subsequently granted

authority. The entire contention of petitioner is anchored on just two (2) words, one found in Section

pursuant to this section.

401 (a)(1): "existing protective rates of import duty," and the second in the proviso found at the end

b. Before any recommendation is submitted to the President by the NEDA pursuant to the

of Section 401 (a): "protection levels granted in Section 104 of this Code . . . . " We believe that the

provisions of this section, except in the imposition of an additional duty not exceeding ten (10) per

words "protective" and ''protection" are simply not enough to support the very broad and

cent ad valorem, the Commission shall conduct an investigation in the course of which they shall

encompassing limitation which petitioner seeks to rest on those two (2) words.

hold public hearings wherein interested parties shall be afforded reasonable opportunity to be

In the second place, petitioner's singular theory collides with a very practical fact of which this

present, produce evidence and to be heard. The Commission shall also hear the views and

Court may take judicial notice that the Bureau of Customs which administers the Tariff and

recommendations of any government office, agency or instrumentality concerned. The Commission

Customs Code, is one of the two (2) principal traditional generators or producers of governmental

shall submit their findings and recommendations to the NEDA within thirty (30) days after the

revenue, the other being the Bureau of Internal Revenue. (There is a third agency, non-traditional

termination of the public hearings.

in character, that generates lower but still comparable levels of revenue for the government The
Philippine Amusement and Games Corporation [PAGCOR].)

In the third place, customs duties which are assessed at the prescribed tariff rates are very much

growing under the soil on tree roots (Chapter 7, Notes); dates (Chapter 8, 8.01); figs (Chapter 8,

like taxes which are frequently imposed for both revenue-raising and for regulatory

8.03); caviar (Chapter 16, 16.01); aircraft (Chapter 88, 88.0l); special diagnostic instruments and

purposes. 4 Thus, it has been held that "customs duties" is "the name given to taxes on the

apparatus for human medicine and surgery (Chapter 90, Notes); X-ray generators; X-ray tubes;

importation and exportation of commodities, the tariff or tax assessed upon merchandise imported

X-ray screens, etc. (Chapter 90, 90.20); etc. In such cases, customs duties may be seen to be

from, or exported to, a foreign country." 5 The levying of customs duties on imported goods may

imposed either for revenue purposes purely or perhaps, in certain cases, to discourage any

have in some measure the effect of protecting local industries where such local industries

importation of the items involved. In either case, it is clear that customs duties are levied and

actually exist and are producing comparable goods. Simultaneously, however, the very same

imposed entirely apart from whether or not there are any competing local industries to protect.

customs duties inevitably have the effect of producing governmental revenues. Customs duties like

Accordingly, we believe and so hold that Executive Orders Nos. 475 and 478 which may be

internal revenue taxes are rarely, if ever, designed to achieve one policy objective only. Most

conceded to be substantially moved by the desire to generate additional public revenues, are not,

commonly, customs duties, which constitute taxes in the sense of exactions the proceeds of which

for that reason alone, either constitutionally flawed, or legally infirm under Section 401 of the Tariff

become public funds have either or both the generation of revenue and the regulation of

and Customs Code. Petitioner has not successfully overcome the presumptions of constitutionality

economic or social activity as their moving purposes and frequently, it is very difficult to say which,

and legality to which those Executive Orders are entitled. 7

in a particular instance, is the dominant or principal objective. In the instant case, since the

The conclusion we have reached above renders it unnecessary to deal with petitioner's additional

Philippines in fact produces ten (10) to fifteen percent (15%) of the crude oil consumed here, the

contention that, should Executive Orders Nos. 475 and 478 be declared unconstitutional and

imposition of increased tariff rates and a special duty on imported crude oil and imported oil

illegal, there should be a roll back of prices of petroleum products equivalent to the "resulting

products may be seen to have some "protective" impact upon indigenous oil production. For the

excess money not be needed to adequately maintain the Oil Price Stabilization Fund (OPSF)." 8

effective, price of imported crude oil and oil products is increased. At the same time, it cannot be

WHEREFORE, premises considered, the Petition for Certiorari, Prohibition and Mandamus is

gainsaid that substantial revenues for the government are raised by the imposition of such

hereby DISMISSED for lack of merit. Costs against petitioner.

increased tariff rates or special duty.

SO ORDERED.

In the fourth place, petitioner's concept which he urges us to build into our constitutional and

G.R. No. 88291 June 8, 1993

customs law, is a stiflingly narrow one. Section 401 of the Tariff and Customs Code establishes

ERNESTO M. MACEDA, petitioner,

general standards with which the exercise of the authority delegated by that provision to the

vs.

President must be consistent: that authority must be exercised in "the interest of national economy,

HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the

general welfare and/or national security." Petitioner, however, insists that the "protection of local

President, HON. VICENTE JAYME, ETC., ET AL., respondents.

industries" is the only permissible objective that can be secured by the exercise of that delegated

Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.

authority, and that therefore "protection of local industries" is the sum total or the alpha and the

Siguion Reyna, Montecillo & Ongsiako for Caltex.

omega of "the national economy, general welfare and/or national security." We find it extremely
difficult to take seriously such a confined and closed view of the legislative standards and policies

NOCON, J.:

summed up in Section 401. We believe, for instance, that the protection of consumers, who after all

Just like lightning which does strike the same place twice in some instances, this matter of indirect

constitute the very great bulk of our population, is at the very least as important a dimension of "the

tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court

national economy, general welfare and national security" as the protection of local industries. And

a second time. Unfazed by the Decision We promulgated on May 31, 1991 1 petitioner Ernesto

so customs duties may be reduced or even removed precisely for the purpose of protecting

Maceda asks this Court to reconsider said Decision. Lest We be criticized for denying due process

consumers from the high prices and shoddy quality and inefficient service that tariff-protected and

to the petitioner. We have decided to take a second look at the issues. In the process, a hearing

subsidized local manufacturers may otherwise impose upon the community.

was held on July 9, 1992 where all parties presented their respective arguments. Etched in this

It seems also important to note that tariff rates are commonly established and the corresponding

Court's mind are the paradoxical claims by both petitioner and private respondents that their

customs duties levied and collected upon articles and goods which are not found at all

respective positions are for the benefit of the Filipino people.

and not produced in the Philippines. The Tariff and Customs Code is replete with such articles and

commodities: among the more interesting examples are ivory (Chapter 5, 5.10);castoreum or musk

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption

taken from the beaver (Chapter 5, 5.14); Olives (Chapter 7, Notes); truffles or European fungi

provisions, at the risk of being repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all

Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the

taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of the

Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury

Republic of the Philippines, its provinces, cities, and municipalities. 15

for the purpose of organizing the NPC and conducting its preliminary work. 3 The main source of

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by

funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds

the increased indebtedness 16 should bear the National Economic Council's stamp of approval. The

. . . issued under the authority of this Act shall be exempt from the payment of all taxes by the

tax exemption provision related to the payment of this total indebtedness was not amended nor

Commonwealth of the Philippines, or by any authority, branch, division or political subdivision

deleted.

thereof and subject to the provisions of the Act of Congress, approved March 24, 1934, otherwise

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC

known as the Tydings McDuffle Law, which facts shall be stated upon the face of said bonds. . . . . 5

was authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No.

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the

357. 17 The tax provision related to the repayment of these loans was not amended nor deleted.

initial operations of the NPC and reiterating the provision of the flotation of bonds as soon as the

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,

first construction of any hydraulic power project was to be decided by the NPC Board. 6 The

2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were

provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor

expressly repealed. 19

deleted.

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the

stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000

bond's principal and interest in "gold coins" but adding that payment could be made in United

shares having a par value of P100.00 each, with said capital stock wholly subscribed to by the

States dollars. The provision on tax exemption in relation to the issuance of the NPC bonds was

Government. 20 No tax exemption was incorporated in said Act.

neither amended nor deleted.

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to

stock to P250,000,000.00 with the increase to be wholly subscribed by the Government.

guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC

provision was incorporated in said Act.

loans. 8 He was also authorized to contract on behalf of the NPC with the International Bank for

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to

Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's

P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was

corporate objectives 9 and for the reconstruction and development of the economy of the

incorporated in said Act. 22

country.10 It was expressly stated that:

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No.

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions
and restrictions of the Republic of the Philippines, its provinces, cities and municipalities.

11

incur other types of indebtedness, aside from indebtedness incurred by flotation of bonds.

No tax

120, as amended. Declared as primary objectives of the nation were:

Declaration of Policy. Congress hereby declares that (1) the comprehensive development,

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to
12

21

As to

utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power

the pertinent tax exemption provision, the law stated as follows:

from all sources to meet the needs of industrial development and dispersal and the needs of rural

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all

electrification are primary objectives of the nation which shall be pursued coordinately and

taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its

supported by all instrumentalities and agencies of the government, including the financial

provinces, cities and municipalities. 13

institutions. 23

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD,

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority

the President of the Philippines was authorized to negotiate, contract and guarantee loans with the

to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financial

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

institution. 14 The tax provision for repayment of these loans, as stated in R.A. No. 357, was not

The bonds issued under the authority of this subsection shall be exempt from the payment of all

amended.

taxes by the Republic of the Philippines, or by any authority, branch, division or political subdivision

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real

thereof which facts shall be stated upon the face of said bonds. . . . 24

estate taxes. As enacted, the law states as follows:

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states

P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total of

as follows:

US$1,000,000,000.00 31 in foreign loans.

The loans, credits and indebtedness contracted under this subsection and the payment of the

The relevant tax exemption provision for these foreign loans states as follows:

principal, interest and other charges thereon, as well as the importation of machinery, equipment,

The loans, credits and indebtedness contracted under this subsection and the payment of the

materials and supplies by the Corporation, paid from the proceeds of any loan, credit or

principal, interest and other charges thereon, as well as the importation of machinery, equipment,

indebtedeness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other

materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or

charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of

indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees,

its agencies and political subdivisions.

25

imposts, other charges and restrictions, including import restrictions previously and presently

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares

imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political

the non-profit character and tax exemptions of NPC as follows:

subdivisions.32 (Emphasis supplied)

The Corporation shall be non-profit and shall devote all its returns from its capital investment, as

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

well as excess revenues from its operation, for expansion. To enable the Corporation to pay its

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the Republic of

indebtedness and obligations and in furtherance and effective implementation of the policy

the Philippines, its provinces, cities, municipalities and other government agencies and

enunciated in Section one of this Act, the Corporation is hereby declared exempt:

instrumentalities including the taxes, duties, fees, imposts and other charges provided for under the

(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in any

Tariff and Customs Code of the Philippines, Republic Act Numbered Nineteen Hundred Thirty-

court or administrative proceedings in which it may be a party, restrictions and duties to the

Seven, as amended, and as further amended by Presidential Decree No. 34 dated October 27,

Republic of the Philippines, its provinces, cities, and municipalities and other government agencies

1972, and Presidential Decree No. 69, dated November 24, 1972, and costs and service fees in

and instrumentalities;

any court or administrative proceedings in which it may be a party;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government,

xxx xxx xxx

its provinces, cities, municipalities and other government agencies and instrumentalities;

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on

Republic of the Philippines, its provinces, cities, municipalities and other government agencies and

import of foreign goods required for its operations and projects; and

instrumentalities, on all petroleum products used by the Corporation in the generation,

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities, municipalities

transmission, utilization and sale of electric power. 33 (Emphasis supplied)

and other government agencies and instrumentalities, on all petroleum products used by the

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of

Corporation in the generation, transmission, utilization, and sale of electric power. 26

electricity to its different customers. 34 No tax exemption provision was amended, deleted or added.

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the electrification of

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated

the entire country was one of the primary concerns of the country. And in connection with this, it

annually to cover the unpaid subscription of the Government in the NPC authorized capital stock,

was specifically stated that:

which amount would be taken from taxes accruing to the General Funds of the Government,

The setting up of transmission line grids and the construction of associated generation facilities in

proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of

Luzon, Mindanao and major islands of the country, including the Visayas, shall be the responsibility

Finance for this particular purpose. 35

of the National Power Corporation (NPC) as the authorized implementing agency of the State.

27

On May 27, 1976 P.D. No. 938 was issued

xxx xxx xxx

(I)n view of the accelerated expansion programs for generation and transmission facilities which

It is the ultimate objective of the State for the NPC to own and operate as a single integrated

includes nuclear power generation, the present capitalization of National Power Corporation (NPC)

system all generating facilities supplying electric power to the entire area embraced by any grid set

and the ceilings for domestic and foreign borrowings are deemed insufficient;

up by the NPC. 28

xxx xxx xxx

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill

(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit character

its role under aforesaid P.D. No. 40. Its authorized capital stock was raised to

of NPC has not been fully utilized because of restrictive interpretation of the taxing agencies of the

P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a maximum of

government on said provisions; 37

xxx xxx xxx

36

(I)n order to effect the accelerated expansion program and attain the declared objective of total

or business firm adversely affected by any decision or ruling of the Inter-Agency Committee may

electrification of the country, further amendments of certain sections of Republic Act No. 6395, as

file an appeal with the Office of the President within ten days from the date of notice thereof. . . . .

amended by Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38

xxx xxx xxx

Thus NPC's capital stock was raised to P8,000,000,000.00,

39

the total domestic indebtedness

ceiling was increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to
US$4,000,000,000.00

41

and Section 13 of R.A. No. 6395, was amended to read as follows:

Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all general and
special laws and decrees are hereby amended accordingly.
xxx xxx xxx

The Corporation shall be non-profit and shall devote all its returns from its capital investment as

On July 30, 1977, P.D. 1177 was issued as it was

well as excess revenues from its operation, for expansion. To enable the Corporation to pay to its

. . . declared the policy of the State to formulate and implement a National Budget that is an

indebtedness and obligations and in furtherance and effective implementation of the policy

instrument of national development, reflective of national objectives, strategies and plans. The

enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared

budget shall be supportive of and consistent with the socio-economic development plan and shall

exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service

be oriented towards the achievement of explicit objectives and expected results, to ensure that

fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative

funds are utilized and operations are conducted effectively, economically and efficiently. The

proceedings.

42

national budget shall be formulated within a context of a regionalized government structure and of

II

the totality of revenues and other receipts, expenditures and borrowings of all levels of

On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177,

government-owned or controlled corporations. The budget shall likewise be prepared within the

1931 and Executive Order No. 93 (S'86).

context of the national long-term plan and of a long-term budget program.

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard

In line with such policy, the law decreed that

to imports as follows:

All units of government, including government-owned or controlled corporations, shall pay income

WHEREAS, importations by certain government agencies, including government-owned or

taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that

controlled corporation, are exempt from the payment of customs duties and compensating tax; and

organizations otherwise exempted by law from the payment of such taxes/duties may ask for a

WHEREAS, in order to reduce foreign exchange spending and to protect domestic industries, it is

subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a

necessary to restrict and regulate such tax-free importations.

procedure shall be established by the Secretary of Finance and the Commissioner of the Budget,

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

whereby such subsidies shall automatically be considered as both revenue and expenditure of the

powers vested in me by the Constitution, and do hereby decree and order the following:

General Fund. 44

Sec. 1. All importations of any government agency, including government-owned or controlled

The law also declared that

corporations which are exempt from the payment of customs duties and internal revenue taxes,

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent

shall be subject to the prior approval of an Inter-Agency Committee which shall insure compliance

with the provisions of the Decree are hereby repealed and/or modified accordingly. 45

with the following conditions:

On July 11, 1984, most likely due to the economic morass the Government found itself in after the

(a) That no such article of local manufacture are available in sufficient quantity and comparable

Aquino assassination, P.D. No. 1931 was issued to reiterate that:

quality at reasonable prices;

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax

(b) That the articles to be imported are directly and actually needed and will be used exclusively by

privileges to any government-owned or controlled corporation and all other units of government;

the grantee of the exemption for its operations and projects or in the conduct of its functions; and

and since there was a

(c) The shipping documents covering the importation are in the name of the grantee to whom the

. . . need for government-owned or controlled corporations and all other units of government

goods shall be delivered directly by customs authorities.

enjoying tax privileges to share in the requirements of development, fiscal or otherwise, by paying

xxx xxx xxx

the duties, taxes and other charges due from them. 47

Sec. 3. The Committee shall have the power to regulate and control the tax-free importation of

it was decreed that:

government agencies in accordance with the conditions set forth in Section 1 hereof and the

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all exemptions

regulations to be promulgated to implement the provisions of this Decree. Provided, however, That

from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of

any government agency or government-owned or controlled corporation, or any local manufacturer

government-owned or controlled corporations including their subsidiaries, are hereby withdrawn.

43

46

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation

(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to

of the Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby

Presidential Decree No. 538, was amended.

empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above, any

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instructions

applicable tax and duty, taking into account, among others, any or all of the following:

No. 1416;

1) The effect on the relative price levels;

e) those conferred under the four basic codes namely:

2) The relative contribution of the corporation to the revenue generation effort;

(i) the Tariff and Customs Code, as amended;

3) The nature of the activity in which the corporation is engaged in; or

(ii) the National Internal Revenue Code, as amended;

4) In general the greater national interest to be served.

(iii) the Local Tax Code, as amended;

xxx xxx xxx

(iv) the Real Property Tax Code, as amended;

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees,

f) those approved by the President upon the recommendation of the Fiscal Incentives Review

executive orders, administrative orders, rules, regulations or parts thereof which are inconsistent

Board.

with this Decree are hereby repealed, amended or modified accordingly.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential

amended, is hereby authorized to:

restoration or grant of tax exemption to other government and private entities without benefit of

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

review by the Fiscal Incentives Review Board, to wit:

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14,

c) impose conditions for the restoration of tax and/or duty exemption;

1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax

d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption;

treatment, of government and private entities with certain exceptions, in order that the

e) formulate and submit to the President for approval, a complete system for the grant of subsidies

requirements of national economic development, in terms of fiscals and other resources, may be

to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty

met more adequately;

exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible

xxx xxx xxx

beneficiaries and the terms and conditions for the grant thereof taking into consideration the

WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal

international commitment of the Philippines and the necessary precautions such that the grant of

Incentives Review Board (FIRB), a number of affected entities, government and private, had their

subsidies does not become the basis for countervailing action.

tax and duty exemption privileges restored or granted by Presidential action without benefit or

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take

review by the Fiscal Incentives Review Board (FIRB);

into account any or all of the following considerations:

xxx xxx xxx

a) the effect on relative price levels;

Since it was decided that:

b) relative contribution of the beneficiary to the revenue generation effort;

[A]ssistance to government and private entities may be better provided where necessary by explicit

c) nature of the activity the beneficiary is engaged; and

subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the

d) in general, the greater national interest to be served.

fiscal monitoring aspects of government operations.

xxx xxx xxx

It was thus ordered that:

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax and

Executive Order are hereby repealed or modified accordingly.

duty incentives granted to government and private entities are hereby withdrawn, except:

E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and

a) those covered by the non-impairment clause of the Constitution;

regulations, to be issued by the Ministry of Finance. 49 Said rules and regulations were promulgated

b) those conferred by effective internation agreement to which the Government of the Republic of

and published in the Official Gazette

the Philippines is a signatory;

on February 23, 1987. These became effective on the 15th day after promulgation

c) those enjoyed by enterprises registered with:

Gasetter,

(i) the Board of Investment pursuant to Presidential Decree No. 1789, as amended;

III

(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66 as amended;

51

which 15th day was March 10, 1987.

50

in the Official

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in

xxx xxx xxx

their TAXATION I course, which fro convenient reference, is as follows:

(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the

Classifications or kinds of Taxes:

Philippines, its provinces, cities, municipalities and other government agencies and

According to Persons who pay or who bear the burden:

instrumentalities, on all petroleum products used by the Corporation in the generation,

a. Direct Tax the where the person supposed to pay the tax really pays it. WITHOUT transferring

transmission, utilization, and sale of electric power.

the burden to someone else.

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax),

follows:

residence tax, immigration tax

xxx xxx xxx

b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the consumer who

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the

ultimately pays for it, not as a tax, but as a part of the purchase price.

Republic of the Philippines, its provinces, cities, municipalities and other government agencies and

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff
and customs indirect taxes (import duties, special import tax and other dues)

52

instrumentalities, on all petroleum products used by the Corporation in the generation,

transmission, utilization and sale of electric power. (Emphasis supplied)

IV

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to

paragraph as follows:

the following:

The Corporation shall be non-profit and shall devote all its returns from its capital investment as

(1) What kind of tax exemption privileges did NPC have?

well as excess revenues from its operation, for expansion. To enable the Corporation to pay its

(2) For what periods in time were these privileges being enjoyed?

indebtedness and obligations and in furtherance and effective implementation of the policy

(3) If there are taxes to be paid, who shall pay for these taxes?

enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared

exempt from the payment of ALL FORMS OF taxes, duties, fees, imposts as well as costs and

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all

service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative

forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D.

proceedings. (Emphasis supplied)

No. 380, does not expressly include "indirect taxes."

Petitioner reminds Us that:

His point is not well-taken.

[I]t must be borne in mind that Presidential Decree Nos. 380

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the

and 938 were issued by one man, acting as such the Executive and Legislative. 53

NPC was to be completely tax exempt from all forms of taxes direct and indirect.

xxx xxx xxx

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its

[S]ince both presidential decrees were made by the same person, it would have been very easy for

operations upon its creation by virtue of C.A. No. 120.

him to retain the same or similar language used in P.D. No. 380 P.D. No. 938 if his intention were to

When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained

preserve the indirect tax exemption of NPC. 54

were to be completely tax exempt.

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his

After the NPC was authorized to borrow from other sources of funds aside issuance of bonds

fault were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the

it was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness."

following items:

Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax

13(a) : court or administrative proceedings;

exemption privileges of the NPC were maintained.

13(b) : income, franchise, realty taxes;

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No.

13(c) : import of foreign goods required for its operations and projects;

987, as above stated. The exemption was, however, restored by R.A. No. 6395.

13(d) : petroleum products used in generation of electric power.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,",

allowed NPC. Its section 13(d) is the starting point of this bone of contention among the parties.

included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax

For easy reference, it is reproduced as follows:

exemptions.

[T]he Corporation is hereby declared exempt:

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of

the tax exemption stood as is with the express mention of "direct

enactment or issuance as narrated above in part I hereof. President Marcos must have considered

and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to

all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395

"taxes, fees, imposts, other charges . . . to be imposed" in the future surely, an indication that

and P.D. No. 759, AND came up

55

with a very simple Section 13, R.A. No. 6395, as amended by

the lawmakers wanted the NPC to be exempt from ALL FORMS of taxes direct and indirect.

P.D. No. 938.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and

One common theme in all these laws is that the NPC must be enable to pay its

indirect taxes under P.D. No. 938.

indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any

VI

one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be

Five (5) years on into the now discredited New Society, the Government decided to rationalize

exempt from all forms of taxes if this goal is to be achieved.

government receipts and expenditures by formulating and implementing a National Budget.

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that

NPC, being a government owned and controlled corporation had to be shed off its tax exemption

to pay the government share in its capital stock P.D. No. 758 was issued mandating that P200

status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the

Million would be appropriated annually to cover the said unpaid subscription of the Government in

General Fund in the exact amount of taxes/duties due.

NPC's authorized capital stock. And significantly one of the sources of this annual appropriation of

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It

P200 million is TAX MONEY accruing to the General Fund of the Government. It does not stand to

allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-

reason then that former President Marcos would order P200 Million to be taken partially or totally

free importation privileges under its Section 1, subject to the prior approval of an Inter-Agency

from tax money to be used to pay the Government subscription in the NPC, on one hand, and then

Committed created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special

order the NPC to pay all its indirect taxes, on the other.

creation of the State, was allowed to continue its tax-free importations.

The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into

This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of

the phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax

NPC's tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private

exemption provision for the foreign loans to be incurred.

Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

the motion for Reconsideration had been filed. During oral arguments heard on July 9, 1992, he

The loans, credits and indebtedness contracted under this subsection and the payment of the

proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice

principal, interest and other charges thereon, as well as the importation of machinery, equipment,

Vicente Abad Santos in opinion No. 133 (S '77). 62 A careful perusal of petitioner's senate Blue

materials and supplies by the Corporation, paid from the proceeds of any loan, credit or

Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield any mention of said

indebtedness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other

P.D. No. 1177's effect on NPC's tax exemption privileges.

charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of
its agencies and political subdivisions.

57

Pablo,

64

63

60

The

Applying by analogy Pulido vs.

the court declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption

privileges was not seasonably invoked

65

by the petitioner.

The same was amended by P.D. No. 380 as follows:

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax

The loans, credits and indebtedness contracted this subsection and the payment of the principal,

exemption privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal

interest and other charges thereon, as well as the importation of machinery, equipment, materials,

of tax privileges of any government-owned or controlled corporation (GOCC). NPC included, was

supplies and services, by the Corporation, paid from the proceeds of any loan, credit or

reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in

indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees,

Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed

imposts, other charges and restrictions, including import restrictions previously and presently

as the Fiscal Incentives Revenue Board was tasked with recommending the partial or total

imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political

restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.

58

subdivisions. (Emphasis supplied)

P.D. No. 938 did not amend the same

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in
59

and so the tax exemption provision in Section 8 (b), R.A.

Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had

No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular

to submit to the Office of the President its request for the P200 million mandated by P.D. No. 758 to

Section 8 (b) had to do only with loans and machinery imported, paid for from the proceeds of

be appropriated annually by the Government to cover its unpaid subscription to the NPC

these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so,

authorized capital stock and that under Section 22, of the same P.D. No. NPC had to likewise

submit to the Office of the President its internal operating budget for review due to capital inputs of

second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had

the government (P.D. No. 758) and to the national government's guarantee of the domestic and

been expressly repealed by Section 2 with its institution of the FIRB recommendation of partial/total

foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.

restoration of tax exemption privileges.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly

The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax

found themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated

exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a

that the Secretary of Finance and the Commissioner of the Budget had to establish the necessary

subsidy for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total

procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC,

restoration of its tax exemption privileges, which, it did, and the same were granted under FIRB

did not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay

Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.

different revenue collectors for the taxes it had to pay.

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were

In his memorandum filed July 16, 1992, petitioner submits:

both legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and tax

tax exemption status but merely restored it. 69

exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to be restored

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now

under P.D. No. 1931, issued on June 11, 1984. This is evident from sections 1 and 2 of said P.D.

rather infamous Amendment No. 6 70 as there was no showing that President Marcos'

No. 1931, which reads:

encroachment on legislative prerogatives was justified under the then prevailing condition that he

"Section 1. The provisions of special or general law to the contrary notwithstanding, all exemptions

could legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately on any

from the payment of duties, taxes, fees, imports and other charges heretofore granted in favor of

matter that in his judgment required immediate action' to meet the 'exigency'.

government-owned or controlled corporations including their subsidiaries are hereby withdrawn."

Actually under said Amendment No. 6, then President Marcos could issue decrees not only when

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation

the Interim Batasang Pambansa failed or was unable to act adequately on any matter for any

of the Fiscal Incentives Review Board created under P.D. No. 776, is hereby empowered to restore

reason that in his (Marcos') judgment required immediate action, but also when there existed a

partially or totally, the exemptions withdrawn by section 1 above. . . .

grave emergency or a threat or thereof. It must be remembered that said Presidential Decree was

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had already

issued only around nine (9) months after the Philippines unilaterally declared a moratorium on its

lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years earlier or on

foreign debt payments 72 as a result of the economic crisis triggered by loss of confidence in the

July 30, 1977, there were no tax exemptions to be withdrawn by section 1 which could later be

government brought about by the Aquino assassination. The Philippines was then trying to

restored by the Minister of Finance upon the recommendation of the FIRB under Section 2 of P.D.

reschedule its debt payments. 73 One of the big borrowers was the NPC
75

74

71

which had a US$ 2.1

No. 1931. Consequently, FIRB resolutions No. 10-85, and 1-86, were all illegally and validly issued

billion white elephant of a Bataan Nuclear Power Plant on its back.

since FIRB acted beyond their statutory authority by creating and not merely restoring the tax

have been this grave emergency of a debt rescheduling which compelled Marcos to issue P.D. No.

exempt status of NPC. The same is true for FIRB Res. No. 17-87 which restored NPC's tax

1931, under his Amendment 6 power. 76

exemption under E.O. No. 93 which likewise abolished all duties and tax exemptions but allowed

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be

the President upon recommendation of the FIRB to restore those abolished.

passed without the concurrence of a majority of all the members of the Batasang

The Court disagrees.

Pambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim Batasang

Applying by analogy the weight of authority that:

Pambansa but by then President Marcos under His Amendment No. 6 power.

When a revised and consolidated act re-enacts in the same or substantially the same terms the

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6

provisions of the act or acts so revised and consolidated, the revision and consolidation shall be

authority.

taken to be a continuation of the former act or acts, although the former act or acts may be

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time,

expressly repealed by the revised and consolidated act; and all rights

President Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption

and liabilities under the former act or acts are preserved and may be enforced.

66

privileges. The same was granted under FIRB Resolution No. 17-87

From all indications, it must

78

dated June 24, 1987 which

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section

restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity of

23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No.

E.O. No. 93 (S'86).

1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the

FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no

And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the policy to be

indication, however, from the records of the case whether or not similar approvals were given by

carried out 85 and it fixed the standard to which the delegate had to conform in the performance of

then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to

his functions, 86 both qualities having been enunciated by this Court in Pelaez vs. Auditor

believe that a "travesty of justice" might have occurred when the Minister of Finance approved his

General. 87

own recommendation as Chairman of the Fiscal Incentives Review Board as what happened

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from

inZambales Chromate vs. Court of Appeals

80

when the Secretary of Agriculture and Natural

Resources approved a decision earlier rendered by him when he was the Director of Mines,
in Anzaldo vs. Clave

82

June 11, 1984 up to the present.

81

and

where Presidential Executive Assistant Clave affirmed, on appeal to

VII
The next question that projects itself is who pays the tax?

Malacaang, his own decision as Chairman of the Civil Service Commission. 83

The answer to the question could be gleamed from the manner by which the Commissaries of the

Upon deeper analysis, the question arises as to whether one can talk about "due process" being

Armed Forces of the Philippines sell their goods.

violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance

By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their

when the same were recommended by him in his capacity as Chairman of the Fiscal Incentives

defendants but groceries and other goods free of all taxes and duties if bought from any AFP

Review Board.

84

Commissaries.

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad

scientist-doctors, respectively. Thus, there was a need for procedural due process to be followed.

valorem and other taxes on the goods earmarked for AFP Commissaries as an added cost of

In the case of the tax exemption restoration of NPC, there is no other comparable entity not

operation and distribute it over the total units of goods sold as it would any other cost. Thus, even

even a single public or private corporation whose rights would be violated if NPC's tax

the ordinary supermarket buyer probably pays for the specific,ad valorem and other taxes which

exemption privileges were to be restored. While there might have been a MERALCO before Martial

theses suppliers do not charge the AFP Commissaries. 89

Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC in line

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb

with the State policy that NPC was to be the State implementing arm for the electrification of the

the taxes they add to the bunker fuel oil they sell to NPC.

entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders

was no more MERALCO as a producer of electricity which could have objected to the

an opinion, 90wherein he stated and We quote:

restoration of NPC's tax exemption privileges.

xxx xxx xxx

It should be noted that NPC was not asking to be granted tax exemption privileges for the first time.

Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees,

It was just asking that its tax exemption privileges be restored. It is for these reasons that, at least

imposts, charges, and restrictions of the Republic of the Philippines and its provinces, cities, and

in NPC's case, the recommendation and approval of NPC's tax exemption privileges under FIRB

municipalities." This exemption is broad enough to include all taxes, whether direct or indirect,

Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as

which the National Power Corporation may be required to pay, such as the specific tax on

Chairman of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not

petroleum products. That it is indirect or is of no amount [should be of no moment], for it is the

violate procedural due process.

corporation that ultimately pays it. The view which refuses to accord the exemption because the

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on

tax is first paid by the seller disregards realities and gives more importance to form than to

October 5, 1987, the view has been expressed that President Aquino, at least with regard to E.O.

substance. Equity and law always exalt substance over from.

93 (S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegate of the

xxx xxx xxx

legislature, the power delegated to her thereunder.

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge that

A misconception must be cleared up.

many impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and

granted the National Power Corporation to direct taxes notwithstanding the general and broad

Legislative powers. Thus, there was no power delegated to her, rather it was she who was

language of the statue will be to thwrat the legislative intention in giving exemption from all forms of

delegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a

taxes and impositions without distinguishing between those that are direct and those that are not.

delegate of the legislature. Clearly, she was not sub-delegating her power.

(Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply

are petitioner's complaints that some indirect tax money has been illegally refunded by the Bureau

bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the

of Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed

very nature of indirect taxation, the economic burden of such taxation is expected to be passed on

for payment by the BIR.

through the channels of commerce to the user or consumer of the goods sold. Because, however,

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the

the NPC has been exempted from both direct and indirect taxation, the NPC must beheld

NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad

exempted from absorbing the economic burden of indirect taxation. This means, on the one hand,

valorem taxes during the period from October 31, 1984 to April 27, 1985.

that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the

declare this Tax Credit Memo illegal as the PNC did not have indirect tax exemptions with the

taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from

enactment of P.D. No. 938. As We have already ruled otherwise, the only questions left are

indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the

whether NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oil

"normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid

purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded

by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies

the amount to NPC.

because to do so may be more convenient and ultimately less costly for NPC than NPC itself

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the

importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed by the

tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the BIR issues its

BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the

letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies

oil company-vendor to the BIR.

pursuant to FIRB Resolution No. 10-85. 92 Since the tax exemption restoration was retroactive to

It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes

June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had

HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of

already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the

which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said

period above indicated and had billed NPC correspondingly. 93 It should be noted that the NPC, in

E.O. no. 195 reads as follows:

its letter-claim dated September 11, 1985 to the Commissioner of the Bureau of Internal Revenue

EXECUTIVE ORDER NO. 195

DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE

part of the bunker fuel oil price it purchased from Caltex (Phils) Inc.

CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM

The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National

PRODUCTS.

Internal Revenue Code of 1977, as amended which reads as follows:

xxx xxx xxx

Sec. 230. Recover of tax erroneously or illegally collected. No suit or proceeding shall be

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended, is

maintained in any court for the recovery of any national internal revenue tax hereafter alleged to

hereby amended to read as follows:

have been erroneously or illegally assessed or collected, or of any penalty claimed to have been

Par. (b) For products subject to ad valorem tax only:

collected without authority, or of any sum alleged to have been excessive or in any Manner

PRODUCT AD VALOREM TAX RATE

wrongfully collected. until a claim for refund or credit has been duly filed with the Commissioner;

1. . . .

but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been

2. . . .

paid under protest or duress.

3. . . .

In any case, no such suit or proceeding shall be begun after the expiration of two years from the

4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less the same

date of payment of the tax or penalty regardless of any supervening cause that may arise after

generating power 0%

payment; Provided, however, That the Commissioner may, even without a written claim therefor,

xxx xxx xxx

refund or credit any tax, where on the face of the return upon which payment was made, such

Sec. 3. This Executive Order shall take effect immediately.

payment appears clearly, to have been erroneously paid.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred and

xxx xxx xxx

eighty-seven. (Emphasis supplied)

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985,

The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is

correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.

going to bear the economic burden of the ad valorem taxes. What this Court will now dispose of

91

Petitioner asks Us to

94

95

the Commissioner

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for
P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the
BIR from June 11, 1984 to the early part of 1986. 96
A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when

PARAS, J.:

the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of
the Deed of Assignment 97executed by and between NPC and Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal Revenue
amounting to P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil purchases from
the Assignee (Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the
BIR from refunding said amount because of Our ruling that NPC has both direct and indirect tax

This petition for review seeks the reversal of the decision* of the
Court of Tax Appeals in CTA Case No. 2480 promulgated on
January 15, 1982 which set aside petitioner's assessment of
deficiency income tax inclusive of interest and surcharge as well
as compromise penalty for violation of bookkeeping regulations
charged against respondent.

exemption privileges. Neither can We order the BIR to refund said amount to NPC as there is no
pending petition for review on certiorariof a suit for its collection before Us. At any rate, at this point

The antecedental facts of the case are as follows:

in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously filed a
claim with the BIR because it is time-barred under Section 230 of the National Internal Revenue
Code of 1977. as amended, which states:
In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty REGARDLESS of any supervening cause that may arise
afterpayment. . . . (Emphasis supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by
NPC for the amount of P410,580,000.00 had been made on said date. it is clear that more than
two (2) years had already elapsed from said date. At the same time, We should note that there is
no legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed
by NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts
covered had actually been paid previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby
DENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL

for brevity), is a foreign corporation engaged in the business of
international air carriage. From 1959 to 1963, JAL did not have
planes that lifted or landed passengers and cargo in the
Philippines as it had not been granted then by the Civil
Aeronautics Board (CAB) a certificate of public convenience and
necessity to operate here. However, since mid-July, 1957, JAL
had maintained an officeat the Filipinas Hotel, Roxas Boulevard,
Manila. Said office did not sell tickets but was maintained merely
for the promotion of the company's public relations and to hand
out brochures, literature and other information playing up the
attractions of Japan as a tourist spot and the services enjoyed in
JAL planes.

AFFIRMED.
SO ORDERED.

G.R. No. 60714

March 6, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner

vs.
JAPAN AIR LINES, INC., and THE COURT OF TAX
APPEALS, Respondents.
The Solicitor General and Attys. F. R. Quiogue & F. T. Dumpit, for
respondents

On July 17, 1957, JAL constituted the Philippine Air Lines (PAL),
as its general sales agent in the Philippines. As an agent, PAL,
among other things, sold for and in behalf of JAL, plane tickets
and reservations for cargo spaces which were used by the
passengers or customers on the facilities of JAL.
On June 2, 1972, JAL received deficiency income tax assessment
notices and a demand letter from petitioner Commissioner of
Internal Revenue (hereinafter referred to as Commissioner for
brevity), all dated February 28, 1972, for a total amount of

P2,099,687.52 inclusive of 50% surcharge and interest, for years

1959 through 1963, computed as follows:

============= ============ =============

Compromise Penalty P 1,500.00

1959 1960 1961

Net income per P472,025.16 P476,671.48 P734,812.77
investigation
Tax due thereon 133,608.00 135,001.00 212,444.00
Add: 50% surch. 66,804.00 67,500.50 106,222.00
1/2% mo. int.

On June 19, 1972, JAL protested said assessments alleging that

as a non-resident foreign corporation, it was taxable only on
income from Philippine sources as determined under Section 37
of the Tax Code, and there being no such income during the
period in question, it was not liable for the deficiency income tax
liabilities assessed (Rollo, pp. 53-55). The Commissioner
resolved otherwise and in a letter-decision dated December 21,
1972, denied JAL's request for cancellaton of the assessment
(Ibid., p. 29).

(3 yrs.) 24,049.44 24,300.18 38,239.92

Total due P224,461.44 P226,801.68 P356,905.92
=========== =========== ===========

JAL therefore, elevated the case to the Court of Tax Appeals

which, in turn, reversed the decision (Ibid., pp. 51-76) and
thereafter denied the motion for reconsideration filed by the
Commissioner (Ibid., p. 77). Hence, this petition.
Petitioner raises two issues in this wise:

1962 1963 S U M M AR Y
Net income per P1,065,641.63 P1,550,230.48 P224,461.44
investigation
Tax due thereon 311,692.00 457,069.00 226,801.68
Add:50% surch. 155,846.00 228,534.50 356,905.92
1/2% mo. int. 523,642.56
(3 yrs.)
56,104.56 82,272.42 767,875.92
Total due P 523,642.56 P 767,875.92 P2,099,687.52

1. WHETHER OR NOT PROCEEDS FROM SALES OF JAPAN

AIR LINES TICKETS SOLD IN THE PHILIPPINES ARE
TAXABLE AS INCOME FROM SOURCES WITHIN THE
PHILIPPINES.
2. WHETHER OR NOT JAPAN AIR LINES IS A FOREIGN
CORPORATION ENGAGED IN TRADE OR BUSINESS IN THE
PHILIPPINES.
The petition is impressed with merit.
The issues in the case at bar have already been laid to rest in no
less than three cases resolved by this Court. Anent the first issue,
the landmark case of Commissioner of Internal Revenue vs.
British Overseas Airways Corporation (G.R. No.L-65773-74, April
30, 1987, 149 SCRA 395) has categorically ruled:
"The Tax Code defines `gross income' thus:

`Gross income' includes gains, profits, and income derived

from salaries, wages or compensation for personal service
of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales,
or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property;
also from interests, rents, dividends, securities, or the
transaction of any business carried on for gain or profit, or
gains, profits and income derived from any source
whatever" (Sec. 29(3);Emphasis supplied)
"The definition is broad and comprehensive to include
proceeds from sales of transport documents. The words
`income from any source whatever' disclose a legislative
policy to include all income not expressly exempted within
the class of taxable income under our laws. Income means
`cash received or its equivalent'; it is the amount of money
coming to a person within a specific time x x x; it means
something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income
tax law, `income' refers to the flow of wealth (Madrigal and
Paternol vs. Rafferty and Concepcion, 38 Phil. 414 [1918]).

wealth should share the burden of supporting the

government.
"x x x x x x
"True, Section 37(a) of the Tax Code, which enumerates
items of gross income from sources within the Philippines,
namely: (1) interest, (2) dividends, (3) service, (4) rentals
and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale
of tickets for international transportation. However, that
does not render it less an income from sources within the
Philippines.
Section 37, by its language does not intend the enumeration to be
exclusive. It merely directs that the types of income listed therein
be treated as income from sources within the Philippines. A
cursory reading of the section will show that it does not state that
it is an all-inclusive enumeration, and that no other kind of income
may be so considered (British Traders Insurance Co., Ltd. vs.
Commissioner of Internal Revenue, 13 SCRA 719 [1965]).
"x x x x x x

"x x x x x x
"x x x x x x
"The source of an income is the property, activity or service
that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were
also made here in Philippine currency. The situs of the
source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of

"The absence of flight operations to and from the

Philippines is not determinative of the source of income or
the situs of income taxation. x x x The test of taxability is
the `source'; and the source of an income is that activity x x
x which produced the income (Howden & Co., Ltd. vs.
Collector of Internal Revenue, 13 SCRA 601 [1965]).
Unquestionably, the passage documentations in these
cases were sold in the Philippines and the revenue
therefrom was derived from a business activity regularly
pursued within the Philippines. x x x The word `source'
conveys one essential Idea, that of origin, and the origin of
the income herein is the Philippines (Manila Gas
Corporation vs. Collector of Internal Revenue, 62 Phil. 895
[1935])."

The above ruling was adopted en toto in the subsequent case of

Commissioner of Internal Revenue vs. Air India and the Court of
Tax Appeals (G.R. No. L-72443, January 29, 1988, 157 SCRA
648) holding that the revenue derived from the sales of airplane
tickets through its agent Philippine Air Lines, Inc., here in the
Philippines, must be considered taxable income, and more
recently, in the case of Commissioner of Internal Revenue vs.
American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938,
December 19, 1989, 180 SCRA 274), it was likewise declared that
for the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activities
within this country regardless of the absence of flight operations
within Philippine territory.
Verily, JAL is a residentforeigncorporation under Section 84 (g) of
the NationalInternalRevenue Code of1939. Definitionofwhata
resident foreign corpora-tion is was likewise reproduced under
Section 20 of the 1977 Tax Code.
The BOAC Doctrine has expressed in unqualified terms:

incident to, and in progressive prosecution of commercial

gain or for the purpose and object of the business
organization (The Mentholatum Co., Inc., et al. vs. Anacleto
Mangaliman, et al., 72 Phil. 524 (1941); Section 1, R.A. No.
5455). In order that a foreign corporation may be regarded
as doing business within a State, there must be continuity
of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and
not one of a temporary character (Pacific Micronesian Line,
Inc. vs. Del Rosario and Peligon, 96 Phil. 23, 30, citing
Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-847
and Fisher's Philippine Law of Stock Corporation, p. 415).
There being no dispute that JAL constituted PAL as local agent to
sell its airline tickets, there can be no conclusion other than that
JAL is a resident foreign corporation, doing business in the
Philippines. Indeed, the sale of tickets is the very lifeblood of the
airline business, the generation of sales being the paramount
objective (Commissioner of Internal Revenue vs. British Overseas
Airways Corporation, supra). The case of CIR vs. American
Airlines, Inc. (supra) sums it up as follows:

"Under Section 20 of the 1977 Tax Code:

"(h) the term `resident foreign corporation' applies to a
foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein.
"(i) the term `non-resident foreign corporation' applies to a
foreign corporation not engaged in trade or business within
the Philippines and not having any office or place of
business therein."
"x x x. There is no specific criterion as to what constitutes
`doing' or `engaging in' or `transacting' business. Each
case must be judged in the light of its peculiar
environmental circumstances. The term implies continuity
of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally

"x x x, foreign airline companies which sold tickets in the

Philippines through their local agents, whether called
liaison offices, agencies or branches, were considered
resident foreign corporations engaged in trade or business
in the country. Such activities show continuity of
commercial dealings or arrangements and performance of
acts or works or the exercise of some functions normally
incident to and in progressive prosecution of commercial
gain or for the purpose and object of the business
organization."
Under Section 24 of Commonwealth Act No. 466 otherwise known
as the "National Internal Revenue Code of 1939", the applicable
law in the case at bar, resident foreign corporations are taxed
thirty percentum (30%) upon the amount by which their total net
income exceed one hundred thousand pesos. JAL is liable to pay
30% of its total net income for the years 1959 through 1963 as

contradistinguished from the computation arrived at by the

Commissioner as shown in the assessment. Apparently, the
Commissioner failed to specify the tax base on the total net
income of JAL in figuring out the total income due, i.e., whether
25% or 30% level.
Having established the tax liability of respondent JAL, the only
thing left to determine is the propriety of the 50% surcharge
imposed by petitioner. It appears that this must be answered in
the negative. As held in the case of CIR vs. Air India (supra):
"The 50% surcharge or fraud penalty provided in Section
72 of the National Internal Revenue Code is imposed on a
delinquent taxpayer who willfully neglects to file the
required tax return within the period prescribed by the law,
or who willfully files a false or fraudulent tax return, x x x.

"x x x x x x
"On the other hand, the same Section provides that if the
failure to file the required tax return is not due to willful
neglect, a penalty of 25% is to be added to the amount of
the tax due from the taxpayer."
Nowhere in the records of the case can be found that JAL
deliberately failed to file its income tax returns for the years
covered by the assessment. There was not even an attempt by
petitioner to prove the same or justify the imposition of the 50%
surcharge. All that petitioner did was to cite the provision of law
upon which the surcharge was based without explaining why it
was applicable to respondent's case. Such cannot be
countenanced for mere allegations are definitely not acceptable.
The willful neglect to file the required tax return or the fraudulent
intent to evade the payment of taxes, considering that the same is
accompanied by legal consequences, cannot be presumed (CIR
vs. Air India, supra). The fraud contemplated by law is actual and
constructive. It must be intentional fraud, consisting of deception

willfully and deliberately done or resorted to in order to induce

another to give up some legal right. Negligence, whether slight or
gross, is not equivalent to the fraud with intent to evade the tax
contemplated by the law. It must amount to intentional
wrongdoing with the sole object of evading the tax (Aznar v. Court
of Tax Appeals, G.R. No. L-20569, August 23, 1974, 58 SCRA
519). This was not proven to be so in the case of JAL as it
believed in good faith that it need not file the tax return for it had
no taxable income then. The element of fraud is lacking. At most,
only negligence may be imputed to JAL for not ascertaining the
dispensability of filing the tax returns. As such, JAL may be
subjected only to the 25% surcharge prescribed by the
aforequoted law.
As to the 1/2% interest per month, the same finds basis in Section
51(d) of the Tax Code then in force which states:
(d) Interest on deficiency. Interest upon the amount
determined as a deficiency shall be assessed at the same
time as the deficiency and shall be paid upon notice and
demand from the Commissioner of Internal Revenue; and
shall be collected as a part of the tax, at the rate of six per
centum per annum from the date prescribed for the
payment of the tax x x x; PROVIDED, That the maximum
amount that may be collected as interest on deficiency
shall in no case exceed the amount corresponding to a
period of three years, the present provisions regarding
prescription to the contrary notwithstanding.
The 6% interest per annum is the same as 1/2% interest per
month and petitioner correctly computed such interest equivalent
to three years which is the maximum set by the law.
On the other hand, the compromise penalty amounting to
P1,500.00 for violation of bookkeeping regulations appears to be
without support. The particular provision in the said regulations
allegedly violated was not even specified. Furthermore, the term
"compromise penalty" itself is not found among the penal
provisions of the Bookkeeping Regulations (Revenue Regulations

No. V-1, as amended, March 17, 1947, pp. 836-837, Revenue

Regulations Updated by Prof. Eustaquio Ordono, 1984). The
compromise penalty is therefore, improperly imposed.
In sum, the following schedule as recomputed illustrates the total
tax liability of the private respondent for the years 1959 through
1963 Net Income 30% of Net Income as Add 25% surcharge Add 6%
interest per Summary of Total Income Tax Due under under Sec.
72 NIRC annum for a maximum Tax Due from the
Secs. 24(a) and (b) of 1939 of 3 years under Private Respondent
(2) NIRC of 1939 Sec. 51(d) NIRC of
1939

conveying or removing passengers and cargo from one place to

another. It purports to tax the business of transportation. Being an
excise tax, the same can be levied by the State only when the
acts, privileges or businesses are done or performed within the
jurisdiction of the Philippines (Commissioner of Internal Revenue
v. British Overseas Airways Corporation, supra).
The subject matter of the case underconsideration is income tax,
a direct tax on the income of persons and other entities "of
whatever kind and in whatever form derived from any source."
Since the two cases treat of a different subject matter, the
decision in G.R. No. L-30041 cannot be res judicata with respect
to this case.

1960 476,671.48 143,001.44 35,750.36 25,740.25 204,492.05

PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the

decision of the Court of Tax Appeals in CTA Case No. 2480 is
SET ASIDE; and (c) private respondent JAL is ordered to pay the
amount of P1,703,177.40 as deficiency taxes for the fiscal years
1959 to 1963 inclusive of interest andsurcharges.

1961 734,812.77 220,443.83 55,110.95 39,679.88 315,234.66

SO ORDERED.

1962 1,065,641.63 319,692.48 79,923.12 399,615.60

G.R. No. L-52019 August 19, 1988

1963 1,550,230.48 465,069.14 116,267.28 581,336.42

vs.

P1,703,177.40

Efrain B. Trenas for plaintiff-appellee.

1959 P 472,025.16 P 141,607.54 P 35,401.88 P 25,489.35 P

202,498.77

Accordingly, private respondent is liable for unpaid taxes and

charges in the total amount of ONE MILLION SEVEN HUNDRED
THREE THOUSAND ONE HUNDRED SEVENTY SEVENAND
FORTY CENTAVOS (P1,703,177.40) The dismissal for lack of
merit by this Court of the appeal in JAL v. Commissioner of
Internal Revenue (G.R. No. L-30041) on February 3, 1969 is
not res judicata to the present case. The Tax Court ruled in that
case that the mere sale of tickets, unaccompanied by the physical
act of carriage of transportation, does not render the taxpayer
therein subject to the common carrier's tax. The common carrier's
tax is an excise tax, being a tax on the activity of transporting,

ILOILO BOTTLERS, INC., plaintiff-appellee,

CITY OF ILOILO, defendant-appellant.
Diosdado Garingalao for defendant-appellant.
CORTES, J.:
The fundamental issue in this appeal is whether the Iloilo Bottlers, Inc. which had its bottling plant
in Pavia, Iloilo, but which sold softdrinks in Iloilo City, is liable under Iloilo City tax Ordinance No. 5,
series of 1960, as amended, which imposes a municipal license tax on distributors of soft-drinks.
On July 12,1972, Iloilo Bottlers, Inc. filed a complaint docketed as Civil Case No. 9046 with the
Court of First Instance of Iloilo praying for the recovery of the sum of P3,329.20, which amount
allegedly constituted payments of municipal license taxes under Ordinance No. 5 series of 1960,
as amended, that the company paid under protest.
On November 15,1972, the parties submitted a partial stipulation of facts, the material portions of
which state

xxx xxx xxx

Manila vs. Bugsuk Lumber Co., L- 8255, July 11, 1957; Manila Trading & Supply Co., Inc. vs. City

2. That plaintiff is engaged in the business of bottling softdrinks under the trade name of Pepsi

of Manila L-1 2156, April 29, 1959; Central Azucarera de Don Pedro vs. City of Manila et al., G.R.

Cola And 7-up and selling the same to its customers, with a bottling plant situated at Barrio Ungca

No. L7679, September 29,1955; Cebu Portland Cement vs. City of Manila and City Treasurer of

Municipality of Pavia, Iloilo, Philippines and which is outside the jurisdiction of defendant;

Manila, L-1 4229,July 26,1960. A xerox copy of the said letter is attached as Annex "B" to the

3. That defendant enacted an ordinance on January 11, 1960 known as Ordinance No. 5, Series of

complaint and made an integral part hereof by reference. As a result of the said letter of the

1960 which ordinance was successively amended by Ordinance No. 28, Series of 1960; Ordinance

plaintiff, the defendant did not anymore press the plaintiff to pay the said municipal license tax;

No. 15, Series of 1964; and Ordinance No. 45, Series of 1964; which provides as follows:

9. That sometime on January 25, 1972, the defendant demanded from the plaintiff compliance with

Section l. Any person, firm or corporation engaged in the distribution, manufacture or bottling of

the said ordinance for 1972 in view of the fact that it was engaged in distribution of the softdrinks in

coca-cola, pepsi cola, tru-orange, seven-up and other soft drinks within the jurisdiction of the City

the City of Iloilo, and it further demanded from the plaintiff payment of back taxes from the time it

of Iloilo, shall pay a municipal license tax of ten (P0.10) centavos for every case of twenty-four

transferred its bottling plant to the Municipality of Pavia, Iloilo;

bottles; PROVIDED, HOWEVER, that softdrinks sold to the public at not more than five (P0.05)

10. That the plaintiff demurred to the said demand of the defendant raising as its jurisdiction the

centavos per bottle shall pay a tax of one and one half (P0.015) (centavos) per case of twenty four

reason that its bottling plant is situated outside the City of Iloilo and as bottler could not be

bottles.

considered as distributor under the said ordinance although it sells its product directly to the

Section 1-AFor purposes of this Ordinance, all deliveries and/or dispatches emanating or made

consumer, in line with the jurisprudence enunciated by the Supreme Court but due to insistence of

at the plant and all goods or stocks taken out of the plant for distribution, sale or exchange

the defendant, the plaintiff paid on April 20, 1972, the first quarter payment of the municipal licence

irrespective (of) where it would take place shall be covered by the operation of this Ordinance.

tax in the sum of P3,329.20, under protest, and thereafter has been paying defendant every

4. That prior to September, 1966, Santiago Syjuco Inc., owned and operated a bottling plant at

quarter under protest;

Muelle Loney Street, Iloilo City, which was doing business under the name of Seven-up Bottling

11. That on June l5, 1972,the defendant informed the plaintiff that it must pay all the taxes due

Company of the Philippines and bottled the soft-drinks Pepsi-Cola and 7-up; however sometime on

since July, 1968 up to the last quarter of 1971, otherwise it shall be constrained to cancel the

September 14,1966, Santiago Syjuco, Inc., informed all its employees that it (was) closing its Iloilo

operation of the business of the plaintiff, and because of this threat, and so as not to occasion

Plant due to financial losses and in fact closed the same and later sold the plant to the plaintiff Iloilo

disruption of its business operation, the plaintiff under protest agreed to the payment of the back

Bottlers, Inc.

taxes, on staggered basis, which was acceded to by the defendant;

5. That thereafter, plaintiff operated the said plant by bottling the soft drinks Pepsi-Cola and 7-up;

12. That as computed by the plaintiff the following are its softdrinks sold in Iloilo City since it

however, sometime in July 1968, plaintiff closed said bottling plant at Muelle Loney, Iloilo City, and

transferred its bottling plant from the City of Iloilo to Barrio Ungca Pavia, Iloilo in July 1968, to wit:

transferred its bottling operations to its new plant in Barrio Ungca, Municipality of Pavia, Province

No. of Cases sold

of Iloilo, and which is outside the jurisdiction of the City of Iloilo;

then still situated at Muelle Loney St., Iloilo City; but the plaintiff stopped paying the municipal

PEPSI-COLA
49,060
87,660
89,211
88,480
314,411
13. That the plaintiff does not maintain any store or commercial establishment in the City of Iloilo

license tax (after) October 21, 1968 (when) it transferred its plant to Barrio Ungca Municipality of

from which it distributes its products, but by means of a fleet of delivery trucks, plaintiff distributes

Pavia, Iloilo which is outside the jurisdiction of the City of Iloilo;

its products from its bottling plant at Barrio Ungca Municipality of Pavia, Iloilo, directly to its

7. That sometime on July 31, 1969, the defendant demanded from the plaintiff the payment of the

customers in the different towns of the Province of Iloilo as well as the City of Iloilo;

municipal license tax under the above-mentioned ordinance, a xerox copy of the said letter is

14. That the plaintiff is already paying the National Government a percentage Tax of 71/t, as

attached to the complaint as Annex "A" and made an integral part hereof by reference.

manufacturer's sales tax on all the softdrinks it manufactures as follows:

8. That plaintiff explained in a letter to the defendant that it could not anymore be liable to pay the

O.R. No. 4683995 - January, 1972 Sales P17,222.90

municipal license fee because its bottling plant (was) not anymore inside the City of Iloilo, and that

O.R. No. 5614767 - February " " 17,024.81

moreover, since it itself (sold) its own products to its (customers) directly, it could not be considered

O.R. No. .5614870 - March " " 17,589.19

as a distributor in line with the doctrines enunciated by the Supreme Court in the cases of City of

O.R. No. 5614891 - April " " 18,726.77

6. That from the time of (the) enactment (of the ordinance), the Seven Up Bottling Company of the
Philippines under Santiago Syjuco Inc., had been religiously paying the defendant City of Iloilo the
above- mentioned municipal license tax due therefrom for bottler because its bottling plant was

O.R. No. 5614897 - May " " 16,710.99

manufactures. In certain cases, however, a manufacturer may also be considered as engaged in

O.R. No. 5614935 - June " " 14,791.20

the separate business of selling its products.

O.R. No. 5614967 - July " " 13,952.00

To determine whether an entity engaged in the principal business of manufacturing, is likewise

O.R. No. 5614973 - August " " 15,726.16

engaged in the separate business of selling, its marketing system or sales operations must be

O.R. No. 56'L4999 - September " " 19,159.54

looked into.

and is also paying the municipal license tax to the municipality of Pavia, Iloilo in the amount of P

In several cases [See Central Azucarera de Don Pedro v. City of Manila and Sarmiento, supra;

l0,000.00 every year, plus a municipal license tax for engaging in its business to the municipality of

Cebu Portland Cement Co. v. City of Manila and the City Treasurer, 108 Phil. 1063 (1960); Caltex

Pavia in its amount of P2,000.00 every year.

(Philippines), Inc. v. City of Manila and Cudiamat, supra], this Court had occasion to distinguish two

xxx xxx xxx

marketing systems:

[Rollo, P. 10 (Record on Appeal, pp. 25-31)]

Under the first system, the manufacturer enters into sales transactions and invoices the sales at its

On the basis of the above stipulations, the court a quo rendered on January 26, 1973 a decision in

main office where purchase orders are received and approved before delivery orders are sent to

favor of Iloilo Bottlers, Inc. declaring the Corporation not liable under the ordinance and directing

the company's warehouses, where in turn actual deliveries are made. No warehouse sales are

the City of Iloilo to pay the sum of' P3,329.20. The decision was amended in an Order dated March

made; nor are separate stores maintained where products may be sold independently from the

15, 1973, so as to include the amounts paid by the company after the filing of the complaint. The

main office. The warehouses only serve as storage sites and delivery points of the products earlier

City of Iloilo appealed to the Court of Appeals which certified the case to this Court.

sold at the main office. Under the second system, sales transactions are entered into and perfected

The tax ordinance imposes a tax on persons, firms, and corporations engaged in the business of:

at stores or warehouses maintained by the company. Any one who desires to purchase the product

1. distribution of soft-drinks

may go to the store or warehouse and there purchase the merchandise. The stores and

2. manufacture of soft-drinks, and

warehouses serve as selling centers.

3. bottling of softdrinks within the territorial jurisdiction of the City of Iloilo.

Entities operating under the first system are NOT considered engaged in the separate business of

There is no question that after it transferred its plant to Pavia, Iloilo province, Iloilo Bottlers, Inc. no

selling or dealing in their products, independent of their manufacturing business. Entities operating

longer manufactured/bottled its softdrinks within Iloilo City. Thus, it cannot be taxed as one falling

under the second system are considered engaged in the separate business of selling.

under the second or the third type of business. The resolution of this case therefore hinges on

In the case at bar, the company distributed its softdrinks by means of a fleet of delivery trucks

whether the company may be considered engaged in the distribution of softdrinks in Iloilo City,

which went directly to customers in the different places in lloilo province. Sales transactions with

even after it had transferred its bottling plant to Pavia, so as to be within the purview of the

customers were entered into and sales were perfected and consummated by route salesmen.

ordinance.

Truck sales were made independently of transactions in the main office. The delivery trucks were

Iloilo Bottlers, Inc. disclaims liability on two grounds: First, it contends that since it is not engaged in

not used solely for the purpose of delivering softdrinks previously sold at Pavia. They served as

the independent business of distributing soft-drinks, but that its activity of selling is merely an

selling units. They were what were called, until recently, "rolling stores". The delivery trucks were

incident to, or is a necessary consequence of its main or principal business of bottling, then it is

therefore much the same as the stores and warehouses under the second marketing system. Iloilo

NOT liable under the city tax ordinance. Second, it claims that only manufacturers or bottlers

Bottlers, Inc. thus falls under the second category above. That is, the corporation was engaged in

having their plants inside the territorial jurisdiction of the city are covered by the ordinance.

the separate business of selling or distributing soft-drinks, independently of its business of bottling

The second ground is manifestly devoid of merit. It is clear from the ordinance that three types of

them.

activities are covered: (1) distribution, (2) manufacture and (3) bottling of softdrinks. A person

The tax imposed under Ordinance No. 5 is an excise tax. It is a tax on the privilege of distributing,

engaged in any or all of these activities is subject to the tax.

manufacturing or bottling softdrinks. Being an excise tax, it can be levied by the taxing authority

The first ground, however, merits serious consideration.

only when the acts, privileges or businesses are done or performed within the jurisdiction of said

This Court has always recognized that the right to manufacture implies the right to sell/distribute

authority [Commissioner of Internal Revenue v. British Overseas Airways Corp. and Court of

the manufactured products [See Central Azucarera de Don Pedro v. City of Manila and Sarmiento,

Appeals, G.R. Nos. 65773-74, April 30, 1987, 149 SCRA 395, 410.] Specifically, the situs of the act

97 Phil. 627 (1955); Caltex (Philippines), Inc. v. City of Manila and Cudiamat, G.R. No. L-22764,

of distributing, bottling or manufacturing softdrinks must be within city limits, before an entity

July 28, 1969, 28 SCRA 840, 843.] Hence, for tax purposes, a manufacturer does not necessarily

engaged in any of the activities may be taxed in Iloilo City.

become engaged in the separate business of selling simply because it sells the products it

As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no option but

for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the

to declare the company liable under the tax ordinance.

refund of the amount paid.

With the foregoing discussion, it becomes unnecessary to discuss the other issues raised by the

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

parties.

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for

WHEREFORE, the appealed decision is hereby REVERSED. The complaint in Civil Case No.

the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the

9046 is ordered DISMISSED. No Costs.

additional amounts of P1,000.00 and P1,800.00 as compromise penalties for violation of Section

SO ORDERED.

46 (requiring the filing of corporation returns) penalized under Section 74 of the National Internal

G.R. No. L-65773-74 April 30, 1987

Revenue Code (NIRC).

COMMISSIONER OF INTERNAL REVENUE, petitioner,

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In

vs.

a letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in

BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

the First Case but also re-issued in the Second Case the deficiency income tax assessment for

Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise penalty under Section
74 of the Tax Code. BOAC's request for reconsideration was denied by the CIR on 24 August 1973.

MELENCIO-HERRERA, J.:

This prompted BOAC to file the Second Case before the Tax Court praying that it be absolved of

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint

liability for deficiency income tax for the years 1969 to 1971.

Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January

This case was subsequently tried jointly with the First Case.

1983, which set aside petitioner's assessment of deficiency income taxes against respondent

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax

British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-

Court held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner

71, respectively, as well as its Resolution of 18 November, 1983 denying reconsideration.

Barnes and Company, Ltd., and later by Qantas Airways, during the period in question, do not

BOAC is a 100% British Government-owned corporation organized and existing under the laws of

constitute BOAC income from Philippine sources "since no service of carriage of passengers or

the United Kingdom It is engaged in the international airline business and is a member-signatory of

freight was performed by BOAC within the Philippines" and, therefore, said income is not subject to

the Interline Air Transport Association (IATA). As such it operates air transportation service and

Philippine income tax. The CTA position was that income from transportation is income from

sells transportation tickets over the routes of the other airline members. During the periods covered

services so that the place where services are rendered determines the source. Thus, in the

by the disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in

dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of

the Philippines, and was not granted a Certificate of public convenience and necessity to operate in

P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of

the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961

P534,132.08 for the fiscal years 1968-69 to 1970-71.

and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

did not carry passengers and/or cargo to or from the Philippines, although during the period

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

covered by the assessments, it maintained a general sales agent in the Philippines Wamer

1. Whether or not the revenue derived by private respondent British Overseas Airways Corporation

Barnes and Company, Ltd., and later Qantas Airways which was responsible for selling BOAC

(BOAC) from sales of tickets in the Philippines for air transportation, while having no landing rights

tickets covering passengers and cargoes. 1

here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.

G.R. No. 65773 (CTA Case No. 2373, the First Case)

2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC

business in the Philippines or has an office or place of business in the Philippines.

the aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to

3. In the alternative that private respondent may not be considered a resident foreign corporation

1963. This was protested by BOAC. Subsequent investigation resulted in the issuance of a new

but a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of thirty-

assessment, dated 16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.

five per cent (35%) of its gross income received from all sources within the Philippines.

BOAC paid this new assessment under protest.

Under Section 20 of the 1977 Tax Code:

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was

(h) the term resident foreign corporation engaged in trade or business within the Philippines or

denied by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition

having an office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in trade

or the transactions of any business carried on for gain or profile, or gains, profits, and income

or business within the Philippines and not having any office or place of business therein

derived from any source whatever (Sec. 29[3]; Emphasis supplied)

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific

The definition is broad and comprehensive to include proceeds from sales of transport documents.

criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must

"The words 'income from any source whatever' disclose a legislative policy to include all income

be judged in the light of its peculiar environmental circumstances. The term implies a continuity of

not expressly exempted within the class of taxable income under our laws." Income means "cash

commercial dealings and arrangements, and contemplates, to that extent, the performance of acts

received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it

or works or the exercise of some of the functions normally incident to, and in progressive

means something distinct from principal or capital. For, while capital is a fund, income is a flow. As
2

prosecution of commercial gain or for the purpose and object of the business organization. "In

used in our income tax law, "income" refers to the flow of wealth. 6

order that a foreign corporation may be regarded as doing business within a State, there must be

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-

continuity of conduct and intention to establish a continuous business, such as the appointment of

71 amounted to P10,428,368 .00. 7

a local agent, and not one of a temporary character.

Did such "flow of wealth" come from "sources within the Philippines",

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent

The source of an income is the property, activity or service that produced the income. 8 For the

in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and

source of income to be considered as coming from the Philippines, it is sufficient that the income is

issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series

derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is

corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)

the activity that produces the income. The tickets exchanged hands here and payments for fares

consequently allocating to the various airline companies on the basis of their participation in the

were also made here in Philippine currency. The site of the source of payments is the Philippines.

services rendered through the mode of interline settlement as prescribed by Article VI of the

The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection

Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions

accorded by the Philippine government. In consideration of such protection, the flow of wealth

which are normally incident to, and are in progressive pursuit of, the purpose and object of its

should share the burden of supporting the government.

organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it

very lifeblood of the airline business, the generation of sales being the paramount objective. There

constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of

should be no doubt then that BOAC was "engaged in" business in the Philippines through a local

the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to

agent during the period covered by the assessments. Accordingly, it is a resident foreign

transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket issued

corporation subject to tax upon its total net income received in the preceding taxable year from all

to members of the traveling public in general embraces within its terms all the elements to

sources within the Philippines. 5

constitute it a valid contract, binding upon the parties entering into the relationship.

Sec. 24. Rates of tax on corporations. ...

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within

(b) Tax on foreign corporations. ...

the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of

(2) Resident corporations. A corporation organized, authorized, or existing under the laws of any

real property, and (6) sale of personal property, does not mention income from the sale of tickets

foreign country, except a foreign fife insurance company, engaged in trade or business within the

for international transportation. However, that does not render it less an income from sources within

Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income

the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It

received in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)

merely directs that the types of income listed therein be treated as income from sources within the

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by

Philippines. A cursory reading of the section will show that it does not state that it is an all-inclusive

BOAC in the Philippines constitutes income from Philippine sources and, accordingly, taxable

enumeration, and that no other kind of income may be so considered. " 10

under our income tax laws.

BOAC, however, would impress upon this Court that income derived from transportation is income

The Tax Code defines "gross income" thus:

for services, with the result that the place where the services are rendered determines the source;

"Gross income" includes gains, profits, and income derived from salaries, wages or compensation

and since BOAC's service of transportation is performed outside the Philippines, the income

for personal service of whatever kind and in whatever form paid, or from profession, vocations,

derived is from sources without the Philippines and, therefore, not taxable under our income tax

trades,business, commerce, sales, or dealings in property, whether real or personal, growing out of

laws. The Tax Court upholds that stand in the joint Decision under review.

the ownership or use of or interest in such property; also from interests, rents, dividends, securities,

The absence of flight operations to and from the Philippines is not determinative of the source of

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE.

income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the

Private respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay

time pertinent to this case. The test of taxability is the "source"; and the source of an income is that

the amount of P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus

activity ... which produced the income. 11Unquestionably, the passage documentations in these

5% surcharge, and 1% monthly interest from April 16, 1972 for a period not to exceed three (3)

cases were sold in the Philippines and the revenue therefrom was derived from a activity regularly

years in accordance with the Tax Code. The BOAC claim for refund in the amount of P858,307.79

pursued within the Philippines. business a And even if the BOAC tickets sold covered the

is hereby denied. Without costs.

"transport of passengers and cargo to and from foreign cities", 12it cannot alter the fact that income

SO ORDERED.

from the sale of tickets was derived from the Philippines. The word "source" conveys one essential

G.R. No. 118295 May 2, 1997

idea, that of origin, and the origin of the income herein is the Philippines. 13

WIGBERTO E. TAADA and ANNA DOMINIQUE COSETENG, as members of the Philippine

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years

Senate and as taxpayers; GREGORIO ANDOLANA and JOKER ARROYO as members of the

covered by the questioned deficiency income tax assessments in these cases, or, from 1959 to

House of Representatives and as taxpayers; NICANOR P. PERLAS and HORACIO R.

1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24

MORALES, both as taxpayers; CIVIL LIBERTIES UNION, NATIONAL ECONOMIC

November, 1972, international carriers are now taxed as follows:

PROTECTIONISM ASSOCIATION, CENTER FOR ALTERNATIVE DEVELOPMENT INITIATIVES,

... Provided, however, That international carriers shall pay a tax of 2- per cent on their cross

LIKAS-KAYANG KAUNLARAN FOUNDATION, INC., PHILIPPINE RURAL RECONSTRUCTION

Philippine billings. (Sec. 24[b] [21, Tax Code).

MOVEMENT, DEMOKRATIKONG KILUSAN NG MAGBUBUKID NG PILIPINAS, INC., and

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the

PHILIPPINE PEASANT INSTITUTE, in representation of various taxpayers and as non-

term "gross Philippine billings," thus:

governmental organizations, petitioners,

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by

vs.

any international carrier doing business in the Philippines of passage documents sold therein,

EDGARDO ANGARA, ALBERTO ROMULO, LETICIA RAMOS-SHAHANI, HEHERSON

whether for passenger, excess baggage or mail provided the cargo or mail originates from the

ALVAREZ, AGAPITO AQUINO, RODOLFO BIAZON, NEPTALI GONZALES, ERNESTO

Philippines. ...

HERRERA, JOSE LINA, GLORIA. MACAPAGAL-ARROYO, ORLANDO MERCADO, BLAS

The foregoing provision ensures that international airlines are taxed on their income from Philippine

OPLE, JOHN OSMEA, SANTANINA RASUL, RAMON REVILLA, RAUL ROCO, FRANCISCO

sources. The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an

TATAD and FREDDIE WEBB, in their respective capacities as members of the Philippine

excise or percentage tax it would have been place under Title V of the Tax Code covering Taxes on

Senate who concurred in the ratification by the President of the Philippines of the

Business.

Agreement Establishing the World Trade Organization; SALVADOR ENRIQUEZ, in his

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of

capacity as Secretary of Budget and Management; CARIDAD VALDEHUESA, in her capacity

the appeal inJAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969,

as National Treasurer; RIZALINO NAVARRO, in his capacity as Secretary of Trade and

is res judicata to the present case. The ruling by the Tax Court in that case was to the effect that

Industry; ROBERTO SEBASTIAN, in his capacity as Secretary of Agriculture; ROBERTO DE

the mere sale of tickets, unaccompanied by the physical act of carriage of transportation, does not

OCAMPO, in his capacity as Secretary of Finance; ROBERTO ROMULO, in his capacity as

render the taxpayer therein subject to the common carrier's tax. As elucidated by the Tax Court,

Secretary of Foreign Affairs; and TEOFISTO T. GUINGONA, in his capacity as Executive

however, the common carrier's tax is an excise tax, being a tax on the activity of transporting,

Secretary, respondents.

conveying or removing passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by the State only when

PANGANIBAN, J.:

the acts, privileges or businesses are done or performed within the jurisdiction of the Philippines.

The emergence on January 1, 1995 of the World Trade Organization, abetted by the membership

The subject matter of the case under consideration is income tax, a direct tax on the income of

thereto of the vast majority of countries has revolutionized international business and economic

persons and other entities "of whatever kind and in whatever form derived from any source." Since

relations amongst states. It has irreversibly propelled the world towards trade liberalization and

the two cases treat of a different subject matter, the decision in one cannot be res judicata to the

economic globalization. Liberalization, globalization, deregulation and privatization, the third-

other.

millennium buzz words, are ushering in a new borderless world of business by sweeping away as
mere historical relics the heretofore traditional modes of promoting and protecting national

economies like tariffs, export subsidies, import quotas, quantitative restrictions, tax exemptions and

"intrudes, limits and/or impairs" the constitutional powers of both Congress and the Supreme Court,

currency controls. Finding market niches and becoming the best in specific industries in a market-

the instant petition before this Court assails the WTO Agreement for violating the mandate of the

driven and export-oriented global scenario are replacing age-old "beggar-thy-neighbor" policies

1987 Constitution to "develop a self-reliant and independent national economy effectively

that unilaterally protect weak and inefficient domestic producers of goods and services. In the

controlled by Filipinos . . . (to) give preference to qualified Filipinos (and to) promote the

words of Peter Drucker, the well-known management guru, "Increased participation in the world

preferential use of Filipino labor, domestic materials and locally produced goods."

economy has become the key to domestic economic growth and prosperity."

Simply stated, does the Philippine Constitution prohibit Philippine participation in worldwide trade

Brief Historical Background

liberalization and economic globalization? Does it proscribe Philippine integration into a global

To hasten worldwide recovery from the devastation wrought by the Second World War, plans for

economy that is liberalized, deregulated and privatized? These are the main questions raised in

the establishment of three multilateral institutions inspired by that grand political body, the

this petition for certiorari, prohibition andmandamus under Rule 65 of the Rules of Court praying (1)

United Nations were discussed at Dumbarton Oaks and Bretton Woods. The first was the World

for the nullification, on constitutional grounds, of the concurrence of the Philippine Senate in the

Bank (WB) which was to address the rehabilitation and reconstruction of war-ravaged and later

ratification by the President of the Philippines of the Agreement Establishing the World Trade

developing countries; the second, the International Monetary Fund (IMF) which was to deal with

Organization (WTO Agreement, for brevity) and (2) for the prohibition of its implementation and

currency problems; and the third, the International Trade Organization (ITO), which was to foster

enforcement through the release and utilization of public funds, the assignment of public officials

order and predictability in world trade and to minimize unilateral protectionist policies that invite

and employees, as well as the use of government properties and resources by respondent-heads

challenge, even retaliation, from other states. However, for a variety of reasons, including its non-

of various executive offices concerned therewith. This concurrence is embodied in Senate

ratification by the United States, the ITO, unlike the IMF and WB, never took off. What remained

Resolution No. 97, dated December 14, 1994.

was only GATT the General Agreement on Tariffs and Trade. GATT was a collection of treaties

The Facts

governing access to the economies of treaty adherents with no institutionalized body administering

On April 15, 1994, Respondent Rizalino Navarro, then Secretary of The Department of Trade and

the agreements or dependable system of dispute settlement.

Industry (Secretary Navarro, for brevity), representing the Government of the Republic of the

After half a century and several dizzying rounds of negotiations, principally the Kennedy Round,

Philippines, signed in Marrakesh, Morocco, the Final Act Embodying the Results of the Uruguay

the Tokyo Round and the Uruguay Round, the world finally gave birth to that administering body

Round of Multilateral Negotiations (Final Act, for brevity).

the World Trade Organization with the signing of the "Final Act" in Marrakesh, Morocco and the

By signing the Final Act, 2 Secretary Navarro on behalf of the Republic of the Philippines, agreed:

ratification of the WTO Agreement by its members.

(a) to submit, as appropriate, the WTO Agreement for the consideration of their respective

Like many other developing countries, the Philippines joined WTO as a founding member with the

competent authorities, with a view to seeking approval of the Agreement in accordance with their

goal, as articulated by President Fidel V. Ramos in two letters to the Senate (infra), of improving

procedures; and

"Philippine access to foreign markets, especially its major trading partners, through the reduction of

(b) to adopt the Ministerial Declarations and Decisions.

tariffs on its exports, particularly agricultural and industrial products." The President also saw in the

On August 12, 1994, the members of the Philippine Senate received a letter dated August 11, 1994

WTO the opening of "new opportunities for the services sector . . . , (the reduction of) costs and

from the President of the Philippines, 3 stating among others that "the Uruguay Round Final Act is

uncertainty associated with exporting . . . , and (the attraction of) more investments into the

hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII of the

country." Although the Chief Executive did not expressly mention it in his letter, the Philippines

Constitution."

and this is of special interest to the legal profession will benefit from the WTO system of dispute

On August 13, 1994, the members of the Philippine Senate received another letter from the

settlement by judicial adjudication through the independent WTO settlement bodies called (1)

President of the Philippines 4 likewise dated August 11, 1994, which stated among others that "the

Dispute Settlement Panels and (2) Appellate Tribunal. Heretofore, trade disputes were settled

Uruguay Round Final Act, the Agreement Establishing the World Trade Organization, the

mainly through negotiations where solutions were arrived at frequently on the basis of relative

Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial

bargaining strengths, and where naturally, weak and underdeveloped countries were at a

Services are hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII

disadvantage.

of the Constitution."

The Petition in Brief

On December 9, 1994, the President of the Philippines certified the necessity of the immediate

Arguing mainly (1) that the WTO requires the Philippines "to place nationals and products of

adoption of P.S. 1083, a resolution entitled "Concurring in the Ratification of the Agreement

member-countries on the same footing as Filipinos and local products" and (2) that the WTO

Establishing the World Trade Organization." 5

On December 14, 1994, the Philippine Senate adopted Resolution No. 97 which "Resolved, as it is

World Trade Organization and the agreements and associated legal instruments included in

hereby resolved, that the Senate concur, as it hereby concurs, in the ratification by the President of

Annexes one (1), two (2) and three (3) of that Agreement which are integral parts thereof, signed at

the Philippines of the Agreement Establishing the World Trade Organization." 6 The text of the WTO

Marrakesh, Morocco on 15 April 1994, do hereby ratify and confirm the same and every Article and

Agreement is written on pages 137 et seq. of Volume I of the 36-volume Uruguay Round of

Clause thereof.

Multilateral Trade Negotiations and includes various agreements and associated legal instruments

To emphasize, the WTO Agreement ratified by the President of the Philippines is composed of the

(identified in the said Agreement as Annexes 1, 2 and 3 thereto and collectively referred to as

Agreement Proper and "the associated legal instruments included in Annexes one (1), two (2) and

Multilateral Trade Agreements, for brevity) as follows:

three (3) of that Agreement which are integral parts thereof."

ANNEX 1

On the other hand, the Final Act signed by Secretary Navarro embodies not only the WTO

Annex 1A: Multilateral Agreement on Trade in Goods

Agreement (and its integral annexes aforementioned) but also (1) the Ministerial Declarations and

General Agreement on Tariffs and Trade 1994

Decisions and (2) the Understanding on Commitments in Financial Services. In his Memorandum

Agreement on Agriculture

dated May 13, 1996, 8 the Solicitor General describes these two latter documents as follows:

Agreement on the Application of Sanitary and

The Ministerial Decisions and Declarations are twenty-five declarations and decisions on a wide

Phytosanitary Measures

range of matters, such as measures in favor of least developed countries, notification procedures,

Agreement on Textiles and Clothing

relationship of WTO with the International Monetary Fund (IMF), and agreements on technical

Agreement on Technical Barriers to Trade

barriers to trade and on dispute settlement.

Agreement on Trade-Related Investment Measures

The Understanding on Commitments in Financial Services dwell on, among other things, standstill

Agreement on Implementation of Article VI of he

or limitations and qualifications of commitments to existing non-conforming measures, market

General Agreement on Tariffs and Trade

access, national treatment, and definitions of non-resident supplier of financial services,

1994

commercial presence and new financial service.

Agreement on Implementation of Article VII of the

On December 29, 1994, the present petition was filed. After careful deliberation on respondents'

General on Tariffs and Trade 1994

comment and petitioners' reply thereto, the Court resolved on December 12, 1995, to give due

Agreement on Pre-Shipment Inspection

course to the petition, and the parties thereafter filed their respective memoranda. The court also

Agreement on Rules of Origin

requested the Honorable Lilia R. Bautista, the Philippine Ambassador to the United Nations

Agreement on Imports Licensing Procedures

stationed in Geneva, Switzerland, to submit a paper, hereafter referred to as "Bautista Paper," 9 for

Agreement on Subsidies and Coordinating

brevity, (1) providing a historical background of and (2) summarizing the said agreements.

Measures

During the Oral Argument held on August 27, 1996, the Court directed:

Agreement on Safeguards

(a) the petitioners to submit the (1) Senate Committee Report on the matter in controversy and (2)

Annex 1B: General Agreement on Trade in Services and Annexes

the transcript of proceedings/hearings in the Senate; and

Annex 1C: Agreement on Trade-Related Aspects of Intellectual

(b) the Solicitor General, as counsel for respondents, to file (1) a list of Philippine treaties signed

Property Rights

prior to the Philippine adherence to the WTO Agreement, which derogate from Philippine

ANNEX 2

sovereignty and (2) copies of the multi-volume WTO Agreement and other documents mentioned in

Understanding on Rules and Procedures Governing

the Final Act, as soon as possible.

the Settlement of Disputes

After receipt of the foregoing documents, the Court said it would consider the case submitted for

ANNEX 3

resolution. In a Compliance dated September 16, 1996, the Solicitor General submitted a printed

Trade Policy Review Mechanism

copy of the 36-volume Uruguay Round of Multilateral Trade Negotiations, and in another

On December 16, 1994, the President of the Philippines signed 7 the Instrument of Ratification,

Compliance dated October 24, 1996, he listed the various "bilateral or multilateral treaties or

declaring:

international instruments involving derogation of Philippine sovereignty." Petitioners, on the other

NOW THEREFORE, be it known that I, FIDEL V. RAMOS, President of the Republic of the

hand, submitted their Compliance dated January 28, 1997, on January 30, 1997.

Philippines, after having seen and considered the aforementioned Agreement Establishing the

The Issues

In their Memorandum dated March 11, 1996, petitioners summarized the issues as follows:

concurrence in the ratification of the WTO Agreement. The foregoing notwithstanding, this Court

A. Whether the petition presents a political question or is otherwise not justiciable.

resolved to deal with these three issues thus:

B. Whether the petitioner members of the Senate who participated in the deliberations and voting

(1) The "political question" issue being very fundamental and vital, and being a matter that

leading to the concurrence are estopped from impugning the validity of the Agreement Establishing

probes into the very jurisdiction of this Court to hear and decide this case was deliberated upon

the World Trade Organization or of the validity of the concurrence.

by the Court and will thus be ruled upon as the first issue;

C. Whether the provisions of the Agreement Establishing the World Trade Organization contravene

(2) The matter of estoppel will not be taken up because this defense is waivable and the

the provisions of Sec. 19, Article II, and Secs. 10 and 12, Article XII, all of the 1987 Philippine

respondents have effectively waived it by not pursuing it in any of their pleadings; in any event, this

Constitution.

issue, even if ruled in respondents' favor, will not cause the petition's dismissal as there are

D. Whether provisions of the Agreement Establishing the World Trade Organization unduly limit,

petitioners other than the two senators, who are not vulnerable to the defense of estoppel; and

restrict and impair Philippine sovereignty specifically the legislative power which, under Sec. 2,

(3) The issue of alleged grave abuse of discretion on the part of the respondent senators will be

Article VI, 1987 Philippine Constitution is "vested in the Congress of the Philippines";

taken up as an integral part of the disposition of the four issues raised by the Solicitor General.

E. Whether provisions of the Agreement Establishing the World Trade Organization interfere with

During its deliberations on the case, the Court noted that the respondents did not question

the exercise of judicial power.

the locus standi of petitioners. Hence, they are also deemed to have waived the benefit of such

F. Whether the respondent members of the Senate acted in grave abuse of discretion amounting to

issue. They probably realized that grave constitutional issues, expenditures of public funds and

lack or excess of jurisdiction when they voted for concurrence in the ratification of the

serious international commitments of the nation are involved here, and that transcendental public

constitutionally-infirm Agreement Establishing the World Trade Organization.

interest requires that the substantive issues be met head on and decided on the merits, rather than

G. Whether the respondent members of the Senate acted in grave abuse of discretion amounting

skirted or deflected by procedural matters. 11

to lack or excess of jurisdiction when they concurred only in the ratification of the Agreement

To recapitulate, the issues that will be ruled upon shortly are:

Establishing the World Trade Organization, and not with the Presidential submission which

(1) DOES THE PETITION PRESENT A JUSTICIABLE CONTROVERSY? OTHERWISE STATED,

included the Final Act, Ministerial Declaration and Decisions, and the Understanding on

DOES THE PETITION INVOLVE A POLITICAL QUESTION OVER WHICH THIS COURT HAS NO

Commitments in Financial Services.

JURISDICTION?

On the other hand, the Solicitor General as counsel for respondents "synthesized the several
issues raised by petitioners into the following":

10

(2) DO THE PROVISIONS OF THE WTO AGREEMENT AND ITS THREE ANNEXES
CONTRAVENE SEC. 19, ARTICLE II, AND SECS. 10 AND 12, ARTICLE XII, OF THE PHILIPPINE

1. Whether or not the provisions of the "Agreement Establishing the World Trade Organization and

CONSTITUTION?

the Agreements and Associated Legal Instruments included in Annexes one (1), two (2) and three

(3) DO THE PROVISIONS OF SAID AGREEMENT AND ITS ANNEXES LIMIT, RESTRICT, OR

(3) of that agreement" cited by petitioners directly contravene or undermine the letter, spirit and

IMPAIR THE EXERCISE OF LEGISLATIVE POWER BY CONGRESS?

intent of Section 19, Article II and Sections 10 and 12, Article XII of the 1987 Constitution.

(4) DO SAID PROVISIONS UNDULY IMPAIR OR INTERFERE WITH THE EXERCISE OF

2. Whether or not certain provisions of the Agreement unduly limit, restrict or impair the exercise of

JUDICIAL POWER BY THIS COURT IN PROMULGATING RULES ON EVIDENCE?

legislative power by Congress.

(5) WAS THE CONCURRENCE OF THE SENATE IN THE WTO AGREEMENT AND ITS

3. Whether or not certain provisions of the Agreement impair the exercise of judicial power by this

ANNEXES SUFFICIENT AND/OR VALID, CONSIDERING THAT IT DID NOT INCLUDE THE

Honorable Court in promulgating the rules of evidence.

FINAL ACT, MINISTERIAL DECLARATIONS AND DECISIONS, AND THE UNDERSTANDING ON

4. Whether or not the concurrence of the Senate "in the ratification by the President of the

COMMITMENTS IN FINANCIAL SERVICES?

Philippines of the Agreement establishing the World Trade Organization" implied rejection of the

The First Issue: Does the Court

treaty embodied in the Final Act.

Have Jurisdiction Over the Controversy?

By raising and arguing only four issues against the seven presented by petitioners, the Solicitor

In seeking to nullify an act of the Philippine Senate on the ground that it contravenes the

General has effectively ignored three, namely: (1) whether the petition presents a political question

Constitution, the petition no doubt raises a justiciable controversy. Where an action of the

or is otherwise not justiciable; (2) whether petitioner-members of the Senate (Wigberto E. Taada

legislative branch is seriously alleged to have infringed the Constitution, it becomes not only the

and Anna Dominique Coseteng) are estopped from joining this suit; and (3) whether the

right but in fact the duty of the judiciary to settle the dispute. "The question thus posed is judicial

respondent-members of the Senate acted in grave abuse of discretion when they voted for

rather than political. The duty (to adjudicate) remains to assure that the supremacy of the

Constitution is upheld." 12 Once a "controversy as to the application or interpretation of a

clauses scattered in various parts not only of the WTO Agreement and its annexes but also in the

constitutional provision is raised before this Court (as in the instant case), it becomes a legal issue

Ministerial Decisions and Declarations and in the Understanding on Commitments in Financial

which the Court is bound by constitutional mandate to decide."

The jurisdiction of this Court to adjudicate the matters

14

13

Services.

raised in the petition is clearly set out in

Specifically, the "flagship" constitutional provisions referred to are Sec 19, Article II, and Secs. 10

the 1987 Constitution, 15 as follows:

and 12, Article XII, of the Constitution, which are worded as follows:

Judicial power includes the duty of the courts of justice to settle actual controversies involving

Article II

rights which are legally demandable and enforceable, and to determine whether or not there has

DECLARATION OF PRINCIPLES

been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any

AND STATE POLICIES

branch or instrumentality of the government.

xxx xxx xxx

The foregoing text emphasizes the judicial department's duty and power to strike down grave

Sec. 19. The State shall develop a self-reliant and independent national economy effectively

abuse of discretion on the part of any branch or instrumentality of government including Congress.

controlled by Filipinos.

It is an innovation in our political law. 16 As explained by former Chief Justice Roberto

xxx xxx xxx

Concepcion,

17

"the judiciary is the final arbiter on the question of whether or not a branch of

Article XII

government or any of its officials has acted without jurisdiction or in excess of jurisdiction or so

NATIONAL ECONOMY AND PATRIMONY

capriciously as to constitute an abuse of discretion amounting to excess of jurisdiction. This is not

xxx xxx xxx

only a judicial power but a duty to pass judgment on matters of this nature."

Sec. 10. . . . The Congress shall enact measures that will encourage the formation and operation of

As this Court has repeatedly and firmly emphasized in many cases,

18

it will not shirk, digress from

enterprises whose capital is wholly owned by Filipinos.

or abandon its sacred duty and authority to uphold the Constitution in matters that involve grave

In the grant of rights, privileges, and concessions covering the national economy and patrimony,

abuse of discretion brought before it in appropriate cases, committed by any officer, agency,

the State shall give preference to qualified Filipinos.

instrumentality or department of the government.

xxx xxx xxx

As the petition alleges grave abuse of discretion and as there is no other plain, speedy or adequate

Sec. 12. The State shall promote the preferential use of Filipino labor, domestic materials and

remedy in the ordinary course of law, we have no hesitation at all in holding that this petition should

locally produced goods, and adopt measures that help make them competitive.

be given due course and the vital questions raised therein ruled upon under Rule 65 of the Rules of

Petitioners aver that these sacred constitutional principles are desecrated by the following WTO

Court. Indeed, certiorari, prohibition andmandamus are appropriate remedies to raise constitutional

provisions quoted in their memorandum: 19

issues and to review and/or prohibit/nullify, when proper, acts of legislative and executive officials.

a) In the area of investment measures related to trade in goods (TRIMS, for brevity):

On this, we have no equivocation.

Article 2

We should stress that, in deciding to take jurisdiction over this petition, this Court will not review

National Treatment and Quantitative Restrictions.

the wisdom of the decision of the President and the Senate in enlisting the country into the WTO,

1. Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any

or pass upon the merits of trade liberalization as a policy espoused by said international body.

TRIM that is inconsistent with the provisions of Article II or Article XI of GATT 1994.

Neither will it rule on the propriety of the government's economic policy of reducing/removing

2. An illustrative list of TRIMS that are inconsistent with the obligations of general elimination of

tariffs, taxes, subsidies, quantitative restrictions, and other import/trade barriers. Rather, it will only

quantitative restrictions provided for in paragraph I of Article XI of GATT 1994 is contained in the

exercise its constitutional duty "to determine whether or not there had been a grave abuse of

Annex to this Agreement." (Agreement on Trade-Related Investment Measures, Vol. 27, Uruguay

discretion amounting to lack or excess of jurisdiction" on the part of the Senate in ratifying the WTO

Round, Legal Instruments, p. 22121, emphasis supplied).

Agreement and its three annexes.

The Annex referred to reads as follows:

Second Issue: The WTO Agreement

ANNEX

and Economic Nationalism

Illustrative List

This is the lis mota, the main issue, raised by the petition.

1. TRIMS that are inconsistent with the obligation of national treatment provided for in paragraph 4

Petitioners vigorously argue that the "letter, spirit and intent" of the Constitution mandating

of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law

"economic nationalism" are violated by the so-called "parity provisions" and "national treatment"

or under administrative rulings, or compliance with which is necessary to obtain an advantage, and

respect of all measures affecting the supply of services, treatment no less favourable than it

which require:

accords to its own like services and service suppliers.

(a) the purchase or use by an enterprise of products of domestic origin or from any domestic

2. A Member may meet the requirement of paragraph I by according to services and service

source, whether specified in terms of particular products, in terms of volume or value of products,

suppliers of any other Member, either formally suppliers of any other Member, either formally

or in terms of proportion of volume or value of its local production; or

identical treatment or formally different treatment to that it accords to its own like services and

(b) that an enterprise's purchases or use of imported products be limited to an amount related to

service suppliers.

the volume or value of local products that it exports.

3. Formally identical or formally different treatment shall be considered to be less favourable if it

2. TRIMS that are inconsistent with the obligations of general elimination of quantitative restrictions

modifies the conditions of completion in favour of services or service suppliers of the Member

provided for in paragraph 1 of Article XI of GATT 1994 include those which are mandatory or

compared to like services or service suppliers of any other Member. (Article XVII, General

enforceable under domestic laws or under administrative rulings, or compliance with which is

Agreement on Trade in Services, Vol. 28, Uruguay Round Legal Instruments, p. 22610 emphasis

necessary to obtain an advantage, and which restrict:

supplied).

(a) the importation by an enterprise of products used in or related to the local production that it

It is petitioners' position that the foregoing "national treatment" and "parity provisions" of the WTO

exports;

Agreement "place nationals and products of member countries on the same footing as Filipinos

(b) the importation by an enterprise of products used in or related to its local production by

and local products," in contravention of the "Filipino First" policy of the Constitution. They allegedly

restricting its access to foreign exchange inflows attributable to the enterprise; or

render meaningless the phrase "effectively controlled by Filipinos." The constitutional conflict

(c) the exportation or sale for export specified in terms of particular products, in terms of volume or

becomes more manifest when viewed in the context of the clear duty imposed on the Philippines

value of products, or in terms of a preparation of volume or value of its local production. (Annex to

as a WTO member to ensure the conformity of its laws, regulations and administrative procedures

the Agreement on Trade-Related Investment Measures, Vol. 27, Uruguay Round Legal Documents,

with its obligations as provided in the annexed agreements.

p. 22125, emphasis supplied).

provisions contravene constitutional limitations on the role exports play in national development

The paragraph 4 of Article III of GATT 1994 referred to is quoted as follows:

and negate the preferential treatment accorded to Filipino labor, domestic materials and locally

The products of the territory of any contracting party imported into the territory of any other

produced goods.

contracting party shall be accorded treatment no less favorable than that accorded to like products

On the other hand, respondents through the Solicitor General counter (1) that such Charter

of national origin in respect of laws, regulations and requirements affecting their internal sale,

provisions are not self-executing and merely set out general policies; (2) that these nationalistic

offering for sale, purchase, transportation, distribution or use, the provisions of this paragraph shall

portions of the Constitution invoked by petitioners should not be read in isolation but should be

not prevent the application of differential internal transportation charges which are based

related to other relevant provisions of Art. XII, particularly Secs. 1 and 13 thereof; (3) that read

exclusively on the economic operation of the means of transport and not on the nationality of the

properly, the cited WTO clauses do not conflict with Constitution; and (4) that the WTO Agreement

product." (Article III, GATT 1947, as amended by the Protocol Modifying Part II, and Article XXVI of

contains sufficient provisions to protect developing countries like the Philippines from the

GATT, 14 September 1948, 62 UMTS 82-84 in relation to paragraph 1(a) of the General Agreement

harshness of sudden trade liberalization.

on Tariffs and Trade 1994, Vol. 1, Uruguay Round, Legal Instruments p. 177, emphasis supplied).

We shall now discuss and rule on these arguments.

(b) In the area of trade related aspects of intellectual property rights (TRIPS, for brevity):

Declaration of Principles

Each Member shall accord to the nationals of other Members treatment no less favourable than

Not Self-Executing

that it accords to its own nationals with regard to the protection of intellectual property. . . (par. 1

By its very title, Article II of the Constitution is a "declaration of principles and state policies." The

Article 3, Agreement on Trade-Related Aspect of Intellectual Property rights, Vol. 31, Uruguay

counterpart of this article in the 1935 Constitution 21 is called the "basic political creed of the nation"

Round, Legal Instruments, p. 25432 (emphasis supplied)

by Dean Vicente Sinco. 22 These principles in Article II are not intended to be self-executing

(c) In the area of the General Agreement on Trade in Services:

principles ready for enforcement through the courts.

National Treatment

guides in the exercise of its power of judicial review, and by the legislature in its enactment of laws.

1. In the sectors inscribed in its schedule, and subject to any conditions and qualifications set out

As held in the leading case of Kilosbayan, Incorporated vs. Morato, 24 the principles and state

therein, each Member shall accord to services and service suppliers of any other Member, in

policies enumerated in Article II and some sections of Article XII are not "self-executing provisions,

23

20

Petitioners further argue that these

They are used by the judiciary as aids or as

the disregard of which can give rise to a cause of action in the courts. They do not embody

Judicial power includes the duty of the courts of justice to settle actual controversies involving

judicially enforceable constitutional rights but guidelines for legislation."

rights which are legally demandable and enforceable, and to determine whether or not there has

In the same light, we held in Basco vs. Pagcor 25 that broad constitutional principles need

been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any

legislative enactments to implement the, thus:

branch or instrumentality of the Government. (Emphasis supplied)

On petitioners' allegation that P.D. 1869 violates Sections 11 (Personal Dignity) 12 (Family) and 13

When substantive standards as general as "the right to a balanced and healthy ecology" and "the

(Role of Youth) of Article II; Section 13 (Social Justice) of Article XIII and Section 2 (Educational

right to health" are combined with remedial standards as broad ranging as "a grave abuse of

Values) of Article XIV of the 1987 Constitution, suffice it to state also that these are merely

discretion amounting to lack or excess of jurisdiction," the result will be, it is respectfully submitted,

statements of principles and policies. As such, they are basically not self-executing, meaning a law

to propel courts into the uncharted ocean of social and economic policy making. At least in respect

should be passed by Congress to clearly define and effectuate such principles.

of the vast area of environmental protection and management, our courts have no claim to special

In general, therefore, the 1935 provisions were not intended to be self-executing principles ready

technical competence and experience and professional qualification. Where no specific, operable

for enforcement through the courts. They were rather directives addressed to the executive and to

norms and standards are shown to exist, then the policy making departments the legislative and

the legislature. If the executive and the legislature failed to heed the directives of the article, the

executive departments must be given a real and effective opportunity to fashion and promulgate

available remedy was not judicial but political. The electorate could express their displeasure with

those norms and standards, and to implement them before the courts should intervene.

the failure of the executive and the legislature through the language of the ballot. (Bernas, Vol. II, p.

Economic Nationalism Should Be Read with

2).

Other Constitutional Mandates to Attain

The reasons for denying a cause of action to an alleged infringement of board constitutional

Balanced Development of Economy

principles are sourced from basic considerations of due process and the lack of judicial authority to

On the other hand, Secs. 10 and 12 of Article XII, apart from merely laying down general principles

wade "into the uncharted ocean of social and economic policy making." Mr. Justice Florentino P.

relating to the national economy and patrimony, should be read and understood in relation to the

Feliciano in his concurring opinion inOposa vs. Factoran, Jr., 26 explained these reasons as follows:

other sections in said article, especially Secs. 1 and 13 thereof which read:

My suggestion is simply that petitioners must, before the trial court, show a more specific legal right

Sec. 1. The goals of the national economy are a more equitable distribution of opportunities,

a right cast in language of a significantly lower order of generality than Article II (15) of the

income, and wealth; a sustained increase in the amount of goods and services produced by the

Constitution that is or may be violated by the actions, or failures to act, imputed to the public

nation for the benefit of the people; and an expanding productivity as the key to raising the quality

respondent by petitioners so that the trial court can validly render judgment grating all or part of the

of life for all especially the underprivileged.

relief prayed for. To my mind, the court should be understood as simply saying that such a more

The State shall promote industrialization and full employment based on sound agricultural

specific legal right or rights may well exist in our corpus of law, considering the general policy

development and agrarian reform, through industries that make full and efficient use of human and

principles found in the Constitution and the existence of the Philippine Environment Code, and that

natural resources, and which are competitive in both domestic and foreign markets. However, the

the trial court should have given petitioners an effective opportunity so to demonstrate, instead of

State shall protect Filipino enterprises against unfair foreign competition and trade practices.

aborting the proceedings on a motion to dismiss.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be

It seems to me important that the legal right which is an essential component of a cause of action

given optimum opportunity to develop. . . .

be a specific, operable legal right, rather than a constitutional or statutory policy, for at least two (2)

xxx xxx xxx

reasons. One is that unless the legal right claimed to have been violated or disregarded is given

Sec. 13. The State shall pursue a trade policy that serves the general welfare and utilizes all forms

specification in operational terms, defendants may well be unable to defend themselves

and arrangements of exchange on the basis of equality and reciprocity.

intelligently and effectively; in other words, there are due process dimensions to this matter.

As pointed out by the Solicitor General, Sec. 1 lays down the basic goals of national economic

The second is a broader-gauge consideration where a specific violation of law or applicable

development, as follows:

regulation is not alleged or proved, petitioners can be expected to fall back on the expanded

1. A more equitable distribution of opportunities, income and wealth;

conception of judicial power in the second paragraph of Section 1 of Article VIII of the Constitution

2. A sustained increase in the amount of goods and services provided by the nation for the benefit

which reads:

of the people; and

Sec. 1. . . .

3. An expanding productivity as the key to raising the quality of life for all especially the
underprivileged.

With these goals in context, the Constitution then ordains the ideals of economic nationalism (1) by

WTO decides by consensus whenever possible, otherwise, decisions of the Ministerial Conference

expressing preference in favor of qualified Filipinos "in the grant of rights, privileges and

and the General Council shall be taken by the majority of the votes cast, except in cases of

concessions covering the national economy and patrimony"

27

and in the use of "Filipino labor,

interpretation of the Agreement or waiver of the obligation of a member which would require three

domestic materials and locally-produced goods"; (2) by mandating the State to "adopt measures

fourths vote. Amendments would require two thirds vote in general. Amendments to MFN

that help make them competitive; 28 and (3) by requiring the State to "develop a self-reliant and

provisions and the Amendments provision will require assent of all members. Any member may

independent national economy effectively controlled by Filipinos."

29

In similar language, the

withdraw from the Agreement upon the expiration of six months from the date of notice of

Constitution takes into account the realities of the outside world as it requires the pursuit of "a trade

withdrawals. 33

policy that serves the general welfare and utilizes all forms and arrangements of exchange on the

Hence, poor countries can protect their common interests more effectively through the WTO than

basis of equality ad reciprocity"; 30 and speaks of industries "which are competitive in both domestic

through one-on-one negotiations with developed countries. Within the WTO, developing countries

and foreign markets" as well as of the protection of "Filipino enterprises against unfair foreign

can form powerful blocs to push their economic agenda more decisively than outside the

competition and trade practices."

Organization. This is not merely a matter of practical alliances but a negotiating strategy rooted in

It is true that in the recent case of Manila Prince Hotel vs. Government Service Insurance

law. Thus, the basic principles underlying the WTO Agreement recognize the need of developing

System, et al.,

31

this Court held that "Sec. 10, second par., Art. XII of the 1987 Constitution is a

countries like the Philippines to "share in the growth in international trade commensurate with the

mandatory, positive command which is complete in itself and which needs no further guidelines or

needs of their economic development." These basic principles are found in the preamble 34 of the

implementing laws or rule for its enforcement. From its very words the provision does not require

WTO Agreement as follows:

any legislation to put it in operation. It is per se judicially enforceable." However, as the

The Parties to this Agreement,

constitutional provision itself states, it is enforceable only in regard to "the grants of rights,

Recognizing that their relations in the field of trade and economic endeavour should be conducted

privileges and concessions covering national economy and patrimony" and not to every aspect of

with a view to raising standards of living, ensuring full employment and a large and steadily

trade and commerce. It refers to exceptions rather than the rule. The issue here is not whether this

growing volume of real income and effective demand, and expanding the production of and trade in

paragraph of Sec. 10 of Art. XII is self-executing or not. Rather, the issue is whether, as a rule,

goods and services, while allowing for the optimal use of the world's resources in accordance with

there are enough balancing provisions in the Constitution to allow the Senate to ratify the Philippine

the objective of sustainable development, seeking both to protect and preserve the environment

concurrence in the WTO Agreement. And we hold that there are.

and to enhance the means for doing so in a manner consistent with their respective needs and

All told, while the Constitution indeed mandates a bias in favor of Filipino goods, services, labor

concerns at different levels of economic development,

and enterprises, at the same time, it recognizes the need for business exchange with the rest of

Recognizing further that there is need for positive efforts designed to ensure that developing

the world on the bases of equality and reciprocity and limits protection of Filipino enterprises only

countries, and especially the least developed among them, secure a share in the growth in

against foreign competition and trade practices that are unfair.

32

In other words, the Constitution

international trade commensurate with the needs of their economic development,

did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and

Being desirous of contributing to these objectives by entering into reciprocal and mutually

services in the development of the Philippine economy. While the Constitution does not encourage

advantageous arrangements directed to the substantial reduction of tariffs and other barriers to

the unlimited entry of foreign goods, services and investments into the country, it does not prohibit

trade and to the elimination of discriminatory treatment in international trade relations,

them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on

Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system

foreign competition that is unfair.

encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization

WTO Recognizes Need to

efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations,

Protect Weak Economies

Determined to preserve the basic principles and to further the objectives underlying this multilateral

Upon the other hand, respondents maintain that the WTO itself has some built-in advantages to

trading system, . . . (emphasis supplied.)

protect weak and developing economies, which comprise the vast majority of its members. Unlike

Specific WTO Provisos

in the UN where major states have permanent seats and veto powers in the Security Council, in

Protect Developing Countries

the WTO, decisions are made on the basis of sovereign equality, with each member's vote equal in

So too, the Solicitor General points out that pursuant to and consistent with the foregoing basic

weight to that of any other. There is no WTO equivalent of the UN Security Council.

principles, the WTO Agreement grants developing countries a more lenient treatment, giving their
domestic industries some protection from the rush of foreign competition. Thus, with respect to

tariffs in general, preferential treatment is given to developing countries in terms of the amount of

The WTO reliance on "most favored nation," "national treatment," and "trade without discrimination"

tariff reduction and the period within which the reduction is to be spread out. Specifically, GATT

cannot be struck down as unconstitutional as in fact they are rules of equality and reciprocity that

requires an average tariff reduction rate of 36% for developed countries to be effected within

apply to all WTO members. Aside from envisioning a trade policy based on "equality and

a period of six (6) years while developing countries including the Philippines are required to

reciprocity," 37 the fundamental law encourages industries that are "competitive in both domestic

effect an average tariff reduction of only 24% within ten (10) years.

and foreign markets," thereby demonstrating a clear policy against a sheltered domestic trade

In respect to domestic subsidy, GATT requires developed countries to reduce domestic support to

environment, but one in favor of the gradual development of robust industries that can compete

agricultural products by 20% over six (6) years, as compared to only 13% for developing countries

with the best in the foreign markets. Indeed, Filipino managers and Filipino enterprises have shown

to be effected within ten (10) years.

capability and tenacity to compete internationally. And given a free trade environment, Filipino

In regard to export subsidy for agricultural products, GATT requires developed countries to reduce

entrepreneurs and managers in Hongkong have demonstrated the Filipino capacity to grow and to

their budgetary outlays for export subsidy by 36% and export volumes receiving export subsidy

prosper against the best offered under a policy of laissez faire.

by 21% within a period of six (6) years. For developing countries, however, the reduction rate is

Constitution Favors Consumers,

only two-thirds of that prescribed for developed countries and a longer period of ten (10)

Not Industries or Enterprises

years within which to effect such reduction.

The Constitution has not really shown any unbalanced bias in favor of any business or enterprise,

Moreover, GATT itself has provided built-in protection from unfair foreign competition and trade

nor does it contain any specific pronouncement that Filipino companies should be pampered with a

practices including anti-dumping measures, countervailing measures and safeguards against

total proscription of foreign competition. On the other hand, respondents claim that WTO/GATT

import surges. Where local businesses are jeopardized by unfair foreign competition, the

aims to make available to the Filipino consumer the best goods and services obtainable anywhere

Philippines can avail of these measures. There is hardly therefore any basis for the statement that

in the world at the most reasonable prices. Consequently, the question boils down to whether

under the WTO, local industries and enterprises will all be wiped out and that Filipinos will be

WTO/GATT will favor the general welfare of the public at large.

deprived of control of the economy. Quite the contrary, the weaker situations of developing nations

Will adherence to the WTO treaty bring this ideal (of favoring the general welfare) to reality?

like the Philippines have been taken into account; thus, there would be no basis to say that in

Will WTO/GATT succeed in promoting the Filipinos' general welfare because it will as promised

joining the WTO, the respondents have gravely abused their discretion. True, they have made a

by its promoters expand the country's exports and generate more employment?

bold decision to steer the ship of state into the yet uncharted sea of economic liberalization. But

Will it bring more prosperity, employment, purchasing power and quality products at the most

such decision cannot be set aside on the ground of grave abuse of discretion, simply because we

reasonable rates to the Filipino public?

disagree with it or simply because we believe only in other economic policies. As earlier stated, the

The responses to these questions involve "judgment calls" by our policy makers, for which they are

Court in taking jurisdiction of this case will not pass upon the advantages and disadvantages of

answerable to our people during appropriate electoral exercises. Such questions and the answers

trade liberalization as an economic policy. It will only perform its constitutional duty of determining

thereto are not subject to judicial pronouncements based on grave abuse of discretion.

whether the Senate committed grave abuse of discretion.

Constitution Designed to Meet

Constitution Does Not

Future Events and Contingencies

Rule Out Foreign Competition

No doubt, the WTO Agreement was not yet in existence when the Constitution was drafted and

Furthermore, the constitutional policy of a "self-reliant and independent national economy"

35

does

ratified in 1987. That does not mean however that the Charter is necessarily flawed in the sense

not necessarily rule out the entry of foreign investments, goods and services. It contemplates

that its framers might not have anticipated the advent of a borderless world of business. By the

neither "economic seclusion" nor "mendicancy in the international community." As explained by

same token, the United Nations was not yet in existence when the 1935 Constitution became

Constitutional Commissioner Bernardo Villegas, sponsor of this constitutional policy:

effective. Did that necessarily mean that the then Constitution might not have contemplated a

Economic self-reliance is a primary objective of a developing country that is keenly aware of

diminution of the absoluteness of sovereignty when the Philippines signed the UN Charter, thereby

overdependence on external assistance for even its most basic needs. It does not mean autarky or

effectively surrendering part of its control over its foreign relations to the decisions of various UN

economic seclusion; rather, it means avoiding mendicancy in the international community.

organs like the Security Council?

Independence refers to the freedom from undue foreign control of the national economy, especially
in such strategic industries as in the development of natural resources and public utilities.

36

It is not difficult to answer this question. Constitutions are designed to meet not only the vagaries of
contemporary events. They should be interpreted to cover even future and unknown
circumstances. It is to the credit of its drafters that a Constitution can withstand the assaults of

bigots and infidels but at the same time bend with the refreshing winds of change necessitated by
unfolding events. As one eminent political law writer and respected jurist

38

explains:

oldest and most fundamental rules in international law is pacta sunt servanda international
agreements must be performed in good faith. "A treaty engagement is not a mere moral obligation

The Constitution must be quintessential rather than superficial, the root and not the blossom, the

but creates a legally binding obligation on the parties . . . A state which has contracted valid

base and frame-work only of the edifice that is yet to rise. It is but the core of the dream that must

international obligations is bound to make in its legislations such modifications as may be

take shape, not in a twinkling by mandate of our delegates, but slowly "in the crucible of Filipino

necessary to ensure the fulfillment of the obligations undertaken."

minds and hearts," where it will in time develop its sinews and gradually gather its strength and

By their inherent nature, treaties really limit or restrict the absoluteness of sovereignty. By their

finally achieve its substance. In fine, the Constitution cannot, like the goddess Athena, rise full-

voluntary act, nations may surrender some aspects of their state power in exchange for greater

grown from the brow of the Constitutional Convention, nor can it conjure by mere fiat an instant

benefits granted by or derived from a convention or pact. After all, states, like individuals, live with

Utopia. It must grow with the society it seeks to re-structure and march apace with the progress of

coequals, and in pursuit of mutually covenanted objectives and benefits, they also commonly agree

the race, drawing from the vicissitudes of history the dynamism and vitality that will keep it, far from

to limit the exercise of their otherwise absolute rights. Thus, treaties have been used to record

becoming a petrified rule, a pulsing, living law attuned to the heartbeat of the nation.

agreements between States concerning such widely diverse matters as, for example, the lease of

Third Issue: The WTO Agreement and Legislative Power

naval bases, the sale or cession of territory, the termination of war, the regulation of conduct of

The WTO Agreement provides that "(e)ach Member shall ensure the conformity of its laws,

hostilities, the formation of alliances, the regulation of commercial relations, the settling of claims,

regulations and administrative procedures with its obligations as provided in the annexed

the laying down of rules governing conduct in peace and the establishment of international

Agreements."

39

Petitioners maintain that this undertaking "unduly limits, restricts and impairs

45

organizations.46 The sovereignty of a state therefore cannot in fact and in reality be considered

Philippine sovereignty, specifically the legislative power which under Sec. 2, Article VI of the 1987

absolute. Certain restrictions enter into the picture: (1) limitations imposed by the very nature of

Philippine Constitution is vested in the Congress of the Philippines. It is an assault on the

membership in the family of nations and (2) limitations imposed by treaty stipulations. As aptly put

sovereign powers of the Philippines because this means that Congress could not pass legislation

by John F. Kennedy, "Today, no nation can build its destiny alone. The age of self-sufficient

that will be good for our national interest and general welfare if such legislation will not conform

nationalism is over. The age of interdependence is here."

with the WTO Agreement, which not only relates to the trade in goods . . . but also to the flow of

UN Charter and Other Treaties

investments and money . . . as well as to a whole slew of agreements on socio-cultural

Limit Sovereignty

matters . . .

40

47

Thus, when the Philippines joined the United Nations as one of its 51 charter members, it

More specifically, petitioners claim that said WTO proviso derogates from the power to tax, which is

consented to restrict its sovereign rights under the "concept of sovereignty as auto-limitation." 47-

lodged in the Congress. 41 And while the Constitution allows Congress to authorize the President to

A Under Article 2 of the UN Charter, "(a)ll members shall give the United Nations every assistance

fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts,

in any action it takes in accordance with the present Charter, and shall refrain from giving

such authority is subject to "specified limits and . . . such limitations and restrictions" as Congress

assistance to any state against which the United Nations is taking preventive or enforcement

may provide, 42 as in fact it did under Sec. 401 of the Tariff and Customs Code.

action." Such assistance includes payment of its corresponding share not merely in administrative

Sovereignty Limited by

expenses but also in expenditures for the peace-keeping operations of the organization. In its

International Law and Treaties

advisory opinion of July 20, 1961, the International Court of Justice held that money used by the

This Court notes and appreciates the ferocity and passion by which petitioners stressed their

United Nations Emergency Force in the Middle East and in the Congo were "expenses of the

arguments on this issue. However, while sovereignty has traditionally been deemed absolute and

United Nations" under Article 17, paragraph 2, of the UN Charter. Hence, all its members must

all-encompassing on the domestic level, it is however subject to restrictions and limitations

bear their corresponding share in such expenses. In this sense, the Philippine Congress is

voluntarily agreed to by the Philippines, expressly or impliedly, as a member of the family of

restricted in its power to appropriate. It is compelled to appropriate funds whether it agrees with

nations. Unquestionably, the Constitution did not envision a hermit-type isolation of the country

such peace-keeping expenses or not. So too, under Article 105 of the said Charter, the UN and its

from the rest of the world. In its Declaration of Principles and State Policies, the Constitution

representatives enjoy diplomatic privileges and immunities, thereby limiting again the exercise of

"adopts the generally accepted principles of international law as part of the law of the land, and

sovereignty of members within their own territory. Another example: although "sovereign equality"

adheres to the policy of peace, equality, justice, freedom, cooperation and amity, with all

and "domestic jurisdiction" of all members are set forth as underlying principles in the UN Charter,

nations." 43 By the doctrine of incorporation, the country is bound by generally accepted principles

such provisos are however subject to enforcement measures decided by the Security Council for

of international law, which are considered to be automatically part of our own laws.

44

One of the

the maintenance of international peace and security under Chapter VII of the Charter. A final

example: under Article 103, "(i)n the event of a conflict between the obligations of the Members of

(k) Multilateral convention on the Law of Treaties. In this convention, the Philippines agreed to be

the United Nations under the present Charter and their obligations under any other international

governed by the Vienna Convention on the Law of Treaties.

agreement, their obligation under the present charter shall prevail," thus unquestionably denying

(l) Declaration of the President of the Philippines accepting compulsory jurisdiction of the

the Philippines as a member the sovereign power to make a choice as to which of conflicting

International Court of Justice. The International Court of Justice has jurisdiction in all legal disputes

obligations, if any, to honor.

concerning the interpretation of a treaty, any question of international law, the existence of any fact

Apart from the UN Treaty, the Philippines has entered into many other international pacts both

which, if established, would constitute a breach "of international obligation."

bilateral and multilateral that involve limitations on Philippine sovereignty. These are

In the foregoing treaties, the Philippines has effectively agreed to limit the exercise of its sovereign

enumerated by the Solicitor General in his Compliance dated October 24, 1996, as follows:

powers of taxation, eminent domain and police power. The underlying consideration in this partial

(a) Bilateral convention with the United States regarding taxes on income, where the Philippines

surrender of sovereignty is the reciprocal commitment of the other contracting states in granting the

agreed, among others, to exempt from tax, income received in the Philippines by, among others,

same privilege and immunities to the Philippines, its officials and its citizens. The same reciprocity

the Federal Reserve Bank of the United States, the Export/Import Bank of the United States, the

characterizes the Philippine commitments under WTO-GATT.

Overseas Private Investment Corporation of the United States. Likewise, in said convention,

International treaties, whether relating to nuclear disarmament, human rights, the environment, the

wages, salaries and similar remunerations paid by the United States to its citizens for labor and

law of the sea, or trade, constrain domestic political sovereignty through the assumption of external

personal services performed by them as employees or officials of the United States are exempt

obligations. But unless anarchy in international relations is preferred as an alternative, in most

from income tax by the Philippines.

cases we accept that the benefits of the reciprocal obligations involved outweigh the costs

(b) Bilateral agreement with Belgium, providing, among others, for the avoidance of double taxation

associated with any loss of political sovereignty. (T)rade treaties that structure relations by

with respect to taxes on income.

reference to durable, well-defined substantive norms and objective dispute resolution procedures

(c) Bilateral convention with the Kingdom of Sweden for the avoidance of double taxation.

reduce the risks of larger countries exploiting raw economic power to bully smaller countries, by

(d) Bilateral convention with the French Republic for the avoidance of double taxation.

subjecting power relations to some form of legal ordering. In addition, smaller countries typically

(e) Bilateral air transport agreement with Korea where the Philippines agreed to exempt from all

stand to gain disproportionately from trade liberalization. This is due to the simple fact that

customs duties, inspection fees and other duties or taxes aircrafts of South Korea and the regular

liberalization will provide access to a larger set of potential new trading relationship than in case of

equipment, spare parts and supplies arriving with said aircrafts.

the larger country gaining enhanced success to the smaller country's market.

(f) Bilateral air service agreement with Japan, where the Philippines agreed to exempt from

The point is that, as shown by the foregoing treaties, a portion of sovereignty may be waived

customs duties, excise taxes, inspection fees and other similar duties, taxes or charges fuel,

without violating the Constitution, based on the rationale that the Philippines "adopts the generally

lubricating oils, spare parts, regular equipment, stores on board Japanese aircrafts while on

accepted principles of international law as part of the law of the land and adheres to the policy of . .

Philippine soil.

. cooperation and amity with all nations."

(g) Bilateral air service agreement with Belgium where the Philippines granted Belgian air carriers

Fourth Issue: The WTO Agreement and Judicial Power

the same privileges as those granted to Japanese and Korean air carriers under separate air

Petitioners aver that paragraph 1, Article 34 of the General Provisions and Basic Principles of the

service agreements.

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

(h) Bilateral notes with Israel for the abolition of transit and visitor visas where the Philippines

power of the Supreme Court to promulgate rules concerning pleading, practice and procedures.
51

48

49

intrudes on the
50

exempted Israeli nationals from the requirement of obtaining transit or visitor visas for a sojourn in

To understand the scope and meaning of Article 34, TRIPS,

the Philippines not exceeding 59 days.

as follows:

it will be fruitful to restate its full text

(i) Bilateral agreement with France exempting French nationals from the requirement of obtaining

Article 34

transit and visitor visa for a sojourn not exceeding 59 days.

Process Patents: Burden of Proof

(j) Multilateral Convention on Special Missions, where the Philippines agreed that premises of

1. For the purposes of civil proceedings in respect of the infringement of the rights of the owner

Special Missions in the Philippines are inviolable and its agents can not enter said premises

referred to in paragraph 1 (b) of Article 28, if the subject matter of a patent is a process for

without consent of the Head of Mission concerned. Special Missions are also exempted from

obtaining a product, the judicial authorities shall have the authority to order the defendant to prove

customs duties, taxes and related charges.

that the process to obtain an identical product is different from the patented process. Therefore,
Members shall provide, in at least one of the following circumstances, that any identical product

when produced without the consent of the patent owner shall, in the absence of proof to the

does not obtain, members shall be free to determine the appropriate method of implementing the

contrary, be deemed to have been obtained by the patented process:

provisions of TRIPS within their own internal systems and processes.

(a) if the product obtained by the patented process is new;

By and large, the arguments adduced in connection with our disposition of the third issue

(b) if there is a substantial likelihood that the identical product was made by the process and the

derogation of legislative power will apply to this fourth issue also. Suffice it to say that the

owner of the patent has been unable through reasonable efforts to determine the process actually

reciprocity clause more than justifies such intrusion, if any actually exists. Besides, Article 34 does

used.

not contain an unreasonable burden, consistent as it is with due process and the concept of

2. Any Member shall be free to provide that the burden of proof indicated in paragraph 1 shall be

adversarial dispute settlement inherent in our judicial system.

on the alleged infringer only if the condition referred to in subparagraph (a) is fulfilled or only if the

So too, since the Philippine is a signatory to most international conventions on patents, trademarks

condition referred to in subparagraph (b) is fulfilled.

and copyrights, the adjustment in legislation and rules of procedure will not be substantial.

3. In the adduction of proof to the contrary, the legitimate interests of defendants in protecting their

Fifth Issue: Concurrence Only in the WTO Agreement and

manufacturing and business secrets shall be taken into account.

Not in Other Documents Contained in the Final Act

From the above, a WTO Member is required to provide a rule of disputable (not the words "in the

Petitioners allege that the Senate concurrence in the WTO Agreement and its annexes but not

absence of proof to the contrary") presumption that a product shown to be identical to one

in the other documents referred to in the Final Act, namely the Ministerial Declaration and

produced with the use of a patented process shall be deemed to have been obtained by the

Decisions and the Understanding on Commitments in Financial Services is defective and

(illegal) use of the said patented process, (1) where such product obtained by the patented product

insufficient and thus constitutes abuse of discretion. They submit that such concurrence in the

is new, or (2) where there is "substantial likelihood" that the identical product was made with the

WTO Agreement alone is flawed because it is in effect a rejection of the Final Act, which in turn

use of the said patented process but the owner of the patent could not determine the exact process

was the document signed by Secretary Navarro, in representation of the Republic upon authority of

used in obtaining such identical product. Hence, the "burden of proof" contemplated by Article 34

the President. They contend that the second letter of the President to the Senate

should actually be understood as the duty of the alleged patent infringer to overthrow such

enumerated what constitutes the Final Act should have been the subject of concurrence of the

presumption. Such burden, properly understood, actually refers to the "burden of evidence"

Senate.

(burden of going forward) placed on the producer of the identical (or fake) product to show that his

"A final act, sometimes called protocol de cloture, is an instrument which records the winding up of

product was produced without the use of the patented process.

the proceedings of a diplomatic conference and usually includes a reproduction of the texts of

The foregoing notwithstanding, the patent owner still has the "burden of proof" since, regardless of

treaties, conventions, recommendations and other acts agreed upon and signed by the

the presumption provided under paragraph 1 of Article 34, such owner still has to introduce

plenipotentiaries attending the conference." 54 It is not the treaty itself. It is rather a summary of the

evidence of the existence of the alleged identical product, the fact that it is "identical" to the

proceedings of a protracted conference which may have taken place over several years. The text

genuine one produced by the patented process and the fact of "newness" of the genuine product or

of the "Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations" is

the fact of "substantial likelihood" that the identical product was made by the patented process.

contained in just one page 55 in Vol. I of the 36-volume Uruguay Round of Multilateral Trade

The foregoing should really present no problem in changing the rules of evidence as the present

Negotiations. By signing said Final Act, Secretary Navarro as representative of the Republic of the

law on the subject, Republic Act No. 165, as amended, otherwise known as the Patent Law,

Philippines undertook:

provides a similar presumption in cases of infringement of patented design or utility model, thus:

(a) to submit, as appropriate, the WTO Agreement for the consideration of their respective

Sec. 60. Infringement. Infringement of a design patent or of a patent for utility model shall

competent authorities with a view to seeking approval of the Agreement in accordance with their

consist in unauthorized copying of the patented design or utility model for the purpose of trade or

procedures; and

industry in the article or product and in the making, using or selling of the article or product copying

(b) to adopt the Ministerial Declarations and Decisions.

the patented design or utility model. Identity or substantial identity with the patented design or

The assailed Senate Resolution No. 97 expressed concurrence in exactly what the Final Act

utility model shall constitute evidence of copying. (emphasis supplied)

required from its signatories, namely, concurrence of the Senate in the WTO Agreement.

Moreover, it should be noted that the requirement of Article 34 to provide a disputable presumption

The Ministerial Declarations and Decisions were deemed adopted without need for ratification.

applies only if (1) the product obtained by the patented process in NEW or (2) there is a substantial

They were approved by the ministers by virtue of Article XXV: 1 of GATT which provides that

likelihood that the identical product was made by the process and the process owner has not been

representatives of the members can meet "to give effect to those provisions of this Agreement

able through reasonable effort to determine the process used. Where either of these two provisos

53

52

which

which invoke joint action, and generally with a view to facilitating the operation and furthering the
objectives of this Agreement."

56

And so, Secretary Romulo, in effect, is the President submitting a new . . . is he making a new
submission which improves on the clarity of the first submission?

The Understanding on Commitments in Financial Services also approved in Marrakesh does not

MR. ROMULO: Mr. Chairman, to make sure that it is clear cut and there should be no

apply to the Philippines. It applies only to those 27 Members which "have indicated in their

misunderstanding, it was his intention to clarify all matters by giving this letter.

respective schedules of commitments on standstill, elimination of monopoly, expansion of

THE CHAIRMAN: Thank you.

operation of existing financial service suppliers, temporary entry of personnel, free transfer and

Can this Committee hear from Senator Taada and later on Senator Tolentino since they were the

processing of information, and national treatment with respect to access to payment, clearing

ones that raised this question yesterday?

systems and refinancing available in the normal course of business."

57

Senator Taada, please.

On the other hand, the WTO Agreement itself expresses what multilateral agreements are deemed

SEN. TAADA: Thank you, Mr. Chairman.

included as its integral parts, 58 as follows:

Based on what Secretary Romulo has read, it would now clearly appear that what is being

Article II

submitted to the Senate for ratification is not the Final Act of the Uruguay Round, but rather the

Scope of the WTO

Agreement on the World Trade Organization as well as the Ministerial Declarations and Decisions,

1. The WTO shall provide the common institutional frame-work for the conduct of trade relations

and the Understanding and Commitments in Financial Services.

among its Members in matters to the agreements and associated legal instruments included in the

I am now satisfied with the wording of the new submission of President Ramos.

Annexes to this Agreement.

SEN. TAADA. . . . of President Ramos, Mr. Chairman.

2. The Agreements and associated legal instruments included in Annexes 1, 2, and 3, (hereinafter

THE CHAIRMAN. Thank you, Senator Taada. Can we hear from Senator Tolentino? And after him

referred to as "Multilateral Agreements") are integral parts of this Agreement, binding on all

Senator Neptali Gonzales and Senator Lina.

Members.

SEN. TOLENTINO, Mr. Chairman, I have not seen the new submission actually transmitted to us

3. The Agreements and associated legal instruments included in Annex 4 (hereinafter referred to as

but I saw the draft of his earlier, and I think it now complies with the provisions of the Constitution,

"Plurilateral Trade Agreements") are also part of this Agreement for those Members that have

and with the Final Act itself . The Constitution does not require us to ratify the Final Act. It requires

accepted them, and are binding on those Members. The Plurilateral Trade Agreements do not

us to ratify the Agreement which is now being submitted. The Final Act itself specifies what is going

create either obligation or rights for Members that have not accepted them.

to be submitted to with the governments of the participants.

4. The General Agreement on Tariffs and Trade 1994 as specified in annex 1A (hereinafter referred

In paragraph 2 of the Final Act, we read and I quote:

to as "GATT 1994") is legally distinct from the General Agreement on Tariffs and Trade, dated 30

By signing the present Final Act, the representatives agree: (a) to submit as appropriate the WTO

October 1947, annexed to the Final Act adopted at the conclusion of the Second Session of the

Agreement for the consideration of the respective competent authorities with a view to seeking

Preparatory Committee of the United Nations Conference on Trade and Employment, as

approval of the Agreement in accordance with their procedures.

subsequently rectified, amended or modified (hereinafter referred to as "GATT 1947").

In other words, it is not the Final Act that was agreed to be submitted to the governments for

It should be added that the Senate was well-aware of what it was concurring in as shown by the

ratification or acceptance as whatever their constitutional procedures may provide but it is the

members' deliberation on August 25, 1994. After reading the letter of President Ramos dated

World Trade Organization Agreement. And if that is the one that is being submitted now, I think it

August 11, 1994, 59 the senators

satisfies both the Constitution and the Final Act itself .

of the Republic minutely dissected what the Senate was concurring in, as follows:

60

Thank you, Mr. Chairman.

THE CHAIRMAN: Yes. Now, the question of the validity of the submission came up in the first day

THE CHAIRMAN. Thank you, Senator Tolentino, May I call on Senator Gonzales.

hearing of this Committee yesterday. Was the observation made by Senator Taada that what was

SEN. GONZALES. Mr. Chairman, my views on this matter are already a matter of record. And they

submitted to the Senate was not the agreement on establishing the World Trade Organization by

had been adequately reflected in the journal of yesterday's session and I don't see any need for

the final act of the Uruguay Round which is not the same as the agreement establishing the World

repeating the same.

Trade Organization? And on that basis, Senator Tolentino raised a point of order which, however,

Now, I would consider the new submission as an act ex abudante cautela.

he agreed to withdraw upon understanding that his suggestion for an alternative solution at that

THE CHAIRMAN. Thank you, Senator Gonzales. Senator Lina, do you want to make any comment

time was acceptable. That suggestion was to treat the proceedings of the Committee as being in

on this?

the nature of briefings for Senators until the question of the submission could be clarified.

SEN. LINA. Mr. President, I agree with the observation just made by Senator Gonzales out of the

That the Senate, after deliberation and voting, voluntarily and overwhelmingly gave its consent to

abundance of question. Then the new submission is, I believe, stating the obvious and therefore I

the WTO Agreement thereby making it "a part of the law of the land" is a legitimate exercise of its

have no further comment to make.

sovereign duty and power. We find no "patent and gross" arbitrariness or despotism "by reason of

Epilogue

passion or personal hostility" in such exercise. It is not impossible to surmise that this Court, or at

In praying for the nullification of the Philippine ratification of the WTO Agreement, petitioners are

least some of its members, may even agree with petitioners that it is more advantageous to the

invoking this Court's constitutionally imposed duty "to determine whether or not there has been

national interest to strike down Senate Resolution No. 97. But that is not a legal reason to attribute

grave abuse of discretion amounting to lack or excess of jurisdiction" on the part of the Senate in

grave abuse of discretion to the Senate and to nullify its decision. To do so would constitute grave

giving its concurrence therein via Senate Resolution No. 97. Procedurally, a writ

abuse in the exercise of our own judicial power and duty. Ineludably, what the Senate did was a

of certiorari grounded on grave abuse of discretion may be issued by the Court under Rule 65 of

valid exercise of its authority. As to whether such exercise was wise, beneficial or viable is outside

the Rules of Court when it is amply shown that petitioners have no other plain, speedy and

the realm of judicial inquiry and review. That is a matter between the elected policy makers and the

adequate remedy in the ordinary course of law.

people. As to whether the nation should join the worldwide march toward trade liberalization and

By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is

economic globalization is a matter that our people should determine in electing their policy makers.

equivalent to lack of jurisdiction.

61

Mere abuse of discretion is not enough. It must be grave abuse

After all, the WTO Agreement allows withdrawal of membership, should this be the political desire

of discretion as when the power is exercised in an arbitrary or despotic manner by reason of

of a member.

passion or personal hostility, and must be so patent and so gross as to amount to an evasion of a

The eminent futurist John Naisbitt, author of the best seller Megatrends, predicts an Asian

positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of

Renaissance 65 where "the East will become the dominant region of the world economically,

law. 62 Failure on the part of the petitioner to show grave abuse of discretion will result in the

politically and culturally in the next century." He refers to the "free market" espoused by WTO as

dismissal of the petition. 63

the "catalyst" in this coming Asian ascendancy. There are at present about 31 countries including

In rendering this Decision, this Court never forgets that the Senate, whose act is under review, is

China, Russia and Saudi Arabia negotiating for membership in the WTO. Notwithstanding

one of two sovereign houses of Congress and is thus entitled to great respect in its actions. It is

objections against possible limitations on national sovereignty, the WTO remains as the only viable

itself a constitutional body independent and coordinate, and thus its actions are presumed regular

structure for multilateral trading and the veritable forum for the development of international trade

and done in good faith. Unless convincing proof and persuasive arguments are presented to

law. The alternative to WTO is isolation, stagnation, if not economic self-destruction. Duly enriched

overthrow such presumptions, this Court will resolve every doubt in its favor. Using the foregoing

with original membership, keenly aware of the advantages and disadvantages of globalization with

well-accepted definition of grave abuse of discretion and the presumption of regularity in the

its on-line experience, and endowed with a vision of the future, the Philippines now straddles the

Senate's processes, this Court cannot find any cogent reason to impute grave abuse of discretion

crossroads of an international strategy for economic prosperity and stability in the new millennium.

to the Senate's exercise of its power of concurrence in the WTO Agreement granted it by Sec. 21

Let the people, through their duly authorized elected officers, make their free choice.

of Article VII of the Constitution. 64

WHEREFORE, the petition is DISMISSED for lack of merit.

It is true, as alleged by petitioners, that broad constitutional principles require the State to develop

SO ORDERED.

an independent national economy effectively controlled by Filipinos; and to protect and/or prefer

G.R. No. 120082 September 11, 1996

Filipino labor, products, domestic materials and locally produced goods. But it is equally true that

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,

such principles while serving as judicial and legislative guides are not in themselves sources

vs.

of causes of action. Moreover, there are other equally fundamental constitutional principles relied

HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial

upon by the Senate which mandate the pursuit of a "trade policy that serves the general welfare

Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON. TOMAS R.

and utilizes all forms and arrangements of exchange on the basis of equality and reciprocity" and

OSMEA, and EUSTAQUIO B. CESA, respondents.

the promotion of industries "which are competitive in both domestic and foreign markets," thereby
justifying its acceptance of said treaty. So too, the alleged impairment of sovereignty in the exercise

DAVIDE, JR., J.:

of legislative and judicial powers is balanced by the adoption of the generally accepted principles of

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of 22

international law as part of the law of the land and the adherence of the Constitution to the policy of

March 1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the petition for

cooperation and amity with all nations.

declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu International Airport Authority
2

by virtue of Sections 193 and 234 of the Local Governmental Code that took effect on January 1,

vs. City of Cebu", and its order of 4, May 1995 denying the motion to reconsider the decision.

1992:

We resolved to give due course to this petition for its raises issues dwelling on the scope of the

Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in this Code, tax

taxing power of local government-owned and controlled corporations.

exemptions or incentives granted to, or presently enjoyed by all persons whether natural or

The uncontradicted factual antecedents are summarized in the instant petition as follows:

juridical,including government-owned or controlled corporations, except local water districts,

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue of Republic

cooperatives duly registered under RA No. 6938, non-stock, and non-profit hospitals and

Act No. 6958, mandated to "principally undertake the economical, efficient and effective control,

educational institutions,are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied)

management and supervision of the Mactan International Airport in the Province of Cebu and the

xxx xxx xxx

Lahug Airport in Cebu City, . . . and such other Airports as may be established in the Province of

Sec. 234. Exemptions from Real Property taxes. . . .

Cebu . . . (Sec. 3, RA 6958). It is also mandated to:

(a) . . .

a) encourage, promote and develop international and domestic air traffic in the Central Visayas and

xxx xxx xxx

Mindanao regions as a means of making the regions centers of international trade and tourism,

(c) . . .

and accelerating the development of the means of transportation and communication in the

Except as provided herein, any exemption from payment of real property tax previously granted to,

country; and

or presently enjoyed by all persons, whether natural or juridical, including government-owned or

b) upgrade the services and facilities of the airports and to formulate internationally acceptable

controlled corporations are hereby withdrawn upon the effectivity of this Code.

standards of airport accommodation and service.

As the City of Cebu was about to issue a warrant of levy against the properties of petitioner, the

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from payment of

latter was compelled to pay its tax account "under protest" and thereafter filed a Petition for

realty taxes in accordance with Section 14 of its Charter.

Declaratory Relief with the Regional Trial Court of Cebu, Branch 20, on December 29, 1994.

Sec. 14. Tax Exemptions. The authority shall be exempt from realty taxes imposed by the

MCIAA basically contended that the taxing powers of local government units do not extend to the

National Government or any of its political subdivisions, agencies and instrumentalities . . .

levy of taxes or fees of any kind on an instrumentality of the national government. Petitioner

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer of

insisted that while it is indeed a government-owned corporation, it nonetheless stands on the same

the City of Cebu, demanded payment for realty taxes on several parcels of land belonging to the

footing as an agency or instrumentality of the national government. Petitioner insisted that while it

petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941,

is indeed a government-owned corporation, it nonetheless stands on the same footing as an

942, 947, 77 Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu

agency or instrumentality of the national government by the very nature of its powers and

City, in the total amount of P2,229,078.79.

functions.

Petitioner objected to such demand for payment as baseless and unjustified, claiming in its favor

Respondent City, however, asserted that MACIAA is not an instrumentality of the government but

the aforecited Section 14 of RA 6958 which exempt it from payment of realty taxes. It was also

merely a government-owned corporation performing proprietary functions As such, all exemptions

asserted that it is an instrumentality of the government performing governmental functions, citing

previously granted to it were deemed withdrawn by operation of law, as provided under Sections

section 133 of the Local Government Code of 1991 which puts limitations on the taxing powers of

193 and 234 of the Local Government Code when it took effect on January 1, 1992. 3

local government units:

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

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

In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its findings, to wit:

otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,

A close reading of the New Local Government Code of 1991 or RA 7160 provides the express

and barangay shall not extend to the levy of the following:

cancellation and withdrawal of exemption of taxes by government owned and controlled

a) . . .

corporation per Sections after the effectivity of said Code on January 1, 1992, to wit: [proceeds to

xxx xxx xxx

quote Sections 193 and 234]

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

Petitioners claimed that its real properties assessed by respondent City Government of Cebu are

instrumentalities, and local government units. (Emphasis supplied)

exempted from paying realty taxes in view of the exemption granted under RA 6958 to pay the

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting that the

same (citing Section 14 of RA 6958).

MCIAA is a government-controlled corporation whose tax exemption privilege has been withdrawn

However, RA 7160 expressly provides that "All general and special laws, acts, city charters,

local government units shall not extend to the levy of taxes of fees or charges of any kind on the

decress [sic], executive orders, proclamations and administrative regulations, or part or parts

national government its agencies and instrumentalities."

thereof which are inconsistent with any of the provisions of this Code are hereby repealed or

As to the second assigned error, the petitioner contends that being an instrumentality of the

modified accordingly." ([f], Section 534, RA 7160).

National Government, respondent City of Cebu has no power nor authority to impose realty taxes

With that repealing clause in RA 7160, it is safe to infer and state that the tax exemption provided

upon it in accordance with the aforesaid Section 133 of the LGC, as explained in Basco

for in RA 6958 creating petitioner had been expressly repealed by the provisions of the New Local

vs. Philippine Amusement and Gaming Corporation; 9

Government Code of 1991.

Local governments have no power to tax instrumentalities of the National Government. PAGCOR is

So that petitioner in this case has to pay the assessed realty tax of its properties effective after

a government owned or controlled corporation with an original character, PD 1869. All its shares of

January 1, 1992 until the present.

stock are owned by the National Government. . . .

This Court's ruling finds expression to give impetus and meaning to the overall objectives of the

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is

New Local Government Code of 1991, RA 7160. "It is hereby declared the policy of the State that

governmental, which places it in the category of an agency or instrumentality of the

the territorial and political subdivisions of the State shall enjoy genuine and meaningful local

Government. Being an instrumentality of the Government, PAGCOR should be and actually is

autonomy to enable them to attain their fullest development as self-reliant communities and make

exempt from local taxes. Otherwise, its operation might be burdened, impeded or subjected to

them more effective partners in the attainment of national goals. Towards this end, the State shall

control by a mere Local government.

provide for a more responsive and accountable local government structure instituted through a

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

system of decentralization whereby local government units shall be given more powers, authority,

control the operation of constitutional laws enacted by Congress to carry into execution the powers

responsibilities, and resources. The process of decentralization shall proceed from the national

vested in the federal government. (McCulloch v. Maryland, 4 Wheat 316, 4 L Ed. 579).

government to the local government units. . . . 5

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

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order, the

Justice Holmes, speaking for the Supreme Court, make references to the entire absence of power

petitioner filed the instant petition based on the following assignment of errors:

on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS VESTED

States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision

WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE SAME

can regulate a federal instrumentality in such a way as to prevent it from consummating its federal

CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau Modern

II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL

Constitutional Law, Vol. 2, p. 140)

PROPERTY TAXES TO THE CITY OF CEBU.

Otherwise mere creature of the State can defeat National policies thru extermination of what local

Anent the first assigned error, the petitioner asserts that although it is a government-owned or

authorities may perceive to be undesirable activities or enterprise using the power to tax as "a toll

controlled corporation it is mandated to perform functions in the same category as an

for regulation" (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice

instrumentality of Government. An instrumentality of Government is one created to perform

Marshall as the "power to destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an

governmental functions primarily to promote certain aspects of the economic life of the

instrumentality or creation of the very entity which has the inherent power to wield it. (Emphasis

people. 6 Considering its task "not merely to efficiently operate and manage the Mactan-Cebu

supplied)

International Airport, but more importantly, to carry out the Government policies of promoting and

It then concludes that the respondent Judge "cannot therefore correctly say that the questioned

developing the Central Visayas and Mindanao regions as centers of international trade and

provisions of the Code do not contain any distinction between a governmental function as against

tourism, and accelerating the development of the means of transportation and communication in

one performing merely proprietary ones such that the exemption privilege withdrawn under the said

the country," 7 and that it is an attached agency of the Department of Transportation and

Code would apply to allgovernment corporations." For it is clear from Section 133, in relation to

Communication (DOTC), the petitioner "may stand in [sic] the same footing as an agency or

Section 234, of the LGC that the legislature meant to exclude instrumentalities of the national

instrumentality of the national government." Hence, its tax exemption privilege under Section 14 of

government from the taxing power of the local government units.

its Charter "cannot be considered withdrawn with the passage of the Local Government Code of

In its comment respondent City of Cebu alleges that as local a government unit and a political

1991 (hereinafter LGC) because Section 133 thereof specifically states that the taxing powers of

subdivision, it has the power to impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution 10 and enhanced further by the LGC. While it may be true

that under its Charter the petitioner was exempt from the payment of realty taxes, 11 this exemption

the exception, the exemption may thus be withdrawn at the pleasure of the taxing authority. The

was withdrawn by Section 234 of the LGC. In response to the petitioner's claim that such

only exception to this rule is where the exemption was granted to private parties based on material

exemption was not repealed because being an instrumentality of the National Government, Section

consideration of a mutual nature, which then becomes contractual and is thus covered by the non-

133 of the LGC prohibits local government units from imposing taxes, fees, or charges of any kind

impairment clause of the Constitution. 23

on it, respondent City of Cebu points out that the petitioner is likewise a government-owned

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by

corporation, and Section 234 thereof does not distinguish between government-owned corporation,

local government units of their power to tax, the scope thereof or its limitations, and the exemption

and Section 234 thereof does not distinguish between government-owned corporation, and Section

from taxation.

234 thereof does not distinguish between government-owned or controlled corporations performing

Section 133 of the LGC prescribes the common limitations on the taxing powers of local

governmental and purely proprietary functions. Respondent city of Cebu urges this the Manila

government units as follows:

International Airport Authority is a governmental-owned corporation,

12

and to reject the application

Sec. 133. Common Limitations on the Taxing Power of Local Government Units. Unless

of Basco because it was "promulgated . . . before the enactment and the singing into law of R.A.

otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,

No. 7160," and was not, therefore, decided "in the light of the spirit and intention of the framers of

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

the said law.

(a) Income tax, except when levied on banks and other financial institutions;

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,

(b) Documentary stamp tax;

acknowledging in its very nature no limits, so that security against its abuse is to be found only in

(c) Taxes on estates, "inheritance, gifts, legacies and other acquisitions mortis causa, except as

the responsibility of the legislature which imposes the tax on the constituency who are to pay it.

otherwise provided herein

Nevertheless, effective limitations thereon may be imposed by the people through their

(d) Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all

Constitutions. 13 Our Constitution, for instance, provides that the rule of taxation shall be uniform

other kinds of customs fees charges and dues except wharfage on wharves constructed and

and equitable and Congress shall evolve a progressive system of taxation.14 So potent indeed is

maintained by the local government unit concerned:

15

the power that it was once opined that "the power to tax involves the power to destroy." Verily,

(e) Taxes, fees and charges and other imposition upon goods carried into or out of, or passing

taxation is a destructive power which interferes with the personal and property for the support of

through, the territorial jurisdictions of local government units in the guise or charges for wharfages,

the government. Accordingly, tax statutes must be construed strictly against the government and

tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such

liberally in favor of the taxpayer. 16 But since taxes are what we pay for civilized society, 17 or are the

goods or merchandise;

lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax

(f) Taxes fees or charges on agricultural and aquatic products when sold by marginal farmers or

exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor of the

fishermen;

taxing authority.

18

A claim of exemption from tax payment must be clearly shown and based on

language in the law too plain to be mistaken. 19 Elsewise stated, taxation is the rule, exemption
therefrom is the exception.

20

However, if the grantee of the exemption is a political subdivision or

(g) Taxes on business enterprise certified to be the Board of Investment 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,

instrumentality, the rigid rule of construction does not apply because the practical effect of the

and taxes, fees or charges on petroleum products;

exemption is merely to reduce the amount of money that has to be handled by the government in

(i) Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on

the course of its operations.

21

goods or services except as otherwise provided herein;

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be

(j) Taxes on the gross receipts of transportation contractor and person engage in the transportation

exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but

of passengers of freight by hire and common carriers by air, land, or water, except as provided in

pursuant to direct authority conferred by Section 5, Article X of the Constitution. 22 Under the latter,

this code;

the exercise of the power may be subject to such guidelines and limitations as the Congress may

(k) Taxes on premiums paid by ways reinsurance or retrocession;

provide which, however, must be consistent with the basic policy of local autonomy.

(l) Taxes, fees, or charges for the registration of motor vehicles and for the issuance of all kinds of

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the

licenses or permits for the driving of thereof, except, tricycles;

payment of realty taxes imposed by the National Government or any of its political subdivisions,

(m) Taxes, fees, or other charges on Philippine product actually exported, except as otherwise

agencies, and instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom

provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprise and Cooperatives

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are real

duly registered under R.A. No. 6810 and Republic Act Numbered Sixty nine hundred thirty-eight

properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a barangay,

(R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines; and

and (vi) registered cooperatives.

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL GOVERNMENT, ITS

(b) Character Exemptions. Exempted from real property taxes on the basis of their character are:

AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS. (emphasis

(i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or convents

supplied)

appurtenant thereto, mosques, and (iii) non profit or religious cemeteries.

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges" referred

(c) Usage exemptions. Exempted from real property taxes on the basis of the actual, direct and

to are "of any kind", hence they include all of these, unless otherwise provided by the LGC. The

exclusive use to which they are devoted are: (i) all lands buildings and improvements which are

term "taxes" is well understood so as to need no further elaboration, especially in the light of the

actually, directed and exclusively used for religious, charitable or educational purpose; (ii) all

above enumeration. The term "fees" means charges fixed by law or Ordinance for the regulation or

machineries and equipment actually, directly and exclusively used or by local water districts or by

24

inspection of business activity, while "charges" are pecuniary liabilities such as rents or fees

government-owned or controlled corporations engaged in the supply and distribution of water

against person or property. 25

and/or generation and transmission of electric power; and (iii) all machinery and equipment used

Among the "taxes" enumerated in the LGC is real property tax, which is governed by Section 232.

for pollution control and environmental protection.

It reads as follows:

To help provide a healthy environment in the midst of the modernization of the country, all

Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality within the

machinery and equipment for pollution control and environmental protection may not be taxed by

Metropolitan Manila Area may levy on an annual ad valorem tax on real property such as land,

local governments.

building, machinery and other improvements not hereafter specifically exempted.

2. Other Exemptions Withdrawn. All other exemptions previously granted to natural or juridical

Section 234 of LGC provides for the exemptions from payment of real property taxes and

persons including government-owned or controlled corporations are withdrawn upon the effectivity

withdraws previous exemptions therefrom granted to natural and juridical persons, including

of the Code. 26

government owned and controlled corporations, except as provided therein. It provides:

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. It

Sec. 234. Exemptions from Real Property Tax. The following are exempted from payment of the

provides:

real property tax:

Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this code, tax

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

exemptions or incentives granted to or presently enjoyed by all persons, whether natural or

when the beneficial use thereof had been granted, for reconsideration or otherwise, to a taxable

juridical, including government-owned, or controlled corporations, except local water districts,

person;

cooperatives duly registered under R.A. 6938, non stock and non profit hospitals and educational

(b) Charitable institutions, churches, parsonages or convents appurtenants thereto, mosques

constitutions, are hereby withdrawn upon the effectivity of this Code.

nonprofits or religious cemeteries and all lands, building and improvements actually, directly, and

On the other hand, the LGC authorizes local government units to grant tax exemption privileges.

exclusively used for religious charitable or educational purposes;

Thus, Section 192 thereof provides:

(c) All machineries and equipment that are actually, directly and exclusively used by local water

Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units may, through

districts and government-owned or controlled corporations engaged in the supply and distribution

ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and

of water and/or generation and transmission of electric power;

conditions as they may deem necessary.

(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of local

and;

government units and the exceptions to such limitations; and (b) the rule on tax exemptions and

(e) Machinery and equipment used for pollution control and environmental protection.

the exceptions thereto. The use of exceptions of provisos in these section, as shown by the

Except as provided herein, any exemptions from payment of real property tax previously granted to

following clauses:

or presently enjoyed by, all persons whether natural or juridical, including all government owned or

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;

controlled corporations are hereby withdrawn upon the effectivity of his Code.

(2) "Unless otherwise provided in this Code" in section 193;

These exemptions are based on the ownership, character, and use of the property. Thus;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,

in section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided

exemptions from real property taxes granted to natural or juridical persons, including government-

herein," with the "herein" to mean, of course, the section, it should have used the clause "unless

owned or controlled corporations, except as provided in the said section, and the petitioner is,

otherwise provided in this Code." The former results in absurdity since the section itself

undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such

enumerates what are beyond the taxing powers of local government units and, where exceptions

tax granted it in Section 14 of its charter, R.A. No. 6958, has been withdrawn. Any claim to the

were intended, the exceptions were explicitly indicated in the text. For instance, in item (a) which

contrary can only be justified if the petitioner can seek refuge under any of the exceptions provided

excepts the income taxes "when livied on banks and other financial institutions", item (d) which

in Section 234, but not under Section 133, as it now asserts, since, as shown above, the said

excepts "wharfage on wharves constructed and maintained by the local government until

section is qualified by Section 232 and 234.

concerned"; and item (1) which excepts taxes, fees, and charges for the registration and issuance

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing powers

of license or permits for the driving of "tricycles". It may also be observed that within the body itself

of the local government units cannot extend to the levy of:

of the section, there are exceptions which can be found only in other parts of the LGC, but the

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

section interchangeably uses therein the clause "except as otherwise provided herein" as in items

instrumentalities, and local government units.

(c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or the clause

I must show that the parcels of land in question, which are real property, are any one of those

"excepts as provided in this Code" in item (j). These clauses would be obviously unnecessary or

enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most

mere surplus-ages if the opening clause of the section were" "Unless otherwise provided in this

likely, it could only be the first, but not under any explicit provision of the said section, for one

Code" instead of "Unless otherwise provided herein". In any event, even if the latter is used, since

exists. In light of the petitioner's theory that it is an "instrumentality of the Government", it could

under Section 232 local government units have the power to levy real property tax, except those

only be within be first item of the first paragraph of the section by expanding the scope of the terms

exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section 133.

Republic of the Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or expediency

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule,

we quote:

as laid down in Section 133 the taxing powers of local government units cannot extend to the levy

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

of inter alia, "taxes, fees, and charges of any kind of the National Government, its agencies and

political subdivisions except when the beneficial use thereof has been granted, for consideration or

instrumentalties, and local government units"; however, pursuant to Section 232, provinces, cities,

otherwise, to a taxable person.

municipalities in the Metropolitan Manila Area may impose the real property tax except on, inter

This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality

alia, "real property owned by the Republic of the Philippines or any of its political subdivisions

of the Government is based on Section 133(o), which expressly mentions the word

except when the beneficial used thereof has been granted, for consideration or otherwise, to a

"instrumentalities"; and in the second place it fails to consider the fact that the legislature used the

taxable person", as provided in item (a) of the first paragraph of Section 234.

phrase "National Government, its agencies and instrumentalities" "in Section 133(o),but only the

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,

phrase "Republic of the Philippines or any of its political subdivision "in Section 234(a).

including government-owned and controlled corporations, Section 193 of the LGC prescribes the

The terms "Republic of the Philippines" and "National Government" are not interchangeable. The

general rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of

former is boarder and synonymous with "Government of the Republic of the Philippines" which the

the LGC, except those granted to local water districts, cooperatives duly registered under R.A. No.

Administrative Code of the 1987 defines as the "corporate governmental entity though which the

6938, non stock and non-profit hospitals and educational institutions, and unless otherwise

functions of the government are exercised through at the Philippines, including, saves as the

provided in the LGC. The latter proviso could refer to Section 234, which enumerates the

contrary appears from the context, the various arms through which political authority is made

properties exempt from real property tax. But the last paragraph of Section 234 further qualifies the

effective in the Philippines, whether pertaining to the autonomous reason, the provincial, city,

retention of the exemption in so far as the real property taxes are concerned by limiting the

municipal or barangay subdivision or other forms of local government." 27 These autonomous

retention only to those enumerated there-in; all others not included in the enumeration lost the

regions, provincial, city, municipal or barangay subdivisions" are the political subdivision. 28

privilege upon the effectivity of the LGC. Moreover, even as the real property is owned by the

On the other hand, "National Government" refers "to the entire machinery of the central

Republic of the Philippines, or any of its political subdivisions covered by item (a) of the first

government, as distinguished from the different forms of local Governments." 29 The National

paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has

Government then is composed of the three great departments the executive, the legislative and the

been granted to taxable person for consideration or otherwise.

judicial. 30

An "agency" of the Government refers to "any of the various units of the Government, including a

The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to

department, bureau, office instrumentality, or government-owned or controlled corporation, or a

the Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b)

local government or a distinct unit therein;" 31 while an "instrumentality" refers to "any agency of the

whether the petitioner is a "taxable person".

National Government, not integrated within the department framework, vested with special

Section 15 of the petitioner's Charter provides:

functions or jurisdiction by law, endowed with some if not all corporate powers, administering

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities,

special funds, and enjoying operational autonomy; usually through a charter. This term includes

runways, lands, buildings and other properties, movable or immovable, belonging to or presently

regulatory agencies, chartered institutions and government-owned and controlled corporations". 32

administered by the airports, and all assets, powers, rights, interests and privileges relating on

If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from

airport works, or air operations, including all equipment which are necessary for the operations of

payment of real property taxes under the last sentence of the said section to the agencies and

air navigation, acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to

instrumentalities of the National Government mentioned in Section 133(o), then it should have

the Authority: Provided however, that the operations control of all equipment necessary for the

restated the wording of the latter. Yet, it did not Moreover, that Congress did not wish to expand the

operation of radio aids to air navigation, airways communication, the approach control office, and

scope of the exemption in Section 234(a) to include real property owned by other instrumentalities

the area control center shall be retained by the Air Transportation Office. No equipment, however,

or agencies of the government including government-owned and controlled corporations is further

shall be removed by the Air Transportation Office from Mactan without the concurrence of the

borne out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646, otherwise

authority. The authority may assist in the maintenance of the Air Transportation Office equipment.

known as the Real Property Tax Code, which reads:

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan International

Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:

AirPort in the Province of Cebu", 36 which belonged to the Republic of the Philippines, then under

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

the Air Transportation Office (ATO). 37

any government-owned or controlled corporations so exempt by is charter: Provided, however, that

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then

this exemption shall not apply to real property of the above mentioned entities the beneficial use of

administered by the Lahug Air Port and includes the parcels of land the respondent City of Cebu

which has been granted, for consideration or otherwise, to a taxable person.

seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among

Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled

other things, to the petitioner and not just the transfer of the beneficial use thereof, with the

corporation so exempt by its charter" was excluded. The justification for this restricted exemption in

ownership being retained by the Republic of the Philippines.

Section 234(a) seems obvious: to limit further tax exemption privileges, specially in light of the

This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's

general provision on withdrawal of exemption from payment of real property taxes in the last

authorized capital stock consists of, inter alia "the value of such real estate owned and/or

paragraph of property taxes in the last paragraph of Section 234. These policy considerations are

administered by the airports." 38 Hence, the petitioner is now the owner of the land in question and

consistent with the State policy to ensure autonomy to local governments 33 and the objective of the

the exception in Section 234(c) of the LGC is inapplicable.

LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter. It

development as self-reliant communities and make them effective partners in the attainment of

was only exempted from the payment of real property taxes. The grant of the privilege only in

national goals. 34 The power to tax is the most effective instrument to raise needed revenues to

respect of this tax is conclusive proof of the legislative intent to make it a taxable person subject to

finance and support myriad activities of local government units for the delivery of basic services

all taxes, except real property tax.

essential to the promotion of the general welfare and the enhancement of peace, progress, and

Finally, even if the petitioner was originally not a taxable person for purposes of real property tax, in

prosperity of the people. It may also be relevant to recall that the original reasons for the

light of the forgoing disquisitions, it had already become even if it be conceded to be an "agency"

withdrawal of tax exemption privileges granted to government-owned and controlled corporations

or "instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal

and all other units of government were that such privilege resulted in serious tax base erosion and

in the last paragraph of Section 234 of exemptions from the payment of real property taxes, which,

distortions in the tax treatment of similarly situated enterprises, and there was a need for this

as earlier adverted to, applies to the petitioner.

entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine

and other charges due from them.

35

Amusement and Gaming Corporation 39 is unavailing since it was decided before the effectivity of
the LGC. Besides, nothing can prevent Congress from decreeing that even instrumentalities or

agencies of the government performing governmental functions may be subject to tax. Where it is

On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from Revenue

done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.

District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the Regional

Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency

Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

value-added and withholding taxes for the taxable year 1999, computed as follows:

No pronouncement as to costs.

ASSESSMENT NOTICE NO. 067-99-003-579-072

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

VALUE ADDED TAX

Gross Sales

P1,697,718.90

Output Tax

P 154,338.08

DECISION

Less: Input Tax

_____________

MENDOZA, J.:

VAT Payable

P 154,338.08

vs.
METRO STAR SUPERAMA, INC., Respondent.

This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner
Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16,
2008 Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2]

Add: 25% Surcharge

P 38,584.54

20% Interest

79,746.49

its November 18, 2008 Resolution2 denying petitioners motion for reconsideration.

Compromise Penalty

The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in

Late Payment

P16,000.00

CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed

Failure to File VAT returns

2,400.00

respondent Metro Star Superama, Inc.(Metro Star) of deficiency value-added tax and withholding
tax for the taxable year 1999.
Based on a Joint Stipulation of Facts and Issues3 of the parties, the CTA Second Division

18,400.00

TOTAL

136,731.01
P 291,069.09

WITHHOLDING TAX

summarized the factual and procedural antecedents of the case, the pertinent portions of which

Compensation

2,772.91

read:

Expanded

110,103.92

Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the

Total Tax Due

P 112,876.83

Less: Tax Withheld

111,848.27

Deficiency Withholding Tax

P 1,028.56

accounts and other accounting records for income tax and other internal revenue taxes for the

Add: 20% Interest p.a.

576.51

taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional

Compromise Penalty

200.00

Director Leonardo Sacamos.

TOTAL

P 1,805.07

Republic of the Philippines, x x x.

On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued Letter
of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioners books of

For petitioners failure to comply with several requests for the presentation of records and

*Expanded Withholding Tax

P1,949,334.25

x 5%

97,466.71

Film Rental

10,000.25

x 10%

1,000.00

with the investigation based on the best evidence obtainable preparatory to the issuance of

Audit Fee

193,261.20

x 5%

9,663.00

assessment notice.

Rental Expense

41,272.73

x 1%

412.73

Security Service

156,142.01

x 1%

1,561.42

Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September
26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed

On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a Preliminary

15-day Letter, which petitioner received on November 9, 2001. The said letter stated that a post
audit review was held and it was ascertained that there was deficiency value-added and
withholding taxes due from petitioner in the amount of P 292,874.16.

Service Contractor
Total
SUMMARIES OF DEFICIENCIES

P 110,103.92

VALUE ADDED TAX

P 291,069.09

WITHHOLDING TAX

1,805.07

TOTAL

P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated May
12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to settle its
deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent BIR shall
be constrained to serve and execute the Warrants of Distraint and/or Levy and Garnishment to
enforce collection.
On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of Distraint
and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency value-added
tax and withholding tax payment in the amount of P292,874.16.
On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for
Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99.
On February 8, 2005, respondent Commissioner, through its authorized representative, Revenue
Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying petitioners
Motion for Reconsideration. Petitioner, through counsel received said Decision on February 18,
2005.
x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not
accorded due process, Metro Star filed a petition for review4 with the CTA. The parties then
stipulated on the following issues to be decided by the tax court:
1. Whether the respondent complied with the due process requirement as provided under the
National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the issuance
of a deficiency tax assessment;
1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as
deficiency VAT and withholding tax for the year 1999;
1.2. Whether the assessment has become final and executory and demandable for failure of
petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant to
Section 228 of the National Internal Revenue Code;
2. Whether the deficiency assessments issued by the respondent are void for failure to state the
law and/or facts upon which they are based.
2.2 Whether petitioner was informed of the law and facts on which the assessment is made in
compliance with Section 228 of the National Internal Revenue Code;
3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on
sales of services under Section 108(A) of the National Internal Revenue Code;
4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section
6(b) of the National Internal Revenue Code.

The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007,
rendered a decision, the decretal portion of which reads:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly,
the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE and
respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner.
The CTA-Second Division opined that "[w]hile there [is] a disputable presumption that a mailed
letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of the
receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed
letter was indeed received by the addressee."5 It also found that there was no clear showing that
Metro Star actually received the alleged PAN, dated January 16, 2002. It, accordingly, ruled that
the Formal Letter of Demand dated April 3, 2002, as well as the Warrant of Distraint and/or Levy
dated May 12, 2003 were void, as Metro Star was denied due process.6
The CIR sought reconsideration7 of the decision of the CTA-Second Division, but the motion was
denied in the latters July 24, 2007 Resolution.8
Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc, but the petition was dismissed
after a determination that no new matters were raised. The CTA-En Banc disposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED
for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007 Resolution of the CTA
Second Division in CTA Case No. 7169 entitled, "Metro Star Superama, Inc., petitioner vs.
Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.
SO ORDERED.
The motion for reconsideration10 filed by the CIR was likewise denied by the CTA-En Banc in its
November 18, 2008 Resolution.11
The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process
was served nonetheless because the latter received the Final Assessment Notice (FAN), comes
now before this Court with the sole issue of whether or not Metro Star was denied due process.
The general rule is that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its functions, has accordingly developed an exclusive expertise on the
resolution unless there has been an abuse or improvident exercise of authority.12 In Barcelon,
Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal
Revenue,13 the Court wrote:
Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with
the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001,
357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the very
nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned unless there has
been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal
if they are not supported by substantial evidence or there is a showing of gross error or abuse on

the part of the Tax Court. In the absence of any clear and convincing proof to the contrary, this

The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence

Court must presume that the CTA rendered a decision which is valid in every respect.

to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply

On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is

presented the registry receipt or the certification from the postmaster that it mailed the PAN, but

instructive, viz:

failed. Neither did it offer any explanation on why it failed to comply with the requirement of service

Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an

of the PAN. It merely accepted the letter of Metro Stars chairman dated April 29, 2002, that stated

assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such

that he had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay the

notice was indeed received by the addressee. The onus probandi was shifted to respondent to

tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of

prove by contrary evidence that the Petitioner received the assessment in the due course of mail.

lessening its tax liability.

The Supreme Court has consistently held that while a mailed letter is deemed received by the

This now leads to the question: Is the failure to strictly comply with notice requirements prescribed

addressee in the course of mail, this is merely a disputable presumption subject to controversion

under Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.)

and a direct denial thereof shifts the burden to the party favored by the presumption to prove that

No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process

the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA

satisfied if only the FAN stating the computation of tax liabilities and a demand to pay within the

351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal

prescribed period was sent to the taxpayer?

Revenue, 13 SCRA 104, January 30, 1965:

The answer to these questions require an examination of Section 228 of the Tax Code which

"The facts to be proved to raise this presumption are (a) that the letter was properly addressed with

reads:

postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized

the letter was received by the addressee as soon as it could have been transmitted to him in the

representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his

ordinary course of the mail. But if one of the said facts fails to appear, the presumption does not lie.

findings: provided, however, that a preassessment notice shall not be required in the following

(VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance

cases:

of Canada, 41 Phil 269)."

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of

x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of

the tax as appearing on the face of the return; or

Posts or the Registry return card which would have been signed by the Petitioner or its authorized

(b) When a discrepancy has been determined between the tax withheld and the amount actually

representative. And if said documents cannot be located, Respondent at the very least, should

remitted by the withholding agent; or

have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax

document which is executed with the intervention of the Bureau of Posts. This Court does not put

for a taxable period was determined to have carried over and automatically applied the same

much credence to the self serving documentations made by the BIR personnel especially if they

amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the

are unsupported by substantial evidence establishing the fact of mailing. Thus:

succeeding taxable year; or

"While we have held that an assessment is made when sent within the prescribed period, even if

(d) When the excise tax due on exciseable articles has not been paid; or

received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259,

(e) When the article locally purchased or imported by an exempt person, such as, but not limited to,

May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the

vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to

notice be clearly and satisfactorily proved. Mere notations made without the taxpayers

non-exempt persons.

intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise, the

The taxpayers shall be informed in writing of the law and the facts on which the assessment is

taxpayer would be at the mercy of the revenue offices, without adequate protection or defense."

made; otherwise, the assessment shall be void.

(Nava vs. CIR, 13 SCRA 104, January 30, 1965).

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be

x x x.

required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly

The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the

authorized representative shall issue an assessment based on his findings.

conclusion that no assessment was issued. Consequently, the governments right to issue an

Such assessment may be protested administratively by filing a request for reconsideration or

assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the

reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as

Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)

may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the

protest, all relevant supporting documents shall have been submitted; otherwise, the assessment

notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's

shall become final.

deficiency tax liability, inclusive of the applicable penalties.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)

3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference and the

days from submission of documents, the taxpayer adversely affected by the decision or inaction

preliminary assessment notice shall not be required in any of the following cases, in which case,

may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or

issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability

from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final,

shall be sufficient:

executory and demandable. (Emphasis supplied).

(i) When the finding for any deficiency tax is the result of mathematical error in the computation of

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that

the tax appearing on the face of the tax return filed by the taxpayer; or

he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and

(ii) When a discrepancy has been determined between the tax withheld and the amount actually

the law upon which the assessment is made. The law imposes a substantive, not merely a formal,

remitted by the withholding agent; or

requirement. To proceed heedlessly with tax collection without first establishing a valid assessment

(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax

is evidently violative of the cardinal principle in administrative investigations - that taxpayers should

for a taxable period was determined to have carried over and automatically applied the same

be able to present their case and adduce supporting evidence.

14

amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the

This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:

succeeding taxable year; or

SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment.

(iv) When the excise tax due on excisable articles has not been paid; or

3.1 Mode of procedures in the issuance of a deficiency tax assessment:

(v) When an article locally purchased or imported by an exempt person, such as, but not limited to,

3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's records

vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to

shall, among others, state in his report whether or not the taxpayer agrees with his findings that the

non-exempt persons.

taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said

3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and

Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the

assessment notice shall be issued by the Commissioner or his duly authorized representative. The

Revenue District Office or by the Special Investigation Division, as the case may be (in the case

letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts,

Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National

the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the

Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes,

formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof).

for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to

The same shall be sent to the taxpayer only by registered mail or by personal delivery.

present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of

If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge

receipt of the notice for informal conference, he shall be considered in default, in which case, the

receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name;

Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional

(b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged

Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case

received by a person other than the taxpayer himself; and (d) date of receipt thereof.

with the least possible delay to the Assessment Division of the Revenue Regional Office or to the

x x x.

Commissioner or his duly authorized representative, as the case may be, for appropriate review

From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of

and issuance of a deficiency tax assessment, if warranted.

the assessment made is but part of the "due process requirement in the issuance of a deficiency

3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the Assessment

tax assessment," the absence of which renders nugatory any assessment made by the tax

Division or by the Commissioner or his duly authorized representative, as the case may be, it is

authorities. The use of the word "shall" in subsection 3.1.2 describes the mandatory nature of the

determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes,

service of a PAN. The persuasiveness of the right to due process reaches both substantial and

the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment

procedural rights and the failure of the CIR to strictly comply with the requirements laid down by

Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and

law and its own rules is a denial of Metro Stars right to due process.15 Thus, for its failure to send

regulations, or jurisprudence on which the proposed assessment is based (see illustration in

the PAN stating the facts and the law on which the assessment was made as required by Section

ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the

228 of R.A. No. 8424, the assessment made by the CIR is void.

PAN, he shall be considered in default, in which case, a formal letter of demand and assessment

The case of CIR v. Menguito16 cited by the CIR in support of its argument that only the non-service

WHEREFORE, the petition is DENIED.

of the FAN is fatal to the validity of an assessment, cannot apply to this case because the issue

SO ORDERED.

therein was the non-compliance with the provisions of R. R. No. 12-85 which sought to interpret

G.R. No. L-59431 July 25, 1984

Section 229 of the old tax law. RA No. 8424 has already amended the provision of Section 229 on

ANTERO M. SISON, JR., petitioner,

protesting an assessment. The old requirement of merelynotifying the taxpayer of the CIRs

vs.

findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on

RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA,

which an assessment would be made. Otherwise, the assessment itself would be invalid.17The

Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner,

regulation then, on the other hand, simply provided that a notice be sent to the respondent in the

Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,

form prescribed, and that no consequence would ensue for failure to comply with that

Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of

form.1avvphi1

Finance, respondents.

The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it is

Antero Sison for petitioner and for his own behalf.

well-settled that a void assessment bears no fruit.18

The Solicitor General for respondents.

It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of
property without due process of law.19 In balancing the scales between the power of the State to

FERNANDO, C.J.:

tax and its inherent right to prosecute perceived transgressors of the law on one side, and the

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on

constitutional rights of a citizen to due process of law and the equal protection of the laws on the

the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional

other, the scales must tilt in favor of the individual, for a citizens right is amply protected by the Bill

infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code

of Rights under the Constitution. Thus, while "taxes are the lifeblood of the government," the power

of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation

to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v.

income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank

20

Algue, Inc., it was said

deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and

Taxes are the lifeblood of the government and so should be collected without unnecessary

similar arrangements, (e) dividends and share of individual partner in the net profits of taxable

hindrance. On the other hand, such collection should be made in accordance with law as any

partnership, (f) adjusted gross income. 2 Petitioner 3as taxpayer alleges that by virtue thereof, "he

arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile

would be unduly discriminated against by the imposition of higher rates of tax upon his income

the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of

arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or

taxation, which is the promotion of the common good, may be achieved.

salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class

xxx

legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a

xxx

xxx

It is said that taxes are what we pay for civilized society. Without taxes, the government would be

transgression of both the equal protection and due process clauses 6 of the Constitution as well as

paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural

of the rule requiring uniformity in taxation.

reluctance to surrender part of ones hard-earned income to taxing authorities, every person who is

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10

able to must contribute his share in the running of the government. The government for its part is

days from notice. Such an answer, after two extensions were granted the Office of the Solicitor

expected to respond in the form of tangible and intangible benefits intended to improve the lives of

General, was filed on May 28, 1982.8 The facts as alleged were admitted but not the allegations

the people and enhance their moral and material values. This symbiotic relationship is the rationale

which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the

of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by

truth [for them] being those stated [in their] Special and Affirmative Defenses."9 The answer then

those in the seat of power.

affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all

and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The

democratic regimes that it be exercised reasonably and in accordance with the prescribed

prayer is for the dismissal of the petition for lack of merit.

procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his

This Court finds such a plea more than justified. The petition must be dismissed.

succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so

taxpayer can demonstrate x x x that the law has not been observed.21 (Emphasis supplied).

clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private

enterprise and initiative and which the government was called upon to enter optionally, and only

assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in

'because it was better equipped to administer for the public welfare than is any private individual or

case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process

group of individuals,' continue to lose their well-defined boundaries and to be absorbed within

grounds. 19

activities that the government must undertake in its sovereign capacity if it is to meet the increasing

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of

social challenges of the times." 11 Hence the need for more revenues. The power to tax, an

this constitutional mandate whether the assailed act is in the exercise of the lice power or the

inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the

power of eminent domain is to demonstrated that the governmental act assailed, far from being

source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the

inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very

government, their prompt and certain availability is of the essence. 12

least, discrimination that finds no support in reason. It suffices then that the laws operate equally

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is

and uniformly on all persons under similar circumstances or that all persons must be treated in the

the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its

same manner, the conditions not being different, both in the privileges conferred and the liabilities

plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth

imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal

such limits . Adversely affecting as it does properly rights, both the due process and equal

protection and security shall be given to every person under circumtances which if not Identical are

protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a

analogous. If law be looked upon in terms of burden or charges, those that fall within a class

revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice

should be treated in the same fashion, whatever restrictions cast on some in the group equally

Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves

binding on the rest." 20 That same formulation applies as well to taxation measures. The equal

v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it

protection clause is, of course, inspired by the noble concept of approximating the Ideal of the laws

as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of

benefits being available to all and the affairs of men being governed by that serene and impartial

absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional

uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as

mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's

realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause

famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is

aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the

not the power to destroy while this Court sits." 17 So it is in the Philippines.

laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any

are expressions of policy arising out of specific difficulties, address to the attainment of specific

legislative or executive, act that runs counter to it. In any case therefore where it can be

ends by the use of specific remedies. The Constitution does not require things which are different

demonstrated that the challenged statutory provision as petitioner here alleges fails to abide

in fact or opinion to be treated in law as though they were the same."

by its command, then this Court must so declare and adjudge it null. The injury thus is centered on

reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a

the question of whether the imposition of a higher tax rate on taxable net income derived from

leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold

business or profession than on compensation is constitutionally infirm.

"at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation,

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,

and it has been repeatedly held that 'inequalities which result from a singling out of one particular

as here. does not suffice. There must be a factual foundation of such unconstitutional taint.

class for taxation, or exemption infringe no constitutional limitation.'"

Considering that petitioner here would condemn such a provision as void or its face, he has not

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The

made out a case. This is merely to adhere to the authoritative doctrine that were the due process

rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice

and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad

Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the

standards, there is a need for of such persuasive character as would lead to such a conclusion.

same force and effect in every place where the subject may be found. "

Absent such a showing, the presumption of validity must prevail. 18

rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary

attainable." 27 The problem of classification did not present itself in that case. It did not arise until

that it finds no support in the Constitution. An obvious example is where it can be shown to amount

nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all

to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of

taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing

this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred.

power has the authority to make reasonable and natural classifications for purposes of

That properly calls for the application of the Holmes dictum. It has also been held that where the

taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation" complained of "conforms

21

Hence the constant

23

26

He likewise added: "The

to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this
clause and is therefore uniform."

29

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."

30

Zone but outside such "fenced-in" territory. The Constitution does not require absolute equality
among residents. It is enough that all persons under like circumstances or conditions are given the
same privileges and required to follow the same obligations. In short, a classification based on
valid and reasonable standards does not violate the equal protection clause.

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration

The Case

the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base

Before us is a petition for review under Rule 45 of the Rules of Court, seeking the reversal of the

or taxable income by eliminating all deductible items and at the same time reducing the applicable

Court of Appeals' Decision 1 promulgated on August 29, 1996, and Resolution 2 dated November

tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the

13, 1996, in CA-GR SP No. 37788. 3 The challenged Decision upheld the constitutionality and

classification must rest upon substantial distinctions that make real differences. In the case of the

validity of Executive Order No. 97-A (EO 97-A), according to which the grant and enjoyment of the

gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of

tax and duty incentives authorized under Republic Act No. 7227 (RA 7227) were limited to the

classification is the susceptibility of the income to the application of generalized rules removing all

business enterprises and residents within the fenced-in area of the Subic Special Economic Zone

deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied

(SSEZ).

to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As

The assailed Resolution denied the petitioners' motion for reconsideration.

there is practically no overhead expense, these taxpayers are e not entitled to make deductions for

On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227 entitled

income tax purposes because they are in the same situation more or less. On the other hand, in

"An Act Accelerating the Conversion of Military Reservations Into Other Productive Uses, Creating

the case of professionals in the practice of their calling and businessmen, there is no uniformity in

the Bases Conversion and Development Authority for this Purpose, Providing Funds Therefor and

the costs or expenses necessary to produce their income. It would not be just then to disregard the

for Other Purposes." Section 12 thereof created the Subic Special Economic Zone and granted

disparities by giving all of them zero deduction and indiscriminately impose on all alike the same

there to special privileges, as follows:

tax rates on the basis of gross income. There is ample justification then for the Batasang

Sec. 12. Subic Special Economic Zone. Subject to the concurrence by resolution of

Pambansa to adopt the gross system of income taxation to compensation income, while continuing

thesangguniang panlungsod of the City of Olongapo and the sangguniang bayan of the

the system of net income taxation as regards professional and business income.

Municipalities of Subic, Morong and Hermosa, there is hereby created a Special Economic and

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack

Free-port Zone consisting of the City of Olongapo and the Municipality of Subic, Province of

of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of

Zambales, the lands occupied by the Subic Naval Base and its contiguous extensions as

controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the

embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines

reasonableness of the distinction between compensation and taxable net income of professionals

and the United States of America as amended, and within the territorial jurisdiction of the

and businessman certainly not a suspect classification,

Municipalities of Morong and Hermosa, Province of Bataan, hereinafter referred to as the Subic

WHEREFORE, the petition is dismissed. Costs against petitioner.

Special Economic Zone whose metes and bounds shall be delineated in a proclamation to be

G.R. No. 127410 January 20, 1999

issued by the President of the Philippines. Within thirty (30) days after the approval of this Act,

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M. JUNGCO, petitioners,

each local government unit shall submit its resolution of concurrence to join the Subic Special

vs.

Economic Zone to the Office of the President. Thereafter, the President of the Philippines shall

COURT OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION AND

issue a proclamation defining the metes and bounds of the zone as provided herein.

DEVELOPMENT AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY, BUREAU OF

The abovementioned zone shall be subject to the following policies:

INTERNAL REVENUE, CITY TREASURER OF OLONGAPO and MUNICIPAL TREASURER OF

(a) Within the framework and subject to the mandate and limitations of the Constitution and the

SUBIC, ZAMBALES, respondents.

pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be
developed into a self-sustaining, industrial, commercial, financial and investment center to

PANGANIBAN, J.:

generate employment opportunities in and around the zone and to attract and promote productive

The constituttional rights to equal protection of the law is not violated by an executive order, issued

foreign investments;

pursuant to law, granting tax and duty incentives only to the bussiness and residents within the

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs

"secured area" of the Subic Special Econimic Zone and denying them to those who live within the

territory ensuring free flow or movement of goods and capital within, into and exported out of the

Subic Special Economic Zone, as well as provide incentives such as tax and duty-free importations

(i) Except as herein provided, the local government units comprising the Subic Special Economic

of raw materials, capital and equipment. However, exportation or removal of goods from the

Zone shall retain their basic autonomy and identity. The cities shall be governed by their respective

territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be

charters and the municipalities shall operate and function in accordance with Republic Act No.

subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws

7160, otherwise known as the Local Government Code of 1991.

of the Philippines;

On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO 97),

(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes,

clarifying the application of the tax and duty incentives thus:

local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying

Sec. 1. On Import Taxes and Duties. Tax and duty-free importations shall apply only to raw

taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the

materials, capital goods and equipment brought in by business enterprises into the SSEZ. Except

Subic Special Economic Zone shall be remitted to the National Government, one percent (1%)

for these items, importations of other goods into the SSEZ, whether by business enterprises or

each to the local government units affected by the declaration of the zone in proportion to their

resident individuals, are subject to taxes and duties under relevant Philippine laws.

population area, and other factors. In addition, there is hereby established a development fund of

The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts

one percent (1%) of the gross income earned by all businesses and enterprises within the Subic

of the Philippine territory shall be subject to duties and taxes under relevant Philippine laws.

Special Economic Zone to be utilized for the development of municipalities outside the City of

Sec. 2. On All Other Taxes. In lieu of all local and national taxes (except import taxes and

Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas.

duties), all business enterprises in the SSEZ shall be required to pay the tax specified in Section

In case of conflict between national and local laws with respect to tax exemption privileges in the

12(c) of R.A. No. 7227.

Subic Special Economic Zone, the same shall be resolved in favor of the latter;

Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO 97-A),

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold,

specifying the area within which the tax-and-duty-free privilege was operative, viz.:

securities and future shall be allowed and maintained in the Subic Special Economic Zone;

Sec. 1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of

the only completely tax and duty-free area in the SSEFPZ [Subic Special Economic and Free Port

banks and other financial institutions within the Subic Special Economic Zone;

Zone]. Business enterprises and individuals (Filipinos and foreigners) residing within the Secured

(f) Banking and finance shall be liberalized with the establishment of foreign currency depository

Area are free to import raw materials, capital goods, equipment, and consumer items tax and duty-

units of local commercial banks and offshore banking units of foreign banks with minimum Central

free. Consumption items, however, must be consumed within the Secured Area. Removal of raw

Bank regulation;

materials, capital goods, equipment and consumer items out of the Secured Area for sale to non-

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be

SSEFPZ registered enterprises shall be subject to the usual taxes and duties, except as may be

less than two hundred fifty thousand dollars ($250,000), his/her spouse and dependent children

provided herein.

under twenty-one (21) years of age, shall be granted permanent resident status within the Subic

On October 26, 1994, the petitioners challenged before this Court the constitutionality of EO 97-A

Special Economic Zone. They shall have the freedom of ingress and egress to and from the Subic

for allegedly being violative of their right to equal protection of the laws. In a Resolution dated June

Special Economic Zone without any need of special authorization form the Bureau of Immigration

27, 1995, this Court referred the matter to the Court of Appeals, pursuant to Revised Administrative

and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this Act may

Circular No. 1-95.

also issue working visas renewable every two (2) years to foreign executives and other aliens

Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos. It

possessing highly technical skills which no Filipino within the Subic Special Economic Zone

delineated the exact metes and bounds of the Subic Special Economic and Free Port Zone,

possesses, as certified by the Department of Labor and Employment. The names of aliens granted

pursuant to Section 12 of RA 7227.

permanent residence status and working visas by the Subic Bay Metropolitan Authority shall be

Ruling of the Court of Appeals

reported to the Bureau of Immigration and Deportation within thirty (30) days after issuance

Respondent Court held that "there is no substantial difference between the provisions of EO 97-A

thereof;

and Section 12 of RA 7227. In both, the 'Secured Area' is precise and well-defined as '. . . the lands

(h) The defense of the zone and the security of its perimeters shall be the responsibility of the

occupied by the Subic Naval Base and its contiguous extensions as embraced, covered and

National Government in coordination with the Subic Bay Metropolitan Authority. The Subic Bay

defined by the 1947 Military Bases Agreement between the Philippines and the United States of

Metropolitan Authority shall provide and establish its own security and fire-fighting forces; and

America, as amended . . .'" The appellate court concluded that such being the case, petitioners

could not claim that EO 97-A is unconstitutional, while at the same time maintaining the validity of

The Court's Ruling

RA 7227.

The petition 5 is bereft of merit.

The court a quo also explained that the intention of Congress was to confine the coverage of the

Main Issue:

SSEZ to the "secured area" and not to include the "entire Olongapo City and other areas

The Constitionality of EO 37-A

mentioned in Section 12 of the law." It relied on the following deliberarions in the Senate:

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City of

Senator Paterno. Thank you, Mr. President. My first question is the extent of the economic zone.

Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the

Since this will be a free port, in effect, I believe that it is important to delineate or make sure that

Subic Naval Base. However, EO 97-A, according to them, narrowed down the area within which

the delineation will be quite precise[. M]y question is: Is it the intention that the entire of Olongapo

the special privileges granted to the entire zone would apply to the present "fenced-in former Subic

City, the Municipality of Subic and the Municipality of Dinalupihan will be covered by the special

Naval Base" only. It has thereby excluded the residents of the first two components of the zone

economic zone or only portions thereof?

from enjoying the benefits granted by the law. It has effectively discriminated against them without

Senator Shahani. Only portions, Mr. President. In other words, where the actual operations of the

reasonable or valid standards, in contravention of the equal protection guarantee.

free port will take place.

On the other hand, the solicitor general defends, on behalf of respondents, the validity of EO 97-A,

Senator Paterno. I see. So, we should say, "COVERING THE DESIGNATED PORTIONS OR

arguing that Section 12 of RA 7227 clearly vests in the President the authority to delineate the

CERTAIN PORTIONS OF OLONGAPO CITY, SUBIC AND DINALUPIHAN" to make it clear that it

metes and bounds of the SSEZ. He adds that the issuance fully complies with the requiretnents of

is not supposed to cover the entire area of all of these territories.

a valid classification.

Senator Shahani. So, the Gentleman is proposing that the words "CERTAIN AREAS". . .

We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not violative of

The President. The Chair would want to invite the attention of the Sponsor and Senator Paterno to

the equal protection clause; neither is it discriminatory. Rather, than we find real and substantive

letter "C," which says: "THE PRESIDENT OF THE PHILIPPINES IS HEREBY AUTHORIZED TO

distinctions between the circumstances obtain;ng inside and those outside the Subic Naval Base,

PROCLAIM, DELINEATE AND SPECIFY THE METES AND BOUNDS OF OTHER SPECIAL

thereby justifying a valid and reasonable classification.

ECONOMIC ZONES WHICH MAY BE CREATED IN THE CLARK MILITARY RESERVATIONS

The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable

AND ITS EXTENSIONS."

classification. If the groupings are characterized by substantial distinctions that make real

Probably, this provision can be expanded since, apparently, the intention is that what is referred to

differences, one class may be treated and regulated differently from another. 6 The classification

in Olongapo as Metro Olongapo is not by itself ipso jure already a special economic zone.

must also be germane to the purpose of the law and must apply to all those belonging to the same

Senator Paterno. That is correct.

class. Explaining the nature of the equal protection guarantee, the Court in Ichong v.

The President. Someone, some authority must declare which portions of the same shall be the

Hernandez 8 said:

economic zone. Is it the intention of the author that it is the President of the Philippines who will

The equal protection of the law clause is against undue favor and individual or class privilege, as

make such delineation?

well as hostile discrimination or the oppression of inequality. It is not intended to prohibit legislation

Senator Shahani. Yes Mr. President.

which is limited either [by] the object to which it is directed or by [the] territory within which it is to

The Court of Appeals further justified the limited application of the tax incentives as being within the

operate. It does not demand absolute equality among residents; it merely requires that all persons

prerogative of the legislature, pursuant to its "avowed purpose [of serving] some public benefit or

shall be treated alike, under like circumstances and conditions both as to privileges conferred and

interest." It ruled that "EO 97-A merely implements the legislative purpose of [RA 7227]."

liabilities enforced. The equal protection clause is not infringed by legislation which applies only to

Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals Decision

those persons falling within a specified class, if it applies alike to all persons within such class, and

and Resolution.

reasonable. grounds exist for making a distinction between those who fall within such class and

The Issue

those who do not.

Petitioners submit the following issue for the resolution of the Court:

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose

[W]hether or not Executive Order No. 97-A violates the equal protection clause of the Constitution.

of the law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the

Specifically the issue is whether the provisions of Executive Order No. 97-A confining the

same class. 9

application of R.A. 7227 within the secured area and excluding the residents of the zone outside of

We first determine the purpose of the law. From the very title itself, it is clear that RA 7227 aims

the secured area is discriminatory or not. 4

primarily toaccelerate the conversion of military reservations into productive uses. Obviously, the

"lands covered under the 1947 Military Bases Agreement" are its object. Thus, the law avows this

Certainly, there are substantial differences between the big investors who are being lured to

policy:

establish and operate their industries in the so-called "secured area" and the present business

Sec. 2. Declaration of Policies. It is hereby declared the policy of the Government to accelerate

operators outside the area. On the one hand, we are talking of billion-peso investments and

the sound and balanced conversion into alternative productive uses of the Clark and Subic military

thousands of new, jobs. On the other hand, definitely none of such magnitude. In the first, the

reservations and their extensions (John Hay Station, Wallace Air Station, O'Donnell Transmitter

economic impact will be national; in the second, only local. Even more important, at this time the

Station, San Miguel Naval Communications Station and Capas Relay Station), to raise funds by the

business activities outside the "secured area" are not likely to have any impact in achieving the

sale of portions of Metro Manila military camps, and to apply said funds as provided herein for the

purpose of the law, which is to turn the former military base to productive use for the benefit of the

development and conversion to productive civilian use of the lands covered under the 1947 Military

Philippine economy. There is, then, hardly any reasonable basis to extend to them the benefits and

Bases Agreement between the Philippines and the United States of America, as amended.

incentives accorded in RA 7227. Additionally, as the Court of Appeals pointed out, it will be easier

To undertake the above objectives, the same law created the Bases Conversion and Development

to manage and monitor the activities within the "secured area," which is already fenced off, to

Authority, some of whose relevant defined purposes are:

prevent "fraudulent importation of merchandise" or smuggling.

(b) To adopt, prepare and implement a comprehensive and detailed development plan embodying

It is well-settled that the equal-protection guarantee does not require territorial uniformity of

a list of projects including but not limited to those provided in the Legislative-Executive Bases

laws. 13 As long as there are actual and material differences between territories, there is no

Council (LEBC) framework plan for the sound and balanced conversion of the Clark and Subic

violation of the constitutional clause. And of course, anyone, including the petitioners, possessing

military reservations and their extensions consistent with ecological and environmental standards,

the requisite investment capital can always avail of the same benefits by channeling his or her

into other productive uses to promote the economic and social development of Central Luzon in

resources or business operations into the fenced-off free port zone.

particular and the country in general;

We believe that the classification set forth by the executive issuance does not apply merely to

(c). To encourage the active participation of the private sector in transforming the Clark and Subic

existing conditions. As laid down in RA 7227, the objective is to establish a "self-sustaining,

military reservations and their extensions into other productive uses;

industrial, commercial, financial and investment center" in the area. There will, therefore, be a long-

Further, in creating the SSEZ, the law declared it a policy to develop the zone into a "self-

term difference between such investment center and the areas outside it.

sustaining, industrial, commercial, financial and investment center." 10

Lastly, the classification applies equally to all the resident individuals and businesses within the

From the above provisions of the law, it can easily be deduced that the real concern of RA 7227 is

"secured area." The residents, being in like circumstances or contributing directly to the

to convert the lands formerly occupied by the US military bases into economic or industrial areas.

achievement of the end purpose of the law, are not categorized further. Instead, they are all

In furtherance of such objective, Congress deemed it necessary to extend economic incentives to

similarly treated, both in privileges granted and in obligations required.

attract and encourage investors, both local and foreign. Among such enticements are: 11 (1) a

All told, the Court holds that no undue favor or privilege was extended. The classification

separate customs territory within the zone, (2) tax-and-duty-free importation's, (3) restructured

occasioned by EO 97-A was not unreasonable, capricious or unfounded. To repeat, it was based,

income tax rates on business enterprises within the zone, (4) no foreign exchange control, (5)

rather, on fair and substantive considerations that were germane to the legislative purpose.

liberalized regulations on banking and finance, and (6) the grant of resident status to certain

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution are

investors and of working visas to certain foreign executives and workers .

hereby AFFIRMED. Costs against petitioners.1wphi1.nt

We believe it was reasonable for the President to have delimited the application of some incentives

SO ORDERED.

to the confines of the former Subic military base. It is this specific area which the government

G.R. No. 109289 October 3, 1994

intends to transform and develop from its status quo ante as an abandoned naval facility into a
self-sustaining industrial and commercial zone, particularly for big foreign and local investors to use
as operational bases for their businesses and industries. Why the seeming bias for the big
investors? Undeniably, they are the ones who can pour huge investments to spur economic growth
in the country and to generate employment opportunities for the Filipinos, the ultimate goals of the
government for such conversion. The classification is, therefore, germane to the purposes of the
law. And as the legal maxim goes, "The intent of a statute is the law."

12

RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE

& JOSE U. ONG, as COMMISSIONER OF INTERNAL

No. 2-93, promulgated by public respondents pursuant to said

REVENUE, respondents.

law.

G.R. No. 109446 October 3, 1994

Petitioners claim to be taxpayers adversely affected by the

continued implementation of the amendatory legislation.

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES,

CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C.

In G.R. No. 109289, it is asserted that the enactment of Republic

JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,

Act

vs.

No. 7496 violates the following provisions of the Constitution:

RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF

FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.

Article VI, Section 26(1) Every bill passed by the

Congress shall embrace only one subject which
shall be expressed in the title thereof.

Rufino R. Tan for and in his own behalf.

Article VI, Section 28(1) The rule of taxation shall
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in

be uniform and equitable. The Congress shall

G.R. 109446.

evolve a progressive system of taxation.

Article III, Section 1 No person shall be deprived
of . . . property without due process of law, nor shall

VITUG, J.:
These two consolidated special civil actions for prohibition
challenge, in G.R. No. 109289, the constitutionality of Republic
Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the
National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations

any person be denied the equal protection of the

laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue
Regulations No. 2-93, argue that public respondents have
exceeded their rule-making authority in applying SNIT to general
professional partnerships.

The Solicitor General espouses the position taken by public

xxx xxx xxx

respondents.
(f) Simplified Net Income Tax for the Self-Employed
The Court has given due course to both petitions. The parties, in

and/or Professionals Engaged in the Practice of

compliance with the Court's directive, have filed their respective

Profession. A tax is hereby imposed upon the

memoranda.

taxable net income as determined in Section 27

received during each taxable year from all sources,

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314,
progenitor of Republic Act No. 7496, is a misnomer or, at least,
deficient for being merely entitled, "Simplified Net Income
Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession"
(Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation
Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession,
Amending Sections 21 and 29 of the National

other than income covered by paragraphs (b), (c),

(d) and (e) of this section by every individual
whether
a citizen of the Philippines or an alien residing in the
Philippines who is self-employed or practices his
profession herein, determined in accordance with
the following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000

Internal Revenue Code, as Amended.

Over P120,000 P15,600 + 20%
The pertinent provisions of Sections 21 and 29, so referred to, of

but not over P350,000 of excess over P120,000

the National Internal Revenue Code, as now amended, provide:

Over P350,000 P61,600 + 30%
Sec. 21. Tax on citizens or residents.

of excess over P350,000

Sec. 29. Deductions from gross income. In

(g) Interest paid or accrued within a taxable year on

computing taxable income subject to tax under

loans contracted from accredited financial

Sections 21(a), 24(a), (b) and (c); and 25 (a)(1),

institutions which must be proven to have been

there shall be allowed as deductions the items

incurred in connection with the conduct of a

specified in paragraphs (a) to (i) of this

taxpayer's profession, trade or business.

section: Provided, however, That in computing

taxable income subject to tax under Section 21 (f) in
the case of individuals engaged in business or
practice of profession, only the following direct costs
shall be allowed as deductions:

For individuals whose cost of goods sold and direct

costs are difficult to determine, a maximum of forty
per cent (40%) of their gross receipts shall be
allowed as deductions to answer for business or
professional expenses as the case may be.

(a) Raw materials, supplies and direct labor;

On the basis of the above language of the law, it would be difficult
(b) Salaries of employees directly engaged in

to accept petitioner's view that the amendatory law should be

activities in the course of or pursuant to the

considered as having now adopted a gross income, instead of as

business or practice of their profession;

having still retained the netincome, taxation scheme. The

allowance for deductible items, it is true, may have significantly

(c) Telecommunications, electricity, fuel, light and

water;
(d) Business rentals;

been reduced by the questioned law in comparison with that

which has prevailed prior to the amendment; limiting, however,
allowable deductions from gross income is neither discordant
with, nor opposed to, the net income tax concept. The fact of the

(e) Depreciation;

matter is still that various deductions, which are by no means

inconsequential, continue to be well provided under the new law.

(f) Contributions made to the Government and

accredited relief organizations for the rehabilitation

Article VI, Section 26(1), of the Constitution has been envisioned

of calamity stricken areas declared by the President;

so as (a) to prevent log-rolling legislation intended to unite the

and

members of the legislature who favor any one of unrelated

subjects in support of the whole act, (b) to avoid surprises or even

those belonging to the same class (Pepsi Cola vs. City of Butuan,

fraud upon the legislature, and (c) to fairly apprise the people,

24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

through such publications of its proceedings as are usually made,

of the subjects of legislation. 1 The above objectives of the fundamental

What may instead be perceived to be apparent from the

law appear to us to have been sufficiently met. Anything else would be to

amendatory law is the legislative intent to increasingly shift the

require a virtual compendium of the law which could not have been the

income tax system towards the schedular approach 2 in the income

intendment of the constitutional mandate.

taxation of individual taxpayers and to maintain, by and large, the present

global treatment 3 on taxable corporations. We certainly do not view this

Petitioner intimates that Republic Act No. 7496 desecrates the

classification to be arbitrary and inappropriate.

constitutional requirement that taxation "shall be uniform and

equitable" in that the law would now attempt to tax single

Petitioner gives a fairly extensive discussion on the merits of the

proprietorships and professionals differently from the manner it

law, illustrating, in the process, what he believes to be an

imposes the tax on corporations and partnerships. The contention

imbalance between the tax liabilities of those covered by the

clearly forgets, however, that such a system of income taxation

amendatory law and those who are not. With the legislature

has long been the prevailing rule even prior to Republic Act No.

primarily lies the discretion to determine the nature (kind), object

7496.

(purpose), extent (rate), coverage (subjects) and situs (place) of

taxation. This court cannot freely delve into those matters which,

Uniformity of taxation, like the kindred concept of equal protection,

by constitutional fiat, rightly rest on legislative judgment. Of

merely requires that all subjects or objects of taxation, similarly

course, where a tax measure becomes so unconscionable and

situated, are to be treated alike both in privileges and liabilities

unjust as to amount to confiscation of property, courts will not

(Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity

hesitate to strike it down, for, despite all its plenitude, the power to

does not forfend classification as long as: (1) the standards that

tax cannot override constitutional proscriptions. This stage,

are used therefor are substantial and not arbitrary, (2) the

however, has not been demonstrated to have been reached within

categorization is germane to achieve the legislative purpose, (3)

any appreciable distance in this controversy before us.

the law applies, all things being equal, to both present and future
conditions, and (4) the classification applies equally well to all

Having arrived at this conclusion, the plea of petitioner to have the

law declared unconstitutional for being violative of due process

must perforce fail. The due process clause may correctly be

partners in general professional partnerships. Petitioners cite the

invoked only when there is a clear contravention of inherent or

pertinent deliberations in Congress during its enactment of

constitutional limitations in the exercise of the tax power. No such

Republic Act No. 7496, also quoted by the Honorable Hernando

transgression is so evident to us.

B. Perez, minority floor leader of the House of Representatives, in

the latter's privilege speech by way of commenting on the

G.R. No. 109446

The several propositions advanced by petitioners revolve around
the question of whether or not public respondents have exceeded
their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:

questioned implementing regulation of public respondents

following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I
would like to get the correct
impression of this bill. Do we speak
here of individuals who are earning, I
mean, who earn through business

Sec. 6. General Professional Partnership The

enterprises and therefore, should file

general professional partnership (GPP) and the

an income tax return?

partners comprising the GPP are covered by R. A.

No. 7496. Thus, in determining the net profit of the
partnership, only the direct costs mentioned in said
law are to be deducted from partnership income.
Also, the expenses paid or incurred by partners in
their individual capacities in the practice of their
profession which are not reimbursed or paid by the

MR. PEREZ. That is correct, Mr.

Speaker. This does not apply to
corporations. It applies only to
individuals.
(See Deliberations on H. B. No. 34314, August 6,
1991, 6:15 P.M.; Emphasis ours).

partnership but are not considered as direct cost,

are not deductible from his gross income.

Other deliberations support this

position, to wit:

The real objection of petitioners is focused on the administrative

interpretation of public respondents that would apply SNIT to

MR. ABAYA . . . Now, Mr. Speaker, did

professional partnership, unlike an ordinary business partnership

I hear the Gentleman from Batangas

(which is treated as a corporation for income tax purposes and so

say that this bill is intended to increase

subject to the corporate income tax), is not itself an income

collections as far as individuals are

taxpayer. The income tax is imposed not on the professional

concerned and to make collection of

partnership, which is tax exempt, but on the partners themselves

taxes equitable?

in their individual capacity computed on their distributive shares of

partnership profits. Section 23 of the Tax Code, which has not

MR. PEREZ. That is correct, Mr.

been amended at all by Republic Act 7496, is explicit:

Speaker.
Sec. 23. Tax liability of members of general
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator
Mamintal Tamano on the Senate version of the
SNITS, it is categorically stated, thus:

professional partnerships. (a) Persons exercising

a common profession in general partnership shall be
liable for income tax only in their individual capacity,
and the share in the net profits of the general
professional partnership to which any taxable

This bill, Mr. President, is not

partner would be entitled whether distributed or

applicable to business corporations or

otherwise, shall be returned for taxation and the tax

to partnerships; it is only with respect

paid in accordance with the provisions of this Title.

to individuals and professionals.

(Emphasis ours)

(b) In determining his distributive share in the net

income of the partnership, each partner

The Court, first of all, should like to correct the apparent

misconception that general professional partnerships are subject
to the payment of income tax or that there is a difference in the
tax treatment between individuals engaged in business or in the
practice of their respective professions and partners in general
professional partnerships. The fact of the matter is that a general

(1) Shall take into account separately

his distributive share of the
partnership's income, gain, loss,
deduction, or credit to the extent

provided by the pertinent provisions of

the Tax Code, and it practically covers all persons who derive

this Code, and

taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the

(2) Shall be deemed to have elected

the itemized deductions, unless he
declares his distributive share of the
gross income undiminished by his
share of the deductions.
There is, then and now, no distinction in income tax liability
between a person who practices his profession alone or
individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax
and the final tax on passive investment income, under the present
income tax system all individuals deriving income from any source
whatsoever are treated in almost invariably the same manner and
under a common set of rules.
We can well appreciate the concern taken by petitioners if
perhaps we were to consider Republic Act No. 7496 as an entirely
independent, not merely as an amendatory, piece of legislation.
The view can easily become myopic, however, when the law is
understood, as it should be, as only forming part of, and subject
to, the whole income tax concept and precepts long obtaining
under the National Internal Revenue Code. To elaborate a little,
the phrase "income taxpayers" is an all embracing term used in

taxpayer (that renders citizens, regardless of residence, and

resident aliens subject to income tax liability on their income from
all sources) and of the generally accepted and internationally
recognized income taxable base (that can subject non-resident
aliens and foreign corporations to income tax on their income
from Philippine sources). In the process, the Code classifies
taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpusand as
to income).
Partnerships are, under the Code, either "taxable partnerships" or
"exempt partnerships." Ordinarily, partnerships, no matter how
created or organized, are subject to income tax (and thus alluded
to as "taxable partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the context of,
and so legally contemplated as, corporations. Except for few
variances, such as in the application of the "constructive receipt
rule" in the derivation of income, the income tax approach is alike
to both juridical persons. Obviously, SNIT is not intended or
envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496,

aforequoted, to cover corporations and partnerships which are

WHEREFORE, the petitions are DISMISSED. No special

independently subject to the payment of income tax.

pronouncement on costs.

"Exempt partnerships," upon the other hand, are not similarly

SO ORDERED.

identified as corporations nor even considered as independent

taxable entities for income tax purposes. A
general professional partnership is such an example. 4Here, the
partners themselves, not the partnership (although it is still obligated to file an

G.R. No. 115455 August 25, 1994

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

income tax return [mainly for administration and data]), are liable for the

G.R. No. 115525 August 25, 1994

payment of income tax in their individual capacity computed on their respective

JUAN T. DAVID, petitioner,

and distributive shares of profits. In the determination of the tax liability, a

vs.

partner does so as an individual, and there is no choice on the matter. In fine,

TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as

Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue;

under the Tax Code on income taxation, the general professional partnership is

and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.

deemed to be no more than a mere mechanism or a flow-through entity in the

G.R. No. 115543 August 25, 1994

generation of income by, and the ultimate distribution of such income to,

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,

respectively, each of the individual partners.

vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.

Section 6 of Revenue Regulation No. 2-93 did not alter, but

merely confirmed, the above standing rule as now so modified by
Republic Act
No. 7496 on basically the extent of allowable deductions
applicable to all individual income taxpayers on their noncompensation income. There is no evident intention of the law,
either before or after the amendatory legislation, to place in an
unequal footing or in significant variance the income tax treatment
of professionals who practice their respective professions
individually and of those who do it through a general professional
partnership.

G.R. No. 115544 August 25, 1994

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON.
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO
B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
G.R. No. 115754 August 25, 1994
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 August 25, 1994
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C.
CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V.

VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR

existing VAT system and enhance its administration by amending the National Internal Revenue

BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT

Code.

COALITION, INC., PHILIPPINE BIBLE SOCIETY, INC., and WIGBERTO TAADA,petitioners,

These are various suits for certiorari and prohibition, challenging the constitutionality of Republic

vs.

Act No. 7716 on various grounds summarized in the resolution of July 6, 1994 of this Court, as

THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF

follows:

INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.

I. Procedural Issues:

G.R. No. 115852 August 25, 1994

A. Does Republic Act No. 7716 violate Art. VI, 24 of the Constitution?

PHILIPPINE AIRLINES, INC., petitioner,

B. Does it violate Art. VI, 26(2) of the Constitution?

vs.

C. What is the extent of the power of the Bicameral Conference Committee?

THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL REVENUE, respondents.

II. Substantive Issues:

G.R. No. 115873 August 25, 1994

A. Does the law violate the following provisions in the Bill of Rights (Art. III)?

COOPERATIVE UNION OF THE PHILIPPINES, petitioners,

1. 1

vs.

2. 4

HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON.

3. 5

TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO

4. 10

B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.

B. Does the law violate the following other provisions of the Constitution?

G.R. No. 115931 August 25, 1994

1. Art. VI, 28(1)

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and ASSOCIATION OF

2. Art. VI, 28(3)

PHILIPPINE BOOK-SELLERS, petitioners,

These questions will be dealt in the order they are stated above. As will presently be explained not

vs.

all of these questions are judicially cognizable, because not all provisions of the Constitution are

HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO,

self executing and, therefore, judicially enforceable. The other departments of the government are

as the Commissioner of Internal Revenue and HON. GUILLERMO PARAYNO, JR., in his

equally charged with the enforcement of the Constitution, especially the provisions relating to them.

capacity as the Commissioner of Customs, respondents.

I. PROCEDURAL ISSUES

Arturo M. Tolentino for and in his behalf.

The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded Value-

Donna Celeste D. Feliciano and Juan T. David for petitioners in G.R. No. 115525.

Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated

Roco, Bunag, Kapunan, Migallos and Jardeleza for petitioner R.S. Roco.

in the House of Representatives, it was not passed by the Senate but was simply consolidated with

Villaranza and Cruz for petitioners in G.R. No. 115544.

the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the

Carlos A. Raneses and Manuel M. Serrano for petitioner in G.R. No. 115754.

President signed into law. The following provisions of the Constitution are cited in support of the

Salonga, Hernandez & Allado for Freedon From Debts Coalition, Inc. & Phil. Bible Society.

proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in

Estelito P. Mendoza for petitioner in G.R. No. 115852.

the House of Representatives and it has not thereby become a law:

Panganiban, Benitez, Parlade, Africa & Barinaga Law Offices for petitioners in G.R. No. 115873.

Art. VI, 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,

R.B. Rodriguez & Associates for petitioners in G.R. No. 115931.

bills of local application, and private bills shall originate exclusively in the House of

Reve A.V. Saguisag for MABINI.

Representatives, but the Senate may propose or concur with amendments.

Id., 26(2): No bill passed by either House shall become a law unless it has passed three readings

MENDOZA, J.:

on separate days, and printed copies thereof in its final form have been distributed to its Members

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as

three days before its passage, except when the President certifies to the necessity of its immediate

well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or

enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment

gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts

thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and

from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the

the yeasand nays entered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills 1 were

entities. It would have been enforced on July 1, 1994 but its enforcement was stopped because the

introduced in the House of Representatives seeking to amend certain provisions of the National

Court, by the vote of 11 to 4 of its members, granted a temporary restraining order on June 30,

Internal Revenue Code relative to the value-added tax or VAT. These bills were referred to the

1994.

House Ways and Means Committee which recommended for approval a substitute measure, H.

First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the

No. 11197, entitled

House of Representatives as required by Art. VI, 24 of the Constitution, because it is in fact the

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE

result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In this connection,

AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99,

petitioners point out that although Art. VI, SS 24 was adopted from the American Federal

100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND

Constitution, 2 it is notable in two respects: the verb "shall originate" is qualified in the Philippine

236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF

Constitution by the word "exclusively" and the phrase "as on other bills" in the American version is

THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

omitted. This means, according to them, that to be considered as having originated in the House,

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on

Republic Act No. 7716 must retain the essence of H. No. 11197.

November 17, 1993, it was approved by the House of Representatives after third and final reading.

This argument will not bear analysis. To begin with, it is not the law but the revenue bill which

It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee

is required by the Constitution to "originate exclusively" in the House of Representatives. It is

on Ways and Means.

important to emphasize this, because a bill originating in the House may undergo such extensive

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No.

changes in the Senate that the result may be a rewriting of the whole. The possibility of a third

1630, entitled

version by the conference committee will be discussed later. At this point, what is important to note

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE

is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue

AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99,

statute and not only the bill which initiated the legislative process culminating in the enactment

100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND

of the law must substantially be the same as the House bill would be to deny the Senate's

238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE

power not only to "concur with amendments" but also to "propose amendments." It would be to

NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

violate the coequality of legislative power of the two houses of Congress and in fact make the

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into

House superior to the Senate.

consideration P.S. Res. No. 734 and H.B. No. 11197."

The contention that the constitutional design is to limit the Senate's power in respect of revenue

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates

bills in order to compensate for the grant to the Senate of the treaty-ratifying power 3 and thereby

on the bill and approved it on second reading on March 24, 1994. On the same day, it approved the

equalize its powers and those of the House overlooks the fact that the powers being compared are

bill on third reading by the affirmative votes of 13 of its members, with one abstention.

different. We are dealing here with the legislative power which under the Constitution is vested not

H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee

in any particular chamber but in the Congress of the Philippines, consisting of "a Senate and a

which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No.

House of Representatives." 4 The exercise of the treaty-ratifying power is not the exercise of

11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached

legislative power. It is the exercise of a check on the executive power. There is, therefore, no

copy of the bill as reconciled and approved by the conferees."

justification for comparing the legislative powers of the House and of the Senate on the basis of the

The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX

possession of such nonlegislative power by the Senate. The possession of a similar power by the

(VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR

U.S. Senate 5 has never been thought of as giving it more legislative powers than the House of

THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE

Representatives.

NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was

In the United States, the validity of a provision ( 37) imposing an ad valorem tax based on the

thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May

weight of vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against

2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May 5,

the claim that the provision was a revenue bill which originated in the Senate in contravention of

1994, signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was

Art. I, 7 of the U.S. Constitution. 6 Nor is the power to amend limited to adding a provision or two

published in two newspapers of general circulation and, on May 28, 1994, it took effect, although

in a revenue bill emanating from the House. The U.S. Senate has gone so far as changing the

its implementation was suspended until June 30, 1994 to allow time for the registration of business

whole of bills following the enacting clause and substituting its own versions. In 1883, for example,

it struck out everything after the enacting clause of a tariff bill and wrote in its place its own

separate days. The phrase "except when the President certifies to the necessity of its immediate

measure, and the House subsequently accepted the amendment. The U.S. Senate likewise added

enactment, etc." in Art. VI, 26(2) qualifies the two stated conditions before a bill can become a

847 amendments to what later became the Payne-Aldrich Tariff Act of 1909; it dictated the

law: (i) the bill has passed three readings on separate days and (ii) it has been printed in its final

schedules of the Tariff Act of 1921; it rewrote an extensive tax revision bill in the same year and

form and distributed three days before it is finally approved.

recast most of the tariff bill of 1922. 7 Given, then, the power of the Senate to propose

In other words, the "unless" clause must be read in relation to the "except" clause, because the two

amendments, the Senate can propose its own version even with respect to bills which are required

are really coordinate clauses of the same sentence. To construe the "except" clause as simply

by the Constitution to originate in the House.

dispensing with the second requirement in the "unless" clause (i.e., printing and distribution three

It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of

days before final approval) would not only violate the rules of grammar. It would also negate the

another Senate bill (S. No. 1129) earlier filed and that what the Senate did was merely to "take [H.

very premise of the "except" clause: the necessity of securing the immediate enactment of a bill

No. 11197] into consideration" in enacting S. No. 1630. There is really no difference between the

which is certified in order to meet a public calamity or emergency. For if it is only the printing that is

Senate preserving H. No. 11197 up to the enacting clause and then writing its own version

dispensed with by presidential certification, the time saved would be so negligible as to be of any

following the enacting clause (which, it would seem, petitioners admit is an amendment by

use in insuring immediate enactment. It may well be doubted whether doing away with the

substitution), and, on the other hand, separately presenting a bill of its own on the same subject

necessity of printing and distributing copies of the bill three days before the third reading would

matter. In either case the result are two bills on the same subject.

insure speedy enactment of a law in the face of an emergency requiring the calling of a special

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills,

election for President and Vice-President. Under the Constitution such a law is required to be made

bills authorizing an increase of the public debt, private bills and bills of local application must come

within seven days of the convening of Congress in emergency session.

from the House of Representatives on the theory that, elected as they are from the districts, the

That upon the certification of a bill by the President the requirement of three readings on separate

members of the House can be expected to be more sensitive to the local needs and problems. On

days and of printing and distribution can be dispensed with is supported by the weight of legislative

the other hand, the senators, who are elected at large, are expected to approach the same

practice. For example, the bill defining the certiorari jurisdiction of this Court which, in consolidation

problems from the national perspective. Both views are thereby made to bear on the enactment of

with the Senate version, became Republic Act No. 5440, was passed on second and third readings

such laws.

in the House of Representatives on the same day (May 14, 1968) after the bill had been certified

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its

by the President as urgent. 12

receipt of the bill from the House, so long as action by the Senate as a body is withheld pending

There is, therefore, no merit in the contention that presidential certification dispenses only with the

receipt of the House bill. The Court cannot, therefore, understand the alarm expressed over the

requirement for the printing of the bill and its distribution three days before its passage but not with

fact that on March 1, 1993, eight months before the House passed H. No. 11197, S. No. 1129 had

the requirement of three readings on separate days, also.

been filed in the Senate. After all it does not appear that the Senate ever considered it. It was only

It is nonetheless urged that the certification of the bill in this case was invalid because there was no

after the Senate had received H. No. 11197 on November 23, 1993 that the process of legislation

emergency, the condition stated in the certification of a "growing budget deficit" not being an

in respect of it began with the referral to the Senate Committee on Ways and Means of H. No.

unusual condition in this country.

11197 and the submission by the Committee on February 7, 1994 of S. No. 1630. For that matter, if

It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis of

the question were simply the priority in the time of filing of bills, the fact is that it was in the House

the certification. To the contrary, by passing S. No. 1630 on second and third readings on March

that a bill (H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several other bills had

24, 1994, the Senate accepted the President's certification. Should such certification be now

been filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was only a

reviewed by this Court, especially when no evidence has been shown that, because S. No. 1630

substitute of those earlier bills.

was taken up on second and third readings on the same day, the members of the Senate were

Second. Enough has been said to show that it was within the power of the Senate to propose S.

deprived of the time needed for the study of a vital piece of legislation?

No. 1630. We now pass to the next argument of petitioners that S. No. 1630 did not pass three

The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration of

readings on separate days as required by the Constitution 8 because the second and third readings

martial law under Art. VII, 18, or the existence of a national emergency justifying the delegation of

11

were done on the same day, March 24, 1994. But this was because on February 24, 1994 and

extraordinary powers to the President under Art. VI, 23(2), is subject to judicial review because

again on March 22, 1994, 10 the President had certified S. No. 1630 as urgent. The presidential

basic rights of individuals may be at hazard. But the factual basis of presidential certification of

certification dispensed with the requirement not only of printing but also that of reading the bill on

bills, which involves doing away with procedural requirements designed to insure that bills are duly

the committee can propose an amendment consisting of one or two provisions, there is no reason

considered by members of Congress, certainly should elicit a different standard of review.

why it cannot propose several provisions, collectively considered as an "amendment in the nature

Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No.

of a substitute," so long as such amendment is germane to the subject of the bills before the

11197. That is because S. No. 1630 was what the Senate was considering. When the matter was

committee. After all, its report was not final but needed the approval of both houses of Congress to

before the House, the President likewise certified H. No. 9210 the pending in the House.

become valid as an act of the legislative department. The charge that in this case the Conference

Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the

Committee acted as a third legislative chamber is thus without any basis.

Conference Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that

Nonetheless, it is argued that under the respective Rules of the Senate and the House of

the Conference Committee report included provisions not found in either the House bill or the

Representatives a conference committee can only act on the differing provisions of a Senate bill

Senate bill and that these provisions were "surreptitiously" inserted by the Conference Committee.

and a House bill, and that contrary to these Rules the Conference Committee inserted provisions

Much is made of the fact that in the last two days of its session on April 21 and 25, 1994 the

not found in the bills submitted to it. The following provisions are cited in support of this contention:

Committee met behind closed doors. We are not told, however, whether the provisions were not

Rules of the Senate

the result of the give and take that often mark the proceedings of conference committees.

Rule XII:

Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in

26. In the event that the Senate does not agree with the House of Representatives on the

executive sessions. Often the only way to reach agreement on conflicting provisions is to meet

provision of any bill or joint resolution, the differences shall be settled by a conference committee

behind closed doors, with only the conferees present. Otherwise, no compromise is likely to be

of both Houses which shall meet within ten days after their composition.

made. The Court is not about to take the suggestion of a cabal or sinister motive attributed to the

The President shall designate the members of the conference committee in accordance with

conferees on the basis solely of their "secret meetings" on April 21 and 25, 1994, nor read anything

subparagraph (c), Section 3 of Rule III.

into the incomplete remarks of the members, marked in the transcript of stenographic notes by

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of

ellipses. The incomplete sentences are probably due to the stenographer's own limitations or to the

the changes in or amendments to the subject measure, and shall be signed by the conferees.

incoherence that sometimes characterize conversations. William Safire noted some such lapses in

The consideration of such report shall not be in order unless the report has been filed with the

recorded talks even by recent past Presidents of the United States.

Secretary of the Senate and copies thereof have been distributed to the Members.

In any event, in the United States conference committees had been customarily held in executive

(Emphasis added)

sessions with only the conferees and their staffs in attendance. 13 Only in November 1975 was a

Rules of the House of Representatives

new rule adopted requiring open sessions. Even then a majority of either chamber's conferees may

Rule XIV:

vote in public to close the meetings. 14

85. Conference Committee Reports. In the event that the House does not agree with the

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been

Senate on the amendments to any bill or joint resolution, the differences may be settled by

explained:

conference committees of both Chambers.

Under congressional rules of procedure, conference committees are not expected to make any

The consideration of conference committee reports shall always be in order, except when the

material change in the measure at issue, either by deleting provisions to which both houses have

journal is being read, while the roll is being called or the House is dividing on any question. Each of

already agreed or by inserting new provisions. But this is a difficult provision to enforce. Note the

the pages of such reports shall be signed by the conferees. Each report shall contain a detailed,

problem when one house amends a proposal originating in either house by striking out everything

sufficiently explicit statement of the changes in or amendments to the subject measure.

following the enacting clause and substituting provisions which make it an entirely new bill. The

The consideration of such report shall not be in order unless copies thereof are distributed to the

versions are now altogether different, permitting a conference committee to draft essentially a new

Members: Provided, That in the last fifteen days of each session period it shall be deemed

bill. . . . 15

sufficient that three copies of the report, signed as above provided, are deposited in the office of

The result is a third version, which is considered an "amendment in the nature of a substitute," the

the Secretary General.

only requirement for which being that the third version be germane to the subject of the House and

(Emphasis added)

Senate bills.

16

To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting

Indeed, this Court recently held that it is within the power of a conference committee to include in
its report an entirely new provision that is not found either in the House bill or in the Senate bill.

18

17

provisions. But Rule XLIV, 112 of the Rules of the Senate is cited to the effect that "If there is no
If

Rule applicable to a specific case the precedents of the Legislative Department of the Philippines

shall be resorted to, and as a supplement of these, the Rules contained in Jefferson's Manual."

consideration" the House bill; that for its part the Conference Committee consolidated the two bills

The following is then quoted from the Jefferson's Manual:

and prepared a compromise version; that the Conference Committee Report was thereafter

The managers of a conference must confine themselves to the differences committed to them. . .

approved by the House and the Senate, presumably after appropriate study by their members. We

and may not include subjects not within disagreements, even though germane to a question in

cannot say that, as a matter of fact, the members of Congress were not fully informed of the

issue.

provisions of the bill. The allegation that the Conference Committee usurped the legislative power

Note that, according to Rule XLIX, 112, in case there is no specific rule applicable, resort must be

of Congress is, in our view, without warrant in fact and in law.

to the legislative practice. The Jefferson's Manual is resorted to only as supplement. It is common

Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be

place in Congress that conference committee reports include new matters which, though germane,

resolved in its favor. Our cases 20 manifest firm adherence to the rule that an enrolled copy of a bill

have not been committed to the committee. This practice was admitted by Senator Raul S. Roco,

is conclusive not only of its provisions but also of its due enactment. Not even claims that a

petitioner in G.R. No. 115543, during the oral argument in these cases. Whatever, then, may be

proposed constitutional amendment was invalid because the requisite votes for its approval had

provided in the Jefferson's Manual must be considered to have been modified by the legislative

not been obtained 21 or that certain provisions of a statute had been "smuggled" in the printing of

practice. If a change is desired in the practice it must be sought in Congress since this question is

the bill 22 have moved or persuaded us to look behind the proceedings of a coequal branch of the

not covered by any constitutional provision but is only an internal rule of each house. Thus, Art. VI,

government. There is no reason now to depart from this rule.

16(3) of the Constitution provides that "Each House may determine the rules of its

No claim is here made that the "enrolled bill" rule is absolute. In fact in one case

proceedings. . . ."

behind" an enrolled bill and consulted the Journal to determine whether certain provisions of a

This observation applies to the other contention that the Rules of the two chambers were likewise

statute had been approved by the Senate in view of the fact that the President of the Senate

disregarded in the preparation of the Conference Committee Report because the Report did not

himself, who had signed the enrolled bill, admitted a mistake and withdrew his signature, so that in

contain a "detailed and sufficiently explicit statement of changes in, or amendments to, the subject

effect there was no longer an enrolled bill to consider.

measure." The Report used brackets and capital letters to indicate the changes. This is a standard

But where allegations that the constitutional procedures for the passage of bills have not been

practice in bill-drafting. We cannot say that in using these marks and symbols the Committee

observed have no more basis than another allegation that the Conference Committee

violated the Rules of the Senate and the House. Moreover, this Court is not the proper forum for

"surreptitiously" inserted provisions into a bill which it had prepared, we should decline the

the enforcement of these internal Rules. To the contrary, as we have already ruled, "parliamentary

invitation to go behind the enrolled copy of the bill. To disregard the "enrolled bill" rule in such

rules are merely procedural and with their observance the courts have no concern."

19

Our concern

23

we "went

cases would be to disregard the respect due the other two departments of our government.

is with the procedural requirements of the Constitution for the enactment of laws. As far as these

Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine

requirements are concerned, we are satisfied that they have been faithfully observed in these

Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, 26(1) which provides

cases.

that "Every bill passed by Congress shall embrace only one subject which shall be expressed in

Nor is there any reason for requiring that the Committee's Report in these cases must have

the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided for removal of

undergone three readings in each of the two houses. If that be the case, there would be no end to

exemption of PAL transactions from the payment of the VAT and that this was made only in the

negotiation since each house may seek modifications of the compromise bill. The nature of the bill,

Conference Committee bill which became Republic Act No. 7716 without reflecting this fact in its

therefore, requires that it be acted upon by each house on a "take it or leave it" basis, with the only

title.

alternative that if it is not approved by both houses, another conference committee must be

The title of Republic Act No. 7716 is:

appointed. But then again the result would still be a compromise measure that may not be wholly

AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX

satisfying to both houses.

BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING

Art. VI, 26(2) must, therefore, be construed as referring only to bills introduced for the first time in

AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE

either house of Congress, not to the conference committee report. For if the purpose of requiring

CODE, AS AMENDED, AND FOR OTHER PURPOSES.

three readings is to give members of Congress time to study bills, it cannot be gainsaid that H. No.

Among the provisions of the NIRC amended is 103, which originally read:

11197 was passed in the House after three readings; that in the Senate it was considered on first

103. Exempt transactions. The following shall be exempt from the value-added tax:

reading and then referred to a committee of that body; that although the Senate committee did not

....

report out the House bill, it submitted a version (S. No. 1630) which it had prepared by "taking into

(q) Transactions which are exempt under special laws or international agreements to which the

This provision is evidently intended to prevent the amendment of the franchise by mere implication

Philippines is a signatory. Among the transactions exempted from the VAT were those of PAL

resulting from the enactment of a later inconsistent statute, in consideration of the fact that a

because it was exempted under its franchise (P.D. No. 1590) from the payment of all "other

franchise is a contract which can be altered only by consent of the parties. Thus in Manila Railroad

taxes . . . now or in the near future," in consideration of the payment by it either of the corporate

Co. v.

income tax or a franchise tax of 2%.

Rafferty, 25 it was held that an Act of the U.S. Congress, which provided for the payment of tax on

As a result of its amendment by Republic Act No. 7716, 103 of the NIRC now provides:

certain goods and articles imported into the Philippines, did not amend the franchise of plaintiff,

103. Exempt transactions. The following shall be exempt from the value-added tax:

which exempted it from all taxes except those mentioned in its franchise. It was held that a special

....

law cannot be amended by a general law.

(q) Transactions which are exempt under special laws, except those granted under Presidential

In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No.

Decree Nos. 66, 529, 972, 1491, 1590. . . .

1590) by specifically excepting from the grant of exemptions from the VAT PAL's exemption under

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is

P.D. No. 1590. This is within the power of Congress to do under Art. XII, 11 of the Constitution,

concerned.

which provides that the grant of a franchise for the operation of a public utility is subject to

The question is whether this amendment of 103 of the NIRC is fairly embraced in the title of

amendment, alteration or repeal by Congress when the common good so requires.

Republic Act No. 7716, although no mention is made therein of P.D. No. 1590 as among those

II. SUBSTANTIVE ISSUES

which the statute amends. We think it is, since the title states that the purpose of the statute is to

A. Claims of Press Freedom, Freedom of Thought and Religious Freedom

expand the VAT system, and one way of doing this is to widen its base by withdrawing some of the

The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of

exemptions granted before. To insist that P.D. No. 1590 be mentioned in the title of the law, in

newspaper publishers established for the improvement of journalism in the Philippines. On the

addition to 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of

other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit

a bill should be a complete index of its content.

organization engaged in the printing and distribution of bibles and other religious articles. Both

The constitutional requirement that every bill passed by Congress shall embrace only one subject

petitioners claim violations of their rights under 4 and 5 of the Bill of Rights as a result of the

which shall be expressed in its title is intended to prevent surprise upon the members of Congress

enactment of the VAT Law.

and to inform the people of pending legislation so that, if they wish to, they can be heard regarding

The PPI questions the law insofar as it has withdrawn the exemption previously granted to the

it. If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is

press under 103 (f) of the NIRC. Although the exemption was subsequently restored by

not because of any defect in the title but perhaps for the same reason other statutes, although

administrative regulation with respect to the circulation income of newspapers, the PPI presses its

published, pass unnoticed until some event somehow calls attention to their existence. Indeed, the

claim because of the possibility that the exemption may still be removed by mere revocation of the

title of Republic Act No. 7716 is not any more general than the title of PAL's own franchise under

regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question the

P.D. No. 1590, and yet no mention is made of its tax exemption. The title of P.D. No. 1590 is:

Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no power

AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH,

to grant tax exemption because this is vested in Congress and requires for its exercise the vote of

OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN

a majority of all its members 26 and (2) the Secretary's duty is to execute the law.

THE PHILIPPINES AND OTHER COUNTRIES.

103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions

The trend in our cases is to construe the constitutional requirement in such a manner that courts do

previously granted exemption were:

not unduly interfere with the enactment of necessary legislation and to consider it sufficient if the

(f) Printing, publication, importation or sale of books and any newspaper, magazine, review, or

title expresses the general subject of the statute and all its provisions are germane to the general

bulletin which appears at regular intervals with fixed prices for subscription and sale and which is

subject thus expressed. 24

devoted principally to the publication of advertisements.

It is further contended that amendment of petitioner's franchise may only be made by special law,

Republic Act No. 7716 amended 103 by deleting (f) with the result that print media became

in view of 24 of P.D. No. 1590 which provides:

subject to the VAT with respect to all aspects of their operations. Later, however, based on a

This franchise, as amended, or any section or provision hereof may only be modified, amended, or

memorandum of the Secretary of Justice, respondent Secretary of Finance issued Revenue

repealed expressly by a special law or decree that shall specifically modify, amend, or repeal this

Regulations No. 11-94, dated June 27, 1994, exempting the "circulation income of print media

franchise or any section or provision thereof.

pursuant to 4 Article III of the 1987 Philippine Constitution guaranteeing against abridgment of

freedom of the press, among others." The exemption of "circulation income" has left income from

slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious

advertisements still subject to the VAT.

competition with the thirteen newspapers in question. It was well known that the thirteen

It is unnecessary to pass upon the contention that the exemption granted is beyond the authority of

newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of

the Secretary of Finance to give, in view of PPI's contention that even with the exemption of the

Louisiana respondent by taxing what Long described as the "lying newspapers" by imposing on

circulation revenue of print media there is still an unconstitutional abridgment of press freedom

them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As

because of the imposition of the VAT on the gross receipts of newspapers from advertisements and

the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of a tax

on their acquisition of paper, ink and services for publication. Even on the assumption that no

to limit the circulation of information to which the public is entitled in virtue of the constitutional

exemption has effectively been granted to print media transactions, we find no violation of press

guaranties." 29 The case is a classic illustration of the warning that the power to tax is the power to

freedom in these cases.

destroy.

To be sure, we are not dealing here with a statute that on its face operates in the area of press

In the other case 30 invoked by the PPI, the press was also found to have been singled out because

freedom. The PPI's claim is simply that, as applied to newspapers, the law abridges press

everything was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed

freedom. Even with due recognition of its high estate and its importance in a democratic society,

a tax on the sales of goods in that state. To protect the sales tax, it enacted a complementary tax

however, the press is not immune from general regulation by the State. It has been held:

on the privilege of "using, storing or consuming in that state tangible personal property" by

The publisher of a newspaper has no immunity from the application of general laws. He has no

eliminating the residents' incentive to get goods from outside states where the sales tax might be

special privilege to invade the rights and liberties of others. He must answer for libel. He may be

lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971,

punished for contempt of court. . . . Like others, he must pay equitable and nondiscriminatory taxes

however, the state legislature amended the tax scheme by imposing the "use tax" on the cost of

on his business. . . .

27

paper and ink used for publication. The law was held to have singled out the press because (1)

The PPI does not dispute this point, either.

there was no reason for imposing the "use tax" since the press was exempt from the sales tax and

What it contends is that by withdrawing the exemption previously granted to print media

(2) the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale."

transactions involving printing, publication, importation or sale of newspapers, Republic Act No.

Minnesota had a heavy burden of justifying the differential treatment and it failed to do so. In

7716 has singled out the press for discriminatory treatment and that within the class of mass media

addition, the U.S. Supreme Court found the law to be discriminatory because the legislature, by

the law discriminates against print media by giving broadcast media favored treatment. We have

again amending the law so as to exempt the first $100,000 of paper and ink used, further narrowed

carefully examined this argument, but we are unable to find a differential treatment of the press by

the coverage of the tax so that "only a handful of publishers pay any tax at all and even fewer pay

the law, much less any censorial motivation for its enactment. If the press is now required to pay a

any significant amount of tax." 31 The discriminatory purpose was thus very clear.

value-added tax on its transactions, it is not because it is being singled out, much less targeted, for

More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held that a law which taxed

special treatment but only because of the removal of the exemption previously granted to it by law.

general interest magazines but not newspapers and religious, professional, trade and sports

The withdrawal of exemption is all that is involved in these cases. Other transactions, likewise

journals was discriminatory because while the tax did not single out the press as a whole, it

previously granted exemption, have been delisted as part of the scheme to expand the base and

targeted a small group within the press. What is more, by differentiating on the basis of contents

the scope of the VAT system. The law would perhaps be open to the charge of discriminatory

(i.e., between general interest and special interests such as religion or sports) the law became

treatment if the only privilege withdrawn had been that granted to the press. But that is not the

"entirely incompatible with the First Amendment's guarantee of freedom of the press."

case.

These cases come down to this: that unless justified, the differential treatment of the press creates

The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim

risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a wide

that Republic Act No. 7716 subjects the press to discriminatory taxation. In the cases cited, the

range of goods and services. The argument that, by imposing the VAT only on print media whose

discriminatory purpose was clear either from the background of the law or from its operation. For

gross sales exceeds P480,000 but not more than P750,000, the law discriminates 33 is without

example, in Grosjean v. American Press Co., 28 the law imposed a license tax equivalent to 2% of

merit since it has not been shown that as a result the class subject to tax has been unreasonably

the gross receipts derived from advertisements only on newspapers which had a circulation of

narrowed. The fact is that this limitation does not apply to the press along but to all sales. Nor is

more than 20,000 copies per week. Because the tax was not based on the volume of

impermissible motive shown by the fact that print media and broadcast media are treated

advertisement alone but was measured by the extent of its circulation as well, the law applied only

differently. The press is taxed on its transactions involving printing and publication, which are

to the thirteen large newspapers in Louisiana, leaving untaxed four papers with circulation of only

different from the transactions of broadcast media. There is thus a reasonable basis for the

as a result of the VAT would violate the constitutional mandate to the government to give priority to

classification.

education, science and technology (Art. II, 17) to be untenable.

The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers
are immune from any forms of ordinary taxation." The license tax in the Grosjean case was

B. Claims of Regressivity, Denial of Due Process, Equal Protection, and Impairment

declared invalid because it was "one single in kind, with a long history of hostile misuse against the

of Contracts

freedom of the

There is basis for passing upon claims that on its face the statute violates the guarantees of

press." 34 On the other hand, Minneapolis Star acknowledged that "The First Amendment does not

freedom of speech, press and religion. The possible "chilling effect" which it may have on the

prohibit all regulation of the press [and that] the States and the Federal Government can subject

essential freedom of the mind and conscience and the need to assure that the channels of

newspapers to generally applicable economic regulations without creating constitutional

communication are open and operating importunately demand the exercise of this Court's power of

problems." 35

review.

What has been said above also disposes of the allegations of the PBS that the removal of the

There is, however, no justification for passing upon the claims that the law also violates the rule

exemption of printing, publication or importation of books and religious articles, as well as their

that taxation must be progressive and that it denies petitioners' right to due process and that equal

printing and publication, likewise violates freedom of thought and of conscience. For as the U.S.

protection of the laws. The reason for this different treatment has been cogently stated by an

Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of Equalization, 36 the

eminent authority on constitutional law thus: "[W]hen freedom of the mind is imperiled by law, it is

Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use

freedom that commands a momentum of respect; when property is imperiled it is the lawmakers'

tax on the sale of religious materials by a religious organization.

judgment that commands respect. This dual standard may not precisely reverse the presumption of

This brings us to the question whether the registration provision of the law,

37

although of general

constitutionality in civil liberties cases, but obviously it does set up a hierarchy of values within the

applicability, nonetheless is invalid when applied to the press because it lays a prior restraint on its

due process clause." 41

essential freedom. The case ofAmerican Bible Society v. City of Manila 38 is cited by both the PBS

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less

and the PPI in support of their contention that the law imposes censorship. There, this Court held

evident and underscores the essential nature of petitioners' attack on the law on the grounds of

that an ordinance of the City of Manila, which imposed a license fee on those engaged in the

regressivity, denial of due process and equal protection and impairment of contracts as a mere

business of general merchandise, could not be applied to the appellant's sale of bibles and other

academic discussion of the merits of the law. For the fact is that there have even been no notices

religious literature. This Court relied on Murdock v. Pennsylvania, 39 in which it was held that, as a

of assessments issued to petitioners and no determinations at the administrative levels of their

license fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when

claims so as to illuminate the actual operation of the law and enable us to reach sound judgment

applied to a religious sect, was actually being imposed as a condition for the exercise of the sect's

regarding so fundamental questions as those raised in these suits.

right under the Constitution. For that reason, it was held, the license fee "restrains in advance

Thus, the broad argument against the VAT is that it is regressive and that it violates the

those constitutional liberties of press and religion and inevitably tends to suppress their

requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve a

exercise."

40

progressive system of taxation." 42Petitioners in G.R. No. 115781 quote from a paper, entitled "VAT

But, in this case, the fee in 107, although a fixed amount (P1,000), is not imposed for the

Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A. Tait of the International

exercise of a privilege but only for the purpose of defraying part of the cost of registration. The

Monetary Fund, that "VAT payment by low-income households will be a higher proportion of their

registration requirement is a central feature of the VAT system. It is designed to provide a record of

incomes (and expenditures) than payments by higher-income households. That is, the VAT will be

tax credits because any person who is subject to the payment of the VAT pays an input tax, even

regressive." Petitioners contend that as a result of the uniform 10% VAT, the tax on consumption

as he collects an output tax on sales made or services rendered. The registration fee is thus a

goods of those who are in the higher-income bracket, which before were taxed at a rate higher

mere administrative fee, one not imposed on the exercise of a privilege, much less a constitutional

than 10%, has been reduced, while basic commodities, which before were taxed at rates ranging

right.

from 3% to 5%, are now taxed at a higher rate.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it

Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by

offends the free speech, press and freedom of religion guarantees of the Constitution to be without

respondents that in fact it distributes the tax burden to as many goods and services as possible

merit. For the same reasons, we find the claim of the Philippine Educational Publishers Association

particularly to those which are within the reach of higher-income groups, even as the law exempts

(PEPA) in G.R. No. 115931 that the increase in the price of books and other educational materials

basic goods and services. It is thus equitable. The goods and properties subject to the VAT are

those used or consumed by higher-income groups. These include real properties held primarily for

Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the

sale to customers or held for lease in the ordinary course of business, the right or privilege to use

imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into prior

industrial, commercial or scientific equipment, hotels, restaurants and similar places, tourist buses,

to the effectivity of the law would violate the constitutional provision that "No law impairing the

and the like. On the other hand, small business establishments, with annual gross sales of less

obligation of contracts shall be passed." It is enough to say that the parties to a contract cannot,

than P500,000, are exempted. This, according to respondents, removes from the coverage of the

through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State.

law some 30,000 business establishments. On the other hand, an occasional paper

43

of the Center

For not only are existing laws read into contracts in order to fix obligations as between parties, but

for Research and Communication cities a NEDA study that the VAT has minimal impact on inflation

the reservation of essential attributes of sovereign power is also read into contracts as a basic

and income distribution and that while additional expenditure for the lowest income class is only

postulate of the legal order. The policy of protecting contracts against impairment presupposes the

P301 or 1.49% a year, that for a family earning P500,000 a year or more is P8,340 or 2.2%.

maintenance of a government which retains adequate authority to secure the peace and good

Lacking empirical data on which to base any conclusion regarding these arguments, any

order of society. 46

discussion whether the VAT is regressive in the sense that it will hit the "poor" and middle-income

In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's

group in society harder than it will the "rich," as the Cooperative Union of the Philippines (CUP)

power of taxation save only where a tax exemption has been granted for a valid

claims in G.R. No. 115873, is largely an academic exercise. On the other hand, the CUP's

consideration. 47 Such is not the case of PAL in G.R. No. 115852, and we do not understand it to

contention that Congress' withdrawal of exemption of producers cooperatives, marketing

make this claim. Rather, its position, as discussed above, is that the removal of its tax exemption

cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives, not

cannot be made by a general, but only by a specific, law.

only goes against the constitutional policy to promote cooperatives as instruments of social justice

The substantive issues raised in some of the cases are presented in abstract, hypothetical form

(Art. XII, 15) but also denies such cooperatives the equal protection of the law is actually a policy

because of the lack of a concrete record. We accept that this Court does not only adjudicate

argument. The legislature is not required to adhere to a policy of "all or none" in choosing the

private cases; that public actions by "non-Hohfeldian"

subject of taxation.44

provided they meet the standing requirement of the Constitution; that under Art. VIII, 1, 2 the

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner

Court has a "special function" of vindicating constitutional rights. Nonetheless the feeling cannot be

in G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90%

escaped that we do not have before us in these cases a fully developed factual record that alone

any more concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press

can impart to our adjudication the impact of actuality 49 to insure that decision-making is informed

Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its members out of

and well grounded. Needless to say, we do not have power to render advisory opinions or even

circulation because their profits from advertisements will not be enough to pay for their tax liability,

jurisdiction over petitions for declaratory judgment. In effect we are being asked to do what the

while purporting to be based on the financial statements of the newspapers in question, still falls

Conference Committee is precisely accused of having done in these cases to sit as a third

short of the establishment of facts by evidence so necessary for adjudicating the question whether

legislative chamber to review legislation.

the tax is oppressive and confiscatory.

We are told, however, that the power of judicial review is not so much power as it is duty imposed

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by

on this Court by the Constitution and that we would be remiss in the performance of that duty if we

the Constitution to do is to "evolve a progressive system of taxation." This is a directive to

decline to look behind the barriers set by the principle of separation of powers. Art. VIII, 1, 2 is

Congress, just like the directive to it to give priority to the enactment of laws for the enhancement

cited in support of this view:

of human dignity and the reduction of social, economic and political inequalities (Art. XIII, 1), or

Judicial power includes the duty of the courts of justice to settle actual controversies involving

for the promotion of the right to "quality education" (Art. XIV, 1). These provisions are put in the

rights which are legally demandable and enforceable, and to determine whether or not there has

Constitution as moral incentives to legislation, not as judicially enforceable rights.

been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any

At all events, our 1988 decision in Kapatiran 45 should have laid to rest the questions now raised

branch or instrumentality of the Government.

against the VAT. There similar arguments made against the original VAT Law (Executive Order No.

To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in

273) were held to be hypothetical, with no more basis than newspaper articles which this Court

1803, to justify the assertion of this power in Marbury v. Madison:

found to be "hearsay and [without] evidentiary value." As Republic Act No. 7716 merely expands

It is emphatically the province and duty of the judicial department to say what the law is. Those

the base of the VAT system and its coverage as provided in the original VAT Law, further debate on

who apply the rule to particular cases must of necessity expound and interpret that rule. If two laws

the desirability and wisdom of the law should have shifted to Congress.

conflict with each other, the courts must decide on the operation of each.

48

or ideological plaintiffs are now cognizable

50

Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:

GIRON, URSULA C. PEREZ ALIAS "BA-YAY," EDILBERTO T. CLARAVALL, CARMEN

And when the judiciary mediates to allocate constitutional boundaries, it does not assert any

CAROMINA, LILIA G. YARANON, DIANE MONDOC, Petitioners,

superiority over the other departments; it does not in reality nullify or invalidate an act of the

vs.

legislature, but only asserts the solemn and sacred obligation assigned to it by the Constitution to

VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHN HAY

determine conflicting claims of authority under the Constitution and to establish for the parties in an

PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD.,

actual controversy the rights which that instrument secures and guarantees to them.

51

This conception of the judicial power has been affirmed in several

cases

52

of this Court following Angara.

ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND

NATURAL RESOURCES,Respondents.
DECISION

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is

CARPIO MORALES, J.:

essentially a case that at best is not ripe for adjudication. That duty must still be performed in the

By the present petition for prohibition, mandamus and declaratory relief with prayer for a temporary

context of a concrete case or controversy, as Art. VIII, 5(2) clearly defines our jurisdiction in terms

restraining order (TRO) and/or writ of preliminary injunction, petitioners assail, in the main, the

of "cases," and nothing but "cases." That the other departments of the government may have

constitutionality of Presidential Proclamation No. 420, Series of 1994, "CREATING AND

committed a grave abuse of discretion is not an independent ground for exercising our power.

DESIGNATING a portion of the area covered by the former Camp John [Hay] as THE JOHN HAY

Disregard of the essential limits imposed by the case and controversy requirement can in the long

Special Economic Zone pursuant to R.A. No. 7227."

run only result in undermining our authority as a court of law. For, as judges, what we are called

R.A. No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS

upon to render is judgment according to law, not according to what may appear to be the opinion of

INTO OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION AND

the day.

DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR AND

_______________________________

FOR OTHER PURPOSES, otherwise known as the "Bases Conversion and Development Act of

In the preceeding pages we have endeavored to discuss, within limits, the validity of Republic Act

1992," which was enacted on March 13, 1992, set out the policy of the government to accelerate

No. 7716 in its formal and substantive aspects as this has been raised in the various cases before

the sound and balanced conversion into alternative productive uses of the former military bases

us. To sum up, we hold:

under the 1947 Philippines-United States of America Military Bases Agreement, namely, the Clark

(1) That the procedural requirements of the Constitution have been complied with by Congress in

and Subic military reservations as well as their extensions including the John Hay Station (Camp

the enactment of the statute;

John Hay or the camp) in the City of Baguio.1

(2) That judicial inquiry whether the formal requirements for the enactment of statutes beyond

As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development

those prescribed by the Constitution have been observed is precluded by the principle of

Authority2(BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the

separation of powers;

ultimate objective of utilizing the base areas in accordance with the declared government policy.

(3) That the law does not abridge freedom of speech, expression or the press, nor interfere with the

R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the

free exercise of religion, nor deny to any of the parties the right to an education; and

metes and bounds of which were to be delineated in a proclamation to be issued by the President

(4) That, in view of the absence of a factual foundation of record, claims that the law is regressive,

of the Philippines.3

oppressive and confiscatory and that it violates vested rights protected under the Contract Clause

R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free importations,

are prematurely raised and do not justify the grant of prospective relief by writ of prohibition.

exemption of businesses therein from local and national taxes, to other hallmarks of a liberalized

WHEREFORE, the petitions in these cases are DISMISSED.

financial and business climate.4

G. R. No. 119775

And R.A. No. 7227 expressly gave authority to the President to create through executive

October 24, 2003

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC.,

proclamation, subject to the concurrence of the local government units directly affected, other

CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN

Special Economic Zones (SEZ) in the areas covered respectively by the Clark military reservation,

REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK

the Wallace Air Station in San Fernando, La Union, and Camp John Hay.5

REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA MOLINA LUYK,

On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow Agreement with

KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G. PE,

private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale Group, Inc.

SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS "KEVAB," BETTY I. STRASSER, RUBY C.

(ASIAWORLD), private corporations registered under the laws of the British Virgin Islands,

preparatory to the formation of a joint venture for the development of Poro Point in La Union and

xxx

Camp John Hay as premier tourist destinations and recreation centers. Four months later or on

Pursuant to the powers vested in me by the law and the resolution of concurrence by the City

December 16, 1993, BCDA, TUNTEX and ASIAWORD executed a Joint Venture

Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and

Agreement whereby they bound themselves to put up a joint venture company known as the

designate a portion of the area covered by the former John Hay reservation as embraced, covered,

Baguio International Development and Management Corporation which would lease areas within

and defined by the 1947 Military Bases Agreement between the Philippines and the United States

Camp John Hay and Poro Point for the purpose of turning such places into principal tourist and

of America, as amended, as the John Hay Special Economic Zone, and accordingly order:

recreation spots, as originally envisioned by the parties under their Memorandum of Agreement.

SECTION 1. Coverage of John Hay Special Economic Zone. - The John Hay Special Economic

The Baguio City government meanwhile passed a number of resolutions in response to the actions

Zone shall cover the area consisting of Two Hundred Eighty Eight and one/tenth (288.1) hectares,

taken by BCDA as owner and administrator of Camp John Hay.

more or less, of the total of Six Hundred Seventy-Seven (677) hectares of the John Hay

By Resolution7 of September 29, 1993, the Sangguniang Panlungsod of Baguio City

Reservation, more or less, which have been surveyed and verified by the Department of

(the sanggunian) officially asked BCDA to exclude all the barangays partly or totally located within

Environment and Natural Resources (DENR) as defined by the following technical description:

Camp John Hay from the reach or coverage of any plan or program for its development.

A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and

By a subsequent Resolution dated January 19, 1994, the sanggunian sought from BCDA an

particularly described in survey plans Psd-131102-002639 and Ccs-131102-000030 as approved

abdication, waiver or quitclaim of its ownership over the home lots being occupied by residents of

on 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and

nine (9) barangays surrounding the military reservation.

Natural Resources, in detail containing:

Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to
9

Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-

BCDA a 15-point concept for the development of Camp John Hay. The sanggunian's vision

000030

expressed, among other things, a kind of development that affords protection to the environment,

-and-

the making of a family-oriented type of tourist destination, priority in employment opportunities for

Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and Lot

Baguio residents and free access to the base area, guaranteed participation of the city government

18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.

in the management and operation of the camp, exclusion of the previously named nine barangays

With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES (288.1

from the area for development, and liability for local taxes of businesses to be established within

hectares); Provided that the area consisting of approximately Six and two/tenth (6.2) hectares,

the camp.10

more or less, presently occupied by the VOA and the residence of the Ambassador of the United

BCDA, Tuntex and AsiaWorld agreed to some, but rejected or modified the other proposals of

States, shall be considered as part of the SEZ only upon turnover of the properties to the

the sanggunian.11They stressed the need to declare Camp John Hay a SEZ as a condition

government of the Republic of the Philippines.

precedent to its full development in accordance with the mandate of R.A. No. 7227.

12

Sec. 2. Governing Body of the John Hay Special Economic Zone. - Pursuant to Section 15 of R.A.

On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the

No. 7227, the Bases Conversion and Development Authority is hereby established as the

determination of realty taxes which may otherwise be collected from real properties of Camp John

governing body of the John Hay Special Economic Zone and, as such, authorized to determine the

Hay.13 The resolution was intended to intelligently guide the sanggunian in determining its position

utilization and disposition of the lands comprising it, subject to private rights, if any, and in

on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the view that such

consultation and coordination with the City Government of Baguio after consultation with its

declaration would exempt the camp's property and the economic activity therein from local or

inhabitants, and to promulgate the necessary policies, rules, and regulations to govern and

national taxation.

regulate the zone thru the John Hay Poro Point Development Corporation, which is its

More than a month later, however, the sanggunian passed Resolution No. 255, (Series of

implementing arm for its economic development and optimum utilization.

1994),14 seeking and supporting, subject to its concurrence, the issuance by then President Ramos

Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section 5(m) and

of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ in

Section 15 of R.A. No. 7227, the John Hay Poro Point Development Corporation shall implement

accordance with the provisions of R.A. No. 7227. Together with this resolution was submitted a

all necessary policies, rules, and regulations governing the zone, including investment incentives,

draft of the proposed proclamation for consideration by the President.

15

in consultation with pertinent government departments. Among others, the zone shall have all the

On July 5, 1994 then President Ramos issued Proclamation No. 420,16 the title of which was earlier

applicable incentives of the Special Economic Zone under Section 12 of R.A. No. 7227 and those

indicated, which established a SEZ on a portion of Camp John Hay and which reads as follows:

applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of

1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be

A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin BCDA,

enacted.

John Hay Poro Point Development Corporation and the city government from implementing

Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. - All Heads of

Proclamation No. 420, and Tuntex and AsiaWorld from proceeding with their plan respecting Camp

departments, bureaus, offices, agencies, and instrumentalities of the government are hereby

John Hay's development pursuant to their Joint Venture Agreement with BCDA.18

directed to give full support to Bases Conversion and Development Authority and/or its

Public respondents, by their separate Comments, allege as moot and academic the issues raised

implementing subsidiary or joint venture to facilitate the necessary approvals to expedite the

by the petition, the questioned Memorandum of Agreement and Joint Venture Agreement having

implementation of various projects of the conversion program.

already been deemed abandoned by the inaction of the parties thereto prior to the filing of the

Sec. 5. Local Authority. - Except as herein provided, the affected local government units shall retain

petition as in fact, by letter of November 21, 1995, BCDA formally notified Tuntex and AsiaWorld of

their basic autonomy and identity.

the revocation of their said agreements.19

Sec. 6. Repealing Clause. - All orders, rules, and regulations, or parts thereof, which are

In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the

inconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modified

John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was

accordingly.

established under R.A. No. 7227, the proclamation is merely implementing the legislative intent of

Sec. 7. Effectivity. This proclamation shall take effect immediately.

said law to turn the US military bases into hubs of business activity or investment. They underscore

Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundred and

the point that the government's policy of bases conversion can not be achieved without extending

ninety-four.

the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs.

The issuance of Proclamation No. 420 spawned the present petition17 for

Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it is

prohibition, mandamus and declaratory relief which was filed on April 25, 1995 challenging, in the

violative of the constitutional guarantee of equal protection, respondents assail petitioners' lack of

main, its constitutionality or validity as well as the legality of the Memorandum of Agreement and

standing to bring the present suit even as taxpayers and in the absence of any actual case or

Joint Venture Agreement between public respondent BCDA and private respondents Tuntex and

controversy to warrant this Court's exercise of its power of judicial review over the proclamation.

AsiaWorld.

Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of

Petitioners allege as grounds for the allowance of the petition the following:

the hierarchy of courts and of the doctrine of exhaustion of administrative remedies.

I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS IT GRANTS

Replying,20 petitioners aver that the doctrine of exhaustion of administrative remedies finds no

TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE BY

application herein since they are invoking the exclusive authority of this Court under Section 21 of

THE PRESIDENT OF A POWER GRANTED ONLY TO THE LEGISLATURE.

R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the base areas; that

II .PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS AND

the established exceptions to the aforesaid doctrine obtain in the present petition; and that they

INTERFERES WITH THE AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND

possess the standing to bring the petition which is a taxpayer's suit.

UNCONSTITUTIONAL.

Public respondents have filed their Rejoinder21 and the parties have filed their respective

III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL IN

memoranda.

THAT IT VIOLATES THE RULE THAT ALL TAXES SHOULD BE UNIFORM AND EQUITABLE.

Before dwelling on the core issues, this Court shall first address the preliminary procedural

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND

questions confronting the petition.

PUBLIC RESPONDENTS BASES CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN

The judicial policy is and has always been that this Court will not entertain direct resort to it except

ENTERED INTO ONLY BY DIRECT NEGOTIATION IS ILLEGAL.

when the redress sought cannot be obtained in the proper courts, or when exceptional and

V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED INTO

compelling circumstances warrant availment of a remedy within and calling for the exercise of this

BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENT BASES CONVERSION

Court's primary jurisdiction.22 Neither will it entertain an action for declaratory relief, which is partly

DEVELOPMENT AUTHORITY IS (sic) ILLEGAL.

the nature of this petition, over which it has no original jurisdiction.

VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING

Nonetheless, as it is only this Court which has the power under Section 2123 of R.A. No. 7227 to

UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS BEING ILLEGALLY CONSIDERED

enjoin implementation of projects for the development of the former US military reservations, the

WITHOUT A VALID ENVIRONMENTAL IMPACT ASSESSMENT.

issuance of which injunction petitioners pray for, petitioners' direct filing of the present petition with
it is allowed. Over and above this procedural objection to the present suit, this Court retains full

discretionary power to take cognizance of a petition filed directly to it if compelling reasons, or the
24

It is settled that when questions of constitutional significance are raised, the court can exercise its

nature and importance of the issues raised, warrant. Besides, remanding the case to the lower

power of judicial review only if the following requisites are present: (1) the existence of an actual

courts now would just unduly prolong adjudication of the issues.

and appropriate case; (2) a personal and substantial interest of the party raising the constitutional

The transformation of a portion of the area covered by Camp John Hay into a SEZ is not simply a

question; (3) the exercise of judicial review is pleaded at the earliest opportunity; and (4) the

re-classification of an area, a mere ascription of a status to a place. It involves turning the former

constitutional question is the lis mota of the case.29

US military reservation into a focal point for investments by both local and foreign entities. It is to

An actual case or controversy refers to an existing case or controversy that is appropriate or ripe

be made a site of vigorous business activity, ultimately serving as a spur to the country's long

for determination, not conjectural or anticipatory.30 The controversy needs to be definite and

awaited economic growth. For, as R.A. No. 7227 unequivocally declares, it is the government's

concrete, bearing upon the legal relations of parties who are pitted against each other due to their

policy to enhance the benefits to be derived from the base areas in order to promote the economic

adverse legal interests.31 There is in the present case a real clash of interests and rights between

and social development of Central Luzon in particular and the country in general.25 Like the Subic

petitioners and respondents arising from the issuance of a presidential proclamation that converts

SEZ, the John Hay SEZ should also be turned into a "self-sustaining, industrial, commercial,

a portion of the area covered by Camp John Hay into a SEZ, the former insisting that such

financial and investment center."26

proclamation contains unconstitutional provisions, the latter claiming otherwise.

More than the economic interests at stake, the development of Camp John Hay as well as of the

R.A. No. 7227 expressly requires the concurrence of the affected local government units to the

other base areas unquestionably has critical links to a host of environmental and social concerns.

creation of SEZs out of all the base areas in the country.32 The grant by the law on local

Whatever use to which these lands will be devoted will set a chain of events that can affect one

government units of the right of concurrence on the bases' conversion is equivalent to vesting a

way or another the social and economic way of life of the communities where the bases are

legal standing on them, for it is in effect a recognition of the real interests that communities nearby

located, and ultimately the nation in general.

or surrounding a particular base area have in its utilization. Thus, the interest of petitioners, being

Underscoring the fragility of Baguio City's ecology with its problem on the scarcity of its water

inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is personal and substantial

supply, petitioners point out that the local and national government are faced with the challenge of

such that they have sustained or will sustain direct injury as a result of the government act being

how to provide for an ecologically sustainable, environmentally sound, equitable transition for the

challenged.33 Theirs is a material interest, an interest in issue affected by the proclamation and not

city in the wake of Camp John Hay's reversion to the mass of government property.27 But that is

merely an interest in the question involved or an incidental interest, 34 for what is at stake in the

why R.A. No. 7227 emphasizes the "sound and balanced conversion of the Clark and Subic

enforcement of Proclamation No. 420 is the very economic and social existence of the people of

military reservations and their extensions consistent with ecological andenvironmental

Baguio City.

28

standards." It cannot thus be gainsaid that the matter of conversion of the US bases into SEZs, in

Petitioners' locus standi parallels that of the petitioner and other residents of Bataan, specially of

this case Camp John Hay, assumes importance of a national magnitude.

the town of Limay, in Garcia v. Board of Investments35 where this Court characterized their interest

Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction

in the establishment of a petrochemical plant in their place as actual, real, vital and legal, for it

over the petition.

would affect not only their economic life but even the air they breathe.

As far as the questioned agreements between BCDA and Tuntex and AsiaWorld are concerned,

Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected councilors of

the legal questions being raised thereon by petitioners have indeed been rendered moot and

Baguio at the time, engaged in the local governance of Baguio City and whose duties included

academic by the revocation of such agreements. There are, however, other issues posed by the

deciding for and on behalf of their constituents the question of whether to concur with the

petition, those which center on the constitutionality of Proclamation No. 420, which have not been

declaration of a portion of the area covered by Camp John Hay as a SEZ. Certainly then,

mooted by the said supervening event upon application of the rules for the judicial scrutiny of

petitioners Claravall and Yaranon, as city officials who voted against36 thesanggunian Resolution

constitutional cases. The issues boil down to:

No. 255 (Series of 1994) supporting the issuance of the now challenged Proclamation No. 420,

(1)
(2)

(3)

standing issues;
to bring the present petition.
Whether the present petition complies with the requirements for this Court's exercise of jurisdictionhave
overlegal
constitutional
That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of
Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other
the issues concerning the questioned agreements between public and private respondents is of no
economic incentives to the John Hay Special Economic Zone; and
moment.
Whether Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City;

"By the mere enactment of the questioned law or the approval of the challenged act, the dispute is

subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws

deemed to have ripened into a judicial controversy even without any other overt act. Indeed, even

of the Philippines;

a singular violation of the Constitution and/or the law is enough to awaken judicial duty."37

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes,

As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they have

local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying

been complied with in the case at bar. This is an action filed purposely to bring forth constitutional

taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the

issues, ruling on which this Court must take up. Besides, respondents never raised issues with

Subic Special Economic Zone shall be remitted to the National Government, one percent (1%)

respect to these requisites, hence, they are deemed waived.

each to the local government units affected by the declaration of the zone in proportion to their

Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as framed

population area, and other factors. In addition, there is hereby established a development fund of

in the second and third issues above, must now be addressed squarely.

one percent (1%) of the gross income earned by all businesses and enterprises within the Subic

The second issue refers to petitioners' objection against the creation by Proclamation No. 420 of a

Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities

regime of tax exemption within the John Hay SEZ. Petitioners argue that nowhere in R. A. No.

contiguous to be base areas. In case of conflict between national and local laws with respect to tax

7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike the

exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of

grant under Section 12 thereof of tax exemption and investment incentives to the therein

the latter;

established Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude,

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold,

thus contravenes Article VI, Section 28 (4) of the Constitution which provides that "No law granting

securities and futures shall be allowed and maintained in the Subic Special Economic Zone;

any tax exemption shall be passed without the concurrence of a majority of all the members of

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of

Congress."

banks and other financial institutions within the Subic Special Economic Zone;

Section 3 of Proclamation No. 420, the challenged provision, reads:

(f) Banking and Finance shall be liberalized with the establishment of foreign currency depository

Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section 5(m) and

units of local commercial banks and offshore banking units of foreign banks with minimum Central

Section 15 of R.A. No. 7227, the John Hay Poro Point Development Corporation shall implement

Bank regulation;

all necessary policies, rules, and regulations governing the zone, including investment incentives,

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not

in consultation with pertinent government departments. Among others, the zone shall have all the

be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent

applicable incentives of the Special Economic Zone under Section 12 of R.A. No. 7227 and

children under twenty-one (21) years of age, shall be granted permanent resident status within the

those applicable incentives granted in the Export Processing Zones, the Omnibus

Subic Special Economic Zone. They shall have freedom of ingress and egress to and from the

Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that

Subic Special Economic Zone without any need of special authorization from the Bureau of

may hereinafter be enacted. (Emphasis and underscoring supplied)

Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this

Upon the other hand, Section 12 of R.A. No. 7227 provides:

Act may also issue working visas renewable every two (2) years to foreign executives and other

xxx

aliens possessing highly-technical skills which no Filipino within the Subic Special Economic Zone

(a) Within the framework and subject to the mandate and limitations of the Constitution and the

possesses, as certified by the Department of Labor and Employment. The names of aliens granted

pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be

permanent residence status and working visas by the Subic Bay Metropolitan Authority shall be

developed into a self-sustaining, industrial, commercial, financial and investment center to

reported to the Bureau of Immigration and Deportation within thirty (30) days after issuance

generate employment opportunities in and around the zone and to attract and promote productive

thereof;

foreign investments;

x x x (Emphasis supplied)

b) The Subic Special Economic Zone shall be operated and managed as a separate customs

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by

territory ensuring free flow or movement of goods and capital within, into and exported out of the

Congress with tax exemption, investment incentives and the like. There is no express extension of

Subic Special Economic Zone, as well as provide incentives such as tax and duty free importations

the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation.

of raw materials, capital and equipment. However, exportation or removal of goods from the

The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and investment

territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be

privileges accorded it under the law, as the following exchanges between our lawmakers show

during the second reading of the precursor bill of R.A. No. 7227 with respect to the investment

incentives under R.A. No. 7227 areexclusive only to the Subic SEZ, hence, the extension of the

policies that would govern Subic SEZ which are now embodied in the aforesaid Section 12 thereof:

same to the John Hay SEZ finds no support therein. Neither does the same grant of privileges to

xxx

the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No.

Senator Maceda: This is what I was talking about. We get into problems here because all of these

420, which laws were already extant before the issuance of the proclamation or the enactment of

following policies are centered around the concept of free port. And in the main paragraph above,

R.A. No. 7227.

we have declared both Clark and Subic as special economic zones, subject to these policies which

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the

are, in effect, a free-port arrangement.

legislature, unless limited by a provision of the state constitution, that has full power to exempt any

Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these

person or corporation or class of property from taxation, its power to exempt being as broad as its

policies only to Subic.

power to tax.42 Other than Congress, the Constitution may itself provide for specific tax

May I withdraw then my amendment, and instead provide that "THE SPECIAL ECONOMIC ZONE

exemptions,43 or local governments may pass ordinances on exemption only from local taxes.44

OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING POLICIES."

The challenged grant of tax exemption would circumvent the Constitution's imposition that a law

Subject to style, Mr. President.

granting any tax exemption must have the concurrence of a majority of all the members of

Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.

Congress.45 In the same vein, the other kinds of privileges extended to the John Hay SEZ are by

Senator Paterno: Mr. President.

tradition and usage for Congress to legislate upon.

The President: Senator Paterno is recognized.

Contrary to public respondents' suggestions, the claimed statutory exemption of the John Hay SEZ

Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent

from taxation should be manifest and unmistakable from the language of the law on which it is

the establishment of other special economic zones observing these policies.

based; it must be expressly granted in a statute stated in a language too clear to be

Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the

mistaken.46 Tax exemption cannot be implied as it must be categorically and unmistakably

point that if we give this delegation to the President to establish other economic zones, that may be

expressed.47

an unwarranted delegation.

If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and

So we agreed that we will simply limit the definition of powers and description of the zone to Subic,

incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227.

but that does not exclude the possibility of creating other economic zones within the baselands.

This Court no doubt can void an act or policy of the political departments of the government on

Senator Paterno: But if that amendment is followed, no other special economic zone may be

either of two grounds-infringement of the Constitution or grave abuse of discretion.48

created under authority of this particular bill. Is that correct, Mr. President?

This Court then declares that the grant by Proclamation No. 420 of tax exemption and other

Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be

privileges to the John Hay SEZ is void for being violative of the Constitution. This renders it

confined only to Subic.

38

unnecessary to still dwell on petitioners' claim that the same grant violates the equal protection

x x x (Underscoring supplied).

guarantee.

As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given to Subic SEZ

With respect to the final issue raised by petitioners -- that Proclamation No. 420 is unconstitutional

consist principally of exemption from tariff or customs duties, national and local taxes of business

for being in derogation of Baguio City's local autonomy, objection is specifically mounted against

entities therein (paragraphs (b) and (c)), free market and trade of specified goods or properties

Section 2 thereof in which BCDA is set up as the governing body of the John Hay SEZ.49

(paragraph d), liberalized banking and finance (paragraph f), and relaxed immigration rules for

Petitioners argue that there is no authority of the President to subject the John Hay SEZ to the

foreign investors (paragraph g). Yet, apart from these, Proclamation No. 420 also makes available

governance of BCDA which has just oversight functions over SEZ; and that to do so is to diminish

to the John Hay SEZ benefits existing in other laws such as the privilege of export processing

the city government's power over an area within its jurisdiction, hence, Proclamation No. 420

zone-based businesses of importing capital equipment and raw materials free from taxes, duties

unlawfully gives the President power of control over the local government instead of just mere

39

and other restrictions; tax and duty exemptions, tax holiday, tax credit, and other incentives under

supervision.

the Omnibus Investments Code of 1987;40 and the applicability to the subject zone of rules

Petitioners' arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted with,

governing foreign investments in the Philippines.

41

While the grant of economic incentives may be essential to the creation and success of SEZs, free
trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The

among other things, the following purpose:50

xxx

(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air

Marcos when the bill was presented to him and Congress had not taken any step to override the

Station, O'Donnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita

presidential veto. We held thus:

Station (Hermosa, Bataan) and those portions of Metro Manila Camps which may be transferred to

The power of the State to impose the 3% caterer's tax is not debatable. The Court of Tax Appeals

it by the President;

erred, however, in holding that the tax was abolished as a result of the presidential veto of August

x x x (Underscoring supplied)

4, 1969. It failed to examine the law then, and up to now, existing on the subject which has always

With such broad rights of ownership and administration vested in BCDA over Camp John Hay,

imposed a 3% caterer's tax on operators of restaurants. Since the Manila Hotel operates

BCDA virtually has control over it, subject to certain limitations provided for by law. By designating

restaurants in its premises, it is liable to pay the tax provided in paragraph (1), Section 206 of the

BCDA as the governing agency of the John Hay SEZ, the law merely emphasizes or reiterates the

Tax Code. (Commissioner of Internal Revenue v. Manila Hotel Corporation and the Court of Tax

statutory role or functions it has been granted.

Appeals, G.R. No. 83250, September 26, 1989)

The unconstitutionality of the grant of tax immunity and financial incentives as contained in the

The petition now before Us presents an identical question: whether the presidential veto referred to

second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed

the entire section or merely to the imposition of 20% tax on gross receipts of operators or

proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant to

proprietors of restaurants, refreshment parlors, bars and other eating places which are maintained

law or the Constitution. The delineation and declaration of a portion of the area covered by Camp

within the premises or compound of a hotel, motel or resthouses. Reference to the Manila Hotel

John Hay as a SEZ was well within the powers of the President to do so by means of a

case, therefore, might have been sufficient to dispose of this petition were it not for the position of

51

proclamation. The requisite prior concurrence by the Baguio City government to such

the CTA that a chief executive has no power to veto part of an item in a bill; either he vetoes an

proclamation appears to have been given in the form of a duly enacted resolution by

entire section or approves it but not a fraction thereof.

the sanggunian. The other provisions of the proclamation had been proven to be consistent with

Herein private respondent, Manila Golf & Country Club, Inc. is a non-stock corporation. True, it

R.A. No. 7227.

maintains a golf course and operates a clubhouse with a lounge, bar and dining room, but these

Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid
52

facilities are for the exclusive use of its members and accompanied guests, and it charges on cost-

portion, if separable from the invalid, may stand and be enforced. This Court finds that the other

plus-expense basis. As such, it claims it should have been exempt from payment of privilege taxes

provisions in Proclamation No. 420 converting a delineated portion of Camp John Hay into the

were it not for the last paragraph of Section 191-A of R.A. No. 6110, otherwise known as the

John Hay SEZ are separable from the invalid second sentence of Section 3 thereof, hence they

"Omnibus Tax Law." Section 191-A reads:

stand.

Sec. 191-A. Caterer. A caterer's tax is hereby imposed as follows:

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby declared

(1) On proprietors or operators of restaurants, refreshment parlors and other eating places,

NULL AND VOID and is accordingly declared of no legal force and effect. Public respondents are

including clubs, and caterers, three per cent of their gross receipts.

hereby enjoined from implementing the aforesaid void provision.

(2) On proprietors or operators of restaurants, bars, cafes and other eating places, including clubs,

Proclamation No. 420, without the invalidated portion, remains valid and effective.

where distilled spirits, fermented liquors, or wines are served, three per cent of their gross receipts

SO ORDERED.

from sale of food or refreshments and seven per cent of their gross receipts from sale of distilled

G.R. No. L-47421 May 14, 1990

spirits, fermented liquors or wines. Two sets of commercial invoices or receipts serially numbered

COMMISSIONER OF INTERNAL REVENUE, petitioner,

in duplicate shall be separately prepared and issued, one for sale of refreshments served, and

vs.

another for each sale of distilled spirits, fermented liquors or wines served, the originals of the

HON. COURT OF TAX APPEALS and MANILA GOLF & COUNTRY CLUB, INC., respondents.

invoices or receipts to be issued to the purchaser or customer.

Bito, Misa & Lozada for private respondent.

(3) On proprietors or operators of restaurants, refreshment parlors, bars, cafes and other eating
places which are maintained within the preferences or compound of a hotel, motel, resthouse,

MEDIALDEA, J.:

cockpit, race track, jai-alai, cabaret, night or day club by means of a connecting door or passage

In Commissioner of Internal Revenue v. Manila Hotel Corporation, et al., G.R. No. 83250,

twenty per cent of their gross receipts.

September 26, 1989, We overruled a decision of the Court of Tax Appeals which declared the

Where the establishments are operated or maintained by clubs of any kind or nature (irrespective

collection of caterer's tax under Section 191-A of Republic Act No. 6110 illegal because Sec. 42 of

of the disposition of their net income and whether or not they cater exclusively to members or their

House Bill No. 17839, which carries that proviso, was vetoed by then President Ferdinand E.

guests) the keepers of the establishments shall pay the corresponding tax at the rate fixed

restrain the development of hotels which is essential to the tourism industry. This in fact was the

above. (Emphasis supplied)

position of the House Ways and Means Committee which reported, to wit:

Republic Act No. 6110 took effect on September 1, 1969. By this virtue, petitioners assessed the

When Congress decided to split Section 191 into two parts, one dealing with contractors, and the

club fixed taxes as operators of golf links and restaurants, and also percentage tax (caterer's tax)

other dealing with those who serve food and drinks, the intention was to classify and to improve.

for its sale of foods and fermented liquors/wines for the period covering September 1969 to

While the Congress expanded the coverage of both 191 and 191-A, it also provided for certain

December 1970 in the amount of P32,504.96. The club protested claiming the assessment to be

exemptions. The veto message seems to object to certain additions to 191-A. What additions are

without basis because Section 42 was vetoed by then President Marcos. The veto message reads:

objectionables can be gleaned from the reasons given: a general reason that this sort of tax is

MALACAANG

passed on to the consuming public, and a particular reason that hotel developments, so essential

Manila

to the tourist industry, may be restrained. These reasons have been taken together in the

August 4, 1969

interpretations of the veto message and the deletions of such enterprises as are connected with

Gentlemen of the House

the tourist industry has therefore been recommended.

of Representatives:

To interpret the veto. message otherwise would result in the exemption of entities already subject

I have the honor to inform you that I have this day signed H.B. No. 17839, entitled:

of tax. This would be absurd. Where the Congress wanted to exempt, it was so provided in the bill.

AN ACT AMENDING CERTAIN

While the President may veto any item or items in a revenue bill the constitution does not give him

PROVISIONS OF THE NATIONAL INTERNAL

the power to repeal an existing tax. (2nd Indorsement dated December 9, 1969, Chairman on

REVENUE CODE, AS AMENDED

Ways and Means, Sixth Congress of the Republic of the Phil.) (Exhs. 14, p. 85, B.I.R. rec.). (pp.

Pursuant to the provisions of Section 20-(3), Article VI, of the Constitution, however, I have vetoed

20-21, Rollo)

the following items in this bill:

It was by reason of this interpretation of the Committee that R.A. No. 6110 was published in

xxx xxx xxx

Volume 66, No. 18, p. 4531 of the Official Gazette (May 4, 1970) in such a way that Section 191-A

pp. 44, SEC. 42. Inserting a new Section 191-A which imposes a caterer's tax of three percent of

was included in the text save for the words "hotels, motels, resthouses."

the gross receipts of proprietors or operators of restaurants, refreshment parlors and other eating

As already mentioned, the Court of Tax Appeals, upon petition by the club, sustained the latter's

places; three percent of gross receipts from sale of food or refreshment and seven percent on

position reasoning that the veto message was clear and unqualified, as in fact it was confirmed

gross receipts from the sale of distilled spirits, fermented liquors or wines, on proprietors or

three years later, after much controversy, by the Office of the President, thus:

operators of restaurants, bars, cafes and other eating places, including clubs, where distilled

Mr. Antero M. Sison, Jr.

spirits, fermented liquors, or wines are served; and twenty percent of gross receipts on proprietor

San Martin Building, 1564,

or operators of restaurants, refreshment parlors, bars, cafes and other eating places maintained

A. Mabini, P.O. Box 2288

within the premises or compound of a hotel, motel, resthouse, cockpit, race track, jai-alai, cabaret,

Manila, Philippines

night or day club, or which are accessible to patrons of said establishments by means of a

Dear Sir:

connecting door or passage.

With reference to your letter dated July 14, 1972, we wish to inform you that Section 42 (which

The burden of petition will be shifted to the consuming public.

contains Sec. 191-A) of House Bill No. 17839, now R.A. 6110 was one of the Sections vetoed by

The development of hotels, essential to our tourist industry, may be restrained considering that a

the President in his veto message dated August 4, 1969, vetoing certain sections of the said

big portion of hotel earnings comes from food sale. . . .

revenue bill.

This bill, H.B. No. 17839, has become Republic Act No. 6110.

Very Truly Yours,

Respectfully,

(SGD.) IRINEO T. AGUIRRE, JR.

(SGD.) FERDINAND E. MARCOS

Presidential Staff Assistant

[Emphasis ours]

(p. 49, Rollo)

The protestation of the club was denied by the petitioner who maintains that Section 42 was not

As mentioned earlier, We have already ruled that the presidential veto referred merely to the

entirely vetoed but merely the words "hotels, motels, resthouses" on the ground that it might

inclusion of hotels, motels and resthouses in the 20% caterer's tax bracket but not to the whole
section. But, as mentioned earlier also, the CTA opined that the President could not veto words or

phrases in a bill but only an entire item. Obviously, what the CTA meant by "item" was an entire

Office of the Undersecretary for International Economic Relations of the DFA and lead

section. We do not agree. But even assuming it to be so, it would also be to petitioner's favor. The

negotiator for the General and Final Provisions of the JPEPA, ERLINDA ARCELLANA, in her

ineffectual veto by the President rendered the whole section 191-A as not having been vetoed at all

capacity as Director of the Board of Investments and lead negotiator for Trade in Goods

and it, therefore, became law as an unconstitutional veto has no effect, whatsoever. (See Bolinao

(General Rules) of the JPEPA, RAQUEL ECHAGUE, in her capacity as lead negotiator for

Electronics Corp. v. Valeria No. L-20740, June 30, 1964, 11 SCRA 486).

Rules of Origin of the JPEPA, GALLANT SORIANO, in his official capacity as Deputy

However, We agree with then Solicitor General Estelito Mendoza and his associates that inclusion

Commissioner of the Bureau of Customs and lead negotiator for Customs Procedures and

of hotels, motels and resthouses in the 20% caterer's tax bracket are "items" in themselves within

Paperless Trading of the JPEPA, MA. LUISA GIGETTE IMPERIAL, in her capacity as Director

the meaning of Sec. 20(3), Art. VI of the 1935 Constitution which, therefore, the President has the

of the Bureau of Local Employment of the Department of Labor and Employment (DOLE)

power to veto. An "item" in a revenue bill does not refer to an entire section imposing a particular

and lead negotiator for Movement of Natural Persons of the JPEPA, PASCUAL DE GUZMAN,

kind of tax, but rather to the subject of the tax and the tax rate. In the portion of a revenue bill which

in his capacity as Director of the Board of Investments and lead negotiator for Investment of

actually imposes a tax, a section identifies the tax and enumerates the persons liable therefor with

the JPEPA, JESUS MOTOOMULL, in his capacity as Director for the Bureau of Product

the corresponding tax rate. To construe the word "item" as referring to the whole section would tie

Standards of the DTI and lead negotiator for Mutual Recognition of the JPEPA, LOUIE

the President's hand in choosing either to approve the whole section at the expense of also

CALVARIO, in his capacity as lead negotiator for Intellectual Property of the JPEPA, ELMER

approving a provision therein which he deems unacceptable or veto the entire section at the

H. DORADO, in his capacity as Officer-in-Charge of the Government Procurement Policy

expense of foregoing the collection of the kind of tax altogether. The evil which was sought to be

Board Technical Support Office, the government agency that is leading the negotiations on

prevented in giving the President the power to disapprove items in a revenue bill would be

Government Procurement of the JPEPA, RICARDO V. PARAS, in his capacity as Chief State

perpetrated rendering that power inutile (See Commonwealth ex rel. Elkin v. Barnett, 199 Pa. 161,

Counsel of the Department of Justice (DOJ) and lead negotiator for Dispute Avoidance and

55 LRA 882 [1901]).

Settlement of the JPEPA, ADONIS SULIT, in his capacity as lead negotiator for the General

ACCORDINGLY, the petition is GRANTED and the decision of the Court of Tax Appeals in CTA

and Final Provisions of the JPEPA, EDUARDO R. ERMITA, in his capacity as Executive

Case No. 2630 is set aside. Section 191-A of RA No. 6110 is valid and enforceable and, hence, the

Secretary, and ALBERTO ROMULO, in his capacity as Secretary of the DFA, * Respondents.

Manila Golf & Country Club Inc. is liable for the amount assessed against it.

DECISION

SO ORDERED.

CARPIO MORALES, J.:

G.R. No. 170516

July 16, 2008

Petitioners non-government organizations, Congresspersons, citizens and taxpayers seek via

AKBAYAN CITIZENS ACTION PARTY ("AKBAYAN"), PAMBANSANG KATIPUNAN NG MGA

the present petition for mandamus and prohibition to obtain from respondents the full text of the

SAMAHAN SA KANAYUNAN ("PKSK"), ALLIANCE OF PROGRESSIVE LABOR ("APL"),

Japan-Philippines Economic Partnership Agreement (JPEPA) including the Philippine and

VICENTE A. FABE, ANGELITO R. MENDOZA, MANUEL P. QUIAMBAO, ROSE BEATRIX

Japanese offers submitted during the negotiation process and all pertinent attachments and

CRUZ-ANGELES, CONG. LORENZO R. TANADA III, CONG. MARIO JOYO AGUJA, CONG.

annexes thereto.

LORETA ANN P. ROSALES, CONG. ANA THERESIA HONTIVEROS-BARAQUEL, AND CONG.

Petitioners Congressmen Lorenzo R. Taada III and Mario Joyo Aguja filed on January 25, 2005

EMMANUEL JOEL J. VILLANUEVA, Petitioners,

House Resolution No. 551 calling for an inquiry into the bilateral trade agreements then being

vs.

negotiated by the Philippine government, particularly the JPEPA. The Resolution became the basis

THOMAS G. AQUINO, in his capacity as Undersecretary of the Department of Trade and

of an inquiry subsequently conducted by the House Special Committee on Globalization (the

Industry (DTI) and Chairman and Chief Delegate of the Philippine Coordinating Committee

House Committee) into the negotiations of the JPEPA.

(PCC) for the Japan-Philippines Economic Partnership Agreement, EDSEL T. CUSTODIO, in

In the course of its inquiry, the House Committee requested herein respondent Undersecretary

his capacity as Undersecretary of the Department of Foreign Affairs (DFA) and Co-Chair of

Tomas Aquino (Usec. Aquino), Chairman of the Philippine Coordinating Committee created under

the PCC for the JPEPA, EDGARDO ABON, in his capacity as Chairman of the Tariff

Executive Order No. 213 ("Creation of A Philippine Coordinating Committee to Study the Feasibility

Commission and lead negotiator for Competition Policy and Emergency Measures of the

of the Japan-Philippines Economic Partnership Agreement") 1 to study and negotiate the proposed

JPEPA, MARGARITA SONGCO, in her capacity as Assistant Director-General of the National

JPEPA, and to furnish the Committee with a copy of the latest draft of the JPEPA. Usec. Aquino did

Economic Development Authority (NEDA) and lead negotiator for Trade in Services and

not heed the request, however.

Cooperation of the JPEPA, MALOU MONTERO, in her capacity as Foreign Service Officer I,

Congressman Aguja later requested for the same document, but Usec. Aquino, by letter of

While the final text of the JPEPA has now been made accessible to the public since September 11,

November 2, 2005, replied that the Congressman shall be provided with a copy thereof "once the

2006,6respondents do not dispute that, at the time the petition was filed up to the filing of

negotiations are completed and as soon as a thorough legal review of the proposed agreement has

petitioners Reply when the JPEPA was still being negotiated the initial drafts thereof were kept

been conducted."

from public view.

In a separate move, the House Committee, through Congressman Herminio G. Teves, requested

Before delving on the substantive grounds relied upon by petitioners in support of the petition, the

Executive Secretary Eduardo Ermita to furnish it with "all documents on the subject including the

Court finds it necessary to first resolve some material procedural issues.

latest draft of the proposed agreement, the requests and offers etc."2 Acting on the request,

Standing

Secretary Ermita, by letter of June 23, 2005, wrote Congressman Teves as follows:

For a petition for mandamus such as the one at bar to be given due course, it must be instituted by

In its letter dated 15 June 2005 (copy enclosed), [the] D[epartment of] F[oreign] A[ffairs] explains

a party aggrieved by the alleged inaction of any tribunal, corporation, board or person which

that the Committees request to be furnished all documents on the JPEPA may be difficult to

unlawfully excludes said party from the enjoyment of a legal right.7 Respondents deny that

accomplish at this time, since the proposed Agreement has been a work in progress for

petitioners have such standing to sue. "[I]n the interest of a speedy and definitive resolution of the

about three years. A copy of the draft JPEPA will however be forwarded to the Committee as soon

substantive issues raised," however, respondents consider it sufficient to cite a portion of the ruling

as the text thereof is settled and complete. (Emphasis supplied)

in Pimentel v. Office of Executive Secretary8 which emphasizes the need for a "personal stake in

Congressman Aguja also requested NEDA Director-General Romulo Neri and Tariff Commission

the outcome of the controversy" on questions of standing.

Chairman Edgardo Abon, by letter of July 1, 2005, for copies of the latest text of the JPEPA.

In a petition anchored upon the right of the people to information on matters of public concern,

Chairman Abon replied, however, by letter of July 12, 2005 that the Tariff Commission does not

which is a public right by its very nature, petitioners need not show that they have any legal or

have a copy of the documents being requested, albeit he was certain that Usec. Aquino would

special interest in the result, it being sufficient to show that they are citizens and, therefore, part of

provide the Congressman with a copy "once the negotiation is completed." And by letter of July 18,

the general public which possesses the right.9 As the present petition is anchored on the right to

2005, NEDA Assistant Director-General Margarita R. Songco informed the Congressman that his

information and petitioners are all suing in their capacity as citizens and groups of citizens including

request addressed to Director-General Neri had been forwarded to Usec. Aquino who would be "in

petitioners-members of the House of Representatives who additionally are suing in their capacity

the best position to respond" to the request.

as such, the standing of petitioners to file the present suit is grounded in jurisprudence.

In its third hearing conducted on August 31, 2005, the House Committee resolved to issue a

Mootness

subpoena for the most recent draft of the JPEPA, but the same was not pursued because by

Considering, however, that "[t]he principal relief petitioners are praying for is the disclosure of the

Committee Chairman Congressman Teves information, then House Speaker Jose de Venecia had

contents of the JPEPA prior to its finalization between the two States parties,"10 public disclosure of

requested him to hold in abeyance the issuance of the subpoena until the President gives her

the text of the JPEPA after its signing by the President, during the pendency of the present petition,

consent to the disclosure of the documents.

has been largely rendered moot and academic.

Amid speculations that the JPEPA might be signed by the Philippine government within December
4

With the Senate deliberations on the JPEPA still pending, the agreement as it now stands cannot

2005, the present petition was filed on December 9, 2005. The agreement was to be later signed

yet be considered as final and binding between the two States. Article 164 of the JPEPA itself

on September 9, 2006 by President Gloria Macapagal-Arroyo and Japanese Prime Minister

provides that the agreement does not take effect immediately upon the signing thereof. For it must

Junichiro Koizumi in Helsinki, Finland, following which the President endorsed it to the Senate for

still go through the procedures required by the laws of each country for its entry into force, viz:

its concurrence pursuant to Article VII, Section 21 of the Constitution. To date, the JPEPA is still

Article 164

being deliberated upon by the Senate.

Entry into Force

The JPEPA, which will be the first bilateral free trade agreement to be entered into by the

This Agreement shall enter into force on the thirtieth day after the date on which the Governments

Philippines with another country in the event the Senate grants its consent to it, covers a broad

of the Parties exchange diplomatic notes informing each other that their respective legal

range of topics which respondents enumerate as follows: trade in goods, rules of origin, customs

procedures necessary for entry into force of this Agreement have been completed. It shall

procedures, paperless trading, trade in services, investment, intellectual property rights,

remain in force unless terminated as provided for in Article 165.11 (Emphasis supplied)

government procurement, movement of natural persons, cooperation, competition policy, mutual

President Arroyos endorsement of the JPEPA to the Senate for concurrence is part of the legal

recognition, dispute avoidance and settlement, improvement of the business environment, and

procedures which must be met prior to the agreements entry into force.

general and final provisions.5

The text of the JPEPA having then been made accessible to the public, the petition has become

It is well-established in jurisprudence that neither the right to information nor the policy of full public

moot and academic to the extent that it seeks the disclosure of the "full text" thereof.

disclosure is absolute, there being matters which, albeit of public concern or public interest, are

The petition is not entirely moot, however, because petitioners seek to obtain, not merely the text of
the JPEPA, but also the Philippine and Japanese offers in the course of the negotiations.

12

recognized as privileged in nature. The types of information which may be considered privileged
have been elucidated in Almonte v. Vasquez,17 Chavez v. PCGG,18 Chavez v. Public Estates

A discussion of the substantive issues, insofar as they impinge on petitioners demand for access

Authority,19 and most recently in Senate v. Ermita20where the Court reaffirmed the validity of the

to the Philippine and Japanese offers, is thus in order.

doctrine of executive privilege in this jurisdiction and dwelt on its scope.

Grounds relied upon by petitioners

Whether a claim of executive privilege is valid depends on the ground invoked to justify it and

Petitioners assert, first, that the refusal of the government to disclose the documents bearing on
13

the context in which it is made.21 In the present case, the ground for respondents claim of privilege

the JPEPA negotiations violates their right to information on matters of public concern and

is set forth in their Comment, viz:

contravenes other constitutional provisions on transparency, such as that on the policy of full public

x x x The categories of information that may be considered privileged includes matters of

14

disclosure of all transactions involving public interest. Second, they contend that non-disclosure

diplomatic character and under negotiation and review. In this case, the privileged character of the

of the same documents undermines their right to effective and reasonable participation in all levels

diplomatic negotiations has been categorically invoked and clearly explained by

15

of social, political, and economic decision-making. Lastly, they proffer that divulging the contents

respondents particularly respondent DTI Senior Undersecretary.

of the JPEPA only after the agreement has been concluded will effectively make the Senate into a

The documents on the proposed JPEPA as well as the text which is subject to negotiations and

mere rubber stamp of the Executive, in violation of the principle of separation of powers.

legal review by the parties fall under the exceptions to the right of access to information on matters

Significantly, the grounds relied upon by petitioners for the disclosure of the latest text of the

of public concern and policy of public disclosure. They come within the coverage of executive

JPEPA are, except for the last, the same as those cited for the disclosure of the Philippine and

privilege. At the time when the Committee was requesting for copies of such documents, the

Japanese offers.

negotiations were ongoing as they are still now and the text of the proposed JPEPA is still

The first two grounds relied upon by petitioners which bear on the merits of respondents claim of

uncertain and subject to change. Considering the status and nature of such documents then and

privilege shall be discussed. The last, being purely speculatory given that the Senate is still

now, these are evidently covered by executive privilege consistent with existing legal provisions

deliberating on the JPEPA, shall not.

and settled jurisprudence.

The JPEPA is a matter of public concern

Practical and strategic considerations likewise counsel against the disclosure of the "rolling texts"

To be covered by the right to information, the information sought must meet the threshold

which may undergo radical change or portions of which may be totally abandoned. Furthermore,

requirement that it be a matter of public concern. Apropos is the teaching of Legaspi v. Civil

the negotiations of the representatives of the Philippines as well as of Japan must be

Service Commission:

allowed to explore alternatives in the course of the negotiations in the same manner as

In determining whether or not a particular information is of public concern there is no rigid test

judicial deliberations and working drafts of opinions are accorded strict

which can be applied. Public concern like public interest is a term that eludes exact definition.

confidentiality.22 (Emphasis and underscoring supplied)

Both terms embrace a broad spectrum of subjects which the public may want to know, either

The ground relied upon by respondents is thus not simply that the information sought involves a

because these directly affect their lives, or simply because such matters naturally arouse the

diplomatic matter, but that it pertains to diplomatic negotiations then in progress.

interest of an ordinary citizen. In the final analysis, it is for the courts to determine on a case by

Privileged character of diplomatic negotiations

case basis whether the matter at issue is of interest or importance, as it relates to or affects the

The privileged character of diplomatic negotiations has been recognized in this jurisdiction. In

public.16 (Underscoring supplied)

discussing valid limitations on the right to information, the Court in Chavez v. PCGG held that

From the nature of the JPEPA as an international trade agreement, it is evident that the Philippine

"information on inter-government exchanges prior to the conclusion of treaties and executive

and Japanese offers submitted during the negotiations towards its execution are matters of public

agreements may be subject to reasonable safeguards for the sake of national interest."23 Even

concern. This, respondents do not dispute. They only claim that diplomatic negotiations are

earlier, the same privilege was upheld in Peoples Movement for Press Freedom (PMPF) v.

covered by the doctrine of executive privilege, thus constituting an exception to the right to

Manglapus24 wherein the Court discussed the reasons for the privilege in more precise terms.

information and the policy of full public disclosure.

In PMPF v. Manglapus, the therein petitioners were seeking information from the Presidents

Respondents claim of privilege

representatives on the state of the then on-going negotiations of the RP-US Military Bases
Agreement.25 The Court denied the petition, stressing that "secrecy of negotiations with foreign

countries is not violative of the constitutional provisions of freedom of speech or of the press

Applying the principles adopted in PMPF v. Manglapus, it is clear that while the final text of the

nor of the freedom of access to information." The Resolution went on to state, thus:

JPEPA may not be kept perpetually confidential since there should be "ample opportunity for

The nature of diplomacy requires centralization of authority and expedition of decision

discussion before [a treaty] is approved" the offers exchanged by the parties during the

which are inherent in executive action. Another essential characteristic of diplomacy is its

negotiations continue to be privileged even after the JPEPA is published. It is reasonable to

confidential nature. Although much has been said about "open" and "secret" diplomacy, with

conclude that the Japanese representatives submitted their offers with the understanding that

disparagement of the latter, Secretaries of State Hughes and Stimson have clearly analyzed and

"historic confidentiality"27 would govern the same. Disclosing these offers could impair the ability

justified the practice. In the words of Mr. Stimson:

of the Philippines to deal not only with Japan but with other foreign governments in

"A complicated negotiation . . . cannot be carried through without many, many private talks

future negotiations.

and discussion, man to man; many tentative suggestions and proposals. Delegates from

A ruling that Philippine offers in treaty negotiations should now be open to public scrutiny would

other countries come and tell you in confidence of their troubles at home and of their

discourage future Philippine representatives from frankly expressing their views during

differences with other countries and with other delegates; they tell you of what they would

negotiations. While, on first impression, it appears wise to deter Philippine representatives from

do under certain circumstances and would not do under other circumstances. . . If these

entering into compromises, it bears noting that treaty negotiations, or any negotiation for that

reports . . . should become public . . . who would ever trust American Delegations in another

matter, normally involve a process of quid pro quo, and oftentimes negotiators have to be

conference? (United States Department of State, Press Releases, June 7, 1930, pp. 282-284.)."

willing to grant concessions in an area of lesser importance in order to obtain more

xxxx

favorable terms in an area of greater national interest. Apropos are the following observations

There is frequent criticism of the secrecy in which negotiation with foreign powers on

of Benjamin S. Duval, Jr.:

nearly all subjects is concerned. This, it is claimed, is incompatible with the substance of

x x x [T]hose involved in the practice of negotiations appear to be in agreement that publicity leads

democracy. As expressed by one writer, "It can be said that there is no more rigid system of

to "grandstanding," tends to freeze negotiating positions, and inhibits the give-and-take essential to

silence anywhere in the world." (E.J. Young, Looking Behind the Censorship, J. B. Lippincott Co.,

successful negotiation. As Sissela Bok points out, if "negotiators have more to gain from being

1938) President Wilson in starting his efforts for the conclusion of the World War declared that we

approved by their own sides than by making a reasoned agreement with competitors or

must have "open covenants, openly arrived at." He quickly abandoned his thought.

adversaries, then they are inclined to 'play to the gallery . . .'' In fact, the public reaction may

No one who has studied the question believes that such a method of publicity is possible. In the

leave them little option. It would be a brave, or foolish, Arab leader who expressed publicly a

moment that negotiations are started, pressure groups attempt to "muscle in." An ill-timed

willingness for peace with Israel that did not involve the return of the entire West Bank, or Israeli

speech by one of the parties or a frank declaration of the concession which are exacted or

leader who stated publicly a willingness to remove Israel's existing settlements from Judea and

offered on both sides would quickly lead to widespread propaganda to block the

Samaria in return for peace.28 (Emphasis supplied)

negotiations. After a treaty has been drafted and its terms are fully published, there is ample

Indeed, by hampering the ability of our representatives to compromise, we may be jeopardizing

opportunity for discussion before it is approved. (The New American Government and Its

higher national goals for the sake of securing less critical ones.

Works, James T. Young, 4th Edition, p. 194) (Emphasis and underscoring supplied)

Diplomatic negotiations, therefore, are recognized as privileged in this jurisdiction, the JPEPA

Still in PMPF v. Manglapus, the Court adopted the doctrine in U.S. v. Curtiss-Wright Export

negotiations constituting no exception. It bears emphasis, however, that such privilege is

Corp.26 that the President is the sole organ of the nation in its negotiations with foreign countries,

only presumptive. For as Senate v. Ermita holds, recognizing a type of information as privileged

viz:

does not mean that it will be considered privileged in all instances. Only after a consideration of the

"x x x In this vast external realm, with its important, complicated, delicate and manifold problems,

context in which the claim is made may it be determined if there is a public interest that calls for the

the President alone has the power to speak or listen as a representative of the nation.

disclosure of the desired information, strong enough to overcome its traditionally privileged status.

He makes treaties with the advice and consent of the Senate; but he alone negotiates. Into the

Whether petitioners have established the presence of such a public interest shall be discussed

field of negotiation the Senate cannot intrude; and Congress itself is powerless to invade it. As

later. For now, the Court shall first pass upon the arguments raised by petitioners against the

Marshall said in his great argument of March 7, 1800, in the House of Representatives, "The

application of PMPF v. Manglapus to the present case.

President is the sole organ of the nation in its external relations, and its sole representative

Arguments proffered by petitioners against the application of PMPF v. Manglapus

with foreign nations." Annals, 6th Cong., col. 613. . . (Emphasis supplied; underscoring in the

Petitioners argue that PMPF v. Manglapus cannot be applied in toto to the present case, there

original)

being substantial factual distinctions between the two.

To petitioners, the first and most fundamental distinction lies in the nature of the treaty involved.

communicate candidly among themselves if each remark is a potential item of discovery and front

They stress thatPMPF v. Manglapus involved the Military Bases Agreement which necessarily

page news," the objective of the privilege being to enhance the quality of agency

pertained to matters affectingnational security; whereas the present case involves an economic

decisionshttp://web2.westlaw.com/find/default.wl?

treaty that seeks to regulate trade and commerce between the Philippines and Japan, matters

rs=WLW7.07&serialnum=1975129772&fn=_top&sv=Split&tc=-1&findtype=Y&tf=-1&db=708&utid=

which, unlike those covered by the Military Bases Agreement, are not so vital to national security to

%7b532A6DBF-9B4C-4A5A-8F16-C20D9BAA36C4%7d&vr=2.0&rp=%2ffind

disallow their disclosure.

%2fdefault.wl&mt=WLIGeneralSubscription. 35

Petitioners argument betrays a faulty assumption that information, to be considered privileged,

29

The diplomatic negotiations privilege bears a close resemblance to the deliberative process and

must involve national security. The recognition in Senate v. Ermita that executive privilege has

presidential communications privilege. It may be readily perceived that the rationale for the

encompassed claims of varying kinds, such that it may even be more accurate to speak of

confidential character of diplomatic negotiations, deliberative process, and presidential

"executive privileges," cautions against such generalization.

communications is similar, if not identical.

While there certainly are privileges grounded on the necessity of safeguarding national security

The earlier discussion on PMPF v. Manglapus36 shows that the privilege for diplomatic negotiations

such as those involving military secrets, not all are founded thereon. One example is the

is meant to encourage a frank exchange of exploratory ideas between the negotiating parties by

"informers privilege," or the privilege of the Government not to disclose the identity of a person or

shielding such negotiations from public view. Similar to the privilege for presidential

persons who furnish information of violations of law to officers charged with the enforcement of that

communications, the diplomatic negotiations privilege seeks, through the same means, to protect

30

law. The suspect involved need not be so notorious as to be a threat to national security for this

the independence in decision-making of the President, particularly in its capacity as "the sole organ

privilege to apply in any given instance. Otherwise, the privilege would be inapplicable in all but the

of the nation in its external relations, and its sole representative with foreign nations." And, as with

most high-profile cases, in which case not only would this be contrary to long-standing practice. It

the deliberative process privilege, the privilege accorded to diplomatic negotiations arises, not on

would also be highly prejudicial to law enforcement efforts in general.

account of the content of the information per se, but because the information is part of a process of

Also illustrative is the privilege accorded to presidential communications, which are presumed

deliberation which, in pursuit of the public interest, must be presumed confidential.

privileged without distinguishing between those which involve matters of national security and

The decision of the U.S. District Court, District of Columbia in Fulbright & Jaworski v. Department

those which do not, the rationale for the privilege being that

of the Treasury37enlightens on the close relation between diplomatic negotiations and deliberative

x x x [a] frank exchange of exploratory ideas and assessments, free from the glare of publicity and

process privileges. The plaintiffs in that case sought access to notes taken by a member of the

pressure by interested parties, is essential to protect the independence of decision-making of

U.S. negotiating team during the U.S.-French taxtreaty negotiations. Among the points noted

31

those tasked to exercise Presidential, Legislative and Judicial power. x x x (Emphasis supplied)

therein were the issues to be discussed, positions which the French and U.S. teams took on some

In the same way that the privilege for judicial deliberations does not depend on the nature of the

points, the draft language agreed on, and articles which needed to be amended. Upholding the

case deliberated upon, so presidential communications are privileged whether they involve matters

confidentiality of those notes, Judge Green ruled, thus:

of national security.

Negotiations between two countries to draft a treaty represent a true example of a

It bears emphasis, however, that the privilege accorded to presidential communications is not

deliberative process. Much give-and-take must occur for the countries to reach an accord. A

absolute, one significant qualification being that "the Executive cannot, any more than the other

description of the negotiations at any one point would not provide an onlooker a summary of the

branches of government, invoke a general confidentiality privilege to shield its officials and

discussions which could later be relied on as law. It would not be "working law" as the points

employees from investigations by the proper governmental institutions into possible criminal

discussed and positions agreed on would be subject to change at any date until the treaty was

wrongdoing." 32 This qualification applies whether the privilege is being invoked in the context of a

signed by the President and ratified by the Senate.

judicial trial or a congressional investigation conducted in aid of legislation.

33

The policies behind the deliberative process privilege support non-disclosure. Much harm

Closely related to the "presidential communications" privilege is the deliberative process privilege

could accrue to the negotiations process if these notes were revealed. Exposure of the pre-

recognized in the United States. As discussed by the U.S. Supreme Court in NLRB v. Sears,

agreement positions of the French negotiators might well offend foreign governments and

Roebuck & Co,34 deliberative process covers documents reflecting advisory opinions,

would lead to less candor by the U. S. in recording the events of the negotiations

recommendations and deliberations comprising part of a process by which governmental decisions

process. As several months pass in between negotiations, this lack of record could hinder readily

and policies are formulated. Notably, the privileged status of such documents rests, not on the

the U. S. negotiating team. Further disclosure would reveal prematurely adopted policies. If these

need to protect national security but, on the "obvious realization that officials will not

policies should be changed, public confusion would result easily.

Finally, releasing these snapshot views of the negotiations would be comparable to

namely, the Japanese representatives in the JPEPA negotiations, and to that extent this case is

releasing drafts of the treaty, particularly when the notes state the tentative provisions and

closer to the factual circumstances ofCIEL than those of Fulbright.

language agreed on. As drafts of regulations typically are protected by the deliberative

Nonetheless, for reasons which shall be discussed shortly, this Court echoes the principle

process privilege, Arthur Andersen & Co. v. Internal Revenue Service, C.A. No. 80-705 (D.C.Cir.,

articulated in Fulbrightthat the public policy underlying the deliberative process privilege requires

May 21, 1982), drafts of treaties should be accorded the same protection. (Emphasis and

that diplomatic negotiations should also be accorded privileged status, even if the documents

underscoring supplied)

subject of the present case cannot be described as purely internal in character.

Clearly, the privilege accorded to diplomatic negotiations follows as a logical consequence from the

It need not be stressed that in CIEL, the court ordered the disclosure of information based on its

privileged character of the deliberative process.

finding that the first requirement of FOIA Exemption 5 that the documents be inter-agency was

The Court is not unaware that in Center for International Environmental Law (CIEL), et al. v. Office

not met. In determining whether the government may validly refuse disclosure of the exchanges

of U.S. Trade Representative38 where the plaintiffs sought information relating to the just-

between the U.S. and Chile, it necessarily had to deal with this requirement, it being laid down by a

completed negotiation of a United States-Chile Free Trade Agreement the same district court,

statute binding on them.

this time under Judge Friedman, consciously refrained from applying the doctrine in Fulbright and

In this jurisdiction, however, there is no counterpart of the FOIA, nor is there any statutory

ordered the disclosure of the information being sought.

requirement similar to FOIA Exemption 5 in particular. Hence, Philippine courts, when assessing a

Since the factual milieu in CIEL seemed to call for the straight application of the doctrine

claim of privilege for diplomatic negotiations, are more free to focus directly on the issue of whether

in Fulbright, a discussion of why the district court did not apply the same would help illumine this

the privilege being claimed is indeed supported by public policy, without having to consider as the

Courts own reasons for deciding the present case along the lines of Fulbright.

CIEL court did if these negotiations fulfill a formal requirement of being "inter-agency." Important

In both Fulbright and CIEL, the U.S. government cited a statutory basis for withholding information,

though that requirement may be in the context of domestic negotiations, it need not be accorded

namely, Exemption 5 of the Freedom of Information Act (FOIA).39 In order to qualify for protection

the same significance when dealing with international negotiations.

under Exemption 5, a document must satisfy two conditions: (1) it must be either inter-agency or

There being a public policy supporting a privilege for diplomatic negotiations for the reasons

intra-agency in nature, and (2) it must be both pre-decisional and part of the agency's

explained above, the Court sees no reason to modify, much less abandon, the doctrine in PMPF v.

deliberative or decision-making process.40

Manglapus.

Judge Friedman, in CIEL, himself cognizant of a "superficial similarity of context" between the two

A second point petitioners proffer in their attempt to differentiate PMPF v. Manglapus from the

cases, based his decision on what he perceived to be a significant distinction: he found the

present case is the fact that the petitioners therein consisted entirely of members of the mass

negotiators notes that were sought inFulbright to be "clearly internal," whereas the documents

media, while petitioners in the present case include members of the House of Representatives who

being sought in CIEL were those produced by or exchanged with an outside party, i.e. Chile. The

invoke their right to information not just as citizens but as members of Congress.

documents subject of Fulbright being clearly internal in character, the question of disclosure therein

Petitioners thus conclude that the present case involves the right of members of Congress to

turned not on the threshold requirement of Exemption 5 that the document be inter-agency, but on

demand information on negotiations of international trade agreements from the Executive branch, a

whether the documents were part of the agency's pre-decisional deliberative process. On this

matter which was not raised inPMPF v. Manglapus.

basis, Judge Friedman found that "Judge Green's discussion [in Fulbright] of the harm that could

While indeed the petitioners in PMPF v. Manglapus consisted only of members of the mass media,

result from disclosure therefore is irrelevant, since the documents at issue [in CIEL] are not

it would be incorrect to claim that the doctrine laid down therein has no bearing on a controversy

inter-agency, and the Court does not reach the question of deliberative process." (Emphasis

such as the present, where the demand for information has come from members of Congress, not

supplied)

only from private citizens.

In fine, Fulbright was not overturned. The court in CIEL merely found the same to be irrelevant in

The privileged character accorded to diplomatic negotiations does not ipso facto lose all

light of its distinct factual setting. Whether this conclusion was valid a question on which this

force and effect simply because the same privilege is now being claimed under different

Court would not pass the ruling inFulbright that "[n]egotiations between two countries to draft a

circumstances. The probability of the claim succeeding in the new context might differ, but to say

treaty represent a true example of a deliberative process" was left standing, since the CIEL court

that the privilege, as such, has no validity at all in that context is another matter altogether.

explicitly stated that it did not reach the question of deliberative process.

The Courts statement in Senate v. Ermita that "presidential refusals to furnish information may be

Going back to the present case, the Court recognizes that the information sought by petitioners

actuated by any of at least three distinct kinds of considerations [state secrets privilege, informers

includes documents produced and communicated by a party external to the Philippine government,

privilege, and a generic privilege for internal deliberations], and may be asserted, with differing

degrees of success, in the context of either judicial or legislative investigations,"41 implies that a

propositions by the governmentand should not cover recognized exceptions like privileged

privilege, once recognized, may be invoked under different procedural settings. That this principle

information, military and diplomatic secrets and similar matters affecting national security

holds true particularly with respect to diplomatic negotiations may be inferred from PMPF v.

and public order. x x x46 (Emphasis and underscoring supplied)

Manglapus itself, where the Court held that it is the President alone who negotiates treaties,

It follows from this ruling that even definite propositions of the government may not be disclosed if

and not even the Senate or the House of Representatives, unless asked, may intrude upon that

they fall under "recognized exceptions." The privilege for diplomatic negotiations is clearly among

process.

the recognized exceptions, for the footnote to the immediately quoted ruling cites PMPF v.

Clearly, the privilege for diplomatic negotiations may be invoked not only against citizens demands

Manglapus itself as an authority.

for information, but also in the context of legislative investigations.

Whether there is sufficient public interest to overcome the claim of privilege

Hence, the recognition granted in PMPF v. Manglapus to the privileged character of diplomatic

It being established that diplomatic negotiations enjoy a presumptive privilege against disclosure,

negotiations cannot be considered irrelevant in resolving the present case, the contextual

even against the demands of members of Congress for information, the Court shall now determine

differences between the two cases notwithstanding.

whether petitioners have shown the existence of a public interest sufficient to overcome the

As third and last point raised against the application of PMPF v. Manglapus in this case, petitioners

privilege in this instance.

proffer that "the socio-political and historical contexts of the two cases are worlds apart." They

To clarify, there are at least two kinds of public interest that must be taken into account. One is the

claim that the constitutional traditions and concepts prevailing at the time PMPF v.

presumed public interest in favor of keeping the subject information confidential, which is the

Manglapus came about, particularly the school of thought that the requirements of foreign policy

reason for the privilege in the first place, and the other is the public interest in favor of disclosure,

and the ideals of transparency were incompatible with each other or the "incompatibility

the existence of which must be shown by the party asking for information. 47

hypothesis," while valid when international relations were still governed by power, politics and

The criteria to be employed in determining whether there is a sufficient public interest in favor of

wars, are no longer so in this age of international cooperation.42

disclosure may be gathered from cases such as U.S. v. Nixon,48 Senate Select Committee on

Without delving into petitioners assertions respecting the "incompatibility hypothesis," the Court

Presidential Campaign Activities v. Nixon,49 and In re Sealed Case.50

notes that the ruling in PMPF v. Manglapus is grounded more on the nature of treaty negotiations

U.S. v. Nixon, which involved a claim of the presidential communications privilege against the

as such than on a particular socio-political school of thought. If petitioners are suggesting that the

subpoena duces tecum of a district court in a criminal case, emphasized the need to balance such

nature of treaty negotiations have so changed that "[a]n ill-timed speech by one of the parties or a

claim of privilege against the constitutional duty of courts to ensure a fair administration of criminal

frank declaration of the concession which are exacted or offered on both sides" no longer "lead[s]

justice.

to widespread propaganda to block the negotiations," or that parties in treaty negotiations no

x x x the allowance of the privilege to withhold evidence that is demonstrably relevant in a

longer expect their communications to be governed by historic confidentiality, the burden is on

criminal trial would cut deeply into the guarantee of due process of law and gravely impair

them to substantiate the same. This petitioners failed to discharge.

the basic function of the courts. A Presidents acknowledged need for confidentiality in the

Whether the privilege applies only at certain stages of the negotiation process

communications of his office is general in nature, whereas the constitutional need for

Petitioners admit that "diplomatic negotiations on the JPEPA are entitled to a reasonable amount of

production of relevant evidence in a criminal proceeding is specific and central to the fair

confidentiality so as not to jeopardize the diplomatic process." They argue, however, that the same

adjudication of a particular criminal case in the administration of justice.Without access to

is privileged "only at certain stages of the negotiating process, after which such information must

specific facts a criminal prosecution may be totally frustrated. The Presidents broad interest in

43

necessarily be revealed to the public." They add that the duty to disclose this information was

confidentiality of communications will not be vitiated by disclosure of a limited number of

vested in the government when the negotiations moved from the formulation and exploratory stage

conversations preliminarily shown to have some bearing on the pending criminal cases.

to the firming up of definite propositions or official recommendations, citingChavez v.

(Emphasis, italics and underscoring supplied)

PCGG44 and Chavez v. PEA.45

Similarly, Senate Select Committee v. Nixon,51 which involved a claim of the presidential

The following statement in Chavez v. PEA, however, suffices to show that the doctrine in both that

communications privilege against the subpoena duces tecum of a Senate committee, spoke of the

case andChavez v. PCGG with regard to the duty to disclose "definite propositions of the

need to balance such claim with the duty of Congress to perform its legislative functions.

government" does not apply to diplomatic negotiations:

The staged decisional structure established in Nixon v. Sirica was designed to ensure that the

We rule, therefore, that the constitutional right to information includes official information on on-

President and those upon whom he directly relies in the performance of his duties could continue

going negotiationsbefore a final contract. The information, however, must constitute definite

to work under a general assurance that their deliberations would remain confidential. So long

as the presumption that the public interest favors confidentiality can be defeated only by

The case for petitioners has, of course, been immensely weakened by the disclosure of the full text

a strong showing of need by another institution of government- a showing that the

of the JPEPA to the public since September 11, 2006, even as it is still being deliberated upon by

responsibilities of that institution cannot responsibly be fulfilled without access to records

the Senate and, therefore, not yet binding on the Philippines. Were the Senate to concur with the

of the President's deliberations- we believed in Nixon v. Sirica, and continue to believe, that the

validity of the JPEPA at this moment, there has already been, in the words of PMPF v. Manglapus,

effective functioning of the presidential office will not be impaired. x x x

"ample opportunity for discussion before [the treaty] is approved."

xxxx

The text of the JPEPA having been published, petitioners have failed to convince this Court that

The sufficiency of the Committee's showing of need has come to depend, therefore, entirely

they will not be able to meaningfully exercise their right to participate in decision-making unless the

on whether the subpoenaed materials are critical to the performance of its legislative

initial offers are also published.

functions. x x x (Emphasis and underscoring supplied)

It is of public knowledge that various non-government sectors and private citizens have already

In re Sealed Case52 involved a claim of the deliberative process and presidential communications

publicly expressed their views on the JPEPA, their comments not being limited to general

privileges against a subpoena duces tecum of a grand jury. On the claim of deliberative process

observations thereon but on its specific provisions. Numerous articles and statements critical of the

privilege, the court stated:

JPEPA have been posted on the Internet.54 Given these developments, there is no basis for

The deliberative process privilege is a qualified privilege and can be overcome by a sufficient

petitioners claim that access to the Philippine and Japanese offers is essential to the exercise of

showing of need. This need determination is to be made flexibly on a case-by-case, ad hoc

their right to participate in decision-making.

basis. "[E]ach time [the deliberative process privilege] is asserted the district court must undertake

Petitioner-members of the House of Representatives additionally anchor their claim to have a right

a fresh balancing of the competing interests," taking into account factors such as "the

to the subject documents on the basis of Congress inherent power to regulate commerce, be it

relevance of the evidence," "the availability of other evidence," "the seriousness of the

domestic or international. They allege that Congress cannot meaningfully exercise the power to

litigation," "the role of the government," and the "possibility of future timidity by

regulate international trade agreements such as the JPEPA without being given copies of the initial

government employees. x x x (Emphasis, italics and underscoring supplied)

offers exchanged during the negotiations thereof. In the same vein, they argue that the President

Petitioners have failed to present the strong and "sufficient showing of need" referred to in the

cannot exclude Congress from the JPEPA negotiations since whatever power and authority the

immediately cited cases. The arguments they proffer to establish their entitlement to the subject

President has to negotiate international trade agreements is derived only by delegation of

documents fall short of this standard.

Congress, pursuant to Article VI, Section 28(2) of the Constitution and Sections 401 and 402 of

Petitioners go on to assert that the non-involvement of the Filipino people in the JPEPA negotiation

Presidential Decree No. 1464.55

process effectively results in the bargaining away of their economic and property rights without

The subject of Article VI Section 28(2) of the Constitution is not the power to negotiate treaties and

their knowledge and participation, in violation of the due process clause of the Constitution. They

international agreements, but the power to fix tariff rates, import and export quotas, and other

claim, moreover, that it is essential for the people to have access to the initial offers exchanged

taxes. Thus it provides:

during the negotiations since only through such disclosure can their constitutional right to

(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to

effectively participate in decision-making be brought to life in the context of international trade

such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage

agreements.

and wharfage dues, and other duties or imposts within the framework of the national development

Whether it can accurately be said that the Filipino people were not involved in the JPEPA

program of the Government.

negotiations is a question of fact which this Court need not resolve. Suffice it to state that

As to the power to negotiate treaties, the constitutional basis thereof is Section 21 of Article VII

respondents had presented documents purporting to show that public consultations were

the article on the Executive Department which states:

conducted on the JPEPA. Parenthetically, petitioners consider these "alleged consultations" as

No treaty or international agreement shall be valid and effective unless concurred in by at least

"woefully selective and inadequate."53

two-thirds of all the Members of the Senate.

AT ALL EVENTS, since it is not disputed that the offers exchanged by the Philippine and Japanese

The doctrine in PMPF v. Manglapus that the treaty-making power is exclusive to the President,

representatives have not been disclosed to the public, the Court shall pass upon the issue of

being the sole organ of the nation in its external relations, was echoed in BAYAN v. Executive

whether access to the documents bearing on them is, as petitioners claim, essential to their right to

Secretary56 where the Court held:

participate in decision-making.

By constitutional fiat and by the intrinsic nature of his office, the President, as head of State, is
the sole organ and authority in the external affairs of the country. In many ways, the President is

the chief architect of the nation's foreign policy; his "dominance in the field of foreign relations is

been given the authority to concur as a means of checking the treaty-making power of the

(then) conceded." Wielding vast powers and influence, his conduct in the external affairs of the

President, but only the Senate.

nation, as Jefferson describes, is "executive altogether."

Thus, as in the case of petitioners suing in their capacity as private citizens, petitioners-members of

As regards the power to enter into treaties or international agreements, the Constitution

the House of Representatives fail to present a "sufficient showing of need" that the information

vests the same in the President, subject only to the concurrence of at least two thirds vote

sought is critical to the performance of the functions of Congress, functions that do not include

of all the members of the Senate.In this light, the negotiation of the VFA and the subsequent

treaty-negotiation.

ratification of the agreement are exclusive acts which pertain solely to the President, in the lawful

Respondents alleged failure to timely claim executive privilege

exercise of his vast executive and diplomatic powers granted him no less than by the

On respondents invocation of executive privilege, petitioners find the same defective, not having

fundamental law itself. Into the field of negotiation the Senate cannot intrude, and Congress

been done seasonably as it was raised only in their Comment to the present petition and not during

itself is powerless to invade it. x x x (Italics in the original; emphasis and underscoring supplied)

the House Committee hearings.

57

The same doctrine was reiterated even more recently in Pimentel v. Executive Secretary where

That respondents invoked the privilege for the first time only in their Comment to the present

the Court ruled:

petition does not mean that the claim of privilege should not be credited. Petitioners position

In our system of government, the President, being the head of state, is regarded as the sole

presupposes that an assertion of the privilege should have been made during the House

organ and authority in external relations and is the country's sole representative with

Committee investigations, failing which respondents are deemed to have waived it.

foreign nations. As the chief architect of foreign policy, the President acts as the country's

When the House Committee and petitioner-Congressman Aguja requested respondents for copies

mouthpiece with respect to international affairs. Hence, the President is vested with the

of the documents subject of this case, respondents replied that the negotiations were still on-going

authority to deal with foreign states and governments, extend or withhold recognition, maintain

and that the draft of the JPEPA would be released once the text thereof is settled and complete.

diplomatic relations, enter into treaties, and otherwise transact the business of foreign

There was no intimation that the requested copies are confidential in nature by reason of public

relations. In the realm of treaty-making, the President has the sole authority to negotiate with

policy. The response may not thus be deemed a claim of privilege by the standards of Senate v.

other states.

Ermita, which recognizes as claims of privilege only those which are accompanied by precise and

Nonetheless, while the President has the sole authority to negotiate and enter into treaties,

certain reasons for preserving the confidentiality of the information being sought.

the Constitution provides a limitation to his power by requiring the concurrence of 2/3 of all

Respondents failure to claim the privilege during the House Committee hearings may not,

the members of the Senate for the validity of the treaty entered into by him. x x x (Emphasis

however, be construed as a waiver thereof by the Executive branch. As the immediately preceding

and underscoring supplied)

paragraph indicates, what respondents received from the House Committee and petitioner-

While the power then to fix tariff rates and other taxes clearly belongs to Congress, and is

Congressman Aguja were mere requests for information. And as priorly stated, the House

exercised by the President only by delegation of that body, it has long been recognized that the

Committee itself refrained from pursuing its earlier resolution to issue a subpoena duces tecum on

power to enter into treaties is vested directly and exclusively in the President, subject only to the

account of then Speaker Jose de Venecias alleged request to Committee Chairperson

concurrence of at least two-thirds of all the Members of the Senate for the validity of the treaty. In

Congressman Teves to hold the same in abeyance.

this light, the authority of the President to enter into trade agreements with foreign nations provided

While it is a salutary and noble practice for Congress to refrain from issuing subpoenas to

under P.D. 146458 may be interpreted as an acknowledgment of a power already inherent in its

executive officials out of respect for their office until resort to it becomes necessary, the fact

office. It may not be used as basis to hold the President or its representatives accountable to

remains that such requests are not a compulsory process. Being mere requests, they do not strictly

Congress for the conduct of treaty negotiations.

call for an assertion of executive privilege.

This is not to say, of course, that the Presidents power to enter into treaties is unlimited but for the

The privilege is an exemption to Congress power of inquiry.59 So long as Congress itself finds no

requirement of Senate concurrence, since the President must still ensure that all treaties will

cause to enforce such power, there is no strict necessity to assert the privilege. In this light,

substantively conform to all the relevant provisions of the Constitution.

respondents failure to invoke the privilege during the House Committee investigations did not

It follows from the above discussion that Congress, while possessing vast legislative powers, may

amount to a waiver thereof.

not interfere in the field of treaty negotiations. While Article VII, Section 21 provides for Senate

The Court observes, however, that the claim of privilege appearing in respondents Comment to

concurrence, such pertains only to the validity of the treaty under consideration, not to the conduct

this petition fails to satisfy in full the requirement laid down in Senate v. Ermita that the claim should

of negotiations attendant to its conclusion. Moreover, it is not even Congress as a whole that has

be invoked by the President or through the Executive Secretary "by order of the

President."60 Respondents claim of privilege is being sustained, however, its flaw notwithstanding,

what it seeks to achieve - to make use of the resources of the private sector in the "financing,

because of circumstances peculiar to the case.

operation and maintenance of infrastructure and development projects" which are necessary for

The assertion of executive privilege by the Executive Secretary, who is one of the respondents

national growth and development but which the government, unfortunately, could ill-afford to

herein, without him adding the phrase "by order of the President," shall be considered as partially

finance at this point in time.64

complying with the requirement laid down in Senate v. Ermita. The requirement that the phrase "by

Similarly, while herein petitioners-members of the House of Representatives may not have been

order of the President" should accompany the Executive Secretarys claim of privilege is a new rule

aiming to participate in the negotiations directly, opening the JPEPA negotiations to their scrutiny

laid down for the first time in Senate v. Ermita, which was not yet final and executory at the time

even to the point of giving them access to the offers exchanged between the Japanese and

61

respondents filed their Comment to the petition. A strict application of this requirement would thus

Philippine delegations would have made a mockery of what the Constitution sought to prevent

be unwarranted in this case.

and rendered it useless for what it sought to achieve when it vested the power of direct negotiation

Response to the Dissenting Opinion of the Chief Justice

solely with the President.

We are aware that behind the dissent of the Chief Justice lies a genuine zeal to protect our

What the U.S. Constitution sought to prevent and aimed to achieve in defining the treaty-making

peoples right to information against any abuse of executive privilege. It is a zeal that We fully

power of the President, which our Constitution similarly defines, may be gathered from Hamiltons

share.

explanation of why the U.S. Constitution excludes the House of Representatives from the treaty-

The Court, however, in its endeavor to guard against the abuse of executive privilege, should be

making process:

careful not to veer towards the opposite extreme, to the point that it would strike down as invalid

x x x The fluctuating, and taking its future increase into account, the multitudinous composition of

even a legitimate exercise thereof.

that body, forbid us to expect in it those qualities which are essential to the proper execution of

We respond only to the salient arguments of the Dissenting Opinion which have not yet been

such a trust. Accurate and comprehensive knowledge of foreign politics; a steady and systematic

sufficiently addressed above.

adherence to the same views; a nice and uniform sensibility to national character,

1. After its historical discussion on the allocation of power over international trade agreements in

decision, secrecy and dispatch; are incompatible with a body so variable and so numerous. The

the United States, the dissent concludes that "it will be turning somersaults with history to contend

very complication of the business by introducing a necessity of the concurrence of so many

that the President is the sole organ for external relations" in that jurisdiction. With regard to this

different bodies, would of itself afford a solid objection. The greater frequency of the calls upon the

opinion, We make only the following observations:

house of representatives, and the greater length of time which it would often be necessary to keep

There is, at least, a core meaning of the phrase "sole organ of the nation in its external relations"

them together when convened, to obtain their sanction in the progressive stages of a treaty, would

which is not being disputed, namely, that the power to directly negotiate treaties and international

be source of so great inconvenience and expense, as alone ought to condemn the project.65

agreements is vested by our Constitution only in the Executive. Thus, the dissent states that

These considerations a fortiori apply in this jurisdiction, since the Philippine Constitution, unlike that

"Congress has the power to regulate commerce with foreign nations but does not have the

of the U.S., does not even grant the Senate the power to advise the Executive in the making of

power to negotiate international agreements directly."62

treaties, but only vests in that body the power to concur in the validity of the treaty after

What is disputed is how this principle applies to the case at bar.

negotiations have been concluded.66 Much less, therefore, should it be inferred that the House of

The dissent opines that petitioner-members of the House of Representatives, by asking for the

Representatives has this power.

subject JPEPA documents, are not seeking to directly participate in the negotiations of the JPEPA,

Since allowing petitioner-members of the House of Representatives access to the subject JPEPA

hence, they cannot be prevented from gaining access to these documents.

documents would set a precedent for future negotiations, leading to the contravention of the public

On the other hand, We hold that this is one occasion where the following ruling in Agan v.

interests articulated above which the Constitution sought to protect, the subject documents should

63

PIATCO and in other cases both before and since should be applied:

not be disclosed.

This Court has long and consistently adhered to the legal maxim that those that cannot be

2. The dissent also asserts that respondents can no longer claim the diplomatic secrets privilege

done directly cannot be done indirectly. To declare the PIATCO contracts valid despite the clear

over the subject JPEPA documents now that negotiations have been concluded, since their

statutory prohibition against a direct government guarantee would not only make a mockery of

reasons for nondisclosure cited in the June 23, 2005 letter of Sec. Ermita, and later in their

what the BOT Law seeks to prevent -- which is to expose the government to the risk of incurring a

Comment, necessarily apply only for as long as the negotiations were still pending;

monetary obligation resulting from a contract of loan between the project proponent and its lenders

In their Comment, respondents contend that "the negotiations of the representatives of the

and to which the Government is not a party to -- but would also render the BOT Law useless for

Philippines as well as of Japan must be allowed to explore alternatives in the course of the

negotiations in the same manner as judicial deliberations and working drafts of opinions are

burden is initially on the Executive to provide precise and certain reasons for upholding its claim of

accorded strict confidentiality." That respondents liken the documents involved in the JPEPA

privilege, once the Executive is able to show that the documents being sought are covered by a

negotiations to judicial deliberations and working drafts of opinions evinces, by itself, that

recognized privilege, the burden shifts to the party seeking information to overcome the privilege by

they were claiming confidentiality not only until, but even after, the conclusion of the

a strong showing of need.

negotiations.

When it was thus established that the JPEPA documents are covered by the privilege for diplomatic

Judicial deliberations do not lose their confidential character once a decision has been

negotiations pursuant to PMPF v. Manglapus, the presumption arose that their disclosure would

promulgated by the courts. The same holds true with respect to working drafts of opinions, which

impair the performance of executive functions. It was then incumbent on petitioner- requesting

are comparable to intra-agencyrecommendations. Such intra-agency recommendations are

parties to show that they have a strong need for the information sufficient to overcome the

privileged even after the position under consideration by the agency has developed into a definite

privilege. They have not, however.

proposition, hence, the rule in this jurisdiction that agencies have the duty to disclose only definite

4. Respecting the failure of the Executive Secretary to explicitly state that he is claiming the

propositions, and not the inter-agency and intra-agency communications during the stage when

privilege "by order of the President," the same may not be strictly applied to the privilege claim

common assertions are still being formulated.67

subject of this case.

3. The dissent claims that petitioner-members of the House of Representatives have sufficiently

When the Court in Senate v. Ermita limited the power of invoking the privilege to the President

shown their need for the same documents to overcome the privilege. Again, We disagree.

alone, it was laying down a new rule for which there is no counterpart even in the United States

The House Committee that initiated the investigations on the JPEPA did not pursue its earlier

from which the concept of executive privilege was adopted. As held in the 2004 case of Judicial

intention to subpoena the documents. This strongly undermines the assertion that access to the

Watch, Inc. v. Department of Justice,69 citing In re Sealed Case,70 "the issue of whether a President

same documents by the House Committee is critical to the performance of its legislative functions.

must personally invoke the [presidential communications] privilege remains an open

If the documents were indeed critical, the House Committee should have, at the very least, issued

question." U.S. v. Reynolds,71 on the other hand, held that "[t]here must be a formal claim of

a subpoena duces tecum or, like what the Senate did in Senate v. Ermita, filed the present

privilege, lodged by the head of the department which has control over the matter, after actual

petition as a legislative body, rather than leaving it to the discretion of individual Congressmen

personal consideration by that officer."

whether to pursue an action or not. Such acts would have served as strong indicia that Congress

The rule was thus laid down by this Court, not in adherence to any established precedent, but with

itself finds the subject information to be critical to its legislative functions.

the aim of preventing the abuse of the privilege in light of its highly exceptional nature. The Courts

Further, given that respondents have claimed executive privilege, petitioner-members of the House

recognition that the Executive Secretary also bears the power to invoke the privilege, provided he

of Representatives should have, at least, shown how its lack of access to the Philippine and

does so "by order of the President," is meant to avoid laying down too rigid a rule, the Court being

Japanese offers would hinder the intelligent crafting of legislation. Mere assertion that the JPEPA

aware that it was laying down a new restriction on executive privilege. It is with the same spirit that

covers a subject matter over which Congress has the power to legislate would not suffice.

the Court should not be overly strict with applying the same rule in this peculiar instance, where the

As Senate Select Committee v. Nixon68 held, the showing required to overcome the presumption

claim of executive privilege occurred before the judgment in Senate v. Ermitabecame final.

favoring confidentiality turns, not only on the nature and appropriateness of the function in the

5. To show that PMPF v. Manglapus may not be applied in the present case, the dissent implies

performance of which the material was sought, but also the degree to which the material was

that the Court therein erred in citing US v. Curtiss Wright72 and the book entitled The New

necessary to its fulfillment. This petitioners failed to do.

American Government and Its Work73since these authorities, so the dissent claims, may not be

Furthermore, from the time the final text of the JPEPA including its annexes and attachments was

used to calibrate the importance of the right to information in the Philippine setting.

published, petitioner-members of the House of Representatives have been free to use it for any

The dissent argues that since Curtiss-Wright referred to a conflict between the executive and

legislative purpose they may see fit. Since such publication, petitioners need, if any, specifically for

legislative branches of government, the factual setting thereof was different from that of PMPF v.

the Philippine and Japanese offers leading to the final version of the JPEPA, has become even

Manglapus which involved a collision between governmental power over the conduct of foreign

less apparent.

affairs and the citizens right to information.

In asserting that the balance in this instance tilts in favor of disclosing the JPEPA documents, the

That the Court could freely cite Curtiss-Wright a case that upholds the secrecy of diplomatic

dissent contends that the Executive has failed to show how disclosing them after the conclusion of

negotiations againstcongressional demands for information in the course of laying down a ruling

negotiations would impair the performance of its functions. The contention, with due respect,

on the public right to information only serves to underscore the principle mentioned earlier that the

misplaces the onus probandi. While, in keeping with the general presumption of transparency, the

privileged character accorded to diplomatic negotiations does not ipso facto lose all force and

The claim that the book cited in PMPF v. Manglapus entitled The New American Government and

effect simply because the same privilege is now being claimedunder different circumstances.

Its Work could not have taken into account the expanded statutory right to information in the FOIA

PMPF v. Manglapus indeed involved a demand for information from private citizens and not an

assumes that the observations in that book in support of the confidentiality of treaty

74

executive-legislative conflict, but so did Chavez v. PEA which held that "the [publics] right to

negotiations would be different had it been written after the FOIA. Such assumption is, with due

information . . . does not extend to matters recognized as privileged information under the

respect, at best, speculative.

separation of powers." What counts as privileged information in an executive-legislative conflict is

As to the claim in the dissent that "[i]t is more doubtful if the same book be used to calibrate the

thus also recognized as such in cases involving the publics right to information.

importance of the right of access to information in the Philippine setting considering its elevation as

75

Chavez v. PCGG also involved the publics right to information, yet the Court recognized as a

a constitutional right," we submit that the elevation of such right as a constitutional right did not set

valid limitation to that right the same privileged information based on separation of powers

it free from the legitimate restrictions of executive privilege which is itself constitutionally-

closed-door Cabinet meetings, executive sessions of either house of Congress, and the internal

based.76 Hence, the comments in that book which were cited in PMPF v. Manglapus remain valid

deliberations of the Supreme Court.

doctrine.

These cases show that the Court has always regarded claims of privilege, whether in the context of

6. The dissent further asserts that the Court has never used "need" as a test to uphold or allow

an executive-legislative conflict or a citizens demand for information, as closely intertwined, such

inroads into rights guaranteed under the Constitution. With due respect, we assert otherwise. The

that the principles applicable to one are also applicable to the other.

Court has done so before, albeit without using the term "need."

The reason is obvious. If the validity of claims of privilege were to be assessed by entirely different

In executive privilege controversies, the requirement that parties present a "sufficient showing of

criteria in each context, this may give rise to the absurd result where Congress would be denied

need" only means, in substance, that they should show a public interest in favor of

access to a particular information because of a claim of executive privilege, but the general

disclosure sufficient in degree to overcome the claim of privilege.77 Verily, the Court in such cases

public would have access to the same information, the claim of privilege notwithstanding.

engages in a balancing of interests. Such a balancing of interests is certainly not new in

Absurdity would be the ultimate result if, for instance, the Court adopts the "clear and present

constitutional adjudication involving fundamental rights. Secretary of Justice v. Lantion,78 which was

danger" test for the assessment of claims of privilege against citizens demands for information. If

cited in the dissent, applied just such a test.

executive information, when demanded by a citizen, is privileged only when there is a clear and

Given that the dissent has clarified that it does not seek to apply the "clear and present danger"

present danger of a substantive evil that the State has a right to prevent, it would be very difficult

test to the present controversy, but the balancing test, there seems to be no substantial dispute

for the Executive to establish the validity of its claim in each instance. In contrast, if the demand

between the position laid down in thisponencia and that reflected in the dissent as to what test to

comes from Congress, the Executive merely has to show that the information is covered by a

apply. It would appear that the only disagreement is on the results of applying that test in this

recognized privilege in order to shift the burden on Congress to present a strong showing of need.

instance.

This would lead to a situation where it would be more difficult for Congress to access executive

The dissent, nonetheless, maintains that "it suffices that information is of public concern for it to be

information than it would be for private citizens.

covered by the right, regardless of the publics need for the information," and that the same would

We maintain then that when the Executive has already shown that an information is covered by

hold true even "if they simply want to know it because it interests them." As has been stated earlier,

executive privilege, the party demanding the information must present a "strong showing of

however, there is no dispute that the information subject of this case is a matter of public concern.

need," whether that party is Congress or a private citizen.

The Court has earlier concluded that it is a matter of public concern, not on the basis of any

The rule that the same "showing of need" test applies in both these contexts, however, should not

specific need shown by petitioners, but from the very nature of the JPEPA as an international trade

be construed as a denial of the importance of analyzing the context in which an executive privilege

agreement.

controversy may happen to be placed. Rather, it affirms it, for it means that the specific need being

However, when the Executive has as in this case invoked the privilege, and it has been

shown by the party seeking information in every particular instance is highly significant in

established that the subject information is indeed covered by the privilege being claimed, can a

determining whether to uphold a claim of privilege. This "need" is, precisely, part of the context

party overcome the same by merely asserting that the information being demanded is a matter of

in light of which every claim of privilege should be assessed.

public concern, without any further showing required? Certainly not, for that would render the

Since, as demonstrated above, there are common principles that should be applied to executive

doctrine of executive privilege of no force and effect whatsoever as a limitation on the right to

privilege controversies across different contexts, the Court in PMPF v. Manglapus did not err when

information, because then the sole test in such controversies would be whether an information is a

it cited the Curtiss-Wrightcase.

matter of public concern.

Moreover, in view of the earlier discussions, we must bear in mind that, by disclosing the

Indeed, in applying to the present case the principles found in U.S. v. Nixon and in the other cases

documents of the JPEPA negotiations, the Philippine government runs the grave risk of betraying

already mentioned, We are merely affirming what the Chief Justice stated in his Dissenting Opinion

the trust reposed in it by the Japanese representatives, indeed, by the Japanese government itself.

in Neri v. Senate Committee on Accountability82 a case involving an executive-legislative conflict

How would the Philippine government then explain itself when that happens? Surely, it cannot bear

over executive privilege. That dissenting opinion stated that, while Nixon was not concerned with

to say that it just had to release the information because certain persons simply wanted to know it

the balance between the Presidents generalized interest in confidentiality and congressional

"because it interests them."

demands for information, "[n]onetheless the [U.S.] Court laid down principles and procedures

Thus, the Court holds that, in determining whether an information is covered by the right to

that can serve as torch lights to illumine us on the scope and use of Presidential

information, a specific "showing of need" for such information is not a relevant consideration, but

communication privilege in the case at bar."83 While the Court was divided in Neri, this opinion

only whether the same is a matter ofpublic concern. When, however, the government has claimed

of the Chief Justice was not among the points of disagreement, and We similarly hold now that

executive privilege, and it has established that the information is indeed covered by the same, then

the Nixon case is a useful guide in the proper resolution of the present controversy,

the party demanding it, if it is to overcome the privilege, must show that that the information is vital,

notwithstanding the difference in context.

not simply for the satisfaction of its curiosity, but for its ability to effectively and reasonably

Verily, while the Court should guard against the abuse of executive privilege, it should also

participate in social, political, and economic decision-making.

79

give full recognition to the validity of the privilege whenever it is claimed within the proper

7. The dissent maintains that "[t]he treaty has thus entered the ultimate stage where the people

bounds of executive power, as in this case. Otherwise, the Court would undermine its own

can exercise theirright to participate in the discussion whether the Senate should concur in its

credibility, for it would be perceived as no longer aiming to strike a balance, but seeking merely to

ratification or not." (Emphasis supplied) It adds that this right "will be diluted unless the people can

water down executive privilege to the point of irrelevance.

have access to the subject JPEPA documents". What, to the dissent, is a dilution of the right to

Conclusion

participate in decision-making is, to Us, simply a recognition of the qualified nature of the publics

To recapitulate, petitioners demand to be furnished with a copy of the full text of the JPEPA has

right to information. It is beyond dispute that the right to information is not absolute and that the

become moot and academic, it having been made accessible to the public since September 11,

doctrine of executive privilege is a recognized limitation on that right.

2006. As for their demand for copies of the Philippine and Japanese offers submitted during the

Moreover, contrary to the submission that the right to participate in decision-making would be

JPEPA negotiations, the same must be denied, respondents claim of executive privilege being

diluted, We reiterate that our people have been exercising their right to participate in the discussion

valid.

on the issue of the JPEPA, and they have been able to articulate their different opinions without

Diplomatic negotiations have, since the Court promulgated its Resolution in PMPF v. Manglapus on

need of access to the JPEPA negotiation documents.

September 13, 1988, been recognized as privileged in this jurisdiction and the reasons proffered by

Thus, we hold that the balance in this case tilts in favor of executive privilege.

petitioners against the application of the ruling therein to the present case have not persuaded the

8. Against our ruling that the principles applied in U.S. v. Nixon, the Senate Select Committee case,

Court. Moreover, petitioners both private citizens and members of the House of Representatives

and In re Sealed Case, are similarly applicable to the present controversy, the dissent cites the

have failed to present a "sufficient showing of need" to overcome the claim of privilege in this

caveat in the Nixon case that the U.S. Court was there addressing only the Presidents assertion of

case.

privilege in the context of a criminal trial, not a civil litigation nor a congressional demand for

That the privilege was asserted for the first time in respondents Comment to the present petition,

information. What this caveat means, however, is only that courts must be careful not to hastily

and not during the hearings of the House Special Committee on Globalization, is of no moment,

apply the ruling therein to other contexts. It does not, however, absolutely mean that the principles

since it cannot be interpreted as a waiver of the privilege on the part of the Executive branch.

applied in that case may never be applied in such contexts.

For reasons already explained, this Decision shall not be interpreted as departing from the ruling

Hence, U.S. courts have cited U.S. v. Nixon in support of their rulings on claims of executive

in Senate v. Ermita that executive privilege should be invoked by the President or through the

privilege in contexts other than a criminal trial, as in the case of Nixon v. Administrator of General

Executive Secretary "by order of the President."

80

Services which involved former President Nixons invocation of executive privilege to challenge

WHEREFORE, the petition is DISMISSED.

the constitutionality of the "Presidential Recordings and Materials Preservation Act" 81 and the

SO ORDERED.

above-mentioned In re Sealed Case which involved a claim of privilege against a subpoena duces

G.R. No. L-39086 June 15, 1988

tecum issued in a grand jury investigation.

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.

HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA,

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then

Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra;

Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents

HEIRS OF PATERNO MILLARE,respondents.

Heirs of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by an amended
answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.

PARAS, J.:

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp.

This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of

106-108).

Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the

College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial

respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered

Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno

(Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver

Millare, defendants," the decretal portion of which reads:

to the Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner,

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial

Check No. 904369.

Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc.,

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial

represented by Director Pedro Borgonia located at Bangued, Abra, is valid;

court in its questioned decision. Said Stipulations reads:

That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the

STIPULATION OF FACTS

amount of P5,140.31 and back taxes and penalties from the promulgation of this decision;

COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into

That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be

the following agreed stipulation of facts:

confiscated to apply for the payment of the back taxes and for the redemption of the property in

1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is

question, if the amount is less than P6,000.00, the remainder must be returned to the Director of

admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by

Pedro Borgonia, who represents the plaintiff herein;

anyone who is actually holding the position of Provincial Treasurer of the Province of Abra;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon

be returned to said Municipal Treasurer of Bangued, Abra;

located in Bangued, Abra under Original Certificate of Title No. 0-83;

And finally the case is hereby ordered dismissed with costs against the plaintiff.

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be

SO ORDERED. (Rollo, pp. 22-23)

served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school

Petitioner, an educational corporation and institution of higher learning duly incorporated with the

under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon,

Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the

amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit

respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul

A;

and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at

Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said

public auction for the satisfaction of the unpaid real property taxes thereon and the same was sold

"Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83

to defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in

duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal

his favor was issued by the defendant Municipal Treasurer.

Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said

5. That all other matters not particularly and specially covered by this stipulation of facts will be the

taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent

subject of evidence by the parties.

treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this

was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered

stipulation of facts on the point agreed upon by the parties.

the highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly

Bangued, Abra, April 12, 1973.

issued to him.

Sgd. Agripino Brillantes

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a

Typ AGRIPINO BRILLANTES

motion to dismiss the complaint.

Attorney for Plaintiff

Sgd. Loreto Roldan

THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE

Typ LORETO ROLDAN

COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.

Provincial Fiscal

II

Counsel for Defendants

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF

Provincial Treasurer of

THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY

Abra and the Municipal

BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE

Treasurer of Bangued, Abra

BUILDING.

Sgd. Demetrio V. Pre

III

Typ. DEMETRIO V. PRE

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF

Attorney for Defendant

THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING

Paterno Millare (Rollo, pp. 17-18)

PETITIONER TO PAY P5,140.31 AS REALTY TAXES.

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the

IV

school is recognized by the government and is offering Primary, High School and College Courses,

THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT

and has a school population of more than one thousand students all in all; (b) that it is located right

MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See

in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the

Brief for the Petitioner, pp. 1-2)

Court of First Instance building; (c) that the elementary pupils are housed in a two-storey building

The main issue in this case is the proper interpretation of the phrase "used exclusively for

across the street; (d) that the high school and college students are housed in the main building; (e)

educational purposes."

that the Director with his family is in the second floor of the main building; and (f) that the annual

Petitioner contends that the primary use of the lot and building for educational purposes, and not

gross income of the school reaches more than one hundred thousand pesos.

the incidental use thereof, determines and exemption from property taxes under Section 22 (3),

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties,

Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building,

is whether or not the lot and building in question are used exclusively for educational purposes.

which are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise

(Rollo, p. 20)

known as the Assessment Law, are without legal basis and therefore void.

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z.

On the other hand, private respondents maintain that the college lot and building in question which

Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental

were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational

Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws

purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr.

applicable, court decisions and jurisprudence, the school building and school lot used for

Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial

educational purposes of the Abra Valley College, Inc., are exempted from the payment of taxes."

purposes because the ground floor of the college building is being used and rented by a

(Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).

commercial establishment, the Northern Marketing Corporation (See photograph attached as

Nonetheless, the trial court disagreed because of the use of the second floor by the Director of

Annex "8" (Comment; Rollo, p. 90]).

petitioner school for residential purposes. He thus ruled for the government and rendered the

Due to its time frame, the constitutional provision which finds application in the case at bar is

assailed decision.

Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants

After having been granted by the trial court ten (10) days from August 6, 1974 within which to

exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant

perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner

thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or

instead availed of the instant petition for review on certiorari with prayer for preliminary injunction

educational purposes ...

before this Court, which petition was filed on August 17, 1974 (Rollo, p.2).

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition

Act No. 409, otherwise known as the Assessment Law, provides:

(Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).

The following are exempted from real property tax under the Assessment Law:

Petitioner raised the following assignments of error:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and

use of the second floor of the main building in the case at bar for residential purposes of the

improvements used exclusively for religious, charitable, scientific or educational purposes.

Director and his family, may find justification under the concept of incidental use, which is

xxx xxx xxx

complimentary to the main or primary purposeeducational, the lease of the first floor thereof to

In this regard petitioner argues that the primary use of the school lot and building is the basic and

the Northern Marketing Corporation cannot by any stretch of the imagination be considered

controlling guide, norm and standard to determine tax exemption, and not the mere incidental use

incidental to the purpose of education.

thereof.

It will be noted however that the aforementioned lease appears to have been raised for the first

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this

time in this Court. That the matter was not taken up in the to court is really apparent in the decision

Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and

of respondent Judge. No mention thereof was made in the stipulation of facts, not even in the

maintains a restaurant for its members, still these do not constitute business in the ordinary

description of the school building by the trial judge, both embodied in the decision nor as one of the

acceptance of the word, but an institution used exclusively for religious, charitable and educational

issues to resolve in order to determine whether or not said properly may be exempted from

purposes, and as such, it is entitled to be exempted from taxation.

payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this

was not disputed even after it was raised in this Court.

Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on

used as a cemetery. It was clarified that the term "used exclusively" considers incidental use also.

appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue

Thus, the exemption from payment of land tax in favor of the convent includes, not only the land

is not squarely raised below, still in the interest of substantial justice, this Court is not prevented

actually occupied by the building but also the adjacent garden devoted to the incidental use of the

from considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to

parish priest. The lot which is not used for commercial purposes but serves solely as a sort of

review palpable errors not assigned as such if it finds that their consideration is necessary in

lodging place, also qualifies for exemption because this constitutes incidental use in religious

arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

functions.

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school

The phrase "exclusively used for educational purposes" was further clarified by this Court in the

building as well as the lot where it is built, should be taxed, not because the second floor of the

cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961]

same is being used by the Director and his family for residential purposes, but because the first

and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965],

floor thereof is being used for commercial purposes. However, since only a portion is used for

thus

purposes of commerce, it is only fair that half of the assessed tax be returned to the school

Moreover, the exemption in favor of property used exclusively for charitable or educational

involved.

purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby

1430), but extends to facilities which are incidental to and reasonably necessary for the

AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner.

accomplishment of said purposes, such as in the case of hospitals, "a school for training nurses, a

SO ORDERED.

nurses' home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student

G.R. No. L-27588 December 31, 1927

nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for the

THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as representative of the Roman

inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).

Catholic Apostolic Church, plaintiff-appellant,

The test of exemption from taxation is the use of the property for purposes mentioned in the

vs.

Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

THE PROVINCIAL BOARD OF ILOCOS NORTE, ET AL., defendants-appellants.

It must be stressed however, that while this Court allows a more liberal and non-restrictive

Vicente Llanes and Proceso Coloma for plaintiff-appellant.

interpretation of the phrase "exclusively used for educational purposes" as provided for in Article

Provincial Fiscal Santos for defendant-appellants.

VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always
been made that exemption extends to facilities which are incidental to and reasonably necessary

AVANCEA, J.:

for the accomplishment of the main purposes. Otherwise stated, the use of the school building or

The plaintiff, the Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia,

lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the

possesses and is the owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all

four sides of which face on public streets. On the south side is a part of the churchyard, the

and its hospital building constructed thereon are subject to assessment for purposes of real

convent and an adjacent lot used for a vegetable garden, containing an area off 1,624 square

property tax.

meters, in which there is a stable and a well for the use of the convent. In the center is the

The Antecedents

remainder of the churchyard and the church. On the north is an old cemetery with two of its walls

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on

still standing, and a portion where formerly stood a tower, the base of which still be seen,

January 16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel

containing a total area of 8,955 square meters.

of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon

As required by the defendants, on July 3, 1925 the plaintiff paid, under protest, the land tax on the

Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square

lot adjoining the convent and the lot which formerly was the cemetery with the portion where the

meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of

tower stood.

Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of

The plaintiff filed this action for the recovery of the sum paid by to the defendants by way of land

the Philippines. A big space at the ground floor is being leased to private parties, for canteen and

tax, alleging that the collection of this tax is illegal. The lower court absolved the defendants from

small store spaces, and to medical or professional practitioners who use the same as their private

the complaint in regard to the lot adjoining convent and declared that the tax collected on the lot,

clinics for their patients whom they charge for their professional services. Almost one-half of the

which formerly was the cemetery and on the portion where the lower stood, was illegal. Both

entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big

parties appealed from this judgment.

portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for

The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative

commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

Code) refers to the home of the parties who presides over the church and who has to take care of

The petitioner accepts paying and non-paying patients. It also renders medical services to out-

himself in order to discharge his duties. In therefore must, in the sense, include not only the land

patients, both paying and non-paying. Aside from its income from paying patients, the petitioner

actually occupied by the church, but also the adjacent ground destined to the ordinary incidental

receives annual subsidies from the government.

uses of man. Except in large cities where the density of the population and the development of

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real

commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a

property taxes in the amount of P4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax

house and, in the case of a convent, it use is limited to the necessities of the priest, which comes

Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land

under the exemption.lawphi1.net

and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for

In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it

Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a

used for commercial purposes and, according to the evidence, is now being used as a lodging

charitable institution. The petitioners request was denied, and a petition was, thereafter, filed

house by the people who participate in religious festivities, which constitutes an incidental use in

before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the

religious functions, which also comes within the exemption.

reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28,

The judgment appealed from is reversed in all it parts and it is held that both lots are exempt from

paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred

land tax and the defendants are ordered to refund to plaintiff whatever was paid as such tax,

that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the

without any special pronouncement as to costs. So ordered.

major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is a

G.R. No. 144104

charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered

June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,

judgment dismissing the petition and holding the petitioner liable for real property taxes. 6

vs.

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment

QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon

Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable

City,respondents.

institution and that its real properties were not actually, directly and exclusively used for charitable

DECISION

purposes; hence, it was not entitled to real property tax exemption under the constitution and the

CALLEJO, SR., J.:

law. The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the

decision of the CBAA.8

Decision dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY

required to pay a certain amount as deposit. That even if a patient is living below the poverty line,

TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS,

he is charged with high hospital bills. And, without these bills being first settled, the poor patient

SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED

cannot be allowed to leave the hospital or be discharged without first paying the hospital bills or

FOR CHARITABLE PURPOSES.

issue a promissory note guaranteed and indorsed by an influential agency or person known only to

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS

the Center; that even the remains of deceased poor patients suffered the same fate. Moreover,

CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON

before a patient is admitted for treatment as free or charity patient, one must undergo a series of

PROPER APPLICATION.

interviews and must submit all the requirements needed by the Center, usually accompanied by

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of

endorsement by an influential agency or person known only to the Center. These facts were heard

the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the

and admitted by the Petitioner LCP during the hearings before the Honorable QC-BAA and

fact that it admits paying patients and renders medical services to them, leases portions of the land

Honorable CBAA. These are the reasons of indigent patients, instead of seeking treatment with the

to private parties, and rents out portions of the hospital to private medical practitioners from which it

Center, they prefer to be treated at the Quezon Institute. Can such practice by the Center be called

derives income to be used for operational expenses. The petitioner points out that for the years

charitable?10

1995 to 1999, 100% of its out-patients were charity patients and of the hospitals 282-bed capacity,

The Issues

60% thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives

The issues for resolution are the following: (a) whether the petitioner is a charitable institution

subsidies from the government attests to its character as a charitable institution. It contends that

within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and

the "exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a

Section 234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner are

portion of its real estate is leased out to private individuals from whom it derives income, it does not

exempt from real property taxes.

lose its character as a charitable institution, and its exemption from the payment of real estate

The Courts Ruling

taxes on its real property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose.

The petition is partially granted.

The petitioner further contends that even if P.D. No. 1823 does not exempt it from the payment of

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973

real estate taxes, it is not precluded from seeking tax exemption under the 1987 Constitution.

and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not,

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity.

the elements which should be considered include the statute creating the enterprise, its corporate

The petitioners real property is not exempt from the payment of real estate taxes under P.D. No.

purposes, its constitution and by-laws, the methods of administration, the nature of the actual work

1823 and even under the 1987 Constitution because it failed to prove that it is a charitable

performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the

institution and that the said property is actually, directly and exclusively used for charitable

use and occupation of the properties.11

purposes. The respondents noted that in a newspaper report, it appears that graft charges were

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing

filed with the Sandiganbayan against the director of the petitioner, its administrative officer, and

laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts

Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for entering into a

under the influence of education or religion, by assisting them to establish themselves in life or

lease contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month,

otherwise lessening the burden of government.12 It may be applied to almost anything that tend to

when the monthly rental should be P357,000 a month as determined by the Commission on Audit;

promote the well-doing and well-being of social man. It embraces the improvement and promotion

and that instead of complying with the directive of the COA for the cancellation of the contract for

of the happiness of man.13 The word "charitable" is not restricted to relief of the poor or sick.14 The

being grossly prejudicial to the government, the petitioner renewed the same on March 13, 1995

test of a charity and a charitable organization are in law the same. The test whether an enterprise

for a monthly rental of only P24,000. They assert that the petitioner uses the subsidies granted by

is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or

the government for charity patients and uses the rest of its income from the property for the benefit

whether it is maintained for gain, profit, or private advantage.

of paying patients, among other purposes. They aver that the petitioner failed to adduce substantial

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the

evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent

provisions of the decree, is to be administered by the Office of the President of the Philippines with

patients. The respondents further assert, thus:

the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That

benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary

before a patient is admitted for treatment in the Center, first impression is that it is pay-patient and

diseases in the Philippines. The raison detre for the creation of the petitioner is stated in the

5. To encourage the training of physicians, nurses, health officers, social workers and medical and

decree, viz:

technical personnel in the practical and scientific implementation of services to lung patients;

Whereas, for decades, respiratory diseases have been a priority concern, having been the leading

6. To assist universities and research institutions in their studies about lung diseases, to encourage

cause of illness and death in the Philippines, comprising more than 45% of the total annual deaths

advanced training in matters of the lung and related fields and to support educational programs of

from all causes, thus, exacting a tremendous toll on human resources, which ailments are likely to

value to general health;

increase and degenerate into serious lung diseases on account of unabated pollution,

7. To encourage the formation of other organizations on the national, provincial and/or city and

industrialization and unchecked cigarette smoking in the country;lavvph!l.net

local levels; and to coordinate their various efforts and activities for the purpose of achieving a

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with

more effective programmatic approach on the common problems relative to the objectives

early and adequate medical care, immunization and through prompt and intensive prevention and

enumerated herein;

health education programs;

8. To seek and obtain assistance in any form from both international and local foundations and

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and

organizations; and to administer grants and funds that may be given to the organization;

efforts at preventing, treating and rehabilitating people affected by lung diseases, and to undertake

9. To extend, whenever possible and expedient, medical services to the public and, in general, to

research and training on the cure and prevention of lung diseases, through a Lung Center which

promote and protect the health of the masses of our people, which has long been recognized as an

will house and nurture the above and related activities and provide tertiary-level care for more

economic asset and a social blessing;

difficult and problematical cases;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the

Whereas, to achieve this purpose, the Government intends to provide material and financial

people in any and all walks of life, including those who are poor and needy, all without regard to or

support towards the establishment and maintenance of a Lung Center for the welfare and benefit

discrimination, because of race, creed, color or political belief of the persons helped; and to enable

of the Filipino people.15

them to obtain treatment when such disorders occur;

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation,

11. To participate, as circumstances may warrant, in any activity designed and carried on to

thus:

promote the general health of the community;

SECOND: That the purposes for which such corporation is formed are as follows:

12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and

1. To construct, establish, equip, maintain, administer and conduct an integrated medical institution

supplies by purchase, donation, or otherwise and to dispose of and distribute the same in such

which shall specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases

manner, and, on such basis as the Center shall, from time to time, deem proper and best, under

in line with the concern of the government to assist and provide material and financial support in

the particular circumstances, to serve its general and non-profit purposes and

the establishment and maintenance of a lung center primarily to benefit the people of the

objectives;lavvphil.net

Philippines and in pursuance of the policy of the State to secure the well-being of the people by

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties,

providing them specialized health and medical services and by minimizing the incidence of lung

whether real or personal, for purposes herein mentioned; and

diseases in the country and elsewhere.

14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of

2. To promote the noble undertaking of scientific research related to the prevention of lung or

the powers herein set forth and to do every other act and thing incidental thereto or connected

pulmonary ailments and the care of lung patients, including the holding of a series of relevant

therewith.16

congresses, conventions, seminars and conferences;

Hence, the medical services of the petitioner are to be rendered to the public in general in any and

3. To stimulate and, whenever possible, underwrite scientific researches on the biological,

all walks of life including those who are poor and the needy without discrimination. After all, any

demographic, social, economic, eugenic and physiological aspects of lung or pulmonary diseases

person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject

and their control; and to collect and publish the findings of such research for public consumption;

of charity.17

4. To facilitate the dissemination of ideas and public acceptance of information on lung

As a general principle, a charitable institution does not lose its character as such and its exemption

consciousness or awareness, and the development of fact-finding, information and reporting

from taxes simply because it derives income from paying patients, whether out-patient, or confined

facilities for and in aid of the general purposes or objects aforesaid, especially in human lung

in the hospital, or receives subsidies from the government, so long as the money received is

requirements, general health and physical fitness, and other relevant or related fields;

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.18 In Congregational Sunday School, etc. v. Board of Review,19 the State Supreme Court

In this case, the petitioner adduced substantial evidence that it spent its income, including the

of Illinois held, thus:

subsidies from the government for 1991 and 1992 for its patients and for the operation of the

[A]n institution does not lose its charitable character, and consequent exemption from taxation,

hospital. It even incurred a net loss in 1991 and 1992 from its operations.

by reason of the fact that those recipients of its benefits who are able to pay are required to do so,

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that

where no profit is made by the institution and the amounts so received are applied in furthering its

those portions of its real property that are leased to private entities are not exempt from real

charitable purposes, and those benefits are refused to none on account of inability to pay therefor.

property taxes as these are not actually, directly and exclusively used for charitable purposes.

The fundamental ground upon which all exemptions in favor of charitable institutions are based is

The settled rule in this jurisdiction is that laws granting exemption from tax are

the benefit conferred upon the public by them, and a consequent relief, to some extent, of the

construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is

burden upon the state to care for and advance the interests of its citizens.20

the rule and exemption is the exception. The effect of an exemption is equivalent to an

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of

appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based

21

South Dakota v. Baker:

on language in the law too plain to be mistaken.26 As held in Salvation Army v. Hoehn:27

[T]he fact that paying patients are taken, the profits derived from attendance upon these patients

An intention on the part of the legislature to grant an exemption from the taxing power of the state

being exclusively devoted to the maintenance of the charity, seems rather to enhance the

will never be implied from language which will admit of any other reasonable construction. Such an

usefulness of the institution to the poor; for it is a matter of common observation amongst those

intention must be expressed in clear and unmistakable terms, or must appear by necessary

who have gone about at all amongst the suffering classes, that the deserving poor can with

implication from the language used, for it is a well settled principle that, when a special privilege or

difficulty be persuaded to enter an asylum of any kind confined to the reception of objects of

exemption is claimed under a statute, charter or act of incorporation, it is to be construed strictly

charity; and that their honest pride is much less wounded by being placed in an institution in which

against the property owner and in favor of the public. This principle applies with peculiar force to a

paying patients are also received. The fact of receiving money from some of the patients does not,

claim of exemption from taxation . 28

we think, at all impair the character of the charity, so long as the money thus received is devoted

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that

altogether to the charitable object which the institution is intended to further.

22

The money received by the petitioner becomes a part of the trust fund and must be devoted to
public trust purposes and cannot be diverted to private profit or benefit.

23

the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation
organized primarily to help combat the high incidence of lung and pulmonary diseases in the

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its

Philippines, all donations, contributions, endowments and equipment and supplies to be imported

character as a charitable institution simply because the gift or donation is in the form of subsidies

by authorized entities or persons and by the Board of Trustees of the Lung Center of the

granted by the government. As held by the State Supreme Court of Utah in Yorgason v. County

Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income

Board of Equalization of Salt Lake County:

24

and gift taxes, the same further deductible in full for the purpose of determining the maximum

Second, the government subsidy payments are provided to the project. Thus, those payments

deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as

are like a gift or donation of any other kind except they come from the government. In

amended.

both Intermountain Health Care and the present case, the crux is the presence or absence of

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees

material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a private

imposed by the Government or any political subdivision or instrumentality thereof with respect to

benefactor, chose to make up the deficit resulting from the exchange between St. Marks Tower

equipment purchases made by, or for the Lung Center.29

and the tenants by making a contribution to the landlord, just as it would have been irrelevant

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption

in Intermountain Health Care if the patients income supplements had come from private individuals

privileges for its real properties as well as the building constructed thereon. If the intentions were

rather than the government.

otherwise, the same should have been among the enumeration of tax exempt privileges under

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the

Section 2:

government rather than private charitable contributions does not dictate the denial of a charitable

It is a settled rule of statutory construction that the express mention of one person, thing, or

exemption if the facts otherwise support such an exemption, as they do here.

25

consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of

September 30, 1961 before the 1973 and 1987 Constitutions took effect.38 As this Court held

the rule is the principle that what is expressed puts an end to that which is implied. Expressium

in Province of Abra v. Hernando:39

facit cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it

Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant

may not, by interpretation or construction, be extended to other matters.

thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or

...

educational purposes shall be exempt from taxation." The present Constitution added "charitable

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive

institutions, mosques, and non-profit cemeteries" and required that for the exemption of "lands,

interpretation. They are based on the rules of logic and the natural workings of the human mind.

buildings, and improvements," they should not only be "exclusively" but also "actually" and

They are predicated upon ones own voluntary act and not upon that of others. They proceed from

"directly" used for religious or charitable purposes. The Constitution is worded differently. The

the premise that the legislature would not have made specified enumeration in a statute had the

change should not be ignored. It must be duly taken into consideration. Reliance on past decisions

intention been not to restrict its meaning and confine its terms to those expressly mentioned.30

would have sufficed were the words "actually" as well as "directly" not added. There must be proof

The exemption must not be so enlarged by construction since the reasonable presumption is that

therefore of the actual and direct use of the lands, buildings, and improvements for religious or

the State has granted in express terms all it intended to grant at all, and that unless the privilege is

charitable purposes to be exempt from taxation.

limited to the very terms of the statute the favor would be intended beyond what was meant.

31

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,

charitable institution; and (b) its real properties

non-profit cemeteries, and all lands, buildings, and

are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is

improvements, actually, directly and exclusively used for religious, charitable or educational

defined as possessed and enjoyed to the exclusion of others; debarred from participation or

purposes shall be exempt from taxation.32

enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege

The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice

exclusively."40 If real property is used for one or more commercial purposes, it is not exclusively

Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what

used for the exempted purposes but is subject to taxation.41 The words "dominant use" or "principal

is exempted is not the institution itself . . .; those exempted from real estate taxes are lands,

use" cannot be substituted for the words "used exclusively" without doing violence to the

buildings and improvements actually, directly and exclusively used for religious, charitable or

Constitutions and the law.42 Solely is synonymous with exclusively.43

educational purposes."

34

What is meant by actual, direct and exclusive use of the property for charitable purposes is the

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No.

direct and immediate and actual application of the property itself to the purposes for which the

7160 (otherwise known as the Local Government Code of 1991) as follows:

charitable institution is organized. It is not the use of the income from the real property that is

SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of

determinative of whether the property is used for tax-exempt purposes.44

the real property tax:

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,

...

directly and exclusively used for charitable purposes. While portions of the hospital are used for the

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-

treatment of patients and the dispensation of medical services to them, whether paying or non-

profit or religious cemeteries and all lands, buildings, and improvements actually, directly,

paying, other portions thereof are being leased to private individuals for their clinics and a canteen.

andexclusively used for religious, charitable or educational purposes.

35

Further, a portion of the land is being leased to a private individual for her business enterprise

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used
36

under the business name "Elliptical Orchids and Garden Center." Indeed, the petitioners evidence

exclusively for charitable purposes shall be exempt from taxation." However, under the

shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said

1973 and the present Constitutions, for "lands, buildings, and improvements" of the charitable

lessees.

institution to be considered exempt, the same should not only be "exclusively" used for charitable

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of

purposes; it is required that such property be used "actually" and "directly" for such purposes.37

the hospital leased to private individuals are not exempt from such taxes.45 On the other hand, the

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our

portions of the land occupied by the hospital and portions of the hospital used for its patients,

ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on

whether paying or non-paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent

(d) To cooperate with organized medical societies, agencies of both government and private sector;

Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions

establish rules and regulations consistent with the highest professional ethics;

of the land and the area thereof which are leased to private persons, and to compute the real

xxxx3

property taxes due thereon as provided for by law.

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes

SO ORDERED.

amounting toP76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,

G.R. No. 195909

September 26, 2012

withholding tax on compensation and expanded withholding tax. The BIR reduced the amount
4

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

to P63,935,351.57 during trial in the First Division of the CTA.

vs.

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency

ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

tax assessments. The BIR did not act on the protest within the 180-day period under Section 228

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

of the NIRC. Thus, St. Luke's appealed to the CTA.

G.R. No. 195960

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.

vs.

According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

exemption on non-profit hospitals that were previously categorized as non-stock, non-profit

DECISION

corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails

CARPIO, J.:

over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-

The Case

profit charitable institutions and civic organizations promoting social welfare.

1

These are consolidated petitions for review on certiorari under Rule 45 of the Rules of Court

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its

assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its

revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and

Resolution of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure

employees directly benefit from its profits and assets. St. Luke's had total revenues

question of law, which involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G)

of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. 7

of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of

St. Luke's contended that the BIR should not consider its total revenues, because its free services

proprietary non-profit hospitals.

to patients wasP218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less

The Facts

operating expenses) ofP334,642,615. 8 St. Luke's also claimed that its income does not inure to

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit

the benefit of any individual.

corporation. Under its articles of incorporation, among its corporate purposes are:

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,

welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per

charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the

se does not destroy its income tax exemption.

sick, diseased and disabled persons; provided that purely medical and surgical services shall be

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the

performed by duly licensed physicians and surgeons who may be freely and individually contracted

CTA that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the

by patients;

enactment of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption

(b) To provide a career of health science education and provide medical services to the community

under Section 30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable

through organized clinics in such specialties as the facilities and resources of the corporation make

income. The BIR prays that St. Luke's be ordered to payP57,659,981.19 as deficiency income and

possible;

expanded withholding tax for 1998 with surcharges and interest for late payment.

(c) To carry on educational activities related to the maintenance and promotion of health as well as

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and

provide facilities for scientific and medical researches which, in the opinion of the Board of

withholding of a part of its income, 9 as well as the payment of surcharge and delinquency interest.

Trustees, may be justified by the facilities, personnel, funds, or other requirements that are

There is no ground for this Court to undertake such a factual review. Under the Constitution

available;

the Rules of Court,

11

10

and

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

responsible organization must be run to at least insure its existence, by operating within the limits

invoke a recognized exception.

of its own resources, especially its regular income. In other words, it should always strive,

The Ruling of the Court of Tax Appeals

whenever possible, to have a surplus." 23

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's.

dated 23 February 2009 which held:

explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.

profit." On the other hand, Congress specifically used the word "non-stock" to qualify a charitable

Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the

"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in

amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby

the present tax code, indicating an intent to exempt this type of charitable organization from income

ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable

tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that

year 1998 in the respective amounts of P5,496,963.54 andP778,406.84 or in the sum

non-stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income

of P6,275,370.38, x x x.

tax on income received by them as such, applying the provision of Section 30(E) of the NIRC of

xxxx

1997, as amended." 25

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on

The Issue

the total amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof,

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B)

pursuant to Section 249(C)(3) of the NIRC of 1997.

of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit

SO ORDERED. 13

hospitals.

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from

The Ruling of the Court

the failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-

St. Luke's Petition in G.R. No. 195960

Net") 14 came from charitable activities. The CTA cancelled the remainder of the P63,113,952.79

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the

deficiency assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which

petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall

the CTA En Banc held was not applicable to St. Luke's.

15

24

The CTA

raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section

Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA]

30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services

manifestly overlooked certain relevant facts not disputed by the parties and which, if properly

to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's

considered, would justify a different conclusion." 27

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

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the
CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to

charitable institution.

show the nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that

consider relevant evidence. The CTA obviously considered the evidence and concluded that it is

"a charitable institution does not lose its charitable character and its consequent exemption from

self-serving. The CTA declared that it has "gone through the records of this case and found no

taxation merely because recipients of its benefits who are able to pay are required to do so, where

other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x

funds derived in this manner are devoted to the charitable purposes of the institution x x x."

19

The

x." 29

generation of income from paying patients does not per se destroy the charitable nature of St.

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%

Luke's.

surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue,
ruled that the old NIRC (Commonwealth Act No. 466, as amended)

21

20

which

"positively exempts from

the time prescribed for its payment in the notice of assessment[.]"

20% delinquency interest under Section 249(C)(3) of the NIRC.

31

30

St. Luke's is also liable to pay

As explained by the CTA En

taxation those corporations or associations which, otherwise, would be subject thereto, because of

Banc, the amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision

the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on

includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency

charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost

interest. 32

whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and

27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of

character of the foregoing organizations from any of their properties, real or personal, or from any

charitable and social welfare institutions. The 10% income tax rate under Section 27(B) specifically

of their activities conducted for profit regardless of the disposition made of such income, shall be

pertains to proprietary educational institutions and proprietary non-profit hospitals. The BIR argues

subject to tax imposed under this Code. (Emphasis supplied)

that Congress intended to remove the exemption that non-profit hospitals previously enjoyed under

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B)

Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the

of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under

NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,

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

can be construed together without the removal of such tax exemption. The effect of the introduction

xxxx

of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and

non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions

hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except

covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary

those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,

30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

business or other activity exceeds fifty percent (50%) of the total gross income derived by such

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary

educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof

non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for

shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated

hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following

trade, business or other activity' means any trade, business or other activity, the conduct of which

the definition of a "proprietary educational institution" as "any private school maintained and

is not substantially related to the exercise or performance by such educational institution or hospital

administered by private individuals or groups" with a government permit. "Non-profit" means no net

of its primary purpose or function. A 'proprietary educational institution' is any private school

income or asset accrues to or benefits any member or specific person, with all the net income or

maintained and administered by private individuals or groups with an issued permit to operate from

asset devoted to the institution's purposes and all its activities conducted not for profit.

the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club

(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may

Filipino Inc. de Cebu,37 this Court considered as non-profit a sports club organized for recreation

be, in accordance with existing laws and regulations. (Emphasis supplied)

and entertainment of its stockholders and members. The club was primarily funded by membership

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a

fees and dues. If it had profits, they were used for overhead expenses and improving its golf

charitable institution and an organization promoting social welfare. The arguments of St. Luke's

course. 38 The club was non-profit because of its purpose and there was no evidence that it was

focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable

engaged in a profit-making enterprise. 39

institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court

remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30

defined "charity" in Lung Center of the Philippines v. Quezon City

state:

consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed

their minds and hearts under the influence of education or religion, by assisting them to establish

under this Title in respect to income received by them as such:

themselves in life or [by] otherwise lessening the burden of government."

xxxx

benefit of its members fails this test. An organization may be considered as non-profit if it does not

(E) Nonstock corporation or association organized and operated exclusively for religious,

distribute any part of its income to stockholders or members. However, despite its being a tax

charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its

exempt institution, any income such institution earns from activities conducted for profit is taxable,

net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any

as expressly provided in the last paragraph of Section 30.

specific person;

To be a charitable institution, however, an organization must meet the substantive test of charity in

xxxx

Lung Center. The issue in Lung Center concerns exemption from real property tax and not income

(G) Civic league or organization not organized for profit but operated exclusively for the promotion

tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an

of social welfare;

indefinite number of persons which lessens the burden of government. In other words, charitable

xxxx

institutions provide for free goods and services to the public which would otherwise fall on the

40

as "a gift, to be applied

41

A non-profit club for the

shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which

(1) A non-stock corporation or association;

should have been spent to address public needs, because certain private entities already assume

(2) Organized exclusively for charitable purposes;

a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of

(3) Operated exclusively for charitable purposes; and

taxes by the government is compensated by its relief from doing public works which would have

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,

been funded by appropriations from the Treasury. 42

organizer, officer or any specific person.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for

Thus, both the organization and operations of the charitable institution must be devoted

a tax exemption are specified by the law granting it. The power of Congress to tax implies the

"exclusively" for charitable purposes. The organization of the institution refers to its corporate form,

power to exempt from tax. Congress can create tax exemptions, subject to the constitutional

as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E)

provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a

of the NIRC specifically requires that the corporation or association be non-stock, which is defined

majority of all the Members of Congress." 43 The requirements for a tax exemption are strictly

by the Corporation Code as "one where no part of its income is distributable as dividends to its

construed against the taxpayer

44

because an exemption restricts the collection of taxes necessary

members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations

for the existence of the government.

shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution

which the corporation was organized." 50 However, under Lung Center, any profit by a charitable

for the purpose of exemption from real property taxes. This ruling uses the same premise as

institution must not only be plowed back "whenever necessary or proper," but must be "devoted or

45

Hospital de San Juan and Jesus Sacred Heart College

46

which says that receiving income from

used altogether to the charitable object which it is intended to achieve."

51

paying patients does not destroy the charitable nature of a hospital.

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of

As a general principle, a charitable institution does not lose its character as such and its exemption

the NIRC requires that these operations be exclusive to charity. There is also a specific

from taxes simply because it derives income from paying patients, whether out-patient, or confined

requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any

in the hospital, or receives subsidies from the government, so long as the money received is

member, organizer, officer or any specific person." The use of lands, buildings and improvements

devoted or used altogether to the charitable object which it is intended to achieve; and no money

of the institution is but a part of its operations.

inures to the private benefit of the persons managing or operating the institution.

47

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.

For real property taxes, the incidental generation of income is permissible because the test of

However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the

exemption is the use of the property. The Constitution provides that "[c]haritable institutions,

organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not

churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and

ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the

all lands, buildings, and improvements, actually, directly, and exclusively used for religious,

Constitution requires that a charitable institution use the property "actually, directly and exclusively"

48

charitable, or educational purposes shall be exempt from taxation." The test of exemption is not

for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that

strictly a requirement on the intrinsic nature or character of the institution. The test requires that the

a charitable institution must be "organized and operated exclusively" for charitable purposes.

institution use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that

Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution

the Lung Center of the Philippines did not lose its charitable character when it used a portion of its

be "operated exclusively" for social welfare.

lot for commercial purposes. The effect of failing to meet the use requirement is simply to remove

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and

from the tax exemption that portion of the property not devoted to charity.

operated exclusively" by providing that:

The Constitution exempts charitable institutions only from real property taxes. In the NIRC,

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and

Congress decided to extend the exemption to income taxes. However, the way Congress crafted

character of the foregoing organizations from any of their properties, real or personal, or from any

Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution.

of their activities conducted for profit regardless of the disposition made of such income, shall be

Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax.

subject to tax imposed under this Code. (Emphasis supplied)

On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution

institution, but requires that the institution "actually, directly and exclusively" use the property for a

conducts "any" activity for profit, such activity is not tax exempt even as its not-for-profit activities

charitable purpose.

remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock

Section 30(E) of the NIRC provides that a charitable institution must be:

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 "operated exclusively" for the promotion of social welfare.

In Lung Center, this Court declared:

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from

purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its

participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a

tax exempt status for its not-for-profit activities. The only consequence is that the "income of

privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for

whatever kind and character" of a charitable institution "from any of its activities conducted for

the words "used exclusively" without doing violence to the Constitution and the law. Solely is

profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the

synonymous with exclusively. 54

introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary

The Court cannot expand the meaning of the words "operated exclusively" without violating the

corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

NIRC. Services to paying patients are activities conducted for profit. They cannot be considered

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It

any other way. There is a "purpose to make profit over and above the cost" of

cannot be disputed that a hospital which receives approximately P1.73 billion from paying patients

services. 55 The P1.73 billion total revenues from paying patients is not even incidental to St. Luke's

is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying

charity expenditure of P218,187,498 for non-paying patients.

patients are income received from "activities conducted for profit."

52

Indeed, St. Luke's admits that

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in

it derived profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from

1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,

Services to Patients" in contrast to its "Free Services" expenditure ofP218,187,498. In its Comment

equipment or facilities used for services to paying and non-paying patients, then it cannot be said

in G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim that 65.20%

that the income is "devoted or used altogether to the charitable object which it is intended to

of its "income after expenses was allocated to free or charitable services" in 1998.
REVENUES FROM SERVICES TO PATIENTS

53

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

P1,730,367,965.00

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

OPERATING EXPENSES

Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which
Professional care of patients

P1,016,608,394.00

introduced the phrase "or from any activity conducted for profit."

Administrative

287,319,334.00

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es

Household and Property

91,797,622.00

una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?
xxxx

P1,395,725,350.00

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos
INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00

34.80%

de buena posicin social econmica, lo que se paga por estos enfermos debe estar sujeto a
'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from
any activity conducted for profit.' 57
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

OTHER INCOME

17,482,304.00

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."

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

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

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section

taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely

1, Rule 45 of the Rules of Court.

exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable

SO ORDERED.

activities from being taxed.

G.R. No. L-9637

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or

AMERICAN BIBLE SOCIETY, plaintiff-appellant,

social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is

vs.

based not only on a strict interpretation of a provision granting tax exemption, but also on the clear

CITY OF MANILA, defendant-appellee.

and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an

City Fiscal Eugenio Angeles and Juan Nabong for appellant.

institution be "operated exclusively" for charitable or social welfare purposes to be completely

Assistant City Fiscal Arsenio Naawa for appellee.

exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if

FELIX, J.:

it earns income from its for-profit activities. Such income from for-profit activities, under the last

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly

paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate

registered and doing business in the Philippines through its Philippine agency established in Manila

but now at the preferential 10% rate pursuant to Section 27(B).

in November, 1898, with its principal office at 636 Isaac Peral in said City. The defendant appellee

A tax exemption is effectively a social subsidy granted by the State because an exempt institution

is a municipal corporation with powers that are to be exercised in conformity with the provisions of

is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions

Republic Act No. 409, known as the Revised Charter of the City of Manila.

for charitable institutions should therefore be limited to institutions beneficial to the public and those

In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles

which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to

and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines

the detriment of the government and other taxpayers.1wphi1

and translating the same into several Philippine dialects. On May 29 1953, the acting City

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely

Treasurer of the City of Manila informed plaintiff that it was conducting the business of general

tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section

merchandise since November, 1945, without providing itself with the necessary Mayor's permit and

27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits

municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529,

are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is

3028 and 3364, and required plaintiff to secure, within three days, the corresponding permit and

entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

license fees, together with compromise covering the period from the 4th quarter of 1945 to the 2nd

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.

quarter of 1953, in the total sum of P5,821.45 (Annex A).

However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which

Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit

opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and

and pay under protest the sum of P5,891.45, if suit was to be taken in court regarding the same

thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal

(Annex B). To avoid the closing of its business as well as further fines and penalties in the

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

April 30, 1957

premises on October 24, 1953, plaintiff paid to the defendant under protest the said permit and
license fees in the aforementioned amount, giving at the same time notice to the City Treasurer
that suit would be taken in court to question the legality of the ordinances under which, the said

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is

fees were being collected (Annex C), which was done on the same date by filing the complaint that

PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010

gave rise to this action. In its complaint plaintiff prays that judgment be rendered declaring the said

and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical

Municipal Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal

Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential

and unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of

income tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not

P5,891.45 paid under protest, together with legal interest thereon, and the costs, plaintiff further

liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the

praying for such other relief and remedy as the court may deem just equitable.

National Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax

Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the

Appeals are AFFIRMED.

Municipal Board of the City of Manila by virtue of the power granted to it by section 2444,
subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949, by section 18,

subsection (1) of Republic Act No. 409, known as the Revised Charter of the City of Manila, and

2nd quarter 1950

21,816.32

plaintiff reiterating the unconstitutionality of the often-repeated ordinances.

3rd quarter 1950

25,004.55

Before trial the parties submitted the following stipulation of facts:

4th quarter 1950

45,287.92

1st quarter 1951

37,841.21

2nd quarter 1951

29,103.98

3rd quarter 1951

20,181.10

4th quarter 1951

22,968.91

1st quarter 1952

23,002.65

2nd quarter 1952

17,626.96

3rd quarter 1952

17,921.01

4th quarter 1952

24,180.72

1st quarter 1953

29,516.21

praying that the complaint be dismissed, with costs against plaintiff. This answer was replied by the

COME NOW the parties in the above-entitled case, thru their undersigned attorneys and
respectfully submit the following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac Peral,
Manila, Bibles, New Testaments, bible portions and bible concordance in English and other foreign
languages imported by it from the United States as well as Bibles, New Testaments and bible
portions in the local dialects imported and/or purchased locally; that from the fourth quarter of 1945
to the first quarter of 1953 inclusive the sales made by the plaintiff were as follows:
Quarter

Amount of Sales

4th quarter 1945

P1,244.21

1st quarter 1946

2,206.85

2nd quarter 1946

1,950.38

3rd quarter 1946

2,235.99

4th quarter 1946

3,256.04

1st quarter 1947

13,241.07

When the case was set for hearing, plaintiff proved, among other things, that it has been in

2nd quarter 1947

15,774.55

existence in the Philippines since 1899, and that its parent society is in New York, United States of

3rd quarter 1947

14,654.13

4th quarter 1947

12,590.94

1st quarter 1948

11,143.90

2nd quarter 1948

14,715.26

3rd quarter 1948

38,333.83

4th quarter 1948

16,179.90

sale of bibles, defendant retorts that the admissions of plaintiff-appellant's lone witness who

1st quarter 1949

23,975.10

testified on cross-examination that bibles bearing the price of 70 cents each from plaintiff-

2nd quarter 1949

17,802.08

3rd quarter 1949

16,640.79

4th quarter 1949

15,961.38

1st quarter 1950

18,562.46

2. That the parties hereby reserve the right to present evidence of other facts not herein stipulated.
WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties may
present further evidence on their behalf. (Record on Appeal, pp. 15-16).

America; that its, contiguous real properties located at Isaac Peral are exempt from real estate
taxes; and that it was never required to pay any municipal license fee or tax before the war, nor
does the American Bible Society in the United States pay any license fee or sales tax for the sale
of bible therein. Plaintiff further tried to establish that it never made any profit from the sale of its
bibles, which are disposed of for as low as one third of the cost, and that in order to maintain its
operating cost it obtains substantial remittances from its New York office and voluntary
contributions and gifts from certain churches, both in the United States and in the Philippines,
which are interested in its missionary work. Regarding plaintiff's contention of lack of profit in the

appellant's New York office are sold here by plaintiff-appellant at P1.30 each; those bearing the
price of $4.50 each are sold here at P10 each; those bearing the price of $7 each are sold here at
P15 each; and those bearing the price of $11 each are sold here at P22 each, clearly show that
plaintiff's contention that it never makes any profit from the sale of its bible, is evidently untenable.
After hearing the Court rendered judgment, the last part of which is as follows:
As may be seen from the repealed section (m-2) of the Revised Administrative Code and the
repealing portions (o) of section 18 of Republic Act No. 409, although they seemingly differ in the

way the legislative intent is expressed, yet their meaning is practically the same for the purpose of

plaintiff to secure a Mayor's permit in connection with the society's alleged business of distributing

taxing the merchandise mentioned in said legal provisions, and that the taxes to be levied by said

and selling bibles, etc. and to pay permit dues in the sum of P35 for the period covered in this

ordinances is in the nature of percentage graduated taxes (Sec. 3 of Ordinance No. 3000, as

litigation, plus the sum of P35 for compromise on account of plaintiff's failure to secure the permit

amended, and Sec. 1, Group 2, of Ordinance No. 2529, as amended by Ordinance No. 3364).

required by Ordinance No. 3000 of the City of Manila, as amended. This Ordinance is of general

IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so holds that

application and not particularly directed against institutions like the plaintiff, and it does not contain

this case should be dismissed, as it is hereby dismissed, for lack of merits, with costs against the

any provisions whatever prescribing religious censorship nor restraining the free exercise and

plaintiff.

enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:

Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which certified the

SEC. 1. PERMITS NECESSARY. It shall be unlawful for any person or entity to conduct or

case to Us for the reason that the errors assigned to the lower Court involved only questions of law.

engage in any of the businesses, trades, or occupations enumerated in Section 3 of this Ordinance

Appellant contends that the lower Court erred:

or other businesses, trades, or occupations for which a permit is required for the proper

1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not

supervision and enforcement of existing laws and ordinances governing the sanitation, security,

unconstitutional;

and welfare of the public and the health of the employees engaged in the business specified in

2. In holding that subsection m-2 of Section 2444 of the Revised Administrative Code under which

said section 3 hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT THEREFOR FROM THE

Ordinances Nos. 2592 and 3000 were promulgated, was not repealed by Section 18 of Republic

MAYOR AND THE NECESSARY LICENSE FROM THE CITY TREASURER.

Act No. 409;

The business, trade or occupation of the plaintiff involved in this case is not particularly mentioned

3. In not holding that an ordinance providing for taxes based on gross sales or receipts, in order to

in Section 3 of the Ordinance, and the record does not show that a permit is required therefor

be valid under the new Charter of the City of Manila, must first be approved by the President of the

under existing laws and ordinances for the proper supervision and enforcement of their provisions

Philippines; and

governing the sanitation, security and welfare of the public and the health of the employees

4. In holding that, as the sales made by the plaintiff-appellant have assumed commercial

engaged in the business of the plaintiff. However, sections 3 of Ordinance 3000 contains item No.

proportions, it cannot escape from the operation of said municipal ordinances under the cloak of

79, which reads as follows:

religious privilege.

79. All other businesses, trades or occupations not

The issues. As may be seen from the proceeding statement of the case, the issues involved in

mentioned in this Ordinance, except those upon which the

the present controversy may be reduced to the following: (1) whether or not the ordinances of the

City is not empowered to license or to tax P5.00

City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are constitutional and valid; and

Therefore, the necessity of the permit is made to depend upon the power of the City to license or

(2) whether the provisions of said ordinances are applicable or not to the case at bar.

tax said business, trade or occupation.

Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides

As to the license fees that the Treasurer of the City of Manila required the society to pay from the

that:

4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including the sum of P50 as

(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise

compromise, Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028

thereof, and the free exercise and enjoyment of religious profession and worship, without

prescribes the following:

discrimination or preference, shall forever be allowed. No religion test shall be required for the

SEC. 1. FEES. Subject to the provisions of section 578 of the Revised Ordinances of the City of

exercise of civil or political rights.

Manila, as amended, there shall be paid to the City Treasurer for engaging in any of the

Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529

businesses or occupations below enumerated, quarterly, license fees based on gross sales or

and 3000, as respectively amended, are unconstitutional and illegal in so far as its society is

receipts realized during the preceding quarter in accordance with the rates herein prescribed:

concerned, because they provide for religious censorship and restrain the free exercise and

PROVIDED, HOWEVER, That a person engaged in any businesses or occupation for the first time

enjoyment of its religious profession, to wit: the distribution and sale of bibles and other religious

shall pay the initial license fee based on the probable gross sales or receipts for the first quarter

literature to the people of the Philippines.

beginning from the date of the opening of the business as indicated herein for the corresponding

Before entering into a discussion of the constitutional aspect of the case, We shall first consider the

business or occupation.

provisions of the questioned ordinances in relation to their application to the sale of bibles, etc. by

xxx

appellant. The records, show that by letter of May 29, 1953 (Annex A), the City Treasurer required

xxx

xxx

GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are not yet subject

for only a very short period of time. Others, and they seem to be in the majority, refuse to accept

to the payment of any municipal tax, such as (1) retail dealers in general merchandise; (2) retail

this view of the situation, and consequently maintain that all rights an liabilities which have accrued

dealers exclusively engaged in the sale of . . . books, including stationery.

under the original statute are preserved and may be enforced, since the re-enactment neutralizes

xxx

the repeal, therefore, continuing the law in force without interruption. (Crawford-Statutory

xxx

xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance No.

Construction, Sec. 322).

2529, as amended, are not imposed directly upon any religious institution but upon those engaged

Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and wider

in any of the business or occupations therein enumerated, such as retail "dealers in general

concept of taxation and is different from the provisions of Section 2444(m-2) that the former cannot

merchandise" which, it is alleged, cover the business or occupation of selling bibles, books, etc.

be considered as a substantial re-enactment of the provisions of the latter. We have quoted above

Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2) of

the provisions of section 2444(m-2) of the Revised Administrative Code and We shall now copy

said legal body, as amended by Act No. 3659, approved on December 8, 1929, empowers the

hereunder the provisions of Section 18, subdivision (o) of Republic Act No. 409, which reads as

Municipal Board of the City of Manila:

follows:

(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or both, and

(o) To tax and fix the license fee on dealers in general merchandise, including importers and

(b) retail dealers in new (not yet used) merchandise, which dealers are not yet subject to the

indentors, except those dealers who may be expressly subject to the payment of some other

payment of any municipal tax.

municipal tax under the provisions of this section.

For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in general

Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail dealers.

merchandise, and (2) retail dealers exclusively engaged in the sale of (a) textiles . . . (e) books,

For purposes of the tax on retail dealers, general merchandise shall be classified into four main

including stationery, paper and office supplies, . . .: PROVIDED, HOWEVER, That the combined

classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential commodities, and (4)

total tax of any debtor or manufacturer, or both, enumerated under these subsections (m-1) and

miscellaneous articles. A separate license shall be prescribed for each class but where

(m-2), whether dealing in one or all of the articles mentioned herein, SHALL NOT BE IN EXCESS

commodities of different classes are sold in the same establishment, it shall not be compulsory for

OF FIVE HUNDRED PESOS PER ANNUM.

the owner to secure more than one license if he pays the higher or highest rate of tax prescribed by

and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were

ordinance. Wholesale dealers shall pay the license tax as such, as may be provided by ordinance.

enacted in virtue of the power that said Act No. 3669 conferred upon the City of Manila. Appellant,

For purposes of this section, the term "General merchandise" shall include poultry and livestock,

however, contends that said ordinances are longer in force and effect as the law under which they

agricultural products, fish and other allied products.

were promulgated has been expressly repealed by Section 102 of Republic Act No. 409 passed

The only essential difference that We find between these two provisions that may have any bearing

on June 18, 1949, known as the Revised Manila Charter.

on the case at bar, is that, while subsection (m-2) prescribes that the combined total tax of any

Passing upon this point the lower Court categorically stated that Republic Act No. 409 expressly

dealer or manufacturer, or both, enumerated under subsections (m-1) and (m-2), whether dealing

repealed the provisions of Chapter 60 of the Revised Administrative Code but in the opinion of the

in one or all of the articles mentioned therein,shall not be in excess of P500 per annum, the

trial Judge, although Section 2444 (m-2) of the former Manila Charter and section 18 (o) of the new

corresponding section 18, subsection (o) of Republic Act No. 409, does not contain any limitation

seemingly differ in the way the legislative intent was expressed, yet their meaning is practically the

as to the amount of tax or license fee that the retail dealer has to pay per annum. Hence, and in

same for the purpose of taxing the merchandise mentioned in both legal provisions and,

accordance with the weight of the authorities above referred to that maintain that "all rights and

consequently, Ordinances Nos. 2529 and 3000, as amended, are to be considered as still in full

liabilities which have accrued under the original statute are preserved and may be enforced, since

force and effect uninterruptedly up to the present.

the reenactment neutralizes the repeal, therefore continuing the law in force without interruption",

Often the legislature, instead of simply amending the pre-existing statute, will repeal the old statute

We hold that the questioned ordinances of the City of Manila are still in force and effect.

in its entirety and by the same enactment re-enact all or certain portions of the preexisting law. Of

Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved by the

course, the problem created by this sort of legislative action involves mainly the effect of the repeal

President of the Philippines as per section 18, subsection (ii) of Republic Act No. 409, which reads

upon rights and liabilities which accrued under the original statute. Are those rights and liabilities

as follows:

destroyed or preserved? The authorities are divided as to the effect of simultaneous repeals and

(ii) To tax, license and regulate any business, trade or occupation being conducted within the City

re-enactments. Some adhere to the view that the rights and liabilities accrued under the repealed

of Manila, not otherwise enumerated in the preceding subsections, including percentage taxes

act are destroyed, since the statutes from which they sprang are actually terminated, even though

based on gross sales or receipts, subject to the approval of the PRESIDENT, except amusement

On the above facts the Supreme Court held that it could not be said that petitioners were engaged

taxes.

in commercial rather than a religious venture. Their activities could not be described as embraced

but this requirement of the President's approval was not contained in section 2444 of the former

in the occupation of selling books and pamphlets. Then the Court continued:

Charter of the City of Manila under which Ordinance No. 2529 was promulgated. Anyway, as stated

"We do not mean to say that religious groups and the press are free from all financial burdens of

by appellee's counsel, the business of "retail dealers in general merchandise" is expressly

government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S.

enumerated in subsection (o), section 18 of Republic Act No. 409; hence, an ordinance prescribing

Ct. 444. We have here something quite different, for example, from a tax on the income of one who

a municipal tax on said business does not have to be approved by the President to be effective, as

engages in religious activities or a tax on property used or employed in connection with activities. It

it is not among those referred to in said subsection (ii). Moreover, the questioned ordinances are

is one thing to impose a tax on the income or property of a preacher. It is quite another to exact a

still in force, having been promulgated by the Municipal Board of the City of Manila under the

tax from him for the privilege of delivering a sermon. The tax imposed by the City of Jeannette is a

authority granted to it by law.

flat license tax, payment of which is a condition of the exercise of these constitutional privileges.

The question that now remains to be determined is whether said ordinances are inapplicable,

The power to tax the exercise of a privilege is the power to control or suppress its enjoyment. . . .

invalid or unconstitutional if applied to the alleged business of distribution and sale of bibles to the

Those who can tax the exercise of this religious practice can make its exercise so costly as to

people of the Philippines by a religious corporation like the American Bible Society, plaintiff herein.

deprive it of the resources necessary for its maintenance. Those who can tax the privilege of

With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028,

engaging in this form of missionary evangelism can close all its doors to all those who do not have

appellant contends that it is unconstitutional and illegal because it restrains the free exercise and

a full purse. Spreading religious beliefs in this ancient and honorable manner would thus be denied

enjoyment of the religious profession and worship of appellant.

the needy. . . .

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the

It is contended however that the fact that the license tax can suppress or control this activity is

freedom of religious profession and worship. "Religion has been spoken of as a profession of faith

unimportant if it does not do so. But that is to disregard the nature of this tax. It is a license tax a

to an active power that binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It

flat tax imposed on the exercise of a privilege granted by the Bill of Rights . . . The power to impose

has reference to one's views of his relations to His Creator and to the obligations they impose of

a license tax on the exercise of these freedom is indeed as potent as the power of censorship

reverence to His being and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342).

which this Court has repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory

The constitutional guaranty of the free exercise and enjoyment of religious profession and worship

measure to defray the expenses of policing the activities in question. It is in no way apportioned. It

carries with it the right to disseminate religious information. Any restraints of such right can only be

is flat license tax levied and collected as a condition to the pursuit of activities whose enjoyment is

justified like other restraints of freedom of expression on the grounds that there is a clear and

guaranteed by the constitutional liberties of press and religion and inevitably tends to suppress

present danger of any substantive evil which the State has the right to prevent". (Taada and

their exercise. That is almost uniformly recognized as the inherent vice and evil of this flat license

Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the

tax."

license fee herein involved is imposed upon appellant for its distribution and sale of bibles and

Nor could dissemination of religious information be conditioned upon the approval of an official or

other religious literature:

manager even if the town were owned by a corporation as held in the case of Marsh vs. State of

In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a license be

Alabama (326 U.S. 501), or by the United States itself as held in the case of Tucker vs. Texas (326

obtained before a person could canvass or solicit orders for goods, paintings, pictures, wares or

U.S. 517). In the former case the Supreme Court expressed the opinion that the right to enjoy

merchandise cannot be made to apply to members of Jehovah's Witnesses who went about from

freedom of the press and religion occupies a preferred position as against the constitutional right of

door to door distributing literature and soliciting people to "purchase" certain religious books and

property owners.

pamphlets, all published by the Watch Tower Bible & Tract Society. The "price" of the books was

"When we balance the constitutional rights of owners of property against those of the people to

twenty-five cents each, the "price" of the pamphlets five cents each. It was shown that in making

enjoy freedom of press and religion, as we must here, we remain mindful of the fact that the latter

the solicitations there was a request for additional "contribution" of twenty-five cents each for the

occupy a preferred position. . . . In our view the circumstance that the property rights to the

books and five cents each for the pamphlets. Lesser sum were accepted, however, and books

premises where the deprivation of property here involved, took place, were held by others than the

were even donated in case interested persons were without funds.

public, is not sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such restraint by the

application of a State statute." (Taada and Fernando on the Constitution of the Philippines, Vol. 1,

Constitution, nor tax the exercise of religious practices. In the case of Coleman vs. City of Griffin,

4th ed., p. 304-306).

189 S.E. 427, this point was elucidated as follows:

Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue

An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or

Code, provides:

otherwise, circulars, handbooks, advertising, or literature of any kind, whether said articles are

SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall

being delivered free, or whether same are being sold within the city limits of the City of Griffin,

not be taxed under this Title in respect to income received by them as such

without first obtaining written permission from the city manager of the City of Griffin, shall be

(e) Corporations or associations organized and operated exclusively for religious, charitable, . . . or

deemed a nuisance and punishable as an offense against the City of Griffin, does not deprive

educational purposes, . . .: Provided, however, That the income of whatever kind and character

defendant of his constitutional right of the free exercise and enjoyment of religious profession and

from any of its properties, real or personal, or from any activity conducted for profit, regardless of

worship, even though it prohibits him from introducing and carrying out a scheme or purpose which

the disposition made of such income, shall be liable to the tax imposed under this Code;

he sees fit to claim as a part of his religious system.

Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff from

It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if

this tax and says that such exemption clearly indicates that the act of distributing and selling bibles,

applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not

etc. is purely religious and does not fall under the above legal provisions.

applicable to plaintiff-appellant and defendant-appellee is powerless to license or tax the business

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets

of plaintiff Society involved herein for, as stated before, it would impair plaintiff's right to the free

was in some instances a little bit higher than the actual cost of the same but this cannot mean that

exercise and enjoyment of its religious profession and worship, as well as its rights of

appellant was engaged in the business or occupation of selling said "merchandise" for profit. For

dissemination of religious beliefs, We find that Ordinance No. 3000, as amended is also

this reason We believe that the provisions of City of Manila Ordinance No. 2529, as amended,

inapplicable to said business, trade or occupation of the plaintiff.

cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its

Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision

religious profession and worship as well as its rights of dissemination of religious beliefs.

appealed from, sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected from

With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit

it. Without pronouncement as to costs. It is so ordered.

before any person can engage in any of the businesses, trades or occupations enumerated
therein, We do not find that it imposes any charge upon the enjoyment of a right granted by the