Caso NG Complek

Tax amnesty Distinguished from tax exemption
Republic v. IAC, 196 SCRA 335 (1991)

REPUBLIC OF THE PHILIPPINES, petitioner, vs. INTERMEDIATE APPELLATE COURT and
SPOUSES ANTONIO and CLARA PASTOR, respondents. G.R. No. L-69344 April 26, 1991
Roberto L. Bautista for private respondents GRIO-AQUINO, J.:
The legal issue presented in this petition for review is whether or not the tax amnesty payments made by
the private respondents on October 23, 1973 bar an action for recovery of deficiency income taxes under
P.D.'s Nos. 23, 213 and 370.
On April 15, 1980, the Republic of the Philippines, through the Bureau of Internal Revenue, commenced
an action in the Court of First Instance (now Regional Trial Court) of Manila, Branch XVI, to collect from
the spouses Antonio Pastor and Clara Reyes-Pastor deficiency income taxes for the years 1955 to 1959
in the amount of P17,117.08 with a 5% surcharge and 1% monthly interest, and costs.
The Pastors filed a motion to dismiss the complaint, but the motion was denied. On August 2, 1975, they
1wphi1
filed an answer admitting there was an assessment against them of P17,117.08 for income tax deficiency
but denying liability therefor. They contended that they had availed of the tax amnesty under P.D.'s Nos.
23, 213 and 370 and had paid the corresponding amnesty taxes amounting to P10,400 or 10% of their
reported untaxed income under P.D. 23, P2,951.20 or 20% of the reported untaxed income under P.D.
213, and a final payment on October 26, 1973 under P.D. 370 evidenced by the Government's Official
Receipt No. 1052388. Consequently, the Government is in estoppel to demand and compel further
payment of income taxes by them.
The parties agreed that there were no issues of fact to be litigated, hence, the case was submitted for
decision upon the pleadings and memoranda on the lone legal question of: whether or not the payment of
deficiency income tax under the tax amnesty, P.D. 23, and its acceptance by the Government operated to
divest the Government of the right to further recover from the taxpayer, even if there was an existing
assessment against the latter at the time he paid the amnesty tax.
It is not disputed that as a result of an investigation made by the Bureau of Internal Revenue in 1963, it
was found that the private respondents owed the Government P1,283,621.63 as income taxes for the
years 1955 to 1959, inclusive of the 50% surcharge and 1% monthly interest. The defendants protested
against the assessment. A reinvestigation was conducted resulting in the drastic reduction of the
assessment to only P17,117.08.
It appears that on April 27, 1978, the private respondents offered to pay the Bureau of Internal Revenue
the sum of P5,000 by way of compromise settlement of their income tax deficiency for the questioned
years, but Assistant Commissioner Bernardo Carpio, in a letter addressed to the Pastor spouses, rejected
the offer stating that there was no legal or factual justification for accepting it. The Government filed the
action against the spouses in 1980, ten (10) years after the assessment of the income tax deficiency was
made.
On a motion for judgment on the pleadings filed by the Government, which the spouses did not oppose,
the trial court rendered a decision on February 28, 1980, holding that the defendants spouses had settled
their income tax deficiency for the years 1955 to 1959, not under P.D. 23 or P.D. 370, but under P.D. 213,
as shown in the Amnesty Income Tax Returns' Summary Statement and the tax Payment Acceptance
Order for P2,951.20 with its corresponding official receipt, which returns also contain the very assessment
for the questioned years. By accepting the payment of the amnesty income taxes, the Government,
therefore, waived its right to further recover deficiency incomes taxes "from the defendants under the
existing assessment against them because:
1. the defendants' amnesty income tax returns' Summary Statement included therein the
deficiency assessment for the years 1955 to 1959;
2. tax amnesty payment was made by the defendants under Presidential Decree No. 213, hence,
it had the effect of remission of the income tax deficiency for the years 1955 to 1959;
3. P.D. No. 23 as well as P.D. No. 213 do not make any exceptions nor impose any conditions for
their application, hence, Revenue Regulation No. 7-73 which excludes certain taxpayers from the
coverage of P.D. No. 213 is null and void, and
4. the acceptance of tax amnesty payment by the plaintiff-appellant bars the recovery of deficiency
taxes. (pp. 3-4, IAC Decision, pp. 031-032, Rollo.)
The Government appealed to the Intermediate Appellant Court (AC G.R. CV No. 68371 entitled, "Republic
of the Philippines vs. Antonio Pastor, et al."), alleging that the private respondents were not qualified to
avail of the tax amnesty under P.D. 213 for the benefits of that decree are available only to persons who
had no pending assessment for unpaid taxes, as provided in Revenue Regulations Nos. 8-72 and 7-73.
Since the Pastors did in fact have a pending assessment against them, they were precluded from availing
of the amnesty granted in P.D.'s Nos. 23 and 213. The Government further argued that "tax exemptions
should be interpreted strictissimi juris against the taxpayer."
The respondent spouses, on the other hand, alleged that P.D. 213 contains no exemptions from its
coverage and that, under Letter of Instruction LOI 129 dated September 18, 1973, the immunities granted
by P.D. 213 include:
II-Immunities Granted.
Upon payment of the amounts specified in the Decree, the following shall be observed:
1. . . . .
2. The taxpayer shall not be subject to any investigation, whether civil, criminal or administrative,
insofar as his declarations in the income tax returns are concerned nor shall the same be used as
evidence against, or to the prejudice of the declarant in any proceeding before any court of law or
body, whether judicial, quasi-judicial or administrative, in which he is a defendant or respondent,
and he shall be exempt from any liability arising from or incident to his failure to file his income tax
return and to pay the tax due thereon, as well as to any liability for any other tax that may be due
as a result of business transactions from which such income, now voluntarily declared may have
been derived. (Emphasis supplied; p. 040, Rollo.)
There is nothing in the LOI which can be construed as authority for the Bureau of Internal Revenue to
introduce exceptions and/or conditions to the coverage of the law.
On November 23, 1984, the Intermediate Appellate Court (now Court of Appeals) rendered a decision
dismissing the Government's appeal and holding that the payment of deficiency income taxes by the
Pastors under PD. No. 213, and the acceptance thereof by the Government, operated to divest the latter
of its right to further recover deficiency income taxes from the private respondents pursuant to the existing
deficiency tax assessment against them. The appellate court held that if Revenue Regulation No. 7-73 did
provide an exception to the coverage of P.D. 213, such provision was null and void for being contrary to,
or restrictive of, the clear mandate of P.D. No. 213 which the regulation should implement. Said revenue
regulation may not prevail over the provisions of the decree, for it would then be an act of administrative
legislation, not mere implementation, by the Bureau of Internal Revenue.
On February 4, 1986, the Republic of the Philippines, through the Solicitor General, filed this petition for
review of the decision dated November 23, 1984 of the Intermediate Appellate Court affirming the
dismissal, by the Court of First Instance of Manila, of the Government's complaint against the respondent
spouses.
The petition is devoid of merit.
Even assuming that the deficiency tax assessment of P17,117.08 against the Pastor spouses were
correct, since the latter have already paid almost the equivalent amount to the Government by way of
amnesty taxes under P.D. No. 213, and were granted not merely an exemption, but an amnesty, for their
past tax failings, the Government is estopped from collecting the difference between the deficiency tax
assessment and the amount already paid by them as amnesty tax.
A tax amnesty, being a general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law,
partakes of an absolute forgiveness or waiver by the Government of its right to collect what
otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax evaders,
who wish to relent and are willing to reform a chance to do so and thereby become a part of the
new society with a clean slate (Commission of Internal Revenue vs. Botelho Corp. and Shipping
Co., Inc., 20 SCRA 487).
The finding of the appellate court that the deficiency income taxes were paid by the Pastors, and accepted
by the Government, under P.D. 213, granting amnesty to persons who are required by law to file income
tax returns but who failed to do so, is entitled to the highest respect and may not be disturbed except
under exceptional circumstances which have already become familiar (Rule 45, Sec. 4, Rules of Court;
e.g., where: (1) the conclusion is a finding grounded entirely on speculation, surmise and conjecture; (2)
the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is
based on misapprehension of facts; (5) the Court of Appeals went beyond the issues of the case and its
findings are contrary to the admissions of both the appellant and the appellee; (6) the findings of fact of
the Court of Appeals are contrary to those of the trial court; (7) said findings of fact are conclusions without
citation of specific evidence in which they are based; (8) the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondents; and (9) when the finding of fact of
the Court of Appeals is premised on the absense of evidence and is contradicted by the evidence on
record (Thelma Fernan vs. CA, et al., 181 SCRA 546, citing Tolentino vs. de Jesus, 56 SCRA 67; People
vs. Traya, 147 SCRA 381), none of which is present in this case.
The rule is that in case of doubt, tax statutes are to be construed strictly against the Government and
liberally in favor of the taxpayer, for taxes, being burdens, are not to be presumed beyond what the
applicable statute (in this case P.D. 213) expressly and clearly declares (Commission of Internal Revenue
vs. La Tondena, Inc. and CTA, 5 SCRA 665, citing Manila Railroad Company vs. Collector of Customs, 52
Phil, 950). WHEREFORE, the petition for review is denied. No costs. SO ORDERED.
People v. Castaeda, 165 SCRA 327 (1988)

PEOPLE OF THE PHILIPPINES, petitioner, vs. HON. MARIANO CASTAEDA JR., Judge of the Court
of First Instance of Pampanga, Branch III, VICENTE LEE TENG, PRISCILLA CASTILLO VDA. DE
CURA and FRANCISCO VALENCIA, respondents. G.R. No. L-46881 September 15, 1988
The Solicitor General for petitioner. Martin N. Roque for respondents Priscilla Castillo Vda. de Cura and
Francisco Valencia. Antonio N. Santos for respondent Judge. FELICIANO, J.:
In this Petition for certiorari and mandamus, the People seek the annulment of the Orders of respondent Judge quashing criminal informations
against the accused upon the grounds that: (a) accused Francisco Valencia was entitled to tax amnesty under Presidential Decree No. 370; and (b)
that the dismissal of the criminal cases against accused Valencia inured to the benefit of his co-accused Vicente Lee Teng and Priscilla Castillo de
Cura, and denying the People's Motion for Reconsideration of said Orders.
Sometime in 1971, two (2) informants submitted sworn information under Republic Act No. 2338 (entitled
"An Act to Provide for Reward to Informers of Violations of the Internal Revenue and Customs Laws,"
effective June 19, 1959) to the Bureau of Internal Revenue ("BIR"), concerning alleged violations of
provisions of the Internal Revenue Code committed by the private respondents, The record of this case
includes an affidavit executed on 27 December 1971 by Mr. William Chan, one of the said informers,
describing the details of alleged violations of the tax code. 1 After conducting an investigation, the BIR
applied for and obtained search warrants from Executive Judge Malcolm Sarmiento. Following
investigation and examination by the BIR of the materials and documents yielded by service of such
search warrants, criminal informations were filed in court against the private respondents.
In July 1973, State Prosecutor Estanislao L. Granados Department of Justice, filed with the Court of First
Instance of Pampanga an information docketed as Criminal Case No. 439 for violation of Sec. 170 (2) of
the National Internal Revenue Code, as amended, against Francisco Valencia, Apolonio G. Erespe y
Comia and Priscilla Castillo de Cura, committed as follows:
That on or about the 19th day of January, 1972, in the premises of Valencia Distillery
located at del Pilar Street, San Fernando, Pampanga, Philippines, and within the
jurisdiction of the abovenamed Court, the accused FRANCISCO VALENCIA, APOLONIO
ERESPE Y COMIA and PRISCILLA QUIAZON OR "QUIAPO" alias "MARY JO,"
conspiring and confederating with one another, did then and there willfully, unlawfully, and
feloniously have in their possession, custody and control, false and counterfeit or fake
internal revenue labels consisting of five (5) sheets containing ten (10) labels each
purporting to be regular labels of the Tanduay Distillery, Inc. bearing Serial Nos. 2571891
to 2571901 to 2571910, 2571911 to 2571920, 05381 to 05390 and 05391 to 05400.
CONTRARY to the provisions of Section 170, paragraph 2 of the National Internal

Revenue Code, as amended. 2
On the same date, another criminal information docketed as Criminal Case No. 440 was filed by the same
State Prosecutor in the same court for violation of Section 174 (3) of the National Internal Revenue Code,
as amended against the same persons, charging them as follows:
That on or about the 19th day of January 1972 in the premises of Valencia Distillery
located at del Pilar Street, San Fernando, Pampanga, Philippines and within the
jurisdiction of this Honorable Court, the accused FRANCISCO VALENCIA, APOLONIO G.
ERESPE y COMIA and PRISCILLA QUIAZON or QUIANO alias MARY JO, conspiring and
confederating together, did then and there wilfully, unlawfully and feloniously, have in their
possession, custody and control, locally manufactured articles subject to specific tax, the
tax on which has not been paid in accordance with law, THIRTY THREE (33) boxes of 24
bottles each of alleged Anejo Rum, 375 cc., NINE (9) BOXES of alleged Tanduay Rum of
TWELVE (12) BOTTLES each, 750 cc., TWENTY (20) BOXES of alleged Ginebra San
Miguel Gin of TWENTY FOUR (24) BOTTLES each, 375 cc., THREE (3) BOXES OF
TWENTY FOUR (24) BOTTLES each, 375 cc., of Ginebra San Miguel Gin, ONE (1)
GALLON bottle of wine improver, NINE lbs. net with actual contents of 1/5 of the bottle,
ONE (1) SMALL BOTTLE, 1 Ib, net, of Rum Jamaica, half-full, ONE (1) BOTTLE, 1 Ib. net
of the wine improvers (full), TWELVE (12) BOTTLES of alleged Tanduay Rum, 750 cc.,
pale, FOUR (4) BOTTLES of Ginebra San Miguel (alleged) 350 cc. and TWO (2)
BOTTLES of Tanduay Rum, 375 cc. the total specific tax due on which is P160.01.
CONTRARY to Section 174 of the National Internal Revenue Code, as amended. 3

As a result of further investigation of the sworn complaints filed by the informers with the BIR, on 14 March
1974, six (6) more criminal informations docketed as Criminal Cases Nos., 538-543 were filed in the
Pampanga Court of First Instance against Vicente Lee Teng alias "Vicente Lee," alias "Lee Teng," and
Francisco Valencia. These informations charged the two (2) with violations of Section 178, in relation to
Sections 182 (A) (1) (3c) and 208 of the National Internal Revenue Code, as amended based on their
failure to pay annual privilege taxes for each of the six (6) years from 1966 to 1972. The six (6)
informations uniformly charged the accused as follows:
The undersigned State Prosecutor accuses VICENTE LEE TENG alias VICENTE LEE
alias LEE TENG, and FRANCISCO VALENCIA of the crime of Violation of Sec. 178 in
relation with Sec. 182 (A) (1) 3c and Sec. 208 of the National Internal Revenue Code as
amended, committed as follows:
That on or about the 19th of January 1972, [also during the years 1967, 1968, 1969, 1970
and 1971] in the premises of Valencia Distillery located at del Pilar Street, San Fernando,
Pampanga, Philippines and within the jurisdiction of this Honorable Court, the above-
named accused, conspiring and confederating together and mutually helping one another,
did then and there willfully, unlawfully and feloniously distill, rectify, repair compound or
manufacture alcoholic products subject to specific tax without having paid the privilege tax
therefor. CONTRARY TO LAW. 4
On 22 April 1974, after arraignment, accused Valencia filed a Motion to Quash Criminal Cases Nos. 538-
543 inclusive, upon the grounds that the six (6) informations had been filed without conducting the
necessary preliminary investigation and that he was entitled to the benefits of the tax amnesty provided by
P.D. No. 370. The State Prosecutor opposed the Motion to Quash arguing that the necessary preliminary
investigation in the six (6) criminal cases had in fact been conducted and that in any case, failure to hold
the preliminary investigation was not a ground for a motion to quash. The State Prosecutor further argued
that the accused Valencia was not entitled to avail himself of the benefits of P.D. No. 370 since his tax
cases were the subject of valid information submitted under R.A. No. 2338 as of 31 December 1973.
The respondent Judge granted the Motion to Quash and issued an Order, dated 15 July 1974, dismissing
not only Criminal Cases Nos. 538-543 but also Criminal Cases Nos. 439 and 440 insofar as accused
Francisco Valencia was concerned. A Motion for Reconsideration by the People was similarly denied by
respondent Judge.
On 14 December 1975, the remaining accused Vicente Lee Teng and Priscilla Castillo de Cura, having
been arraigned, filed Motions to Quash Criminal Cases Nos. 538-543 and 439 and 440, upon the common
ground that the dismissal of said cases insofar as accused Francisco Valencia was concerned, inured to
their benefit. The People opposed the Motions to Quash upon the ground that the accused were not
entitled to the benefits of the tax amnesty under P.D. No. 370 and that, assuming the dismissal of said
criminal cases was valid insofar as accused Valencia was concerned, the resulting immunity from criminal
prosecution was personal to accused Valencia.
The respondent Judge granted the Motions to Quash by Vicente Lee Teng and Priscilla Castillo de Cura,
and denied the People's Motion for Reconsideration.
There are two (2) preliminary issues which need to be addressed before dealing with the questions of
substantive law posed by this case. The first preliminary issue-whether or not the People of the Philippines
are guilty of laches-was raised by private respondents in their Answer. 5 The respondent Judge denied the
People's Motion for Reconsideration of his Order granting Francisco Valencia's Motion to Quash the eight
(8) criminal cases, on 18 November 1974. Vicente Lee Teng and Priscilla Castillo de Cura filed their
respective Motions to Quash on 14 December 1975; respondent Judge granted their Motions to Quash on
31 March 1976. The People filed a Motion for Reconsideration which was denied on 17 February 1977.
Approximately seven (7) months later, on 12 September 1977, the present Petition
for certiorari and mandamus was filed by the People. Initially, the Court resolved to dismiss this Petition in
a Resolution dated 5 July 1978. The People, however, filed a Motion for Reconsideration of that Order and
the Court, in its Resolution of 1 October 1979, set aside its Resolution of dismissal and considered this
case as submitted for decision.
Ordinarily, perhaps, a Petition for certiorari brought seven (7) months after rendition of the last order
sought to be set aside might be regarded as barred by laches. In the case at bar, however, the Court
believes that the equitable principle of laches should not be applied to bar this Petition
for certiorari and Mandamus. The effect of such application would not be the avoidance of an inequitable
situation (the very raison d'etre of the laches principle), but rather the perpetuation of the state of facts
brought about by the orders of the respondent Judge, a state of facts which, as will be seen later, is
marked by a gross disregard of the legal rights of the People. The Court, in other words, is compelled to
take into account both the importance of the substantive issues raised in this case and the nature of the
result brought about by the respondent Judge's orders. Moreover, on a more practical level, the dismissal
of the cases was resisted vigorously by the prosecution which filed both oppositions to the Motion to
Dismiss and Motions for Reconsideration of the Orders granting the Motions to Quash. The private
respondents, in other words, were under no illusion as to the position taken and urged by the People in
this Case. We hold that, in the circumstances of this case, the Petition for certiorari and mandamus is not
barred by laches.
The second preliminary issue was also raised by private respondents in their Answer, that is, whether or
not the defense of double jeopardy became available to them with the dismissal by respondent Judge of
the eight (8) criminal cases. This defense need not detain us for long for it is clearly premature in the
present certiorari proceeding. In the certiorari petition at bar, the validity and legal effect of the orders of
dismissal issued by the respondent Judge of the eight (8) criminal cases are precisely in issue. Should the
Court uphold these dismissal orders as valid and effective and should a second prosecution be brought
against the accused respondents, that second prosecution may be defended against with the plea of
double jeopardy. If, upon the other hand, the Court finds the dismissal orders to be invalid and of no legal
effect, the legal consequence would follow that the first jeopardy commenced by the eight (8) informations
against the accused has not yet been terminated and accordingly a plea of second jeopardy must be
rejected both here and in the continuation of the criminal proceedings against the respondents-accused.
We turn, therefore, to the first substantive issue that needs to be resolved: whether or not the accused
Valencia, Lee Teng and de Cura are entitled to the benefits available under P.D. No. 370.
The scope of application of the tax amnesty declared by P.D. No. 370 is marked out in the following broad
terms:
1. A tax amnesty is hereby granted to any person, natural or juridical, who for any reason
whatsoever failed to avail of Presidential Decree No. 23 and Presidential Decree No. 157;
or, in so availing of the said Presidential Decrees failed to include all that were required to
be declared therein if he now voluntarily discloses under this decree all his previously
untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other
acquisitions from any source whatsoever which are or were previously taxable under the
National Internal Revenue Code, realized here or abroad by condoning all internal revenue
taxes including the increments or penalties on account of non-payment as well as all civil,
criminal or administrative liabilities, under the National Internal Revenue Code, the
Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative
Code, the Civil Service Laws and Regulations, laws and regulations on Immigration and
Deportation, or any other applicable law or proclamation, as it is hereby condoned,
provided a tax of fifteen (15%) per centum on such previously untaxed income and/or
wealth is imposed subject to the following conditions:
a. Such previously untaxed income and/or wealth must have been earned or realized prior
to 1973, except the following:
b. Capital gains transactions where the taxpayer has availed of Presidential Decree No.
16, as amended, but has not complied with the conditions thereof;
c. Tax liabilities with or without assessments, on withholding tax at source provided under
Sections 53 and 54 of the National Internal Revenue Code, as amended;
d. Tax liabilities with assessment notices issued as of December 31, 1 973;
e. Tax cases which are the subject of a valid information under Republic Act No. 2338 as
of December 31, 1973; and
f. Property transferred by reason of death or by donation during the year 1972.
xxx xxx xxx
The first point that should be made in respect of P.D. No. 370 is that compliance with all the requirements
of availment of tax amnesty under P.D. No. 370 would have the effect of condoning not just income tax
liabilities but also "all internal revenue taxes including the increments or penalties on account of non-
payment as well as all civil, criminal or administrative liabilities, under the Internal Revenue Code, the
Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the Civil
Service Laws and Regulations, laws and regulations on Immigration and Deportation, or any other
applicable law or proclamation." Thus, entitlement to benefits of P.D. No. 370 would have the effect of
condoning or extinguishing the liabilities consequent upon possession of false and counterfeit internal
revenue labels; the manufacture of alcoholic products subject to specific tax without having paid the
annual privilege tax therefor, and the possession, custody and control of locally manufactured articles
subject to specific tax on which the taxes had not been paid in accordance with law, in other words, the
criminal liabilities sought to be imposed upon the accused respondents by the several informations quoted
above.
It should be underscored, secondly, that to be entitled to the extinction of liability provided by P.D. No.
370, the claimant must have voluntarily disclosed his previously untaxed income or wealth and paid the
required fifteen percent (15%) tax on such previously untaxed income or wealth imposed by P.D.
No.370.6 Where the disclosure of such previously untaxed income or wealth was not voluntary but rather
the accompaniment or result of tax cases or tax assessments already pending as of 31 December 1973,
the claimant is not entitled to the benefits of P.D. No. 370. Section 1 (a) (4) of P.D. No. 370, expressly
excluded from the coverage of P.D. No. 370: "tax cases which are the subject of a valid information under
R.A. No. 2338 as of December 31, 1973." 7 In the instant case, the violations of the National Internal
Revenue Code with which the respondent accused were charged, had already been discovered by the
BIR when P.D. No. 370 took effect on 9 January 1974, by reason of the sworn information or affidavit-
complaints filed by informers with the BIR under Republic Act No. 2338 prior to 31 December 1973.
It is necessary to note that the "valid information under Republic Act No. 2338" referred to in Section 1 (a)
(4) of P.D. No. 370, refers not to a criminal information filed in court by a fiscal or special prosecutor, but
rather to the sworn information or complaint filed by an informer with the BIR under R.A. No. 2338 in the
hope of earning an informer's reward. The sworn information or complaint filed with the BIR under R.A.
No. 2338 may be considered "valid" where the following conditions are complied with:
(1) that the information was submitted by a person other than an internal revenue or
customs official or employee or other public official, or a relative of such official or
employee within the sixth degree of consanguinity;
(2) that the information must be definite and sworn to and must state the facts constituting
the grounds for such information; and
(3) that such information was not yet in the possession of the BIR or the Bureau of
Customs and does not refer to "a case already pending or previously investigated or
examined by the Commissioner of Internal Revenue or the Commissioner of Customs, or
any of their deputies, agents or examiners, as the case may be, or the Secretary of
Finance or any of his deputies or agents.8
In the instant case, not one but two (2) "informations' or affidavit-complaints concerning private
respondents' operations said to be in violation of certain provisions of the National Internal Revenue Code,
had been filed with the BIR as of 31 December 1973. In fact, those two (2) affidavit-complaints had
matured into two (2) criminal informations in court -Criminal Cases Nos. 439 and 440 against the
respondent accused, by 31 December 1973. The six (6) informations docketed as Criminal Cases Nos.
538-543, while filed in court only on 14 March 1974, had been based upon the sworn information
previously submitted as of 31 December 1973 to the BIR.
It follows that, even assuming respondent accused Francisco Valencia was otherwise entitled to the
benefits of P.D. No. 370, none of the informations filed against him could have been condoned under the
express provisions of the tax amnesty statute.
Accused Valencia argued that the People were estopped from questioning his entitlement to the benefits
of the tax amnesty, considering that agents of the BIR had already accepted his application for tax
amnesty and his payment of the required fifteen percent (15%) special tax.
This contention does not persuade. At the time he paid the special fifteen percent (15%) tax under P.D.
No. 370, accused Francisco Valencia had in fact already been subjected by the BIR to extensive
investigation such that the criminal charges against him could not be condoned under the provisions of the
amnesty statute. Further, acceptance by the BIR agents of accused Valencia's application for tax amnesty
and payment of the fifteen percent (15%) special tax was no more than a ministerial duty on the part of
such agents. Accused Valencia does not pretend that the BIR had actually ruled that he was entitled to the
benefits of the tax amnesty statute. In any case, even assuming, though only arguendo, that the BIR had
so ruled, there is the long familiar rule that "erroneous application and enforcement of the law by public
officers do not block, subsequent correct application of the statute and that the government is never
estopped by mistake or error on the part of its agent." 9 which finds application in the case at bar. Still
further, a tax amnesty, much like to a tax exemption, is never favored nor presumed in law and if granted
by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.10 Valencia's payment of the special fifteen percent
(15%) tax must be regarded as legally ineffective.
We turn to the second substantive issue which is whether or not the dismissal by the respondent court of
the criminal informations against accused Valencia, inured to the benefit of Valencia's co-accused.
Because of the conclusion reached above, that is, that accused Francisco Valencia was not legally
entitled to the benefits of P.D. No. 370 and that the dismissal of the criminal information as against him
was serious error on the part of the respondent Judge, it may not be strictly necessary to deal with this
second issue. There was in fact nothing that could have inured to the benefit of Valencia's co-accused. It
seems appropriate to stress, nonetheless, that co-accused and co-respondents Lee Teng and Priscilla
Castillo de Cura, in order to enjoy the benefits of the tax amnesty statute here involved, must show that
they have individually complied with and come within the terms of that statute. 11 The fact that conspiracy
had been alleged in each of the criminal informations here involved certainly could not result in an
automatic exemption of Lee Teng and Priscilla Castillo de Cura from compliance with the requirements of
the tax amnesty statute. In the second place, assuming, for present purposes only, that accused
Francisco Valencia was (and he was not) legally entitled to the benefits of P.D. No. 370 the defense of
amnesty which (hypothetically) became available to Valencia was personal to him. Once more, the
allegation of conspiracy made in the several criminal informations here involved, did not have the effect of
making a defense available to one co-conspirator automatically available to the other co-conspirators. The
defense of the tax amnesty under P.D. No. 370 is, like insanity, a personal defense; for that defense
relates to the circumstances of a particular accused and not to the character of the acts charged in the
criminal information. The statute makes the defense of extinguishment of liability available only under very
specific circumstances and on the basis of reciprocity, as it were: the claimant must disclose his previously
untaxed income or wealth (which then may be effectively subjected to future taxation) and surrender to the
Government fifteen percent (15%) of such income or wealth; then, and only then, would the claimant's
liability be extinguished. Lee Teng and Pricilla Castillo de Cura never pretended that they had complied
with the requirements of PD No. 370, including that of reciprocity.
We conclude that the respondent Judge's error in respect of the first and second substantive issues
considered above is so gross and palpable as to amount to arbitrary and capricious action and to grave
abuse of discretion. Those orders effectively prevented the People from prosecuting and presenting
evidence against the accused-respondents; they denied the People its day in court. It is well-settled that:
[a] purely capricious dismissal of an information as herein involved, moreover, deprives the
State of fair opportunity to prosecute and convict. It denies the prosecution its day in court.
Accordingly, it is a dismissal without due process and, therefore, null and void. A dismissal
invalid for lack of a fundamental requisite, such as due process, will not constitute a proper
basis for the claim of double jeopardy. 12
WHEREFORE, the Orders of respondent Judge dated 15 July 1974, 18 November 1974, 31 March 1976 and 17
February 1977 are hereby SET ASIDE. Respondent Judge no longer being with the Judiciary, the branch of the Regional Trial Court of Pampanga
seized of Criminal Cases Nos. 439 and 440, and 538-543 inclusive, against the surviving respondent accused, 13 is hereby ORDERED to proceed
with the trial of these criminal cases. Costs against private respondents. SO ORDERED.
Pascual v. Com., 166 SCRA 560 (1988)

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs. THE COMMISSIONER OF
INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. G.R. No. 78133 October 18, 1988
De la Cuesta, De las Alas and Callanta Law Offices for petitioners. The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or

joint venture for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May
28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land
were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were
sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit
in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in
the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974
by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners
were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income
taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of
tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and
1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint
venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed
under Section 24, both of the National Internal Revenue Code 1 that the unregistered partnership was
subject to corporate income tax as distinguished from profits derived from the partnership by them which
is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended,
by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the
tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency
income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No.
3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in
fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that
imposed on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the petitioners, there
was no adequate basis for the conclusion that they thereby formed an unregistered partnership which
made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the
respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN
UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND
THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS
UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE

AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp.
12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage their
properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or
leased to various tenants for several years and they gained net profits from the rental income. Thus, the
Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from
them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on corporations
provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National
Internal Revenue Code, as well as to the residence tax for corporations and the real estate
dealers' fixed tax. With respect to the tax on corporations, the issue hinges on the meaning
of the terms corporation and partnership as used in sections 24 and 84 of said Code, the
pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.There shall be levied, assessed, collected, and
paid annually upon the total net income received in the preceding taxable year from all
sources by every corporation organized in, or existing under the laws of the Philippines, no
matter how created or organized but not including duly registered general co-partnerships
(companies collectives), a tax upon such income equal to the sum of the following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participation), associations or
insurance companies, but does not include duly registered general co-partnerships
(companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element is undoubtedly present in
the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to their intent in acting as they
did. Upon consideration of all the facts and circumstances surrounding the case, we are
fully satisfied that their purpose was to engage in real estate transactions for monetary
gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a
property inherited by them pro indiviso. They created it purposely. What is more they
jointly borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions.
On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased
21 lots for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of
another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth
lot for P237,234.14. The number of lots (24) acquired and transcations undertaken, as well
as the brief interregnum between each, particularly the last three purchases, is strongly
indicative of a pattern or common design that was not limited to the conservation and
preservation of the aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but perceive a character of
habituality peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from
1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the
lots are still being so let, for petitioners do not even suggest that there has been any
change in the utilization thereof.
4. Since August, 1945, the properties have been under the management of one person,
namely, Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been handled as if the same
belonged to a corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute
a partnership, the collective effect of these circumstances is such as to leave no room for
doubt on the existence of said intent in petitioners herein. Only one or two of the
aforementioned circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24)
lots showing that the purpose was not limited to the conservation or preservation of the common fund or
even the properties acquired by them. The character of habituality peculiar to business transactions
engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make
any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was
only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new
purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The
character of habituality peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:
I wish however to make the following observation Article 1769 of the new Civil Code lays
down the rule for determining when a transaction should be deemed a partnership or a co-
ownership. Said article paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not itself establish a partnership, whether such
co-owners or co-possessors do or do not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in any property from
which the returns are derived;
From the above it appears that the fact that those who agree to form a co- ownership
share or do not share any profits made by the use of the property held in common does
not convert their venture into a partnership. Or the sharing of the gross returns does not of
itself establish a partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. This only means that, aside from the
circumstance of profit, the presence of other elements constituting partnership is
necessary, such as the clear intent to form a partnership, the existence of a juridical
personality different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons contribute funds to
buy certain real estate for profit in the absence of other circumstances showing a contrary
intention cannot be considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the
gross returns of that enterprise in proportion to their contribution, but who severally retain
the title to their respective contribution, are not thereby rendered partners. They have no
common stock or capital, and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the Law of Partnership by Flord
D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in respect thereto;
nor does an agreement to share the profits and losses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12
Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the profits of disposing of it, the brother
and the other not being entitled to share in plaintiffs commission, no partnership existed as
between the three parties, whatever their relation may have been as to third parties.
(Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the
same; (b) generally participating in both profits and losses; (c) and such a community of
interest, as far as third persons are concerned as enables each party to make contract,
manage the business, and dispose of the whole property.-Municipal Paving Co. vs.
Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership between the
owners, though they may use it for the purpose of making gains; and they may, without
becoming partners, agree among themselves as to the management, and use of such
property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W.
363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. There must be a clear intent to form a partnership,
the existence of a juridical personality different from the individual partners, and the freedom of each party
to transfer or assign the whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on
their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby liable for corporate income tax,
as the respondent commissioner proposes.
And even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor with assets
that can be held liable for said deficiency corporate income tax, then petitioners can be held individually
liable as partners for this unpaid obligation of the partnership p. 7 However, as petitioners have availed of
the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby relieved of any
further tax liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals
of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered
relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.
SO ORDERED.
Com. v. Marubeni, G.R. No. 137377, December 18, 2001
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.
G.R. No. 137377 December 18, 2001
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15,
1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of
the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal
Revenue to desist from collecting the 1985 deficiency income, branch profit remittance and contractor's
taxes from Marubeni Corporation after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business. It is
duly registered to engage in such business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to
examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year
ending March 1985. In the course of the examination, petitioner found respondent to have undeclared
income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the
contracts was with the National Development Company (NDC) in connection with the construction and
installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation
(Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development
Estate.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income,
branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this
assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive
of surcharge and interest, were as follows:
I. DEFICIENCY INCOME TAX

FY ended March 31, 1985
Undeclared gross income (Philphos and
NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
Undeclared gross income from Philphos
and NDC construction projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
III. DEFICIENCY CONTRACTOR'S TAX
Undeclared gross receipts/gross income
from Philphos and NDC construction
projects P967,269,811.14
Contractor's tax due thereon (4%) 38,690,792.00
Add: 50% surcharge for non-declaration 19,345,396.00
20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
Add: 50% surcharge for non-declaration 814,284.50
20% surcharge for late payment 407,142.25
Sub-total 2,849,995.75
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 751,539.98
The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid taxable
revenues while the 25% surcharge was imposed because of your client's failure to pay on time the above
deficiency percentage taxes.
xxx xxx xxx"1
Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that the gross
income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and
since the projects called for the construction and installation of facilities in the Philippines, the entire
income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes.
The assessment letter further stated that the same was petitioner's final decision and that if respondent
disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty (30) days from
receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The
first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and
contractor's tax assessments in petitioner's assessment letter. The second, CTA Case No. 4110,
questioned the deficiency commercial broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty covering unpaid
income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of
the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his
net worth as of December 31, 1985; (b) file a certified true copy of his statement declaring his net worth as
of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record exists, file
a statement of said net worth subject to verification by the BIR; and (c) file a return and pay a tax
equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980 to December 31,
1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30,
1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal Year
(FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and respondent paid
the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and
1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986
by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.)
No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No.
64 3 included estate and donor's taxes under Title III and the tax on business under Chapter II, Title V of
the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided
that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the
period within which the taxpayer could avail of the amnesty was extended to December 15, 1986. Those
taxpayers who already filed their amnesty return under E.O. No. 41, as amended, could avail themselves
of the benefits, immunities and privileges under the new E.O. by filing an amended return and paying an
additional 5% on the increase in net worth to cover business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No.
64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase
of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed
cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to

DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the same
are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper availment
by petitioner of the amnesty under Executive Order No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of
Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court of
Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax
Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of
E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income tax, branch profit
remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41
and 64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties
because the latter falls under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:
"Sec. 4. Exceptions. The following taxpayers may not avail themselves of the amnesty herein
granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as of
the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National Internal
Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as
amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case
No. 4109 had already been filed and was pending; before the Court of Tax Appeals. Respondent therefore
fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It
excepts from income tax amnesty those taxpayers "with income tax cases already filed in court as of the
effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing of income tax
cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a
taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in
court against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income
tax amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income,
branch profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax
Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No.
4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in
Section 4 (b), hence, respondent was not disqualified from availing of the amnesty for income tax under
E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit
remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal
Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a tax on income.
Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and respondent's availment of the
amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate and
donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax Code while
business taxes fall under Chapter II, Title V of the same. The contractor's tax is provided in Section 205,
Chapter II, Title V of the Tax Code; it is defined and imposed under the title on business taxes, and is
therefore a tax on business.7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of
the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with
the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to
amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision
excepts from tax amnesty coverage a taxpayer who has "income tax cases already filed in court as of the
effectivity hereof." As to what Executive Order the exception refers to, respondent argues that because of
the words "income" and "hereof," they refer to Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O.
No. 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively.9 While
an amendment is generally construed as becoming a part of the original act as if it had always been
contained therein,10 it may not be given a retroactive effect unless it is so provided expressly or by
necessary implication and no vested right or obligations of contract are thereby impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41,
the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not
merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not
covered in the first.12 It has been held that where a statute amending a tax law is silent as to whether it
operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past
transactions not subject to tax under the original act.13 In an amendatory act, every case of doubt must be
resolved against its retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start
with a clean slate.16 A tax amnesty, much like a tax exemption, is never favored nor presumed in law.17 If
granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.18For the right of taxation is inherent in government.
The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an
exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic
or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the
legislature, that doubt must be resolved in favor of the state.19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be
construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate
and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order
No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are
concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent
filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the
exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax
amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty under the two
Executive Orders, it is still not liable for the deficiency contractor's tax because the income from the
projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two parts,
i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the
"Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and are therefore
not subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of the two contracts,
examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment
arm of the Philippine Government, established the Philphos to engage in the large-scale manufacture of
phosphatic fertilizer for the local and foreign markets.20 The Philphos plant complex which was envisioned
to be the largest phosphatic fertilizer operation in Asia, and among the largest in the world, covered an
area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient
and integrated wharf/port complex at the Leyte Industrial Development Estate. The wharf/port complex
was intended to be one of the major facilities for the industrial plants at the Leyte Industrial Development
Estate. It was to be specifically adapted to the site for the handling of phosphate rock, bagged or bulk
fertilizer products, liquid materials and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar),21and other industrial plants within the Estate. The bidding was participated
in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corporation."22 The Port Development Project would
consist of a wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel oil
depot, utilities systems, storage and service buildings, offsite facilities, harbor service vessels, navigational
aid system, fire-fighting system, area lighting, mobile equipment, spare parts and other related
facilities.23 The scope of the works under the contract covered turn-key supply, which included grants of
licenses and the transfer of technology and know-how,24 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Wharf-Port Complex as set
forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule
of the use of a part or the whole of the Wharf/Port Complex through the Owner, with the design
and construction of other facilities around the site. The scope of works shall also include any
activity, work and supply necessary for, incidental to or appropriate under present international
industrial port practice, for the timely and successful implementation of the object of this Contract,
whether or not expressly referred to in the abovementioned Annex I."25
The contract price for the wharf/port complex was 12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen Portion
I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as the Philippine
Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan
provided by the Overseas Economic Cooperation Fund (OECF); and (b) by supplier's credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of
Japan extended by the Japanese government as assistance to foreign governments to promote economic
development.26 The OECF extended to the Philippine Government a loan of 7,560,000,000.00 for the
Leyte Industrial Estate Port Development Project and authorized the NDC to implement the same.27 The
other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from the
Export-Import Bank of Japan to advance payment to its sub-contractors.28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were
further broken down and subdivided according to the materials, equipment and services rendered on the
project. The price breakdown and the corresponding materials, equipment and services were contained in
a list attached as Annex III to the contract.29
A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent
corporation entered into an agreement entitled "Turn-Key Contract for Ammonia Storage Complex
Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation."30 The object of the
contract was to establish and place in operating condition a modern, reliable, efficient and integrated
ammonia storage complex adapted to the site for the receipt and storage of liquid anhydrous
ammonia31 and for the delivery of ammonia to an integrated fertilizer plant adjacent to the storage complex
and to vessels at the dock.32 The storage complex was to consist of ammonia storage tanks, refrigeration
system, ship unloading system, transfer pumps, ammonia heating system, fire-fighting system, area
lighting, spare parts, and other related facilities.33 The scope of the works required for the completion of
the ammonia storage complex covered the supply, including grants of licenses and transfer of technology
and know-how,34 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Ammonia Storage Complex
as set forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and
schedule of the use of a part or the whole of the Ammonia Storage Complex through the Owner
with the design and construction of other facilities at and around the Site. The scope of works shall
also include any activity, work and supply necessary for, incidental to or appropriate under present
international industrial practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I."35
The contract price for the project was 3,255,751,000.00 and P17,406,000.00. Like the NDC contract, the
price was divided into three portions. The price in Japanese currency was broken down into the Japanese
Yen Portion I and Japanese Yen Portion II while the price in Philippine currency was classified as the
Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by supplier's credit from the
Export-Import Bank of Japan. The price stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the project and their individual prices. Like
the NDC contract, the breakdown in the Philphos contract is contained in a list attached to the latter as
Annex III.36
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the
two contracts corresponds to the two parts into which the contracts were classified the Foreign
Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I
corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the Philippine Pesos Portion
correspond to the Philippine Onshore Portion.38
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax on the
income from the two projects. In fact respondent claims, which petitioner has not denied, that the income it
derived from the Onshore Portion of the two projects had been declared for tax purposes and the taxes
thereon already paid to the Philippine government.39 It is with regard to the gross receipts from the Foreign
Offshore Portion of the two contracts that the liabilities involved in the assessments subject of this case
arose. Petitioner argues that since the two agreements are turn-key,40 they call for the supply of both
materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of
the two projects is in the Philippines, and the materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines.41 Accordingly, respondent's entire receipts
from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine
sources. The total gross receipts covering both labor and materials should be subjected to contractor's tax
in accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment & Supply
Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
four percent of the gross receipts is hereby imposed on proprietors or operators of the following
business establishments and/or persons engaged in the business of selling or rendering the
following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in Republic
Act No. 4566;
xxx xxx xxx
(q) Other independent contractors. The term "independent contractors" includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under the Local Tax Code) whose activity consists essentially of the sale of
all kinds of services for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. It does not include regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives, and which headquarters do
not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
xxx xxx xxx43
Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. The word "contractor" refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his own means and methods
without submitting himself to control as to the petty details.44
A contractor's tax is a tax imposed upon the privilege of engaging in business.45 It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products;46 and is directly collectible from the person exercising the privilege.47 Being an excise tax, it can
be levied by the taxing authority only when the acts, privileges or business are done or performed within
the jurisdiction of said authority.48 Like property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.49
In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the
two subject contracts. Respondent, however, argues that the work therein were not all performed in the
Philippines because some of them were completed in Japan in accordance with the provisions of the
contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be made and
the works and services to be performed by respondent are indeed classified into two. The first part,
entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions
of materials and equipment which will be shipped to Leyte as units and lots. This subdivision of
price is to be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the
Contract. The agreed subdivision of Japanese Yen Portion I is as follows:
xxx xxx xxx50
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II
and the Philippine Pesos Portion enumerate other materials and equipment and the construction and
installation work on the project. In other words, the supplies for the project are listed under Portion I while
labor and other supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo,
then General Manager of the Industrial Plant Section II of the Industrial Plant Department of Marubeni
Corporation in Japan who supervised the implementation of the two projects, testified that all the
machines and equipment listed under Japanese Yen Portion I in Annex III were manufactured in
Japan.51 The machines and equipment were designed, engineered and fabricated by Japanese firms sub-
contracted by Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel
Corporation which did the design, fabrication, engineering and manufacture thereof;53 Yashima & Co. Ltd.
which manufactured the mobile equipment; Bridgestone which provided the rubber fenders of the mobile
equipment;54 and B.S. Japan for the supply of radio equipment.55 The engineering and design works made
by Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of the design in
accordance with the specifications given by respondent.56 All sub-contractors and manufacturers are
Japanese corporations and are based in Japan and all engineering and design works were performed in
that country.57
The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2) sets
of ship unloader and loader; several boats and mobile equipment.58 The ship unloader unloads bags or
bulk products from the ship to the port while the ship loader loads products from the port to the ship. The
unloader and loader are big steel structures on top of each is a large crane and a compartment for
operation of the crane. Two sets of these equipment were completely manufactured in Japan according to
the specifications of the project. After manufacture, they were rolled on to a barge and transported to
Isabel, Leyte.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to the
pier to the spot where they were installed.60 Their installation simply consisted of bolting them onto the
pier.61
Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in
Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four
sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and completed in Japan.
They were loaded on to a shipping vessel and unloaded at the Isabel Port. These pieces of equipment
were all on wheels and self-propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.62
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC
contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a
causeway, a warehouse, a transit shed, an administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams and other steel structures, navigational
and communication as well as electrical equipment.63
In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the
ammonia storage tanks and refrigeration units.64 The steel plates for the tank were manufactured and cut
in Japan according to drawings and specifications and then shipped to Isabel. Once there, respondent's
employees put the steel plates together to form the storage tank. As to the refrigeration units, they were
completed and assembled in Japan and thereafter shipped to Isabel. The units were simply installed
there. 65 Annex III to the Philphos contract lists down under the Japanese Yen Portion I the materials for
the ammonia storage tank, incidental equipment, piping facilities, electrical and instrumental apparatus,
foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the contracts.66 The inspection was made by representatives of
respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services of a private
consultancy firm to verify the correctness of the tests on the machines and equipment67 while Philphos
sent a representative to Japan to inspect the storage equipment.68
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant
General Manager and Manager of the Steel Plant Marketing Department, Engineering & Construction
Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the two projects
provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such
payments were duly issued by Kawasaki in Japanese and English.69 Yashima & Co. Ltd. and B.S. Japan
were likewise paid by Marubeni in Japan.70
Between Marubeni and the two Philippine corporations, payments for all materials and equipment under
Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through
the Philippine National Bank, established letters of credit in favor of respondent through the Bank of
Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with the Bank of
Tokyo. The Bank of Tokyo, upon respondent's submission of pertinent documents, released the amount in
the letters of credit in favor of respondent and credited the amount therein to respondent's account within
the same bank.71
Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . "72 of the two
projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the
Philippines. While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed and engineered
in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project
and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were
already finished products when shipped to the Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus,
these were not finished products when shipped to the Philippines. They, however, were likewise fabricated
and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and
are therefore not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering Equipment &
Supply Co73 is not in point. In that case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed centralized air-conditioning systems for clients
who contracted its services. Engineering, however, did not manufacture all the materials for the air-
conditioning system. It imported some items for the system it designed and installed.74 The issues in that
case dealt with services performed within the local taxing jurisdiction. There was no foreign element
involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties. IN VIEW
WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed. SO ORDERED.
Tax exemption and exclusion

General rule
Commissioner v. CA, G.R. No. 115349, April 18, 1997 *
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural values thru its Institute of
Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor
and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a
three percent contractor's tax? This question is answer by the Court in the negative as it resolves this
petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely
undisputed by the parties.
Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine
Culture (IPC), which has no legal personality separate and distinct from that of private
respondent. The IPC is a Philippine unit engaged in social science studies of Philippine
society and culture. Occasionally, it accepts sponsorships for its research activities from
international organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner Commissioner of Internal

Revenue a demand letter dated June 3, 1983, assessing private respondent the sum of
P174,043.97 for alleged deficiency contractor's tax, and an assessment dated June 27,
1983 in the sum of P1,141,837 for alleged deficiency income tax, both for the fiscal year
ended March 31, 1978. Denying said tax liabilities, private respondent sent petitioner a
letter-protest and subsequently filed with the latter a memorandum contesting the validity
of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for
deficiency income tax but modifying the assessment for deficiency contractor's tax by
increasing the amount due to P193,475.55. Unsatisfied, private respondent requested for
a reconsideration or reinvestigation of the modified assessment. At the same time, it filed
in the respondent court a petition for review of the said letter-decision of the petitioner.
While the petition was pending before the respondent court, petitioner issued a final
decision dated August 3, 1988 reducing the assessment for deficiency contractor's tax
from P193,475.55 to P46,516.41, exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned decision which
dispositively reads:
WHEREFORE, in view of the foregoing, respondent's decision is SET

ASIDE. The deficiency contractor's tax assessment in the amount of
P46,516.41 exclusive of surcharge and interest for the fiscal year ended
March 31, 1978 is hereby CANCELED. No pronouncement as to cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this Court via the present petition for
review raising the following issues:
1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE

PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION
205 OF THE TAX CODE; and
2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%

CONTRACTOR'S TAX UNDER SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's

tax of three per centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors except persons,

associations and corporations under contract for embroidery and apparel
for export, as well as their agents and contractors and except gross
receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural)

not enumerated above (but not including individuals subject to the
occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their
employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in holding that private respondent is
not an "independent contractor" within the purview of Section 205 of the Tax Code. To
petitioner, the term "independent contractor", as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are the following:
a. Persons, association and corporations under contract for embroidery and apparel for
export and gross receipts of or from pioneer industry registered with the Board of
Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by multinational

corporations, including their alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region
(Section 205 of the Tax Code).
Petitioner thus submits that since private respondent falls under the definition of an
"independent contractor" and is not among the aforementioned exceptions, private
respondent is therefore subject to the 3% contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the
assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through
this petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code.
2) Whether or not private respondent is subject to 3% contractor's tax under Section 205 of
the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or
branch the Institute of Philippine Culture performing the work of an independent contractor and,
thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal
Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:
Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's

tax of three per centum of the gross receipts is hereby imposed on the following:
xxx xxx xxx
(16) Business agents and other independent contractors, except persons, associations
and corporations under contract for embroidery and apparel for export, as well as their
agents and contractors, and except gross receipts of or from a pioneer industry registered
with the Board of Investments under the provisions of Republic Act No. 5186;
xxx xxx xxx
The term "independent contractors" include persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a
fee regardless of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their employees.
The term "independent contractor" shall not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region.
The term "gross receipts" means all amounts received by the prime or principal contractor
as the total contract price, undiminished by amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the subcontractor.
Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
University "falls within the definition" of an independent contractor and "is not one of those mentioned as
excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing
provision of law. 6 Petitioner states that the "term 'independent contractor' is not specifically defined so as
to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for
a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According
to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It
is obviously both illogical and impractical to determine who are exempted without first determining who are
covered by the aforesaid provision. The Commissioner should have determined first if private respondent
was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other
burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this
occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the
question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens
are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its services. Hence, to impose the three
percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the
private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is
only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the
question of exemption therefrom would arise. Only after such coverage is shown does the rule of
construction that tax exemptions are to be strictly construed against the taxpayer come into play,
contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its
decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture
ever sold its services for a fee to anyone or was ever engaged in a business apart from and independently
of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner
Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting researches
for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter
entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of
a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the
various contracts entered into between private respondent and its clients are almost of the same terms,
showing, among others, the compensation and terms of payment." 11(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that
Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court
of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established factual
milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed,
contracts for sale of services were ever entered into by the private respondent. As appropriately pointed
out by the latter:
An examination of the Commissioner's Written Formal Offer of Evidence in the Court of

Tax Appeals shows that only the following documentary evidence was presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field Audit Report
3 Adjustments to Sales/Receipts
4 Letter-decision of BIR Commissioner Bienvenido A. Tan
Jr.
None of the foregoing evidence even comes close to purport to be contracts between
private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the
Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which
are tax-exempt" as shown by private respondent's compliance with the requirement of Section 123 of the
National Internal Revenue Code providing for the exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
To our mind, private respondent hardly fits into the definition of an "independent
contractor".
For one, the established facts show that IPC, as a unit of the private respondent, is not
engaged in business. Undisputedly, private respondent is mandated by law to undertake
research activities to maintain its university status. In fact, the research activities being
carried out by the IPC is focused not on business or profit but on social sciences studies of
Philippine society and culture. Since it can only finance a limited number of IPC's research
projects, private respondent occasionally accepts sponsorship for unfunded IPC research
projects from international organizations, private foundations and governmental
agencies. However, such sponsorships are subject to private respondent's terms and
conditions, among which are, that the research is confined to topics consistent with the
private respondent's academic agenda; that no proprietary or commercial purpose
research is done; and that private respondent retains not only the absolute right to publish
but also the ownership of the results of the research conducted by the IPC. Quite clearly,
the aforementioned terms and conditions belie the allegation that private respondent is a
contractor or is engaged in business.
For another, it bears stressing that private respondent is a non-stock, non-profit

educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects
is merely incidental. For, the main function of the IPC is to undertake research projects
under the academic agenda of the private respondent. Moreover the records do not show
that in accepting sponsorship of research work, IPC realized profits from such work. On
the contrary, the evidence shows that for about 30 years, IPC had continuously operated
at a loss, which means that sponsored funds are less than actual expenses for its research
projects. That IPC has been operating at a loss loudly bespeaks of the fact that education
and not profit is the motive for undertaking the research projects.
Then, too, granting arguendo that IPC made profits from the sponsored research projects,
the fact still remains that there is no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none was so distributed because
they accrued to the benefit of the private respondent which is a non-profit educational
institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the
concept of a fee or price in exchange for the performance of a service or delivery of an object. Rather, the
amounts are in the nature of an endowment or donation given by IPC's benefactors solely for the purpose
of sponsoring or funding the research with no strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done,
and IPC retains the ownership of the results of the research, including the absolute right to publish the
same. The copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without its permission. 15 The amounts
given to IPC, therefore, may not be deemed, it bears stressing as fees or gross receipts that can be
subjected to the three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot
be deemed either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the
contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and
the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a contract of sale
requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to
transfer ownership as an essential element of the contract of sale, following modern codes, such as the
German and the Swiss. Even in the absence of this express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of
ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery
of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of
title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the
case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the
work from materials furnished by him, he shall deliver the thing produced to the employer and transfer
dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work,
a transfer of ownership is involved and a party necessarily walks away with an object. 19 In the case at
bench, it is clear from the evidence on record that there was no sale either of objects or services because,
as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance
of maintaining Ateneo's university status and not in the course of an independent business of selling such
research with profit in mind. This is clear from a reading of the regulations governing universities:
31. In addition to the legal requisites an institution must meet, among others, the following
requirements before an application for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research and operate with a competent qualified staff at
least three graduate departments in accordance with the rules and standards for graduate
education. One of the departments shall be science and technology. The competence of
the staff shall be judged by their effective teaching, scholarly publications and research
activities published in its school journal as well as their leadership activities in the
profession.
(f) The institution must show evidence of adequate and stable financial resources and
support, a reasonable portion of which should be devoted to institutional development and
research. (emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due notice and hearing, for failure to
maintain satisfactorily the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is
patently erroneous because the former is not an independent juridical entity that is separate and distinct
form the latter.
Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals
Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for
the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the
issue of whether" 21 Ateneo de Manila University may be deemed a subject of the three percent
contractor's tax "through the evidence presented before it." Consequently, "as a matter of principle, this
Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been an abuse or improvident
exercise of authority . . ." 22 This point becomes more evident in the case before us where the findings and
conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the
former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit
of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In
fact, it was Ateneo de Manila University itself that had funded the research projects of the institute, and it
was only when Ateneo could no longer produce the needed funds that the institute sought funding from
outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides
significant insight on the academic and nonprofit nature of the institute's research activities done in
furtherance of the university's purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute of
Philippine Culture) that as far as grants from sponsored research it is possible that the
grant sometimes is less than the actual cost. Will you please tell us in this case when the
actual cost is a lot less than the grant who shoulders the additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university, because a university has

to have its own research institute. 24
So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine
Culture when it undisputedly loses not an insignificant amount in the process? The plain and simple
answer is that private respondent is not a contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its commitments to education and, ultimately, to public
service. For the institute to have tenaciously continued operating for so long despite its accumulation of
significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that
"education and not profit is [IPC's] motive for undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of
Appeals is hereby AFFIRMED in full.
SO ORDERED.
Misamis Oriental Asso. v. Dept. of Finance, 238 SCRA 63 (1994) *

G.R. No. 108524 November 10, 1994
MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., petitioner,

vs.
DEPARTMENT OF FINANCE SECRETARY, COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE (BIR), AND REVENUE DISTRICT OFFICER, BIR MISAMIS ORIENTAL, respondents.
Damasing Law Office for petitioner.
MENDOZA, J.:
This is a petition for prohibition and injunction seeking to nullify Revenue Memorandum Circular No. 47-91
and enjoin the collection by respondent revenue officials of the Value Added Tax (VAT) on the sale of
copra by members of petitioner organization. 1
Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domestic corporation whose members,
individually or collectively, are engaged in the buying and selling of copra in Misamis Oriental. The
petitioner alleges that prior to the issuance of Revenue Memorandum Circular 47-91 on June 11, 1991,
which implemented VAT Ruling 190-90, copra was classified as agricultural food product under $ 103(b)
of the National Internal Revenue Code and, therefore, exempt from VAT at all stages of production or
distribution.
Respondents represent departments of the executive branch of government charged with the generation
of funds and the assessment, levy and collection of taxes and other imposts.
The pertinent provision of the NIRC states:
Sec. 103. Exempt Transactions. The following shall be exempt from the value-added
tax:
(a) Sale of nonfood agricultural, marine and forest products in their original state by the
primary producer or the owner of the land where the same are produced;
(b) Sale or importation in their original state of agricultural and marine food products,
livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption, and breeding stock and genetic material therefor;
Under 103(a), as above quoted, the sale of agricultural non-food products in their original state is exempt
from VAT only if the sale is made by the primary producer or owner of the land from which the same are
produced. The sale made by any other person or entity, like a trader or dealer, is not exempt from the tax.
On the other hand, under 103(b) the sale of agricultural food products in their original state is exempt
from VAT at all stages of production or distribution regardless of who the seller is.
The question is whether copra is an agricultural food or non-food product for purposes of this provision of
the NIRC. On June 11, 1991, respondent Commissioner of Internal Revenue issued the circular in
question, classifying copra as an agricultural non-food product and declaring it "exempt from VAT only if
the sale is made by the primary producer pursuant to Section 103(a) of the Tax Code, as amended." 2
The reclassification had the effect of denying to the petitioner the exemption it previously enjoyed when
copra was classified as an agricultural food product under 103(b) of the NIRC. Petitioner challenges
RMC No. 47-91 on various grounds, which will be presently discussed although not in the order raised in
the petition for prohibition.
First. Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the BIR is
the competent government agency to determine the proper classification of food products. Petitioner cites
the opinion of Dr. Quintin Kintanar of the Bureau of Food and Drug to the effect that copra should be
considered "food" because it is produced from coconut which is food and 80% of coconut products are
edible.
On the other hand, the respondents argue that the opinion of the BIR, as the government agency charged
with the implementation and interpretation of the tax laws, is entitled to great respect.
We agree with respondents. In interpreting 103(a) and (b) of the NIRC, the Commissioner of Internal
Revenue gave it a strict construction consistent with the rule that tax exemptions must be strictly
construed against the taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar said that his
classification of copra as food was based on "the broader definition of food which includes agricultural
commodities and other components used in the manufacture/processing of food." The full text of his letter
reads:
10 April 1991
Mr. VICTOR A. DEOFERIO, JR.

Chairman VAT Review Committee
Bureau of Internal Revenue
Diliman, Quezon City
Dear Mr. Deoferio:
This is to clarify a previous communication made by this Office about copra in a letter
dated 05 December 1990 stating that copra is not classified as food. The statement was
made in the context of BFAD's regulatory responsibilities which focus mainly on foods that
are processed and packaged, and thereby copra is not covered.
However, in the broader definition of food which include agricultural commodities and other
components used in the manufacture/ processing of food, it is our opinion that copra
should be classified as an agricultural food product since copra is produced from coconut
meat which is food and based on available information, more than 80% of products
derived from copra are edible products.
Very truly
yours,
QUINTIN L.
KINTANAR,
M.D., Ph.D.
Director
Assistant
Secretary of
Health for
Standards
and
Regulations
Moreover, as the government agency charged with the enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the absence of any showing that it is plainly wrong, is entitled to
great weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the exercise of his
power under 245 of the NIRC to "make rulings or opinions in connection with the implementation of the
provisions of internal revenue laws, including rulings on the classification of articles for sales tax and
similar purposes."
Second. Petitioner complains that it was denied due process because it was not heard before the ruling
was made. There is a distinction in administrative law between legislative rules and interpretative
rules. 3 There would be force in petitioner's argument if the circular in question were in the nature of a
legislative rule. But it is not. It is a mere interpretative rule.
The reason for this distinction is that a legislative rule is in the nature of subordinate legislation, designed
to implement a primary legislation by providing the details thereof. In the same way that laws must have
the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be
hearing. In this connection, the Administrative Code of 1987 provides:
Public Participation. If not otherwise required by law, an agency shall, as far as
practicable, publish or circulate notices of proposed rules and afford interested parties the
opportunity to submit their views prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall
have been published in a newspaper of general circulation at least two (2) weeks before
the first hearing thereon.
(3) In case of opposition, the rules on contested cases shall be observed. 4
In addition such rule must be published.5 On the other hand, interpretative rules are designed to provide
guidelines to the law which the administrative agency is in charge of enforcing.
Accordingly, in considering a legislative rule a court is free to make three inquiries: (i) whether the rule is
within the delegated authority of the administrative agency; (ii) whether it is reasonable; and (iii) whether it
was issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the
desirability or wisdom of the rule for the legislative body, by its delegation of administrative judgment, has
committed those questions to administrative judgments and not to judicial judgments. In the case of an
interpretative rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a
matter of power a court, when confronted with an interpretative rule, is free to (i) give the force of law to
the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii) give some intermediate degree
of authoritative weight to the interpretative rule. 6
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering
copra as an "agricultural food product" within the meaning of 103(b) of the NIRC. As the Solicitor
General contends, "copra per se is not food, that is, it is not intended for human consumption. Simply
stated, nobody eats copra for food." That previous Commissioners considered it so, is not reason for
holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not bound by
the ruling of his predecessors. 7 To the contrary, the overruling of decisions is inherent in the interpretation
of laws.
Third. Petitioner likewise claims that RMC No. 47-91 is discriminatory and violative of the equal protection
clause of the Constitution because while coconut farmers and copra producers are exempt, traders and
dealers are not, although both sell copra in its original state. Petitioners add that oil millers do not enjoy
tax credit out of the VAT payment of traders and dealers.
The argument has no merit. There is a material or substantial difference between coconut farmers and
copra producers, on the one hand, and copra traders and dealers, on the other. The former produce and
sell copra, the latter merely sell copra. The Constitution does not forbid the differential treatment of
persons so long as there is a reasonable basis for classifying them differently. 8
It is not true that oil millers are exempt from VAT. Pursuant to 102 of the NIRC, they are subject to 10%
VAT on the sale of services. Under 104 of the Tax Code, they are allowed to credit the input tax on the
sale of copra by traders and dealers, but there is no tax credit if the sale is made directly by the copra
producer as the sale is VAT exempt. In the same manner, copra traders and dealers are allowed to credit
the input tax on the sale of copra by other traders and dealers, but there is no tax credit if the sale is made
by the producer.
Fourth. It is finally argued that RMC No. 47-91 is counterproductive because traders and dealers would be
forced to buy copra from coconut farmers who are exempt from the VAT and that to the extent that prices
are reduced the government would lose revenues as the 10% tax base is correspondingly diminished.
This is not so. The sale of agricultural non-food products is exempt from VAT only when made by the
primary producer or owner of the land from which the same is produced, but in the case of agricultural
food products their sale in their original state is exempt at all stages of production or distribution. At any
rate, the argument that the classification of copra as agricultural non-food product is counterproductive is a
question of wisdom or policy which should be addressed to respondent officials and to Congress.
WHEREFORE, the petition is DISMISSED.
SO ORDERED.
Com. of Customs v. Phil. Acetylene Co., 39 SCRA 70 (1971) *

G.R. No. L-22443 May 29, 1971
THE COMMISSIONER OF CUSTOMS, petitioner,

vs.
PHILIPPINE ACETYLENE COMPANY, and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete and
Solicitor Sumilang V. Bernardo for petitioner.
Ponce Enrile, Siguion Reyna, Montecillo & Belo for respondent Philippine Acetylene Company.
MAKALINTAL, J.:
This is a petition filed by the Commissioner of Customs for review of the decision of the Court of Tax
Appeals in its Case No. 1147, ordering the herein petitioner to refund to the Philippine Acetylene Co., Inc.
the amount of P3,683.00 which it had paid under protest as special import tax on one (1) custom built
liquefied petroleum gas tank.
The facts were stipulated by the parties as follows:
1. That the Philippine Acetylene Company is a corporation duly organized and existing
under the laws of the Philippines;
2. That said company is engaged in the manufacture of oxygen, acetylene and nitrogen
and packaging of liquefied petroleum gas in cylinders and tanks;
3. That sometime in 1957 the protestant imported from the United States one custom-built
liquefied petroleum gas tank which arrived via the S/S 'PLEASANT VILLE' under Register
No. 1356, and declared in Import Entry No. 94060, series of 1957; and .
4. That the amount of P3,683.00 was assessed thereon as special import tax and which
(sic) was paid under protest by the importer-protestant as evidenced by Official Receipt
No. 12690 dated February 25, 1958.
According to Charles L. Butler, manager of the Philippine Acetylene Co., Inc., the imported custom-built
liquefied petroleum gas tank is simply a large cylinder which is used as container for liquefied petroleum
gas obtained from the CALTEX Refinery in Bauan, Batangas and transported to the company's plant in
Manila. The gas does not undergo any chemical change and is sold to consumers in the same state as
when it was acquired from the refinery, except that before it is sold the gas is pumped into smaller
cylinders, which are labeled with the company's trademark "Philigas."
Under the foregoing facts the issue presented for resolution is purely one of law, namely, whether or not
the Philippine Acetylene Co., Inc., insofar as its packaging operation of liquefied petroleum gas is
concerned, may be considered engaged in an industry as contemplated in section 6 of Republic Act No.
1394 and therefore exempt from the payment of the special import tax in respect of the gas tank in
question.
Section 6 of Republic Act No. 1394, insofar as it is pertinent to the issue, provides:
Section 6. The tax provided for in section one of this Act shall not be imposed against the
importation into the Philippines of machinery and/or raw materials to be used by new and
necessary industries as determined in accordance with Republic Act numbered Nine
Hundred and One; ...; machinery, equipment, accessories and spare parts, for the use
of industries, miners, mining enterprises planters and farmers; ...
In finding that the Philippine Acetylene Co., Inc. is engaged in industry within the meaning of the
abovequoted provision, the Tax Court held that the term industry should be understood in its ordinary and
general definition, which is any enterprise employing relatively large amounts of capital and/or labor. On
such premise the Tax Court concluded that inasmuch as the Philippine Acetylene Co., Inc. employs
considerable labor and capital in packaging liquefied petroleum gas purchased by it and selling the same
for profit, it is engaged in industry and hence is exempt from the payment of the special import tax in
connection with the tank used as container.
The following observations in the brief for the petitioner are apropos:
... in the exempting provisions of Republic Act No. 1394, the exempted items are divided
into separate and specific enumerations. The term 'industries' is used in two distinct
groups. The first group of exempted industries refers exclusively to those falling under the
new and necessary industries as defined in Republic Act No. 901. In the second, the term
"industries" is classed together with the terms miners, mining enterprises, planters and
farmers. ... If Congress really intended to give the term "industries" its ordinary and general
meaning and thus grant tax exemption to all ventures and trades falling under the said
ordinary and general definition, it should have eliminated the words "new and necessary
industries' and 'mining enterprises" since these two ventures are already covered by the
term "industries" in its ordinary and general meaning. On the other hand, the fact that the
language of the law specifically segregates new and necessary industries under Republic
Act No. 901 among those entitled to the tax exemption, in effect, restricts the meaning and
scope of the word "industries."
The argument appears logical and reasonable. Since the term "industries" as used in the law for the
second time is classified together with the terms "miners, mining enterprises, planters and farmers", the
obvious legislative intent is to confine the meaning of the term to activities that tend to produce or create
or manufacture, such as those of miners, mining enterprises, ]planters and farmers. The Tax Court's
interpretation would lead to a Patent inconsistency, in that while the first part of the law confines the
exemption to new and necessary industries, another part would extend the exemption to all other
industries, regardless of their nature, as long as they employ labor and capital for profit-making purposes.
In granting the exemption, it would have been illogical for Congress to specify importations needed by new
and necessary industries -- as the term is defined by law and in the same breath allow a similar exemption
to all other industries in general.
The respondents make much of the interpretation of the term "industries" by the Secretary of Finance in
his First Indorsement dated November 19, 1956, to wit:
Any Productive enterprise which employs relatively large amounts of capital and/or labor
falls under the term 'industries' as used in Section 6 of Republic Act No. 1394.
Assuming ng the correctness of such interpretation, what should be noted is that it stresses
the productive aspect of the enterprise. The operation for which the respondent company employs the gas
tank in question does not involve manufacturing or production. It is nothing but packaging; the liquefied
gas, when obtained from the refinery, has to be placed in some kind of container for transportation to
Manila. When sold to consumers, it undergoes no change or transformation, but is merely placed in
smaller cylinders for convenience. The process is certainly not production in any sense.
The phrasing of Section 6 of Republic Act No. 1394, to be sure, is rather vague and infelicitious,
particularly in the repetition of the word "industries." It is such lack of precision in the law that gives rise to
litigious controversies concerning its proper application. One of the established rules of statutory
construction, however, is that tax exemptions are held strictly against the taxpayer, and if not expressly
mentioned in the law must be within its purview by clear legislative intent. In the present case the
construction adhered to by the respondents in reference to the scope of the term "industries" as employed
for the second time in Section 6 of Republic Act No. 1394 is contrary to such rule. For if the term were all
inclusive, and meant industries in general, that is, those which involve relatively large amounts of capital
and/or labor regardless of their productive or non-productive nature, there would be no point in making a
separate classification with respect to "new and necessary industries" for purposes of the tax exemption.
We hold, therefore, that to be entitled to exemption under the second classification in the statute the
industry concerned, in connection with the activity for which the importation is made, must be engaged in
some productive enterprise, not in merely packaging an already finished product to facilitate its
transportation. In a comparable case this Court has held that the tax exemption in connection with the
processing of gasoline and the manufacture of lubricating oil does not extend to pump parts imported by
the processor and leased to gasoline stations for their use in servicing customers' vehicles, overruling the
argument of the petitioner therein that the marketing of its gasoline product "is corollary to or incidental to
its industrial operations." (ESSO Standard, Eastern, Inc. vs. Acting Commissioner of Customs, 18 SCRA
488).
WHEREFORE, the decision of the Court of Tax Appeals is reversed and that of the Collector of Customs
of Manila and the Commissioner of Customs upheld. Costs against respondent Philippine Acetylene Co.,
Inc.
Manila Electric Company v. Tabios, 67 SCRA 352 (1975) *
MANILA ELECTRIC COMPANY, petitioner,

vs.
MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, respondent.
G.R. No. L-23847 October 22, 1975
MANILA ELECTRIC COMPANY, petitioner,

vs.
BENJAMIN. TABIOS, as Commissioner of Internal Revenue, respondent.
Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner.
Office of the Solicitor General for respondents.
MUOZ PALMA, J.:

Manila Electric Company, petitioner in these two cases, poses a single before Us: is Manila
Electric Company (MERALCO for short) exempt from payment of a compensating tax on poles,
wires, transformers, and insulators imported by it for use in the operation of its electric light, heat,
and power system? MERALCO answers the query in the affirmative while the Commissioner of
Internal Revenue asserts the contrary.
MERALCO is the holder of a franchise to construct, maintain, and operate an electric light, heat,
and power system in the City of Manila and its suburbs.1
In 1962, MERALCO imported and received from abroad on various dates copper wires, transformers, and
insulators for use in the operation of its business on which, the Collector of Customs, as Deputy of
Commissioner of Internal Revenue, levied and collected a compensating tax amounting to a total of
P62,335.00. A claim for refund of said amount was presented by MERALCO and because no action was
taken by the Commissioner of Internal Revenue on its claim, it appealed to the Court of Tax Appeals by
filing a petition for review on February 25, 1964 (CTA Case No. 1495). On November 28, 1968, the Court
of Tax Appeals denied MERALCO claim, forthwith, the case was elevated to the Court on appeal (L-
29987).
Again in 1963, MERALCO imported certain quantities of copper wires, transformers and insulators also to
be used in its business and again a compensating tax of P6,587.00 on said purchases was collected. Its
claim for refund of the amount having been denied by the Commissioner of Internal Revenue on January
23, 1964, MERALCO riled with the Court of Tax Appeals CTA Case No. 1493. On September 23, 1964
the Court of Tax Appeals decided against petitioner, and the latter filed with this Court the corresponding
Petition for Review of said decision docketed herein as G.R. No. L-23847.
Inasmuch as the two appeals raise the same issue, they are consolidated in this Decision.
The law under which the Commissioner of Internal Revenue, respondent in these two cases, assessed
and collected the corresponding compensating taxes in 1962 and 1963 was found in Section 190 of the
National Internal Revenue Code(Commonwealth Act No. 466, as amended) the pertinent provision of
which read at the time as follows:
Sec. 190. Compensating Tax. All persons residing or doing business in the Philippines,
who purchase or receive from without the Philippines any commodities, goods, wares, or
merchandise, excepting those subject to specific taxes under Title IV of this Code, shall
pay on the total value thereof at the time they are received by such persons, including
freight, postage, insurance, commission and all similar charges, a compensating tax
equivalent to the percentage taxes imposed under this Title on original transactions
effected by merchants, importers, or manufacturers, such tax to be paid before the
withdrawal or removal of said commodities, goods, wares, or merchandise from the
customhouse or the post office: ... 2
In deciding against petitioner, the Court of Tax Appeals held that following the ruling of the Supreme Court
in the case of Panay Electric Co. vs. Collector of Internal Revenue, G.R. No. L-6753, July 30,
1955, Manila Gas Corp. vs. Collector of Internal Revenue, G.R. No. L-11784, October 24, 1958, and Borja
vs. Collector of Internal Revenue, G.R. No. L-12134, November 30,1961, MERALCO is not exempt from
paying the compensating tax provided for in Section 190 of the National Internal Revenue Code, the
purpose of which is to "place casual importers, who are not merchants on equal putting with established
merchants who pay sales tax on articles imported by them." The court further stated that MERALCO's
claim for exemption from the payment of the compensating tax is not clear or expressed, contrary to the
cardinal rule in taxation that "exemptions from taxation are highly disfavored in law, and he who claims
exemption must be able to justify his claim by the clearest grant of organic or statute law. (pp. 10-11, L-
23847, rollo)
Petitioner, on the other hand, bases its claim for exemption from the compensating tax on poles, wires,
transformers and insulators purchased by it from abroad on paragraph 9 of its franchise which We quote
from its brief:
PARAGRAPH 9. The grantee shall be liable to pay the same taxes upon its real estate,
buildings, plant (not including poles, wires, transformers, and insulators), machinery, and
personal property as other persons are or may be hereafter by law to pay. Inconsideration
of Part Two of the franchise herein granted, to wit, the right to build and maintain in the
City of Manila and its suburbs a plant for the conveying and furnishing of electric current
for light, heat, and power, and to charge for the same, the grantee shall pay to the City of
Manila a five per centum of the gross earnings received form its business under this
franchise in the City and its suburbs: PROVIDED, That two and one-half per centum of the
gross earnings received from the business of the line to Malabon shall be paid to the
Province of Rizal. Said percentage shall be due and payable at the times stated in
paragraph nineteen of Part One hereof, and after an audit, like that provided in paragraph
twenty of Part One hereof, and shall be in lieu of all taxes and assessments of whatsoever
nature, and by whatsoever authority upon the privileges, earnings, income, franchise, and
poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted. (Petitioner's brief, p. 4, G.R. No.
L-29987; see also pp. 3-4, petitioner's brief, L-23847)
Petitioner argues that the abovequoted provision in plain and unambiguous terms makes two references
to the exemption of the articles in question from all taxes except the franchise tax. Thus, after prescribing
in the opening sentence that "the grantee shall be liable to pay the said taxes upon its real estate
buildings, plant (not including poles, wires, transformers and insulators), machinery and personal property
as other persons are or may be hereinafter required by law to pay," par. 9, specifically provides that the
percentage tax payable by petitioner as fixed therein "shall be in lieu of all taxes and assessments of
whatsoever nature, and by whatsoever authority upon the privileges, earnings, income, franchise,
and poles, wires, transformers and insulators of the grantee from which taxes and assessments the
grantee is hereby expressly exempted." Petitioner further states that while par. 9 does not specifically
mention the compensating tax for the obvious reason that petitioner's original franchise was an earlier
enactment, the words "in lieu of all taxes and assessments of whatsoever nature and by whatsoever
authority" are broad and sweeping enough to include the compensating tax. (p. 5, petitioner's brief, L-
29987; pp, 4-5, ibid, L-23847)
Petitioner also contends that the ruling of this Court in the cases of Panay Electric Co., Manila Gas
Corporation, and Borja (supra) are not applicable to its situation.
We find no merit in petitioner's cause.
1. One who claims to be exempt from the payment of a particular tax must do so under clear and
unmistakable terms found in the statute. Tax exemptions are strictly construed against the taxpayer, they
being highly disfavored and may almost be said "to be odious to the law." He who claims an exemption
must be able to print to some positive provision of law creating the right; it cannot be allowed to exist upon
a mere vague implication or inference.3 The right of taxation will not beheld to have been surrendered
unless the intention to surrender is manifested by words too plain to be mistaken (Ohio Life Insurance &
Trust Co. vs. Debolt, 60 Howard, 416), for the state cannot strip itself of the most essential power of
taxation by doubtful words; it cannot, by ambiguous language, be deprived of this highest attribute of
sovereignty (Erie Railway Co. vs. Commonwealth of Pennsylvania, 21 Wallace 492, 499). So, when
exemption is claimed, it must be shown indubitably to exist, for every presumption is against it, and a well-
founded doubt is fatal to the claim (Farrington vs. Tennessee & County of Shelby, 95 U.S. 679, 686).4
2. Petitioner's submission that its right to exemption is supported by the "plain and unambiguous" term of
paragraph 9 of its franchise is positively without basis.
First, the Court cannot overlook the tax court's finding that, and We quote:
At the outset it should be noted that the franchise by the Municipal Board of the City of
Manila to Mr. Charles M. Swift and later assumed and taken over by petitioner (see Rep.
Act No. 150, CTA rec. p. 84), is a municipal franchise and not a legal franchise. While it is
true that Section 1 of Act No. 484 of the Philippine Commission of 1902 authorizes the
Municipal Board of the City of Manila to grant a franchise to the person making the most
favorable bid for the construction and maintenance of an electric street railway and the
construction, maintenance, and operation of an electric light, heat, and power system in
Manila and its suburbs, Section 2 of the same Act authorize the said Municipal Board to
make necessary amendments to be fixed by the terms of the successful bid; otherwise, the
form of the franchise to be granted shall be in the words and figures appearing in Act No.
484 of the Philippine Commission, which includes Par. 9. Part Two, thereof, supra.
This Court is not aware whether or not the tax exemption provisions contained in Par. 9,
Part Two of Act No. 484 of the Philippine Commission of 1902 was incorporated in the
municipal franchise granted to Mr. Charles M. Swift by the Municipal Board of the City of
Manila and later assumed and taken over by petitioner because no admissible copy of
Ordinance No. 44 of the said Board was ever presented in evidence by the herein
petitioner. Neither is this Court aware of any amendment to the terms of this franchise
granted by the aforesaid Municipal Board to the successful bidder in the absence of
Ordinance No. 44 and the amendment thereto, if any. In the circumstances, we are at a
Las to interpret and apply the tax exemption provisions relied upon by petitioner. (pp. 11-
13, rollo, L-29987)
Second, and this is the controlling reason for the denial of petitioner's claim in these cases, We do not see
in paragraph 9 of its petitioner's franchise, on the assumption that it does exist as worded, what may be
considered as "plain and unambiguous terms" declaring petitioner MERALCO exempt from paying a
compensating tax on its imports of poles, wires, transformers, and insulators. What MERALCO really
wants Us to do, but which We cannot under the principles enumerated earlier, is to infer and imply that
there is such an exemption from the following phrase: "... the grantee shall pay to the City of Manila five
per centum of the gross earnings received from its business ... and shall be in lieu of all taxes and
assessments of whatsoever nature, and by whatsoever authority upon the privileges, earnings, income,
franchise, and poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted."
Note that what the above provision exempts petitioner from, is the payment of property, tax on its poles,
wires, transformers, and insulators; it does not exempt it from payment of taxes like the one in question
which, by mere necessity or consequence alone, fall upon property. The first sentence of paragraph 9 of
petitioner's franchise expressly states that the grantee like any other taxpayer shall pay taxes upon its real
estate, buildings, plant (not including poles, wires, transformers, and insulators),machinery, and personal
property. These are direct taxes imposed upon the thing or property itself. Thus, while the grantee is to
pay tax on its plant, its poles, wires, transformers, and insulators as forming part of the plant or
installation(significantly the enumeration is in parenthesis and follows the word "plant") are exempt and as
such are not to be included in the assessment of the property tax to be paid.
The ending clause of paragraph 9 providing in effect that the percentage tax imposed upon petitioner shall
be in lieu of "all taxes and assessments of what and by whatsoever authority" cannot be said to have
granted it exemption from payment of compensating tax. The phrase "all taxes and assessments of
whatsoever nature and by whatsoever authority" is not so broad and sweeping, as petitioner would have
Us think, as to include the tax in question because there is an immediately succeeding phrase which limits
the scope of exemption to taxes and assessments "upon the privileges earnings, income, franchise,
and poles, wires, transformers, and insulators of the grantee." The last clause of paragraph 9 merely
reaffirms, with regards to poles, wires, transformers, and insulators, what has been expressed in the that
first sentence of the same paragraph namely, exemption of petitioner from payment of property tax. It is a
principle of statutory construction that general terms may be restricted by specific words, with the result
that the general language will be limited by the specific language which indicates the statute's object and
purpose. (Statutory Construction by Crawford, 1940 ed. p. 324-325)
3. It is a well-settled rule or principle in taxation that a compensating tax is not a property tax but is an
excise tax.5Generally stated, an excise tax is one that is imposed on the performance of an act, the
engaging in an occupation, or the enjoyment of a privilege. 6 A tax upon property because of its ownership
its a direct tax, whereas one levied upon property because of its use is an excise duty. (Manufacturer's
Trust Co. vs. United States, Ct. Cl., 32 F. Supp. 289, 296) Thus, where a tax which is not on the property
as such, is upon certain kinds of property, having reference to their origin and their intended use, that is an
excise tax. (State v. Wynne, 133 S.W. 2d 951, 956,957, 133 Tex. 622)
The compensating tax being imposed upon petitioner herein, MERALCO, is an impost on its use of
imported articles and is not in the nature of a direct tax on the articles themselves, the latter tax falling
within the exemption. Thus, in International Business Machine Corp. vs. Collector of Internal Revenue,
1956, 98 Phil. Reports 595, 593, which involved the collection of a compensating tax from the plaintiff-
petitioner on business machines imported by it, this Court stated in unequivocal terms that "it is not the act
of importation that is taxed under section 190, but the use of imported goods not subjected to sales tax"
because "the compensating tax was expressly designed as a substitute to make up or compensate for the
revenue lost to the government through the avoidance of sales taxes by means of direct purchases
abroad. ..."
It is true that upon the collection of a compensating tax on petitioner's poles, wires, transformers, and
insulators purchased from abroad, the tax falls on the goods themselves; this fact leads petitioner to claim
that what is being imposed upon it is a property tax. But petitioner loses sight of the principle that "every
excise necessarily must finally fall upon and be paid by property, and so may be indirectly a tax upon
property; but if it is really imposed upon the performance of an act, the enjoyment of a privilege, or the
engaging in an occupation, it will be considered an excise." (51 Am. Jur. 1d, Taxation, Sec. 34, emphasis
supplied) And so, to reiterate, what is being taxed here is the use of goods purchased from out of the
country, and the imposition is in the nature of an excise tax.
4. There is no valid reason for Us not to apply to petitioner the ruling of the Court in Panay Electric Co.
and Borja, supra, for MERALCO is similarly situated.
Panay Electric Co. sought exemption from payment of a compensating tax on equipments purchased
abroad for use in its electric plant. A provision in its franchise reads:
Sec 8. ... Said percentage shall be due and payable quarterly and shall be lieu of all taxes
of any kind levied, established, or collected by any authority whatsoever, now or in the
future, on its poles, wires, insulators, switches, transformers and other structures,
installations, conductors, and accessories, placed in and over the public streets, avenues,
roads, thoroughfares, squares, bridges, and other places on its franchise, from which
taxes the grantee is hereby expressly exempted. (113 Phil. 570)
This Court rejected the exemption sought by Panay Electric and held that the cited provision in its
franchise exempts from taxation those rights and privileges which are not enjoyed by the public in general
but only by the grantee of a franchise, but do not include the common right or privileges of every citizen to
make purchases anywhere; and that we must bear in mind the purpose for the imposition of compensating
tax which as explained in the report of the Tax Commission is as follows:
The purpose of this proposal is to place persons purchasing goods from dealers doing
business in the Philippines on an equal footing, for tax purposes, with those who purchase
goods directly from without the Philippines. Under the present tax law, the former bear the
burden of the local sales tax because it is shifted to them as part of the selling price
demanded by the local merchants, while the latter do not. The proposed tax will do away
with this inequality and render justice to merchants and firms of all nationalities who are in
legitimate business here, paying taxes and giving employment to a large number of
people. (113 Phil. 571)
In Borja, petitioner Consuelo P. Borja, a grantee of a legislative franchise, also claimed to be free from
paying the compensating tax imposed on the materials and equipment such as wires, insulators,
transformers, conductors, etc. imported from Japan, on the basis of Sec. 10 of Act No. 3636 (Model
Electric Light and Power Franchise Act) which has been incorporated by reference in franchise under Act
No. 3810. Section 10 provides:
The grantee shall pay the same taxes as are now or may "hereafter be required by law
from other individuals, co-partnerships, private, public or quasi-public associations,
corporations, or joint-stock companies, on his (its) real estate, buildings, plants, machinery;
and other personal property, except property section. In consideration of the franchise and
rights hereby granted, the grantee shall pay into the municipal treasury of the (of each)
municipality in which it is supplying electric current to the public under this franchise, a tax
equal to two per centum of the gross earnings from electric current sold or supplied under
this franchise in said (each) municipality. Said tax shall be due and payable quarterly and
shall be in lieu of any and all taxes of any kind, nature or description levied, established, or
collected by any authority whatsoever, municipal, provincial or insular, now or in the future,
on its poles, wires, insulators, switches; transformers and structures, installations,
conductors, and accessories, placed in and over and under all public property, including
public streets and highways, provincial roads, bridges and public squares, and on its
franchise, rights, privileges, receipts, revenues and profits, from which taxes the grantee is
hereby expressly exempted. (113 Phil. 569-570)
The Court applying the ruling in Panay Electric denied the exemption with the added statement that
Considering, therefore, the fact that section 190 of the Tax Code is a sort of an equalizer,
to place casual importers, who are not merchants on equal footing with established
merchants who pay sales tax on articles imported by them ... We may conclude that it was
not the intention of the law to exempt the payment of compensating tax on the personal
properties in question. The principle and legal philosophy underlying the imposition of
compensating tax, as enunciated in the above case (referring to Borja), are fundamentally
correct, and no plausible reason is advanced for their non-application to the case at bar.
(p. 572, ibid.)
Petitioner claims that there exists a difference between paragraph 9 of its franchise and the corresponding
provisions of the franchise of Panay Electric and Borja in that in the latter, unlike in the former, there is no
statement that the grantee is exempt from "all taxes of whatsoever nature and whatsoever authority." In
addition, petitioner points out, the franchise of Panay Electric and Borja contains a qualifying phrase, to
wit: "placed in and over the public streets, avenues, roads, thoroughfares, etc."
A comparison of the pertinent provisions mentioned by petitioner and which are quoted in the preceding
pages reveals no substantial or fundamental distinction as to remove petitioner MERALCO from the ambit
of the Panay Electric and Borja ruling. There may be differences in the phraseology used, but the intent to
exempt the grantee from the payment only of property tax on its poles, wires, transformers, and insulators
is evidently common to the three; withal, in all the franchises in question there is no specific mention of
exemption of the grantee from the payment of compensating tax.
Petitioner disputes, however, the applicability of the stare decisis principle to its case claiming that this
Court should not blindly follow the doctrine of Panay Electric and Borja, and that in Philippine Trust Co. et
al. vs. Mitchell, 59 Phil. 30, 36, the Court had occasion to state: ,the rule of stare decisis is entitled to
respect. Stability in the law, particularly in the business field, is desirable. But idolatrous reverence for
precedent, simply as precedent, no longer rules. More important than anything else is that the court
should be right." (pp. 18-19, petitioner's brief, L-29987)
But what possible ground can there be for deviating from the decisions of this Court in these two cases? A
doctrine buttressed by the law, reason, and logic is not to be simply brushed aside to suit the convenience
of a particular party or interest or to avoid hardship to one. As We view this legal problem, no justification
can be found for giving petitioner herein preferential treatment by reading into its franchise an exemption
from a particular kind of tax which is not there. If it had been the legislative intent to exempt MERALCO
from paying a tax on the use of imported equipments, the legislative body could have easily done so by
expanding the provision of paragraph 9 and adding to the exemption such words as "compensating tax" or
"purchases from abroad for use in its business," and the like. We cannot ignore the principle that express
mention in a statute of one exemption precludes reading others into it. (Hoard vs. Sears, Roebuck & Co.,
122 Conn. 185, 193, 188 A. 269)
On this point, the Government correctly argues that the provision in petitioner's franchise that the payment
of the percentage tax on the gross earnings shall be "in lieu of all taxes and assessments of whatsoever
nature, and whatsoever authority" is not to be given a literal meaning as to preclude the imposition of the
compensating tax in this particular case, and cites for its authority the Opinion of the Supreme Court of
Connecticut rendered in Connecticut Light & Power Co., et al. vs. Walsh, 1948, which involved the
construction of a statute imposing a sales and use tax, and which inter alia held:
The broad statement that the tax upon the gross earning of telephone companies shall be
"in lieu of all other taxation" upon them is not necessarily to be given a literal meaning. "In
construing the act it is our duty to seek the real intent of the legislature, even though by so
doing we may limit the literal meaning of the broad language used." Greenwich Trust Co.
v. Tyson, 129 Conn. 211, 222, 27 A. 2d 166, 172. It is not reasonable to assume that the
General Assembly intended by the provisions we have quoted that the tax on gross
earnings should take the place of taxes of a kind not then anywhere imposed and entire
outside its knowledge. ... ." (57 A.R., 2d S, pp. 129, 133-134, emphasis supplied)
In 1902 when Act 484 of the Philippine Commission was enacted, "compensating tax' was certainly not
generally known or in use, hence, to paraphrase the above-mentioned Connecticut decision, the Court
cannot assume that the Philippine Commission in providing that the gross earnings taxes imposed on the
grantee of the electric light franchise shall be in lieu of all taxes and assessments, meant to include
impositions in the nature of a compensating tax which came into use in this country only upon the
enactment of Commonwealth Act 466 in 1939.
5. One last argument of petitioner to support its cause is that just as a new and necessary industry was
held to be exempt from paying a compensating tax on its imports under the tax exemption provision of
Republic Act 901, so should MERALCO be exempt from such a tax under the general clause in its
franchise, to wit: "... in lieu of all taxes and assessments of whatsoever nature and whatsoever authority
upon poles, wires, etc."
We agree with the court below that there can be no analogy between MERALCO and what is considered
as a new and necessary industry under Republic Act 35 now superseded by Republic Act 901.
The rationale of Republic Act 901 is "to encourage the establishment or exploitation of new and necessary
industries to promote the economic growth of the country," and because "an entrepreneur engaging in a
new and necessary industry faces uncertainty and assumes a risk bigger than one engaging in a venture
already known and developed ... the law grants him tax exemption to lighten onerous financial burdens
and reduce losses." (Marcelo Steel Corporation vs. Collector of Internal Revenue, 109 Phil. 921, 926) This
intendment of the legislature in enacting Republic Act 901 is not the motivation behind the tax exemption
clause found in petitioner MERALCO's franchise; consequently, there can be no analogy between the two.
IN VIEW OF THE FOREGOING, We find no merit in these Petitions for Review and We hereby AFFIRM
the decision of the Court of Tax Appeals in these two cases, with costs against petitioner in both
instances.
So Ordered.
Benguet Corporation v. CBAA, 210 SCRA 579 (1992) *

G.R. No. 100959 June 29, 1992
BENGUET CORPORATION, petitioner,
vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, LOCAL BOARD OF ASSESSMENT APPEALS OF THE PROVINCE OF BENGUET, and
MUNCIPAL ASSESSOR OF ITOGON, BENGUET, respondents.
BELLOSILLO, J.:
BENGUET CORPORATION, in this original petition for certiorari, seeks to annul and set aside the Decision of the Central Board of Assessment
Appeals of May 28, 1991, as well as the Resolution of July 1, 1991, denying its motion for reconsideration, which affirmed the decision of respondent
Local Board of Assessment Appeals of the Province of Benguet declaring as valid the tax assessments made by the Municipal Assessor of Itogon,
Benguet, on the bunkhouses of petitioner occupied as dwelling by its rank and file employees based on Tax Declarations Nos. 8471 and 10454.
The Provincial Assessor of Benguet, through the Municipal Assessor of Itogon, assessed real property tax on the bunkhouses of petitioner Benguet
Corporation occupied for residential purposes by its rank and file employees under Tax Declarations Nos. 8471 (effective 1985) and 10454 (effective
1986). According to the Provincial Assessor, the tax exemption of bunkhouses under Sec. 3 (a), P.D. 745 (Liberalizing the Financing and Credit
Terms for Low Cost Housing Projects of Domestic Corporations and Partnerships),was withdrawn by P.D. 1955 (Withdrawing, Subject to Certain
Conditions, the Duty and Tax Privileges Granted to Private Business Enterprises and/or Persons Engaged in Any Economic Activity, and Other
Purposes). Petitioner appealed the assessment on Tax Declarations Nos. 8471 and 10454 to the Local Board of Assessment Appeals (LBAA) of the
Province of Benguet, docketed as LBAA Cases Nos. 42 and 43, respectively. Both were heard jointly.
Meanwhile, the parties agreed to suspend hearings in LBAA Cases Nos. 42 and 43 to await the outcome of another case, LBAA Case No. 41,
covering Tax Declaration No. 9534(effective 1984), which involved the same parties and issue until the appeal was decided by the Central Board of
Assessment Appeals (CBAA). On July 15, 1986, CBAA handed down its decision in LBAA Case No. 41 holding that the buildings of petitioner used
as dwellings by its rank and file employees were exempt from real property tax pursuant to P.D. 745.
Thereafter, the proceedings in LBAA Cases Nos. 42 and 43 proceeded after which a decision was rendered affirming the taxability of subject
property of petitioner. On appeal, CBAA sustained the decision holding that the realty tax exemption under P.D. 745 was withdrawn by P.D. 1955
and E.O. 93, so that petitioner should have applied for restoration of the exemption with the Fiscal Incentives Review Board (FIRB). The decision of
CBAA clarified that Case No. 41 was different because it was effective prior to 1985, hence, was not covered by P.D. 1955 nor by E.O. 93.
Petitioner moved for reconsideration but was denied with CBAA holding that petitioner's "classification" of P.D. 745 is unavailing because P.D. 1955
and E.O. 93 do not discriminate against the so-called "social statutes". Hence, this petition.
Encapsulized, the issues raised in the petition are:(1) whether respondent Assessors may validly assess real property tax on the properties of
petitioner considering the proscription in The Local Tax Code (P.D. 231) and the Mineral Resources Development Degree of 1974 (P.D. 463)against
imposition of taxes on mines by local governments; and, (2) whether the real tax exemption granted under P.D. 745 (promulgated July 15, 1975) was
withdrawn by P.D. 1955 (took effect October 15, 1984) and E.O. 93.
Presidential Decree No. 745, particularly Sec. 3 thereof, provides:
Sec. 3. Pursuant to the above incentive, such domestic corporations and partnerships shall enjoy tax exemption on: (a) real
estate taxes on the improvements which will be used exclusively for housing their employees and workers . . .
Presidential Decree No. 1955, Sec. 1, provides:
Sec. 1. The provisions of any special or general law to the contrary notwithstanding, all exemptions from or any preferential
treatment in the payment of duties, taxes, fees, imposts and other charges heretofore granted to private business enterprises
and/or persons engaged in any economic activity are hereby withdrawn. except those enjoyed by the following: . . . (e) Those
that will be approved by the President of the Philippines upon the recommendation of the Minister of Finance,
should be read in connection with Ministry Order No. 39-84, Sec. 1 (d), of the then Ministry of Finance, which took effect October 15, 1984, states:
Sec. 1. The withdrawal of exemptions from, or any preferential treatment in, the payment of duties, taxes, fees, imposts and
other charges as provided for under Presidential Decree No. 1955, does not apply to exemptions or preferential treatment
embodied in the following laws: . . . (d) The Real Property Tax Code . . .
Executive Order No. 93, promulgated December 17, 1986, is also to the same effect. Both P.D. 1955 and E.O. 93 operate as wholesale withdrawal
of tax incentives granted to private entities so that the government may re-examine existing tax exemptions and restore through the "review
mechanism" of the Fiscal Incentives Review Board only those that are consistent with declared economic policy. Thuswise, the chief revenue source
of the government will not be greatly, if not unnecessarily, eroded since tax exemptions that were granted on piecemeal basis, and which have lost
relevance to existing programs, are eliminated.
On the first issue, petitioner contends that local government units are without any authority to levy realty taxes on mines pursuant to Sec. 52 of P.D.
463, which states:
Sec. 52. Power to Levy Taxes on Mines, Mining Operations and Mineral Products. Any law to the contrary notwithstanding,
no province, city, municipality, barrio or municipal district shall levy and collect taxes, fees, rentals, royalties or charges of any
kind whatsoever on mines, mining claims, mineral products, or any operation, process or activity connected therewith,
and Sec. 5 (m) of The Local Tax Code, as amended by P.D. 426 (reiterated in Secs. 17 [d] and 22 [c], same Code), which provides:
Sec. 5. Common limitations on the taxing powers of local governments. The exercise of the taxing powers of provinces,
cities, municipalities and barrios shall not extend to the imposition of the following: . . . (m) Taxes on mines; mining operations;
and minerals, mineral products, and their by-products when sold domestically by the operator . . .
The Solicitor General observes that the petitioner is estopped from raising the question of lack of authority to issue the challenged assessments
inasmuch as it was never raised before, hence, not passed upon by, the municipal and provincial assessors, LBAA and CBAA. This observation is
well taken. The rule that the issue of jurisdiction over subject matter may be raised anytime, even during appeal, has been qualified where its
application results in mockery of the tenets of fair play, as in this case when the issue could have been disposed of earlier and more authoritatively
by any of the respondents who are supposed to be experts in the field of realty tax assessment. As We held in Suarez v. Court of Appeals 1:
. . . It is settled that any decision rendered without jurisdiction is a total nullity and may be struck down at any time, even on
appeal before this Court. The only exception is where the party raising the issue is barred by estoppel (Tijam vs. Sibonghanoy,
23 SCRA 29, reiterated in Solid Homes, Inc. vs. Payawal and Court of Appeals, G.R. No. 84811, August 29, 1989; emphasis
supplied).
While petitioner could have prevented the trial court from exercising jurisdiction over the case by seasonably taking exception
thereto, they instead invoked the very same jurisdiction by filing an answer and seeking affirmative relief from it. What is more,
they participated in the trial of the case by cross-examining respondent. Upon the premises, petitioner cannot now be allowed
belatedly to adopt an inconsistent posture by attacking the jurisdiction of the court to which they had submitted themselves
voluntarily (Tijam vs. Sibonghanoy, supra).
In Aguinaldo Industries Corporation v. Commissioner of Internal Revenue and the Court of Tax of Appeals, 2 We held:
To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at
the administrative level, would be to sanction a procedure whereby the court which is supposed to review administrative
determinations would not review, but determine and decide for the first time, a question not raised at the administrative
forum. This cannot be permitted, for the same reason that underlies the requirement of prior exhaustion of administrative
remedies to give administrative authorities the prior opportunity to decide controversies within its competence, and in much the
same way that, an the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal.
Besides, the special civil action of certiorari is available to pass upon the determinations of administrative bodies where patent denial of due process
is alleged as a consequence of grave abuse of discretion or lack of jurisdiction, or question of law is raised and no appeal is available. In this case,
petitioner may not complain of denial of due process since it had enough opportunity, but opted not, to raise the issue of jurisdiction in any of the
administrative bodies to which the case may have been brought.
Petitioner argues that realty taxes are local taxes because they are levied by local government units, citing Sec. 39 of P.D. 464, which provides:
Sec. 39. Rates of Levy. The provincial, city or municipal board or council shall fix a uniform rate of real property tax
applicable to their respective localities . . .
While local government units are charged with fixing the rate of real property taxes, it does not necessarily follow from that authority the
determination of whether or not to impose the tax. In fact, local governments have no alternative but to collect taxes as mandated in Sec. 38 of the
Real Property Tax Code, which states:
Sec. 38 Incidence of Real Property Tax. There shall be levied, assessed and collected in all provinces, cities and
municipalities an annual ad valorem tax on real property, such as land, buildings, machinery and other improvements affixed or
attached to real property not hereinafter specifically exempted.
It is thus clear from the foregoing that it is the national government, expressing itself through the legislative branch, that levies the real property tax.
Consequently, when local governments are required to fix the rates, they are merely constituted as agents of the national government in the
enforcement of the Real Property Tax Code. The delegation of taxing power is not even involved here because the national government has already
imposed realty tax in Sec. 38 above-quoted, leaving only the enforcement to be done by local governments.
The challenge of petitioner against the applicability of Meralco Securities Industrial Corporation v. Central Board of Assessment Appeals, et al., 3 is
unavailing, absent any cogent reason to overturn the same. Thus
Meralco Securities argues that the realty tax is a local tax or levy and not a tax of general application. This argument is
untenable because the realty tax has always been imposed by the lawmaking body and later by the President of the
Philippines in the exercise of his lawmaking powers, as shown in Sections 342 et seq. of the Revised Administrative Code, Act
No. 3995, Commonwealth Act No. 470 and Presidential Decree No. 464.
The realty tax is enforced throughout the Philippines and not merely in a particular municipality or city but the proceeds of the
tax accrue to the province, city, municipality and barrio where the realty taxed is situated (Sec. 86, P.D. No. 464). In contrast, a
local tax is imposed by the municipal or city council by virtue of the Local Tax Code, Presidential Decree No. 231, which took
effect on July 1, 1973 (69 O.G. 6197).
Consequently, the provisions of Sec. 52 of the Mineral Resources Development Decree of 1974 (P.D. 463), and Secs. 5 (m), 17 (d) and 22 (c) of The
Local Tax Code (P.D. 231) cited by petitioner are mere limitations on the taxing power of local government units; they are not pertinent to the issue
before Us and, therefore, cannot and should not affect the imposition of real property tax by the national government.
As regards the second issue, petitioner, which claims that E.O. 93 does not repeal social statutes like P.D. 745, in the same breath takes refuge in
Sec. 1 (e) of the same E.O. 93, to wit:
Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to
government and private entities are hereby withdrawn except: . . . (e) those conferred under the four basic codes, namely: . . .
(iv) the Real Property Tax Code, as amended . . .
in relation to Sec. 40 of the Real Property Tax Code, which provides:
Sec. 40. Exemptions from Real Property Tax. The exemption shall be as follows: . . . (g) Real property exempt under other
laws.
and concluding that P.D. 745 is one of the "other laws" referred to.
We do not agree. If We are to sanction this interpretation, then necessarily all real properties exempt by any law would be covered, and there would
be no need for the legislature to specify "Real Property Tax Code, as amended", instead of stating clearly "realty tax exemption laws''. Indubitably,
the intention is to limit the application of the "exception clause" only to those conferred by the Real Property Tax Code. This is not only a logical
construction of the provisions but more so in keeping with the principle of statutory construction that tax exemptions are construed strictly against
taxpayers, hence, they cannot be created by mere implication but must be clearly provided by law. Non-exemption, in case of doubt, is favored.
Quite obviously, the exception in Sec. 1 (e), (iv), of E.O. 93, refers to "those conferred under . . . Real Property Tax Case, as amended, and that the
exemption claimed by petitioner is granted not by the Real Property Tax Code but by P.D. 745. When Sec. 40 (g) of the Property Tax Code provides
that "[T]he exemption shall be as follows: . . . Real Property exempt under other laws", the Code merely recognizes realty tax exemptions provided
by other laws, otherwise, it may unwittingly repeal those "other laws"
The argument of petitioner that P.D. 745 is a social statute to give flesh to the Constitutional provisions on housing, hence, not covered by P.D.
1955, was squarely met by respondent CBAA in its Resolution of July 1, 1991, to which We fully agree
The phrase "any special or general law" explicitly indicates that P.D. No. 1955 did not distinguish between a social statute and
an economic or tax legislation. Hence, where the law does not distinguish, we cannot distinguish. In view thereof, we have no
recourse but to apply the express provision of P.D. No. 1955 and rule in favor of the withdrawal of the real property tax
exemption provided under P.D. No. 745. We also find without merit the contention of Petitioner-Appellant that B.P. No. 391
(Investment Incentives Policy Act of 1983) is the source and reason for the existence of P.D. No. 1955; therefore, the scope of
P.D. No. 1955 is limited to investment incentives. Although Section 20 of said B.P. which authorizes the President to
restructure investment incentives systems/legislations to align them with the overall economic development objectives is one of
the declared policies of P.D. No. 1955, its primary aim is the formulation of national recovery program to meet and overcome
the grave emergency arising from the current economic crisis. Hence, it cannot be maintained that its provisions apply only to
investment incentives.
Besides, even granting that its scope is limited, it is noted that P.D. No. 745 also speaks of investment incentives in Section 2
and 3 thereof . . .
In fine, despite the spirited effort put up by petitioner, We find no compelling reason to disturb the findings and conclusion of public respondents.
Petitioner, which even changed theories midstream, utterly failed to show that respondents, in issuing the challenged Decision and Resolution,
committed grave abuse of discretion amounting to lack of or excess of jurisdiction.
WHEREFORE, for lack of merit, the instant petition is dismissed, with costs against petitioner.
SO ORDERED.
PLDT v. City of Davao (2003)

G.R. No. 143867 March 25, 2003
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner,

vs.
CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as the City Treasurer of
Davao, respondents.
RESOLUTION
MENDOZA, J.:
Petitioner seeks a reconsideration of the decision of the Second Division in this case. Because the
decision bears directly on issues involved in other cases brought by petitioner before other Divisions of the
Court, the motion for reconsideration was referred to the Court en banc for resolution.1 The parties were
heard in oral arguments by the Court en banc on January 21, 2003 and were later granted time to submit
their memoranda. Upon the filing of the last memorandum by the City of Davao on February 10, 2003, the
motion was deemed submitted for resolution.
To provide perspective, it will be helpful to restate the basic facts.
Petitioner PLDT paid a franchise tax equal to three percent (3%) of its gross receipts. The franchise tax
was paid "in lieu of all taxes on this franchise or earnings thereof" pursuant to R.A. No. 7082 amending its
charter, Act. No. 3436. The exemption from "all taxes on this franchise or earnings thereof" was
subsequently withdrawn by R.A. No. 7160 (Local Government Code of 1991), which at the same time
gave local government units the power to tax businesses enjoying a franchise on the basis of income
received or earned by them within their territorial jurisdiction. The Local Government Code (LGC) took
effect on January 1, 1992.
The pertinent provisions of the LGC state:
Sec. 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction. . . .
Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or -controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.
Pursuant to these provisions, the City of Davao enacted Ordinance No. 519, Series of 1992, which in
pertinent part provides:
Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a
tax on businesses enjoying a franchise, at a rate of Seventy-five percent (75%) of one percent
(1%) of the gross annual receipts for the preceding calendar year based on the income or receipts
realized within the territorial jurisdiction of Davao City.
Subsequently, Congress granted in favor of Globe Mackay Cable and Radio Corp. (Globe)2 and Smart
Information Technologies, Inc. (Smart)3 franchises which contained "in lieu of all taxes" provisos. In 1995,
it enacted R.A. No. 7925 (Public Telecommunications Policy of the Philippines), 23 of which provides
that "Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may
hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises
and shall be accorded immediately and unconditionally to the grantees of such franchises." The law took
effect on March 16, 1995.
In January 1999, when PLDT applied for a mayors permit to operate its Davao Metro Exchange, it was
required to pay the local franchise tax for the first to the fourth quarter of 1999 which then had amounted
to P3,681,985.72. PLDT challenged the power of the city government to collect the local franchise tax and
demanded a refund of what it had paid as local franchise tax for the year 1997 and for the first to the third
quarters of 1998. For this reason, it filed a petition in the Regional Trial Court of Davao. However, its
petition was dismissed and its claim for exemption under R.A. No. 7925 was denied. The trial court ruled
that the LGC had withdrawn tax exemptions previously enjoyed by persons and entities and authorized
local government units to impose a tax on businesses enjoying franchises within their territorial
jurisdictions, notwithstanding the grant of tax exemption to them. Petitioner, therefore, brought this appeal.
In its decision of August 22, 2001, this Court, through its Second Division, held that R.A. No. 7925, 23
cannot be so interpreted as granting petitioner exemption from local taxes because the word "exemption,"
taking into consideration the context of the law, does not mean "tax exemption." Hence this motion for
reconsideration.
The question is whether, by virtue of R.A. No. 7925, 23, PLDT is again entitled to exemption from the
payment of local franchise tax in view of the grant of tax exemption to Globe and Smart.
Petitioner contends that because their existing franchises contain "in lieu of all taxes" clauses, the same
grant of tax exemption must be deemed to have become ipso facto part of its previously granted
telecommunications franchise. But the rule is that tax exemptions should be granted only by clear and
unequivocal provision of law "expressed in a language too plain to be mistaken."4 If, as PLDT contends,
the word "exemption" in R.A. No. 7925 means "tax exemption" and assuming for the nonce that the
charters of Globe and of Smart grant tax exemptions, then this runabout way of granting tax exemption to
PLDT is not a direct, "clear and unequivocal" way of communicating the legislative intent.
But the best refutation of PLDTs claim that R.A. No. 7925, 23 grants tax exemption is the fact that after
its enactment on March 16, 1995, Congress granted several franchises containing both an "equality
clause" similar to 23 and an "in lieu of all taxes" clause. If the equality clause automatically extends the
tax exemption of franchises with "in lieu of all taxes" clauses, there would be no need in the same statute
for the "in lieu of all taxes" clause in order to extend its tax exemption to other franchises not containing
such clause. For example, the franchise of Island Country Telecommunications, Inc., granted under R.A.
No. 7939 and which took effect on March 22, 1995, contains the following provisions:
Sec. 8. Equality Clause. If any subsequent franchise for telecommunications service is awarded
or granted by the Congress of the Philippines with terms, privileges and conditions more favorable
and beneficial than those contained in this Act, then the same privileges or advantages shall ipso
facto accrue to the herein grantee and be deemed part of this Act.
Sec. 10. Tax Provisions. The grantee shall be liable to pay the same taxes on their real estate,
buildings and personal property exclusive of this franchise, as other persons or
telecommunications entities are now or hereafter may be required by law to pay. In addition
hereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent
(3%) of all gross receipts transacted under this franchise, and the said percentage shall be in lieu
of all taxes on this franchise or earnings thereof; Provided, That the grantee shall continue to be
liable for income taxes payable under Title II of the National Internal Revenue Code. The grantee
shall file the return with and pay the taxes due thereon to the Commissioner of Internal Revenue
or his duly authorized representatives in accordance with the National Revenue Code and the
return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis added)
Similar provisions ("in lieu of all taxes" and equality clauses) are also found in the franchises of Cruz
Telephone Company, Inc.,5 Isla Cellular Communications, Inc.,6 and Islatel Corporation.7
We shall now turn to the other points raised in the motion for reconsideration of PLDT.
First. Petitioner contends that the legislative intent to promote the development of the telecommunications
industry is evident in the use of words as "development," "growth," and "financial viability," and that the
way to achieve this purpose is to grant tax exemption or exclusion to franchises belonging in this industry.
Furthermore, by using the words "advantage," "favor," "privilege," "exemption," and "immunity" and the
terms "ipso facto," "immediately," and "unconditionally," Congress intended to automatically extend
whatever tax exemption or tax exclusion has been granted to the holder of a franchise enacted after the
LGC to the holder of a franchise enacted prior thereto, such as PLDT.
The contention is untenable. The thrust of the law is to promote the gradual deregulation of entry, pricing,
and operations of all public telecommunications entities and thus to level the playing field in the
telecommunications industry. An intent to grant tax exemption cannot even be discerned from the law. The
records of Congress are bereft of any discussion or even mention of tax exemption. To the contrary, what
the Chairman of the Committee on Transportation, Rep. Jerome V. Paras, mentioned in his sponsorship of
H.B. No. 14028, which became R.A. No. 7925, were "equal access clauses" in interconnection
agreements, not tax exemptions. He said:
There is also a need to promote a level playing field in the telecommunications industry. New
entities must be granted protection against dominant carriers through the encouragement
of equitable access charges and equal access clauses in interconnection agreements and the
strict policing of predatory pricing by dominant carriers. Equal access should be granted to all
operators connecting into the interexchange network. There should be no discrimination against
any carrier in terms of priorities and/or quality of service.8
Nor does the term "exemption" in 23 of R.A. No. 7925 mean tax exemption. The term refers to
exemption from certain regulations and requirements imposed by the National Telecommunications
Commission (NTC). For instance, R.A. No. 7925, 17 provides: "The Commission shall exempt any
specific telecommunications service from its rate or tariff regulations if the service has sufficient
competition to ensure fair and reasonable rates or tariffs." Another exemption granted by the law in line
with its policy of deregulation is the exemption from the requirement of securing permits from the NTC
every time a telecommunications company imports equipment.9
Second. PLDT says that the policy of the law is to promote healthy competition in the telecommunications
industry.10 According to PLDT, the LGC did not repeal the "in lieu of all taxes" provision in its franchise but
only excluded from it local taxes, such as the local franchise tax. However, some franchises, like those of
Globe and Smart, which contain "in lieu of all taxes" provisions were subsequently granted by Congress,
with the result that the holders of franchises granted prior to January 1, 1992, when the LGC took effect,
had to pay local franchise tax in view of the withdrawal of their local tax exemption. It is argued that it is
this disparate situation which R.A. No. 7925, 23 seeks to rectify.
One can speak of healthy competition only between equals. For this reason, the law seeks to break up
monopoly in the telecommunications industry by gradually dismantling the barriers to entry and granting to
new telecommunications entities protection against dominant carriers through equitable access charges
and equal access clauses in interconnection agreements and through the strict policing of predatory
pricing by dominant carriers.11 Interconnection among carriers is made mandatory to prevent a dominant
carrier from delaying the establishment of connection with a new entrant and to deter the former from
imposing excessive access charges.12
That is also the reason there are franchises13 granted by Congress after the effectivity of R.A. No. 7925
which do not contain the "in lieu of all taxes" clause, just as there are franchises, also granted after March
16, 1995, which contain such exemption from other taxes.14 If, by virtue of 23, the tax exemption granted
under existing franchises or thereafter granted is deemed applicable to previously granted franchises (i.e.,
franchises granted before the effectivity of R.A. No. 7925 on March 16, 1995), then those franchises
granted after March 16, 1995, which do not contain the "in lieu of all taxes" clause, are not entitled to tax
exemption. The "in lieu of all taxes" provision in the franchises of Globe and Smart, which are relatively
new entrants in the telecommunications industry, cannot thus be deemed applicable to PLDT, which had
virtual monopoly in the telephone service in the country for a long time,15 without defeating the very policy
of leveling the playing field of which PLDT speaks.
Third. Petitioner argues that the rule of strict construction of tax exemptions does not apply to this case
because the "in lieu of all taxes" provision in its franchise is more a tax exclusion than a tax exemption.
Rather, the applicable rule should be that tax laws are to be construed most strongly against the
government and in favor of the taxpayer.
This is contrary to the uniform course of decisions16 of this Court which consider "in lieu of all taxes"
provisions as granting tax exemptions. As such, it is a privilege to which the rule that tax exemptions must
be interpreted strictly against the taxpayer and in favor of the taxing authority applies. Along with the
police power and eminent domain, taxation is one of the three necessary attributes of sovereignty.
Consequently, statutes in derogation of sovereignty, such as those containing exemption from taxation,
should be strictly construed in favor of the state. A state cannot be stripped of this most essential power by
doubtful words and of this highest attribute of sovereignty by ambiguous language.17
Indeed, both in their nature and in their effect there is no difference between tax exemption and tax
exclusion. Exemption is an immunity or privilege; it is freedom from a charge or burden to which others are
subjected.18Exclusion, on the other hand, is the removal of otherwise taxable items from the reach of
taxation, e.g., exclusions from gross income and allowable deductions.19 Exclusion is thus also an
immunity or privilege which frees a taxpayer from a charge to which others are subjected. Consequently,
the rule that tax exemption should be applied in strictissimi juris against the taxpayer and liberally in favor
of the government applies equally to tax exclusions. To construe otherwise the "in lieu of all taxes"
provision invoked is to be inconsistent with the theory that R.A. No. 7925, 23 grants tax exemption
because of a similar grant to Globe and Smart.
Petitioner cites Cagayan Electric Power & Light Co., Inc. v. Commissioner of Internal Revenue20 in support
of its argument that a "tax exemption" is restored by a subsequent law re-enacting the "tax exemption." It
contends that by virtue of R.A. No. 7925, its tax exemption or exclusion was restored by the grant of tax
exemptions to Globe and Smart. Cagayan Electric Power & Light Co., Inc., however, is not in point. For
there, the re-enactment of the exemption was made in an amendment to the charter of Cagayan Electric
Power and Light Co.
Indeed, petitioners justification for its claim of tax exemption rests on a strained interpretation of R.A. No.
7925, 23. For petitioners claim for exemption is not based on an amendment to its charter but on a
circuitous reasoning involving inquiry into the grant of tax exemption to other telecommunications
companies and the lack of such grant to others,21 when Congress could more clearly and directly have
granted tax exemption to all franchise holders or amend the charter of PLDT to again exempt it from tax if
this had been its purpose.
The fact is that after petitioners tax exemption by R.A. No. 7082 had been withdrawn by the LGC,22 no
amendment to re-enact its previous tax exemption has been made by Congress. Considering that the
taxing power of local government units under R.A. No. 7160 is clear and is ordained by the Constitution,
petitioner has the heavy burden of justifying its claim by a clear grant of exemption.23
Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of
language too plain to be mistaken.24 They cannot be extended by mere implication or inference. Thus, it
was held in Home Insurance & Trust Co. v. Tennessee25 that a law giving a corporation all the "powers,
rights reservations, restrictions, and liabilities" of another company does not give an exemption from
taxation which the latter may possess. In Rochester R. Co. v. Rochester,26 the U.S. Supreme Court, after
reviewing cases involving the effect of the transfer to one company of the powers and privileges of another
in conferring a tax exemption possessed by the latter, held that a statute authorizing or directing the grant
or transfer of the "privileges" of a corporation which enjoys immunity from taxation or regulation should not
be interpreted as including that immunity. Thus:
We think it is now the rule, notwithstanding earlier decisions and dicta to the contrary, that a
statute authorizing or directing the grant or transfer of the "privileges" of a corporation which
enjoys immunity from taxation or regulation should not be interpreted as including that immunity.
We, therefore, conclude that the words "the estate, property, rights, privileges, and franchises" did
not embrace within their meaning the immunity from the burden of paving enjoyed by the Brighton
Railroad Company. Nor is there anything in this, or any other statute, which tends to show that the
legislature used the words with any larger meaning than they would have standing alone. The
meaning is not enlarged, as faintly suggested, by the expression in the statute that they are to be
held by the successor "fully and entirely, and without change and diminution," words of
unnecessary emphasis, without which all included in "estate, property, rights, privileges, and
franchises" would pass, and with which nothing more could pass. On the contrary, it appears, as
clearly as it did in the Phoenix Fire Insurance Company Case, that the legislature intended to use
the words "rights, franchises, and privileges" in the restricted sense. . . .27
Fourth. It is next contended that, in any event, a special law prevails over a general law and that the
franchise of petitioner giving it tax exemption, being a special law, should prevail over the LGC, giving
local governments taxing power, as the latter is a general law. Petitioner further argues that as between
two laws on the same subject matter which are irreconcilably inconsistent, that which is passed later
prevails as it is the latest expression of legislative will.
This proposition flies in the face of settled jurisprudence. In City Government of San Pablo, Laguna v.
Reyes,28this Court held that the phrase "in lieu of all taxes" found in special franchises should give way to
the peremptory language of 193 of the LGC specifically providing for the withdrawal of such exemption
privileges. Thus, the rule that a special law must prevail over the provisions of a later general law does not
apply as the legislative purpose to withdraw tax privileges enjoyed under existing laws or charters is
apparent from the express provisions of 137 and 193 of the LGC.
As to the alleged inconsistency between the LGC and R.A. No. 7925, this Court has already explained in
the decision under reconsideration that no inconsistency exists and that the rule that the later law is the
latest expression of the legislature does not apply. The matter need not be further discussed.
In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that
petitioners exemption from local taxes has been restored is a contemporaneous construction of 23 and,
as such, it is entitled to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which is a
special court created for the purpose of reviewing tax cases, the BLGF was created merely to provide
consultative services and technical assistance to local governments and the general public on local
taxation and other related matters.29 Thus, the rule that the "Court will not set aside conclusions rendered
by the CTA, which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority"30cannot apply in the case of BLGF.
WHEREFORE, the motion for reconsideration is DENIED and this denial is final.
SO ORDERED.
Davide, Jr., C.J., Quisumbing, Corona, Carpio-Morales, Callejo, Sr., and Azcuna, JJ., concur.
Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, and Austria-Martinez, JJ., join the dissent of J. Puno.
Puno, J., please see dissent.
Vitug, J., I concur; a statute effectively limiting the constitutionally-delegated tax powers of LGUs can only
be done in a clear and express manner.
Panganiban, J., no part. Same reason given in original decision.
Carpio, J., see separate opinion.
Dissenting Opinion
PUNO, J.:
The sole issue in the case at bar is whether petitioner Philippine Long Distance Telephone Company, Inc.
(PLDT) is liable to pay the franchise tax imposed by the City of Davao. The issue can be resolved only by
untangling the different laws dealing with local government and the telecommunications industry. It is thus
necessary to first lay down these laws.
On January 1, 1992, the Local Government Code took effect. The Code pertinently provides:
"Sec. 137. Franchise Tax.- Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on business enjoying a franchise, at a rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year
based on the incoming receipt, or realized, within its territorial jurisdiction. . .
Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
juridical, including government-owned or controlled corporations, except local water districts,
educational institutions, are hereby withdrawn upon the effectivity of this Code."
In accord with this Code, the City of Davao enacted Ordinance No. 519, Series of 1992. It provides:
"Notwithstanding any exemption granted by any law or other special law, there is hereby imposed
a tax on business enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%)
of the gross annual receipts for the preceding calendar year based on the income or receipts
realized within the territorial jurisdiction of Davao City."
On March 19, 1992, Congress enacted Republic Act No. 7229 entitled "An Act approving the merger
between Globe Mackay Cable and Radio Corporation and Clavecilla Radio System and the consequent
transfer of the franchise of Clavecilla Radio System granted under Republic Act No. 402, as amended,
to Globe Mackay Cable and Radio Corporation, extending the life of said franchise and repealing certain
sections of RA No. 402, as amended." Section 3 thereof provides:
"Sec. 3. Section 9 of the same Act is hereby amended to read as follows:
Sec. 9. . .
(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit and
approval of the accounts as prescribed in this Act, one and one-half per centum of all gross
receipts from business transacted under this franchise by the said grantee in the Philippines, in
lieu of any and all taxes of any kind, nature or description levied, established or collected by any
authority whatsoever, municipal, provincial or national from which the grantee is hereby expressly
exempted, effective from the date of the approval of R.A. No.1618. . ."
Section 5 provides:
"Sec. 5. Section twenty of the same Act is hereby amended to read as follows:
Sec. 20. This franchise shall not be interpreted to mean an exclusive grant of the privileges herein
provided for, however, in the event of any competing individual, partnership, or corporation,
receiving from the Congress of the Philippines a similar permit or franchise more favorable than
those herein granted or tending to place the herein grantee at any disadvantage, then such term
or terms, shall ipso facto become part of the terms hereof, and shall operate equally in favor of the
grantee as in the case of said competing individual, partnership or corporation."
On March 27, 1992, Congress enacted Republic Act No. 7294 entitled "An Act granting Smart Information
Technologies, Inc. (SMART) a franchise to establish, maintain, lease and operate integrated
telecommunications/computer/electronic services, and stations throughout the Philippines for public
domestic and international communications, and for other purposes." Section 9 of the Act provides:
"Section 9. Tax provisions.- The grantee, its successors or assigns shall be liable to pay the same
taxes on their real estate buildings and personal property, exclusive of this franchise, as other
persons or corporations which are now or hereafter may be required by law to pay. In addition
thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent
(3%) of all gross receipts of the business transacted under this franchise by the grantee, its
successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or
earnings thereof. . ."
On March 16, 1995, Republic Act No. 7925 entitled "Public Telecommunications Policy" was enacted.
Section 23 of the Act states:
"Section 23. Equality of Treatment in the Telecommunications Industry.- Any advantage, favor,
privilege, exemption, or immunity granted under existing franchise, or may hereafter be granted,
shall ipso facto become part of previously granted telecommunications franchises and shall be
accorded immediately and unconditionally to the grantees of such franchises: Provided, however,
that the foregoing shall neither apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the franchise, or the type of service
authorized by the franchise."
It also appears that after 1995, Congress enacted laws granting franchises to other telecommunications
companies. Some of these franchises contain the "in lieu of all taxes" clause as well as the "equality
clause." The others, however, did not.1
On the basis of these laws, petitioner PLDT wrote to the City Treasurer of Davao protesting the
assessment of the local franchise tax amounting to P3,681,985.75 for the year 1999. It likewise claimed
exemption from the payment of said franchise tax on the basis of the opinion of the Bureau of Local
Government Finance (BLGF). The opinion holds that petitioner is exempt from payment of franchise and
business taxes imposable by local government units upon the effectivity of Republic Act No. 7925 on
March 16, 1995. The protest was denied by the City Treasurer of Davao. Petitioner challenged the denial
in Branch 13 of the RTC of Davao but was unsuccessful. The trial court ruled that the Local Government
Code had withdrawn the tax exemption previously granted to petitioner PLDT.
Petitioner thus filed a petition for review on certiorari with this Court. On August 22, 2001, the Second
Division of this Court denied the petition. It held: (1) petitioners claim of tax exemption is based on
strained inferences; (b) the claim would result in absurd consequences; (c) the word "exemption" in RA
No, 7925, sec. 23 does not mean "tax exemption"; and (d) there can be no reliance on the alleged
expertise of the BLGF for the issue involves the interpretation of a law.
Petitioner contends in its Motion for Reconsideration, viz:
"A. THE ABSURD CONSEQUENCES REFERRED TO BY THE COURT AS ALLEGEDLY

RESULTING FROM PETITIONERS POSITION(,) HAVE NO BASIS IN FACT AND IN LAW; IN
ANY CASE, FOR THE COURT TO SAY THAT PETITIONERS POSITION WOULD RESULT IN
ABSURD CONSEQUENCES, IS TO QUESTION, UNDER THE GUISE OF INTERPRETATION,
THE WISDOM OF THE POLICY BEHIND REPUBLIC ACT NO. 7925.
B. THE PROVISIONS OF SECTION 23 OF REPUBLIC ACT NO. 7925 ARE CLEAR AND NEED
NO INTERPRETATION; ASSUMING THERE IS A NECESSITY FOR INTERPRETATION, THE
RULING OF THE BUREAU OF LOCAL GOVERNMENT FINANCE, WHICH IS A
CONTEMPORANEOUS CONSTRUCTION OF SECTION 23 AND IS THEREFORE ENTITLED
TO GREAT WEIGHT, SHOULD BE CONSIDERED BY THE COURT.
C. SECTION 23 OF REPUBLIC ACT NO. 7925 CLEARLY GRANTS A TAX EXEMPTION OR TAX
EXCLUSION TO PETITIONER.
D. THE AUTHORITIES ON STRICT CONSTRUCTION CITED BY THE COURT HAVE NO

APPLICATION IN THIS CASE.
E. THE IN LIEU OF ALL TAXES PROVISION IN PETITIONERS FRANCHISE WAS DEEMED

RESTORED WITH REGARD TO LOCAL TAXES BY SECTION 23 OF REPUBLIC ACT NO. 7925
IN RELATION TO THE FRANCHISES OF GLOBE TELECOM, INC. AND SMART
COMMUNICATIONS, INC.
F. THE COURT FAILED TO CONSIDER THE OTHER ARGUMENTS OF PETITIONER."
Petitioners Motion for Reconsideration was elevated to the Court en banc considering its significance and
as similar cases are pending decision in its other divisions.
The majority will now deny petitioners motion for reconsideration. It holds that section 23 of Republic Act
No. 7925 mandating equality of treatment in the telecommunications industry and relied upon by the
petitioner is not "clear and unequivocal." Again, I quote section 23, viz:
"Sec. 23. Equality of Treatment in the Telecommunications Industry - Any advantage, favor,
privilege, exemption, or immunity granted under existing franchise or may hereafter be granted,
shall ipso facto become part of previously granted telecommunications franchise and shall be
accorded immediately and unconditionally to the grantees of such franchises . . ."
I cannot understand what is unclear in section 23. Favor, privilege, exemption and immunity are ordinary
words without any mystic meaning. The provision states without any flourish that if any favor, privilege,
exemption or immunity is granted in the franchise of any telecommunications company, it will be deemed
granted to other telecommunications companies with prior franchises. The grant is unequivocal for the
provision directs that it is "ipso facto," and should be "immediately and unconditionally." The language of
the law cannot be more limpid, indeed, the work of a worthy wordsmith.
Next, the majority holds that "x x x the best refutation of PLDTs claim that RA No. 7925, section 23 grants
tax exemption is the fact that after its enactment on March 16, 1995, Congress granted several franchises
containing both an equality clause similar to section 23 and an in lieu of all taxes clause."2 It cites the
laws granting franchises to the Island Country Telecommunications, Inc., Cruz Telephone Company, Inc.,
ISLA Cellular Communications, Inc., and Islatel Corporation.3
I agree that all these subsequent laws should be considered and not only the laws granting exemptions to
Smart and Globe. With due respect, however, I have great difficulty following the flow of the logic of the
majority. To my mind, the reiteration of the "equality clause" as well as the "in lieu of all taxes clause" in
the telecommunications franchises granted by Congress after March 16, 1995 fortifies the claim for
exemption of the petitioner. The reiteration of the clauses shows that Congress never wavered in its
touchstone policy of equalizing the status of our companies in the telecommunications industry. To be
sure, Congress need not reiterate the "equality clause" and the "in lieu of all taxes clause" in these
subsequent telecommunications franchises for without it, Republic Act No. 7925, section 23 could still be
availed of by them. The reiteration is simply a stubborn stress on the importance of equality in the entire
telecommunications industry but the majority inexplicably reads it as denying the rule of equality to the
petitioner. By treating alikes as unalike, the majority is violating the equal protection clause of the
Constitution.
Further to its stance that the law is vague, the majority parleys the proposition that "an intent to grant tax
exemption cannot even be discerned from the law." It quotes the sponsorship speech of Rep. Jerome B.
Paras of H.B. No. 14028, viz:4
"There is also a need to promote a level playing field in the telecommunications industry. New
entities must be granted protection against dominant carriers through the encouragement of
equitable access charges and equal access clauses in interconnection agreements and the strict
policing of predatory pricing by dominant carriers. Equal access should be granted to all operators
connecting into the inter-exchange network. There should he no discrimination against any carrier
in terms of priorities and/or equality of service."
Again, I do not see how this one-paragraph observation of Congressman Paras can serve as a crutch to
support the majority ruling. Congressman Paras merely clarified that the aim of the law is to promote a
level playing field in the telecommunications industry. And, doubtless, one way of leveling the playing field
is by granting equal access to all operators connecting into the inter-exchange network. But this is not
all that has to be done to level the playing field. There are other acts and practices that distort the playing
field in the telecommunications industry and they were addressed by Congress. One destructive practice
that can really dislevel the playing field is the imposition of discriminatory tax. Precisely to eliminate these
practices, Congress enacted section 23 decreeing for equality of treatment of all companies in the
telecommunications industry. By one sweep, it did away with the grant of unequal favors to
telecommunication companies, which is anathema to fair competition in deregulated industries.
More untenable is the majority ruling that "exemption" in section 23 does not refer to tax exemption but
"exemptions from certain regulations and requirements imposed by the National Telecommunications
Commission" like for instance, exemption from securing permits for every import equipment. The ruling is
not based on any clear cut provision of law but is a mere surmise. It is all too easy for the law to define
exemption as the majority interprets it but the law did not. I submit that the majority reading of the word
"exemption" collides with the basic rule in statutory construction that the meaning of a word should be
understood in light of the cluster of words to which it is associated. The word "exemption" is clustered with
the words "advantage, favor, privilege and immunity." Its most natural meaning is that it refers, to and at
least includes, tax exemption.
Petitioner has also called our attention to what would result from the majority decision under
reconsideration - "x x x the result is that while the holders of franchise granted prior to January 1, 1992
when the LGC took effect, had to pay local franchise tax in view of the withdrawal of their local tax
exemption, those whose franchises were granted after January 1, 1992, because of the in lieu of all taxes
provisions contained therein, were exempted from such local tax."5 The disparate treatment, petitioner
contends, will not promote healthy competition in the telecommunications industry. The majority, however,
dismisses petitioners fear by holding:
"One can speak of healthy competition only between equals. For this reason, the law seeks to
break up monopoly in the telecommunications industry by gradually dismantling the barriers to
entry and granting to new telecommunications entities protection against dominant carriers
through equitable access charges and equal access clauses in interconnection agreements and
through the strict policing of predatory pricing by dominant carriers. Interconnection among
carriers is made mandatory to prevent a dominant carrier from delaying the establishment of
connection with a new entrant and to deter the former from imposing excessive access charges.
"That is also the reason there are franchises granted by Congress after the effectivity of R.A. No.
7925 which do not contain the in lieu of all taxes clause, just as there are franchises, also granted
after March 16, 1995, which contain such exemption from other taxes. If, by virtue of section 23,
the tax exemption granted under existing franchises or thereafter granted is deemed applicable to
previously granted franchises (i.e., franchises granted before the effectivity of R.A. No. 7925 on
March 16, 1995), then those franchises granted after March 16, 1995, which do not contain the in
lieu of all taxes clause, are not entitled to tax exemption. The in lieu of all taxes provision in the
Franchises of Globe and Smart, which are relatively new entrants in the telecommunications
industry, cannot thus be deemed applicable to PLDT, which had virtual monopoly in the telephone
service in the country for a long time, without defeating the very policy of leveling the playing field
of which PLDT speaks."6
Again, I am unable to agree with the majority. With due respect, the majority fails to grasp the processes
of deregulation followed in the telecommunications industry. The key move to take before deregulating is
to break up the monopoly or oligopoly in control of the industry. For with a monopoly or oligopoly enjoying
a stranglehold on the industry, the market forces cannot have a free play and prices in the industry will be
dictated by the lucre of commerce. For this reason. petitioner PLDTs monopoly had to be broken. Among
others, the law made interconnection among carriers mandatory and provided for equitable access
charges and equal access clauses in interconnection agreements. With this provision, the law busted the
biggest barrier to the effective entry of new players in the telecommunications industry. The next step in
deregulation is to level the playing field. The mechanism for leveling the playing field is installed in section
23 of the law which requires equality of treatment in the telecommunications industry. In no uncertain
terms, it orders that "any advantage, favor, privilege, exemption, or immunity granted under existing
franchise, or may hereafter be granted, shall ipso facto become part of previously granted
telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of
such franchises xxx." A level playing field is indispensable to prevent predatory pricing on the part of any
player in the industry. Without a level playing field, competition will be unfair and prices in the industry will
not be determined by market forces but by unregulated greed. Inexplicably, the majority would deny to
petitioner PLDT the right to a level playing field. Its reasons are tenuous to say the least. Its prime reason
is that petitioner PLDT had enjoyed virtual monopoly in the telephone service in the country for a long
time.7 The monopoly status of petitioner PLDT is past and should be viewed in its propel historical
perspective. In the early years of our economic history, monopolies in certain industries had to be allowed.
They have to be entertained in industries which are high-risk, capital intensive and indispensable to
economic growth. No company will risk venture capital in these industries unless they are accorded
favored treatment, usually a monopoly status, for a certain time. Even then, administrative mechanisms
were put in place to regulate their activities especially their pricing policies to protect the interest of the
consuming public. Indeed, a great part of the United States would still be a wilderness if it did not allow
monopolies in its railroad and telecommunications industries. We adopted this proven strategy and
allowed monopolies in some of our industries like electric power, transportation and telecommunications. It
is in line with this strategy that Congress granted to petitioner PLDT a monopoly status for a certain time.
No company would then invest in our telecommunications industry but petitioner PLDT did, assumed the
risk and undeniably played a vital role in our economic development which cannot be dismissed as
insignificant. For this reason, our Constitution does not ban monopolies as evil per se for they are not.
It appears that a misappreciation of the past dominant role of petitioner PLDT in our telecommunications
industry has poisoned the position of the majority. The majority thinks that if it orders equal tax treatment
to petitioner vis--vis the other companies in the telecommunications industry, there will be inequality
because there is no parity between them in terms of resources. Following this thought, the majority again
surmises that the strategy of Congress to achieve equality in the industry is to grant exemptions on a case
to case basis. Thus, it holds that "that is xxx the reason there are franchises granted by Congress after the
effectivity of R.A. No. 7925 which do not contain the in lieu of all taxes clause, just as there are
franchises, also granted after March 16, 1995, which contain such exemption from other taxes."8 Footnote
no. 13 of the majority decision cites a list of telecommunications companies whose franchises do not
contain the "in lieu of all taxes" clause while footnote no. 14 cites the companies whose franchises contain
the said clause. A cursory glance at the companies in footnote no. 13 will, however, show that they are not
the giant-type which will explain why their franchises do not contain the "in lieu of all taxes" clause.
Similarly, there appears in footnote no. 14 big companies yet their franchises contain the aforesaid clause.
Significantly, the majority does not cite the legislative proceedings of the laws granting these franchises to
support its ruling that the grant or non-grant of the "in lieu of all taxes" clause in the franchises of the
companies involved is part of the strategy of Congress to equalize them and level the playing field in the
telecommunications industry. The ruling is an ex-cathedra pronouncement unsupported by any footnote.
Again, I submit the view that section 23 granted equal tax treatment to all telecommunications companies
and to stress again, this was done only after breaking up the monopoly in the industry. Today, petitioner
PLDT no longer controls the industry and there is no reason to treat it unequally from other companies.
The inclusion of the "in lieu of all taxes" clause in some franchises simply reiterates section 23 of Republic
Act No. 7925. The non-inclusion of the clause in other franchises does not mean its non-grant for the
exemption can be claimed under section 23 of Republic Act 7925 which still stands for it has not been
repealed by any subsequent law. By insisting that petitioner cannot claim its tax exemption because of its
prior dominant status, the majority is substituting its own concept of equality from that of section 23, and it
is restructuring the level playing field designed by the legislature. It is not our business to construct the law
hut to construe it for we are not another chamber of Congress.
I vote to grant the Motion for Reconsideration.
Separate Opinion
Carpio, J.:
I concur in the result of the ponencia of Justice Vicente V. Mendoza that petitioner Philippine Long
Distance Telephone Company, Inc. (PLDT) is subject to the local franchise tax imposed by the City of
Davao.
My concurrence is based on two grounds. First, the "in lieu of all taxes" clause was not re-enacted in the
franchise of Globe Mackay Cable and Radio Corporation (Globe) when Congress adopted Republic Act
No. 7229 approving the merger of Globe and Clavecilla Radio System (Clavecilla). Second, the "in lieu of
all taxes" clause in the franchise of Smart Communications, Inc. (Smart) has become functus officio with
the abolition of the franchise tax on telecommunications companies. Moreover, this clause applies only to
national internal revenue taxes and not to local taxes.
PLDT claims that the "in lieu of all taxes" clause in the franchises of Globe and Smart applies to PLDT by
virtue of the equality clause1 in Republic Act No. 7925. However, if the "in lieu of all taxes" clauses in the
franchises of Globe and Smart are no longer in effect, then PLDTs claim to tax exemption will necessarily
fail even if the equality clause applies to tax exemptions. I find that Globes existing franchise has no "in
lieu of all taxes" clause. I also find that the abolition of the franchise tax on telecommunications companies
and its replacement by the value-added tax (VAT) effective January 1, 1996 has rendered ineffective the
"in lieu of all taxes" clause in the franchise of Smart.
On June 19, 1965, Republic Act No. 4540 amended the franchise of Clavecilla and inserted the following
"in lieu of all taxes" clause in Section 9 (b) of its franchise:
"The grantee shall further pay to the Treasurer of the Philippines each year after the audit and
approval of the accounts as prescribed in this Act, one and one-half per centum of all gross
receipts from business transacted under this franchise by the said grantee in the Philippines, in
lieu of any and all taxes of any kind, nature or description levied, established or collected by an
authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly
exempted, effective from the date of the approval of Republic Act Numbered Sixteen Hundred
Eighteen."
On the other hand, the franchise of Globe contained no "in lieu of all taxes" clause.
The Local Government Code of 1991,2 which took effect on January 1, 1992, repealed Section 9(b) of
Clavecillas franchise with respect to local taxes. Sections 137, 151, and 193 of the Local Government
Code of 1991 provide that
"Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding
year based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereon, as provided herein."
"Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes."
"Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
cooperatives duly registered under RA No. 6938, non-stock and non-profit hospitals and
Thus, from January 1, 1992 up to the enactment on March 19, 1992 of RA No. 7229, Clavecilla did not
enjoy, with respect to local taxes, the tax exemption under its "in lieu of all taxes" clause. The only
question is whether RA No. 7229 re-enacted Section 9 (b) of Clavecillas old franchise to restore its "in lieu
of all taxes" clause, at least with respect to local taxes.
The answer is a categorical no for two reasons. First, there is no language in RA No. 7229, express or
even implied, re-enacting Section 9 (b) of Clavecillas old franchise with respect to local taxes. RA No.
7229 merely approved the merger of Globe and Clavecilla, and transferred the then existing franchise3 of
Clavecilla to the surviving corporation, Globe. When Congress approved RA No. 7229, Clavecillas then
existing franchise did not contain the "in lieu of all taxes" clause with respect to local taxes. Logically, the
transfer of Clavecillas franchise to Globe did not transfer the "in lieu of all taxes" clause since Clavecillas
franchise no longer had such clause with respect to local taxes.
Second, RA No. 7229 expressly provides that original provisions of the franchise of Clavecilla under
Republic Act No. 402, as amended, which have not been repealed, shall continue in full force and effect.
The clear intent of the law is that provisions in Clavecillas franchise which had already been repealed as
of the enactment of RA No. 7229 shall remain repealed and shall not be re-enacted with the passage of
RA No. 7229. Thus, Section 11 of RA No. 7229 states
"All other provisions of Republic Act No. 402, as amended by Republic Act Nos. 1618 and 4540,
and other provisions of Batas Pambansa Blg. 95 which are not inconsistent with the provisions of
this Act and are still unrepealed shall continue to be in full force and effect." (Emphasis supplied)
Clearly, Congress did not intend to re-enact any of the provisions in the franchise of Clavecilla that had
already been repealed by prior laws.
Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common
burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. Tax exemptions
cannot arise by mere implication, much less by an implied re-enactment of a repealed tax exemption
clause. In the instant case, there is even no implied re-enactment of Section 9 (b) of Clavecillas old
franchise since Section 11 of RA No. 7229 expressly states that only unrepealed provisions of Clavecillas
franchise shall continue in force and effect. Measured against these well-recognized principles of taxation,
PLDTs claim to tax exemption based on the franchise of Globe must necessarily fail.
PLDT also relies on Smarts franchise which PLDT claims contains the "in lieu of all taxes" clause. PLDT
points to Section 9 of Republic Act No. 7294, Smarts franchise, which states -
"Tax provisions. - The grantee, its successors or assigns shall be liable to pay the same taxes on
their real estate, buildings and personal property, exclusive of this franchise, as other persons or
corporations which are now or hereafter may be required by law to pay. In addition thereto, the
grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all
gross receipts of the business transacted under this franchise by the grantee, its successors or
assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof:
Provided, that the grantee, its successors or assigns shall continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive
Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment
or repeal shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the commissioner of internal
Revenue or his duly authorized representative in accordance with the National Internal Revenue
Code and the return shall be subject to audit by the Bureau of Internal Revenue." (Emphasis
supplied)
RA No. 7294 took effect on May 27, 1992, after the effectivity of the Local Government Code of 1991.
Thus, the withdrawal of tax exemptions in the Local Government Code cannot apply to Smart, Applying
the equality clause in Section 23 of RA No. 7925. PLDT claims that the "in lieu of all taxes" clause in
Smarts franchise should also benefit PLDT.
PLDTs reliance on the "in lieu of all taxes" clause in Smarts franchise is misplaced for two reasons. First,
Republic Act No. 7716 abolished the franchise tax on telecommunications companies effective January 1,
1996. To replace the 3 percent franchise tax in Section 227 (now Section 119) of the National Internal
Revenue Code, RA No. 7716 imposed a 10 percent VAT on telecommunications companies under
Section 102 (now Section 108) of the Tax Code. As explained by PLDT, "presently, the
telecommunications companies do not anymore pay a franchise tax of varying percentages and instead
pay a uniform VAT of 10%."4 The franchise tax in Section 119 of the Tax Code still exists but is now
applicable only to "electric, gas and water utilities" and no longer to telecommunications companies.
The franchise tax is imposed only on franchise holders, while the VAT is imposed on all sellers of goods
and services, whether or not they hold franchises. The franchise tax is now imposed in Section 119 of the
Tax Code, while the VAT on telecommunications companies is imposed in Section 108 of the Tax Code.
The Tax Code defines the VAT as an indirect tax which can be passed on to the buyer. The Tax Code
precludes payment of a "VAT on the VAT" by excluding the VAT in computing the gross receipts. This is
not the case of the franchise tax. Certainly, the franchise tax is a different tax from the VAT.
Smarts franchise states that the 3 percent "franchise tax" shall be "in lieu of all taxes." Clearly, it is
the franchise tax that shall be in lieu of all taxes referred to in Section 9, and not the VAT or any other tax.
Following the rule on strict interpretation of tax exemptions, the "in lieu of all taxes" clause cannot apply
when what is paid is a tax other than the franchise tax. Since the franchise tax on telecommunications
companies has been abolished, the "in lieu of all taxes" clause has now become functus officio, rendered
inoperative for lack of a franchise tax. Revenue Memorandum Circular No. 5-96 issued by the
Commissioner of Internal Revenue stating that the VAT shall be "in lieu of all taxes" since it merely
replaced the franchise tax is void for lack of a legal basis.
Second, the "in lieu of all taxes" clause in Smarts franchise refers only to taxes, other than income tax,
imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to
local taxes. The proviso in the first paragraph of Section 9 of Smarts franchise states that the grantee
shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code."
Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner
of Internal Revenue or his duly authorized representative in accordance with the National Internal
Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by
the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is
for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not
to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does
not apply to income tax.
If Congress intended the "in lieu of all taxes" clause in Smarts franchise to also apply to local taxes,
Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress
could have used the language in Section 9 (b) of Clavecillas old franchise, as follows:
"x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected
by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby
expressly exempted, x x x." (Emphasis supplied)
However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all
taxes" clause only in reference to national internal revenue taxes. The only interpretation, under the rule
on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smarts franchise refers
only to national and not to local taxes.
PLDT cites Philippine Railway Co. v. Nolting5 to support its claim6 that the "in lieu of all taxes" clause
includes exemption from local taxes. However, in Philippine Railway the franchise of the railway company
expressly exempted it from municipal and provincial taxes, as follows:
"Such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes
of every name and nature -municipal, provincial or central - upon its capital stock, franchises, right
of way, earnings, and all other property owned or operated by the grantee, under this concession
or franchise." (Emphasis supplied)
If anything, Philippine Railway shows the need to avoid ambiguity by specifying the taxing authority -
municipal, provincial or national - from whose jurisdiction the taxing power is withheld to create the tax
exemption. This is not the case in Smarts franchise, where the "in lieu of all taxes" clause refers only to
national internal revenue taxes.
The existing legislative policy is clearly against the revival of the "in lieu of all taxes" clause in franchises of
telecommunications companies. After the VAT on telecommunications companies took effect on January
1, 1996, Congress never again included the "in lieu of all taxes" clause in any telecommunications
franchise it subsequently approved. Also, from September 2000 to July 2001, all the fourteen
telecommunications franchises7approved by Congress uniformly and expressly state that the franchisee
shall be subject to all taxes under the National Internal Revenue Code, except the specific tax. The
following is substantially the uniform tax provision in these fourteen franchises:
"Tax Provisions. - The grantee, its successors or assigns, shall be subject to the payment of all
taxes, duties, fees, or charges and other impositions under the National Internal Revenue Code of
1997, as amended, and other applicable laws: Provided, That nothing herein shall be construed as
repealing any specific tax exemptions, incentives or privileges granted under any relevant law:
Provided, further, That all rights, privileges, benefits and exemptions accorded to existing and
future telecommunications entities shall likewise be extended to the grantee."8 (Emphasis
supplied)
Thus, after the imposition of the VAT on telecommunications companies, Congress refused to grant any
tax exemption to telecommunications companies that sought new franchises from Congress, except the
exemption from specific tax. More importantly, the uniform tax provision in these new franchises expressly
states that the franchisee shall pay not only all taxes, except specific tax, under the National Internal
Revenue Code, but also all taxes under "other applicable laws." One of the "other applicable laws" is the
Local Government Code of 1991, which empowers local governments to impose a franchise tax on
telecommunications companies. This, to reiterate, is the existing legislative policy.
Lastly, although it has no bearing on the instant case, I find that the equality clause in Section 23 of RA
No. 7925 applies to tax exemptions. This Section provides as follows:
"Equality of Treatment in the Telecommunications Industry. -Any advantage, favor, privilege,

exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso
facto become part of previously granted telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning
territory covered by the franchise, the life span of the franchise, or the type of service authorized
by the franchise."
The legislative intent behind Section 23 is unquestionably to level the playing field among all competing
companies in the telecommunications industry. If one telecommunications company enjoys a tax
advantage over its competitors, while enjoying equal treatment with its competitors in all other aspects like
interconnection, fee sharing and the like, then there obviously will be no level playing field. A tax
exemption granted to one telecommunications company, but not to others, will sooner than later kill all its
competitors and result in a monopoly. This obviously is not the meaning of "equality of treatment."
Besides, a tax exemption granted to one or more, but not to all, telecommunications companies similarly
situated will violate the constitutional rule on uniformity of taxation.9 It will deny equal protection of the law
to those similarly situated but to whom the tax exemption is denied. A tax exemption granted to one or
some telecommunications companies, but not to all, can only be constitutionally justified if there is a
reasonable basis for classifying some companies exempt and others not exempt. RA No. 7925, which
prescribes the state policy on public telecommunications, does not allow any classification or
discrimination in the grant of any "advantage, favor, privilege, exemption, or immunity." This is precisely to
observe, as far as taxation is concerned, the rule of uniformity and thus significantly level the playing field.
The law mandates "equality of treatment" to promote a "healthy competitive environment."10 If this
manifest state policy is to have any meaning, Section 23 must include tax exemption.
Under Section 23, a tax exemption in a franchise granted after the effectivity of RA No. 7925 is deemed
automatically written in all prior franchises, whether the prior franchises were granted before or after the
effectivity of RA No. 7925. Section 23 states that a tax exemption in a new franchise "shall ipso
facto become part of previously granted telecommunications franchises." There is no limitation
whatsoever that only franchises issued prior to the effectivity of RA No. 7925 can benefit from Section 23.
To interpret such limitation in Section 23 is to negate the legislative intent in Section 23. Such a limitation
will result in unfair advantage to new franchisees, grossly distort market forces and prevent the level
playing field that Section 23 seeks to create.
That Section 23 uses the word "exemption" and not the term "tax exemption" does not exclude exemption
from tax, which by far is the most important exemption in a telecommunications franchise. If the word
"exemption" is inadequate to embrace tax exemption, then it will be inadequate to embrace any kind of
exemption. To have any significance, the law will have to spell out each kind of exemption before or after
the word "exemption," like "exemption from reportorial requirements," "exemption from monitoring
requirements" and the like. This will render the word "exemption" in Section 23 meaningless because at
present this word stands alone. Certainly, we must avoid an interpretation that will effectively erase the
word "exemption" from Section 23.
The reiteration in individual franchises of rights or privileges already guaranteed in RA No. 7925 does not
nullify or deny such guarantees in RA No. 7925. The right to a fair and reasonable interconnection is
expressly mandated in RA No. 7925.11 The same right is expressly reiterated in 2112 of the 23 franchises
approved by Congress after the effectivity of RA No. 7925 up to July 31, 2001. The reiteration does not
mean that the same right never existed in RA No. 7925, thus requiring the right to be expressly stated in
the individual franchises. No such inference can be drawn. Where a general law is enacted to regulate an
industry, it is common for individual franchises subsequently granted to restate the rights and privileges
already mentioned in the general law. This is the situation in 17 franchises13 granted after the effectivity of
RA No. 7925 up to July 31, 2001, all of which reiterate the equality clause found in Section 23 of RA No.
7925.
In view of the foregoing, I vote to deny the motion for reconsideration for lack of merit.
Exceptions
Maceda v. Macaraig, 196 SCRA 771 (1991)
G.R. No. 88291 May 31, 1991
ERNESTO M. MACEDA, petitioner,

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President;
HON. VICENTE R. JAYME, in his capacity as Secretary of the Department of Finance; HON.
SALVADOR MISON, in his capacity as Commissioner, Bureau of Customs; HON. JOSE U. ONG, in
his capacity as Commissioner of Internal Revenue; NATIONAL POWER CORPORATION; the
FISCAL INCENTIVES REVIEW BOARD; Caltex (Phils.) Inc.; Pilipinas Shell Petroleum Corporation;
Philippine National Oil Corporation; and Petrophil Corporation, respondents.
Villamor & Villamor Law Offices for petitioner.

Angara, Abello, Concepcion, Regala & Cruz for Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex (Phils.), Inc.
GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive
Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the
Fiscal Incentives Review Board FIRB for exempting the National Power Corporation (NPC) from indirect
tax and duties.
The relevant facts are not in dispute.

On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake
the development of hydraulic power and the production of power from other sources.1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities.
On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress
declared as a national policy the total electrification of the Philippines through the development of power
from all sources to meet the needs of industrial development and rural electrification which should be
pursued coordinately and supported by all instrumentalities and agencies of the government, including its
financial institutions.2 The corporate existence of NPC was extended to carry out this policy, specifically to
undertake the development of hydro electric generation of power and the production of electricity from
nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide
basis.3 Being a non-profit corporation, Section 13 of the law provided in detail the exemption of the NPC
from all taxes, duties, fees, imposts and other charges by the government and its instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of
Republic Act No. 6395 by specifying, among others, the exemption of NPC from such taxes, duties, fees,
imposts and other charges imposed "directly or indirectly," on all petroleum products used by NPC in its
operation. Presidential Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by
integrating the tax exemption in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including their subsidiaries.4 However, said law empowered
the President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially
or totally, the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and
duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and
duty exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB
issued resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July
1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty
incentives granted to government and private entities which had been restored under Presidential Decree
Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the scope and prescribe the date of
effectivity of such tax and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption
privileges effective March 10, 1987. On October 5, 1987, the President, through respondent Executive
Secretary Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties
originally paid by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the
BIR; and for Customs duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau
of Customs on its crude oil importation.
Many of the factual statements are reproduced from the Senate Committee on Accountability of
Public Officers and Investigations (Blue Ribbon) Report No. 474 dated January 12, 1989 and
approved by the Senate on April 21, 1989 (copy attached hereto as Annex "A") and are identified
in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931
was promulgated abolishing the tax exemptions of all government-owned or-controlled
corporations, the oil firms never paid excise or specific and ad valorem taxes for petroleum
products sold and delivered to the NPC. This non-payment of taxes therefore spanned a period of
eight (8) years. (par. 23, p. 7, Annex "A")
During this period, the Bureau of Internal Revenue was not collecting specific taxes on the
purchases of NPC of petroleum products from the oil companies on the erroneous belief that the
National Power Corporation (NPC) was exempt from indirect taxes as reflected in the letter of
Deputy Commissioner of Internal Revenue (DCIR) Romulo Villa to the NPC dated October 29,
1980 granting blanket authority to the NPC to purchase petroleum products from the oil companies
without payment of specific tax (copy of this letter is attached hereto as petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to
NPC only after the promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all exemptions
granted in favor of government-owned or-controlled corporations and empowering the FIRB to
recommend to the President or to the Minister of Finance the restoration of the exemptions which
were withdrawn. "Specifically, Caltex paid the total amount of P58,020,110.79 in specific and ad
valorem taxes for deliveries of petroleum products to NPC covering the period from October 31,
1984 to April 27, 1985." (par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion.
Beginning June 11, 1984, when P.D. 1931 was promulgated abolishing NPC's tax exemptions,
Caltex's billings to NPC always included both duties and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-
5) (par. 24, p, 7, Annex "A")
4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to
April, 1985, NPC was billed a total of P522,016,77.34 (sic) including both duties and taxes, the
specific tax component being valued at P58,020,110.79. (par. 25, p. 8, Annex "A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true
copy of which is hereto attached as Annex "C", restored the tax exemption privileges of NPC
effective retroactively to June 11, 1984 up to June 30, 1985. The first paragraph of said resolution
reads as follows:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National
Power Corporation under C.A. No. 120, as amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for
a "refund of Specific Taxes paid on petroleum products . . . in the total amount of P58,020,110.79.
(par. 26, pp. 8-9, Annex "A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex
"D"), Acting BIR Commissioner Ruben Ancheta declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum
products from the oil companies free of specific and ad valorem taxes, during the period in
question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata,
Chairman of the FIRB (Annex "E"), requesting "the FIRB to resolve conflicting rulings on the tax
exemption privileges of the National Power Corporation (NPC)." These rulings involve FIRB
Resolutions No. 1-84 and 10-85. (par. 40, p. 12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata
confirmed the ruling of May 8, 1985 of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12,
Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development
Co., Ltd., a Korean contractor of NPC for its infrastructure projects, certified true copy of which is
attached hereto as petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled:
In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by
P.D. 938, this Office is of the opinion, and so holds, that the scope of the tax exemption
privilege enjoyed by NPC under said section covers only taxes for which it is directly liable
and not on taxes which are only shifted to it. (Phil. Acetylene vs. C.I.R. et al., G.R. L-
19707, Aug. 17, 1967) Since contractor's tax is directly payable by the contractor, not by
NPC, your request for exemption, based on the stipulation in the aforesaid contract that
NPC shall assume payment of your contractor's tax liability, cannot be granted for lack of
legal basis." (Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is
directly liable and does not cover taxes which are only shifted to it or for indirect taxes. The BIR,
through Ancheta, reversed its previous position of May 8, 1985 adopted by Ancheta himself
favoring NPC's indirect tax exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex
(Annex "F"), the BIR Commissioner declared that PAL's tax exemption is limited to taxes for which
PAL is directly liable, and that the payment of specific and ad valorem taxes on petroleum
products is a direct liability of the manufacturer or producer thereof". (par. 51, p. 15, Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions
retroactively from July 1, 1985 to a indefinite period, certified true copy of which is hereto attached
as petitioner's Annex "H".
12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79
(corresponding to Caltex) was approved and released by way of a Tax Credit Memo (Annex "Q")
dated July 7, 1986, certified true copy of which [is) attached hereto as petitioner's Annex "F,"
which was assigned by NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment
on July 30, 1987, certified true copy of which is hereto attached as petitioner's Annex "G"). (pars.
26, 52, 53, pp. 9 and 15, Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in
partial settlement of its outstanding obligations to the latter while Caltex, in turn, would apply the
assigned tax credit against its specific tax payments for two (2) months. (per memorandum dated
July 28, 1986 of DCIR Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit
assigned to Caltex, the NPC reiterated its request for the release of the balance of its pending
refunds of taxes paid by respondents Petrophil, Shell and Caltex covering the period from June
11, 1984 to early part of 1986 amounting to P410.58 million. (The claim of the first two (2) oil
companies covers the period from June 11, 1984 to early part of 1986; while that of Caltex starts
from July 1, 1985 to early 1986). This request was denied on August 18, 1986, under BIR Ruling
152-86 (certified true copy of which is attached hereto as petitioner's Annex "I"). The BIR ruled that
NPC's tax free privilege to buy petroleum products covered only the period from June 11, 1984 up
to June 30, 1985. It further declared that, despite FIRB No. 1-86, NPC had already lost its tax and
duty exemptions because it only enjoys special privilege for taxes for which it is directly liable. This
ruling, in effect, denied the P410 Million tax refund application of NPC (par. 28, p. 9, Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not
resolved the motion. (Benigna, II 3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct.
26, 1988, p. 15)." (par. 29, p. 9, Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR
Commissioner Tan, Jr. (certified true copy of which is hereto attached and made a part hereof as
petitioner's Annex "J"), reversed his previous position and states this time that all deliveries of
petroleum products to NPC are tax exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93,
entitled "Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions, Expanding the
Powers of the Fiscal Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption
privilege and included in the exemption "those pertaining to its domestic purchases of petroleum
and petroleum products, and the restorations were made to retroact effective March 10, 1987, a
certified true copy of which is hereto attached and made a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoez, Secretary of Justice, issued Opinion No. 77,
series of 1987, opining that "the power conferred upon Fiscal Incentives Review Board by Section
2a (b), (c) and (d) of Executive order No. 93 constitute undue delegation of legislative power and,
therefore, [are] unconstitutional," a copy of which is hereto attached and made a part hereof as
Petitioner's Annex "L."
19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the
Chairman of the FIRB a certified true copy of which is hereto attached and made a part hereof as
petitioner's Annex "M," confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987,
allegedly pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who
by letter dated May 2, 1988 asked him to rule "on whether or not, as the law now stands, the
National Power Corporation is still exempt from taxes, duties . . . on its local purchases of . . .
petroleum products . . ." declared that "NPC under the provisions of its Revised Charter retains its
exemption from duties and taxes imposed on the petroleum products purchased locally and used
for the generation of electricity," a certified true copy of which is attached hereto as petitioner's
Annex "N." (par. 30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5,
1988 but without the usual official form of "By the Authority of the President," a certified true copy
of which is hereto attached and made a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the Executive Secretary are based on the
RESOLUTION No. 17-87 of FIRB restoring the tax and duty exemption of the respondent NPC
pertaining to its domestic purchases of petroleum products (petitioner's Annex K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988
reported that the Office of the President and the Department of Finance had ordered the BIR to
refund the tax payments of the NPC amounting to Pl.58 Billion which includes the P410 Million Tax
refund already rejected by BIR Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a
letter dated July 28, 1988 of Undersecretary Marcelo B. Fernando to BIR Commissioner Tan, Jr.
the Pl.58 Billion tax refund was ordered released to NPC (par. 31, p. 1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan
requesting them to hold in abeyance the release of the Pl.58 billion and await the outcome of the
investigation in regard to Senate Resolution No. 227," copies attached as Petitioner's Annexes "P"
and "P-1 " (par. 32, p. 10, Annex "A").
Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the
BIR dated August, 1988 requesting him to hold in abeyance the release of the tax refunds to NPC
until after the termination of the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from
customs custody, the corresponding customs duties and ad valorem taxes are paid. Bunker fuel oil
is one of the petroleum products processed from the crude oil; and same is sold to NPC. After the
sale, NPC applies for tax credit covering the duties and ad valorem exemption under its Charter.
Such applications are processed by the Bureau of Customs and the corresponding tax credit
certificates are issued in favor of NPC which, in turn assigns it to the oil firm that imported the
crude oil. These certificates are eventually used by the assignee-oil firms in payment of their other
duty and tax liabilities with the Bureau of Customs. (par. 70, p. 19, Annex "A")
A lesser amount totalling P740 million, covering the period from 1985 to the present, is being
sought by respondent NPC for refund from the Bureau of Customs for duties paid by the oil
companies on the importation of crude oil from which the processed products sold locally by them
to NPC was derived. However, based on figures submitted to the Blue Ribbon Committee of the
Philippine Senate which conducted an investigation on this matter as mandated by Senate
Resolution No. 227 of which the herein petitioner was the sponsor, a much bigger figure was
actually refunded to NPC representing duties and ad valorem taxes paid to the Bureau of Customs
by the oil companies on the importation of crude oil from 1979 to 1985.
26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227,
entitled:
Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct
a Formal and Extensive Inquiry into the Reported Massive Tax Manipulations and
Evasions by Oil Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil,
Which Were Made Possible By Their Availing of the Non-Existing Exemption of National
Power Corporation (NPC) from Indirect Taxes, Resulting Recently in Their Obtaining A
Tax Refund Totalling P1.55 Billion From the Department of Finance, Their Refusal to Pay
Since 1976 Customs Duties Amounting to Billions of Pesos on Imported Crude Oil
Purportedly for the Use of the National Power Corporation, the Non-Payment of Surtax on
Windfall Profits from Increases in the Price of Oil Products in August 1987 amounting
Maybe to as Much as Pl.2 Billion Surtax Paid by Them in 1984 and For Other Purposes.
27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a
lengthy formal inquiry on the matter, calling all parties interested to the witness stand including
representatives from the different oil companies, and in due time submitted its Committee Report
No. 474 . . . The Blue Ribbon Committee recommended the following courses of action.
1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power
Corporation (NPC) and its approval of Tax Credit memo covering said amount (Annex "P"
hereto), dated July 7, 1986, and cancel its approval of the Deed of Assignment (Annex "Q"
hereto) by NPC to Caltex, dated July 28, 1986, and collect from Caltex its tax liabilities
which were erroneously treated as paid or settled with the use of the tax credit certificate
that NPC assigned to said firm.:
1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD
938 was issued. Therefore, the grant of a tax refund to NPC in the amount of P58
million was illegal, and therefore, null and void. Such refund was a nullity right from
the beginning. Hence, it never transferred any right in favor of NPC.
2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil
companies on the same ground that the NPC, since May 27, 1976 up to June 17, 1987
was never granted any indirect tax exemption. So, the P1.58 billion represent taxes legally
and properly paid by the oil firms.
3. Start collection actions of specific or excise and ad valorem taxes due on petroleum
products sold to NPC from May 27, 1976 (promulgation of PD 938) to June 17, 1987
(issuance of EO 195).
B. For the Bureau of Customs (BOC) to do the following:

1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of
petroleum products by NPC and allegedly granted under the NPC charter covering the years
1978-1988 . . .
28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to
direct the Bureau of Internal Revenue and of Customs to proceed with the processing of claims for
tax credits/refunds of the NPC, respondent Executive Secretary rendered his ruling, the dispositive
portion of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained
by proper authorities, that department and/or its line-tax bureaus may now proceed with the processing of
the claims of the National Power Corporation for duty and tax free exemption and/or tax credits/ refunds, if
there be any, in accordance with the ruling of that Department dated May 20,1988, as confirmed by this
Office on June 15, 1988 . . .5
Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary injunction
and/or restraining order, praying among others that:
1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent
FIRB Executive Secretary Macaraig, and Secretary of Finance Jayme restraining them and other
persons acting for, under, and in their behalf from enforcing their resolution, orders and ruling, to
wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's

Annex "M");
C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N").
2. Said temporary restraining order should also include respondent Commissioners of Customs
Mison and Internal Revenue Ong restraining them from processing and releasing any pending
claim or application by respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction
against above-named respondents and all persons acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the respondents:
A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27,
1976 up to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's

Annex "M");
3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund
for P58,020,110.79 (petitioner's Annex "F");
7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987
(petitioner's Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the
Bureau of Internal Revenue and
9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by
way of tax credit certificates from 1979 up to the present.
C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent
NPC with the Bureau of Customs and the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue

from enforcing the abovequestioned resolution, orders and ruling of respondents Executive
Secretary, Secretary of Finance, and FIRB by processing and releasing respondent NPC's tax and
duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending
claims for refund of respondent NPC with the Bureau of Customs covering the period from 1985 to
the present; to cancel and invalidate the illegal payment made by respondents Caltex, Shell and
PNOC by using the tax credit certificates assigned to them by NPC and to recover from
respondents Caltex, Shell and PNOC all the amounts appearing in said tax credit certificates
which were used to settle their duty and tax liabilities with the Bureau of Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the
pending claims for refund of respondent NPC with the Bureau of Internal Revenue covering the
period from June 11, 1984 to June 17, 1987.
PETITIONER prays for such other relief and remedy as may be just and equitable in the
premises.6
The issues raised in the petition are the following:
To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds,
this Honorable Court must resolve the following issues:
Main issue
Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the
enactment of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11,
1974.
Corollary issues
1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax
exemption privilege effective June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated
January 7, 1986 restoring NPC's tax exemption privilege effective July 1, 1985 included the
restoration of indirect tax exemption to NPC and
2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987
which restored NPC's tax exemption privilege effective March 10, 1987; and if said Resolution was
validly issued, the nature and extent of the tax exemption privilege restored to NPC.7
In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required
respondents to comment thereon, within ten (10) days from notice. The respondents having submitted
their comment, on October 10, 1989 the Court required petitioner to file a consolidated reply to the same.
After said reply was filed by petitioner on November 15, 1989 the Court gave due course to the petition,
considering the comments of respondents as their answer to the petition, and requiring the parties to file
simultaneously their respective memoranda within twenty (20) days from notice. The parties having
submitted their respective memoranda, the petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the standing to challenge the questioned orders
and resolution.
In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-
elected Senator of the Philippines." Public respondent argues that petitioner must show he has sustained
direct injury as a result of the action and that it is not sufficient for him to have a mere general interest
common to all members of the public.8
The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following
the ruling in Lozada when it involves illegal expenditure of public money. The petition questions the
legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits
by respondent oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.
Assuming petitioner has the personality to file the petition, public respondents also allege that the proper
remedy for petitioner is an appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125 instead of
this petition. However Section 11 of said law provides
Sec. 11. Who may appeal; effect of appealAny person, association or corporation adversely
affected by a decision or ruling of the Commissioner of Internal Revenue, the Collector of Customs
(Commissioner of Customs) or any provincial or City Board of Assessment Appeals may file an
appeal in the Court of Tax Appeals within thirty days after receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner
of Internal Revenue, the Commissioner of Customs or any provincial or city Board of Assessment Appeal
who may appeal to the Court of Tax Appeals. Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal
Revenue to impose a tax assessment not found by him to be proper. It would be tantamount to a
usurpation of executive functions.9
Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when the exercise of discretion is tainted with
arbitrariness and grave abuse as to go beyond statutory authority.10
Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an
unlawful exercise of jurisdiction11 or to prevent the oppressive exercise of legal authority.12 Precisely,
petitioner questions the lawfulness of the acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an
indirect tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it
engages in. Examples are the custom duties and ad valorem taxes paid by the oil companies to the
Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to the
Bureau of Internal Revenue after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon
someone else ."13 For example, the excise and ad valorem taxes that oil companies pay to the Bureau of
Internal Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the
NPC, by adding them to the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential
Decree No. 938, the exemption of NPC from indirect taxation was revoked and repealed. While petitioner
concedes that NPC enjoyed broad exemption privileges from both direct and indirect taxes on the
petroleum products it used, under Section 13 of Republic Act No, 6395 and more so under Presidential
Decree No. 380, however, by the deletion of the phrases "directly or indirectly" and "on all petroleum
products used by the Corporation in the generation, transmission, utilization and sale of electric power" he
contends that the exemption from indirect taxes was withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No. 938
regarding the payments of "all forms of taxes, etc." cannot be interpreted to include indirect tax exemption.
He cites Philippine Aceytelene Co. Inc. vs. Commissioner of Internal Revenue.14 Petitioner emphasizes the
principle in taxation that the exception contained in the tax statutes must be strictly construed against the
one claiming the exemption, and that the rule that a tax statute granting exemption must be strictly
construed against the one claiming the exemption is similar to the rule that a statute granting taxing power
is to be construed strictly, with doubts resolved against its existence.15 Petitioner cites rulings of the BIR
that the phrase exemption from "all taxes, etc." from "all forms of taxes" and "in lieu of all taxes" covers
only taxes for which the taxpayer is directly liable.16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree
No. 1931, the relevant provision of which are to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions
from the payment of duties, taxes . . . heretofore granted in favor of government-owned or
controlled corporations are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation
of the Fiscal Incentives Review Board . . . is hereby empowered to restore, partially or totally, the
exemptions withdrawn by Section 1 above . . . (Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:

1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power
Corporation under C.A. No. 120 as amended are restored up to June 30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing agreements, the NPC is
hereby required to furnish the FIRB on a periodic basis the particulars of items received or to be received
through such arrangements, for purposes of tax and duty exemptions privileges.17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation
(NPC) under Commonwealth Act No. 120, as amended, are restored: Provided, That importations of fuel
oil (crude oil equivalent), and coal of the herein grantee shall be subject to the basic and additional import
duties; Provided, further, that the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other
monetary benefits from deposit substitutes, trust funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and improvements
owned by it provided that the beneficial use of the property is not transferred to another pursuant to the
provisions of Sec. 10(a) of the Real Property Tax Code, as amended.18
Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86.
Indeed, they were issued in compliance with the requirement of Section 2, P.D. No. 1931, whereby the
FIRB should make the recommendation subject to the approval of "the President of the Philippines and/or
the Minister of Finance." While said Resolutions do not appear to have been approved by the President,
they were nevertheless approved by the Minister of Finance who is also duly authorized to approve the
same. In fact it was the Minister of Finance who signed and promulgated said resolutions.19
The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and 1-
86 which were promulgated by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister of
Finance Cesar E.A Virata, as Chairman of FIRB respectively, should be separately approved by said
Minister of Finance as required by P.D. 1931 is, a superfluity. An examination of the said resolutions which
are reproduced in full in the dissenting opinion show that the said officials signed said resolutions in the
dual capacity of Chairman of FIRB and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of
Albay,20wherein the Court observed that under P.D. No. 776 the power of the FIRB was only
recommendatory and requires the approval of the President to be valid. Thus, in said case the Court held
that FIRB Resolutions Nos. 10-85 and 1-86 not having been approved by the President were not valid and
effective while the validity of FIRB 17-87 was upheld as it was duly approved by the Office of the President
on October 5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended
P.D. No. 776, it is clearly provided for that such FIRB resolution, may be approved by the "President of the
Philippines and/or the Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were
duly approved by the Minister of Finance, hence they are valid and effective. To this extent, this decision
modifies or supersedes the Court's earlier decision in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges
enjoyed by the NPC under its charter, C.A. No. 120, as amended, are restored, that is, only its direct tax
exemption privilege; and that it cannot be interpreted to cover indirect taxes under the principle that tax
exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.
Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a
tax credit certificate21 which was assigned to respondent Caltex through a deed of assignment approved
by the BIR22 is patently illegal. He also contends that the pending claim of respondent NPC in the amount
of P410.58 million with respondent BIR for the sale and delivery to it of bunker fuel by respondents
Petrophil, Shell and Caltex from July 1, 1985 up to 1986, being illegal, should not be released.
Now to the second corollary issue involving the validity of FIRB Resolution No. 17-87 issued on June 24,
1987. It was issued under authority of Executive Order No. 93 dated December 17, 1986 which grants to
the FIRB among others, the power to recommend the restoration of the tax and duty
exemptions/incentives withdrawn thereunder.
Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect
that the powers conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive Order No. 93
"constitute undue delegation of legislative power and is, therefore, unconstitutional." Petitioner observes
that the FIRB did not merely recommend but categorically restored the tax and duty exemption of the NPC
so that the memorandum of the respondent Executive Secretary dated October 5, 1987 approving the
same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine
in Philippine Aceytelene, petitioner avers that the restoration cannot cover indirect taxes and it cannot
create new indirect tax exemption not otherwise granted in the NPC charter as amended by Presidential
Decree No. 938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for the general good and welfare23 wholly owned by the
government of the Republic of the Philippines.24 From the very beginning of its corporate existence, the
NPC enjoyed preferential tax treatment25 to enable the Corporation to pay the indebtedness and obligation
and in furtherance and effective implementation of the policy enunciated in Section one of "Republic Act
No. 6395"26which provides:
Sec. 1. Declaration of PolicyCongress hereby declares that (1) the comprehensive

development, 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 from all sources to meet the need of rural electrification are primary
objectives of the nation which shall be pursued coordinately and supported by all instrumentalities
and agencies of the government including its financial institutions.
From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is
obvious.
Under Republic Act No. 358, its exemption is provided as follows:
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities."
Under Republic Act No. 6395:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts
and other Charges by Government and Governmental Instrumentalities. The Corporation shall
be non-profit and shall devote all its returns from its capital investment, as well as excess
revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section one
of this Act, the Corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any
court or administrative proceedings in which it may be a party, restrictions and duties to the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government,
its provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on
import of foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts
and other Charges by the Government and Government Instrumentalities. The Corporation shall
be non-profit and shall devote all its returns from its capital investment as well as excess revenues
from its operation, for expansion. To enable the Corporation to pay its indebtedness and
of this Act, the Corporation, including its subsidiaries, is hereby declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services fees in any
instrumentalities;
its provinces, cities, municipalities and other governmental agencies and instrumentalities;
import of foreign goods required for its operation and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the
instrumentalities, on all petroleum produced used by the Corporation in the generation,
transmission, utilization, and sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts
and Other Charges by the Government and Government Instrumentalities.The Corporation shall
be non-profit and shall devote all its returns from its capital investment as well as excess revenues
from its operation, for expansion. To enable the Corporation to pay the indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section
One of this Act, the Corporation, including its subsidiaries hereby declared exempt from the
payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. (Emphasis supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover
"all taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395
enumerated the details covered by the exemption. Subsequently, P.D. No. 380, made even more specific
the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No. 938 amended the tax exemption by simplifying the
same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as
well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax
exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC
"shall devote all its returns from its capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay the indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, . . ."27
The preamble of P.D. No. 938 states
WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit
character of the NPC has not been fully utilized because of restrictive interpretations of the taxing
agencies of the government on said provisions. . . . (Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938
shall be construed strictly against NPC. On the contrary, the law mandates that it should be interpreted
liberally so as to enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes
granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.28
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions
or deductions, even more obvious than with reference to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of
treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may be
construed liberally, in favor of non tax liability of such agencies.29
In the case of property owned by the state or a city or other public corporations, the express exemption
should not be construed with the same degree of strictness that applies to exemptions contrary to the
policy of the state, since as to such property "exemption is the rule and taxation the exception."30
The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No.
6395 and P.D. No. 380, is deemed repealed by P.D. No. 938 when the reference to it was deleted is not
well-taken.
Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are
presumed to be passed with deliberation and with knowledge of all existing ones on the subject, it is
logical to conclude that in passing a statute it is not intended to interfere with or abrogate a former law
relating to the same subject matter, unless the repugnancy between the two is not only irreconcilable but
also clear and convincing as a result of the language used, or unless the latter Act fully embraces the
subject matter of the earlier.31 The first effort of a court must always be to reconcile or adjust the provisions
of one statute with those of another so as to give sensible effect to both provisions.32
The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an
isolated part or a particular provision alone.33 When construing a statute, the reason for its enactment
should be kept in mind and the statute should be construed with reference to its intended scope and
purpose34 and the evil sought to be remedied.35
The NPC is a government instrumentality with the enormous task of undertaking development of
hydroelectric generation of power and production of electricity from other sources, as well as the
transmission of electric power on a nationwide basis, to improve the quality of life of the people pursuant
to the State policy embodied in Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax exemption of
NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No. 380
if it is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given
controlling weight.36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June
26, 1985 confirming said ruling, the letters of the BIR of August 18, 1986, and December 22, 1986, the
letter of the Secretary of Finance of February 19, 1987, the Memorandum of the Executive Secretary of
October 9, 1987, by authority of the President, confirming and approving FIRB Resolution No. 17-87, the
letter of the Secretary of Finance of May 20, 1988 to the Executive Secretary rendering his opinion as
requested by the latter, and the latter's reply of June 15, 1988, it was uniformly held that the grant of tax
exemption to NPC under C.A. No. 120, as amended, included exemption from payment of all taxes
relative to NPC's petroleum purchases including indirect taxes.37 Thus, then Secretary of Finance Vicente
Jayme in his letter of May 20, 1988 to the Executive Secretary Macaraig aptly stated the justification for
this tax exemption of NPC
The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase
'taxes imposed indirectly on oil products and its exemption from 'all forms of taxes.' It is suggested
that the change in language evidenced an intention to exempt NPC only from taxes directly
imposed on or payable by it; since taxes on fuel-oil purchased by it; since taxes on fuel-oil
purchased by NPC locally are levied on and paid by its oil suppliers, NPC thereby lost its
exemption from those taxes. The principal authority relied on is the 1967 case of Philippine
Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the Revised Charter, the strengthening
of NPC's preferential tax treatment was clearly the intention. To the extent that the explanatory
"whereas clauses" may disclose the intent of the law-maker, the changes effected by P.D. 938 can
only be read as being expansive rather than restrictive, including its version of Section 13.
Our Tax Code does not recognize that there are taxes directly imposed and those imposed
indirectly. The textbook distinction between a direct and an indirect tax may be based on the
possibility of shifting the incidence of the tax. A direct tax is one which is demanded from the very
person intended to be the payor, although it may ultimately be shifted to another. An example of a
direct tax is the personal income tax. On the other hand, indirect taxes are those which are
demanded from one person in the expectation and intention that he shall indemnify himself at the
expense of another. An example of this type of tax is the sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no
moment. What is more relevant is that when an "indirect tax" is paid by those upon whom the tax
ultimately falls, it is paid not as a tax but as an additional part of the cost or of the market price of
the commodity.
This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he
analyzed the nature of the percentage (sales) tax to determine whether it is a tax on the producer
or on the purchaser of the commodity. Under out Tax Code, the sales tax falls upon the
manufacturer or producer. The phrase "pass on" the tax was criticized as being inaccurate. Justice
Castro says that the tax remains on the manufacturer alone. The purchaser does not pay the tax;
he pays an amount added to the price because of the tax. Therefore, the tax is not "passed on"
and does not for that reason become an "indirect tax" on the purchaser. It is eminently possible
that the law maker in enacting P.D. 938 in 1976 may have used lessons from the analysis of Chief
Justice Castro in 1967 Philippine Acetylene case.
When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-
called oil crunch had already drastically pushed up crude oil Prices from about $1.00 per bbl in
1971 to about $10 and a peak (as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC
was operating the Meralco thermal plants under a lease agreement. The power generated by the
leased plants was sold to Meralco for distribution to its customers. This lease and sale
arrangement was entered into for the benefit of the consuming public, by reducing the burden on
the swiftly rising world crude oil prices. This objective was achieved by the use of NPC's "tax
umbrella under its Revised Charterthe exemption from specific taxes on locally purchased fuel
oil. In this context, I can not interpret P.D. 938 to have withdrawn the exemption from tax on fuel oil
to which NPC was already entitled and which exemption Government in fact was utilizing to soften
the burden of high crude prices.
There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil
products sold to NPC, whether paid to them by NPC or no never entered into the rates charged by
NPC to its customers not even during those periods of uncertainty engendered by the issuance of
P.D. 1931 and E. 0. 93 on NP/Cs tax status. No tax component on the fuel have been charged or
recovered by NPC through its rates.
There is an import duty on the crude oil imported by the local refineries. After the refining process,
specific and ad valorem taxes are levied on the finished products including fuel oil or residue upon
their withdrawal from the refinery. These taxes are paid by the oil companies as the manufacturer
thereof.
In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component.
NPC pays the oil companies' invoices including the duty component but net of the tax component.
NPC then applies for drawback of customs duties paid and for a credit in amount equivalent to the
tax paid (by the oil companies) on the products purchased. The tax credit is assigned to the oil
companiesas payment, in effect, of the tax component shown in the sales invoices. (NOTE:
These procedures varied over timeThere were instances when NPC paid the tax component
that was shifted to it and then applied for tax credit. There were also side issues raised because of
P.D. 1931 and E.O. 93 which withdrew all exemptions of government corporations. In these latter
instances, the resolutions of the Fiscal Incentives Review Board (FIRB) come into play. These
incidents will not be touched upon for purposes of this discussion).
NPC rates of electricity are structured such that changes in its cost of fuel are automatically
(without need of fresh approvals) reflected in the subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability
to the tax and duty component on the oil products, such amount will go into its fuel cost and be
passed on to its customers through corresponding increases in rates. Since 1974, when NPC
operated the oil-fired generating stations leased from Meralco (which plants it bought in 1979),
until the present time, no tax on fuel oil ever went into NPC's electric rates.
That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon
me by yet another circumstance. It is conceded that NPC at the very least, is exempt from taxes to
which it is directly liable. NPC therefore could very well have imported its fuel oil or crude residue
for burning at its thermal plants. There would have been no question in such a case as to its
exemption from all duties and taxes, even under the strictest interpretation that can be put forward.
However, at the time P.D. 938 was issued in 1976, there were already operating in the Philippines
three oil refineries. The establishment of these refineries in the Philippines involved heavy
investments, were economically desirable and enabled the country to import crude oil and process
/ refine the same into the various petroleum products at a savings to the industry and the public.
The refining process produced as its largest output, in volume, fuel oil or residue, whose
conventional economic use was for burning in electric or steam generating plants. Had there been
no use locally for the residue, the oil refineries would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-
pass the local oil refineries and import its fossil fuel requirements directly in order to avail itself of
its exemption from "direct taxes." The oil refineries had to keep operating both for economic
development and national security reasons. In fact, the restoration by the FIRB of NPC's
exemption after P.D. 1931 and E.O. 93 expressly excluded direct fuel oil importations, so as not to
prejudice the continued operations of the local oil refineries.
To answer your query therefore, it is the opinion of this Department that NPC under the provisions
of its Revised Charter retains its exemption from duties and taxes imposed on the petroleum
products purchased locally and used for the generation of electricity.
The Department in issuing this ruling does so pursuant to its power and function to supervise and
control the collection of government revenues by the application and implementation of revenue
laws. It is prepared to take the measures supplemental to this ruling necessary to carry the same
into full effect.
As presented rather extensively above, the NPC electric power rates did not carry the taxes and
duties paid on the fuel oil it used. The point is that while these levies were in fact paid to the
government, no part thereof was recovered from the sale of electricity produced. As a
consequence, as of our most recent information, some P1.55 B in claims represent amounts for
which the oil suppliers and NPC are "out-of-pocket. There would have to be specific order to the
Bureaus concerned for the resumption of the processing of these claims."38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the
said opinion ruling of the latter was confirmed and its implementation was directed.39
The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the Secretary
of Finance as confirmed by the then Executive Secretary are well-taken. When the NPC was exempted
from all forms of taxes, duties, fees, imposts and other charges, under P.D. No. 938, it means exactly
what it says, i.e., all forms of taxes including those that were imposed directly or indirectly on petroleum
products used in its operation.
Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC
extends only to taxes for which it is directly liable and not to taxes merely shifted to it. However, these
rulings are predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It
involved the sales tax of products the plaintiff sold to NPC from June 2, 1953 to June 30,1958 when NPC
was enjoying tax exemption from all taxes under Commonwealth Act No. 120, as amended by Republic
Act No. 358 issued on June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so plaintiff
cannot claim exemptions simply because the NPC, the buyer, was exempt.
However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC
whereby Section 13 thereof was amended by emphasizing its non-profit character and expanding the
extent of its tax exemption.
As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells
out clearly the exemption of the NPC from indirect taxes. And as hereinabove stated, in P.D. No. 380, the
exemption of NPC from indirect taxes was emphasized when it was specified to include those imposed
"directly and indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the
same in general terms to cover "all forms of taxes, duties, fees, imposts, etc." which, as hereinabove
discussed, logically includes exemption from indirect taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the
authority of which FIRB Resolution Nos. 10-85 and 1-86 were issued, and when Executive Order No. 93
was promulgated, by which FIRB Resolution 17-87 was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental
circumstances. As a matter of fact, the amendments of Section 13, under R.A. No. 6395, P.D. No, 380
and P.D. No. 838 appear to have been brought about by the earlier inconsistent rulings of the tax
agencies due to the doctrine in Philippine Acetylene, so as to leave no doubt as to the exemption of the
NPC from indirect taxes on petroleum products it uses in its operation. Effectively, said amendments
superseded if not abrogated the ruling in Philippine Acetylene that the tax exemption of NPC should be
limited to direct taxes only.
In the light of the foregoing discussion the first corollary issue must consequently be resolved in the
affirmative, that is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution No. 1-86
dated January 7, 1986 which restored NPC's tax exemption privileges included the restoration of the
indirect tax exemption of the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987, the Court finds that the same is valid
and effective.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of
the National Power Corporation, including those pertaining to its domestic purchases of petroleum
and petroleum products, granted under the terms and conditions of Commonwealth Act No. 120
(Creating the National Power Corporation, defining its powers, objectives and functions, and for
other purposes), as amended, are restored effective March 10, 1987, subject to the following
conditions:
1. The restoration of the tax and duty exemption privileges does not apply to the following:
1.1. Importation of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which include but are not limited
to those financed by the NPC's own internal funds, domestic borrowings from any source
whatsoever, borrowing from foreign-based private financial institutions, etc.); and
1.3. Interest income derived from any source.
2. The NPC shall submit to the FIRB a report of its expansion program, including details of
disposition of relieved tax and duty payments for such expansion on an annual basis or as often
as the FIRB may require it to do so. This report shall be in addition to the usual FIRB reporting
requirements on incentive availment.40
Executive Order No. 93 provides as follows
Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and
duty incentives granted " to government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective international agreements to which the Government of the

Republic of the Philippines is a signatory;
c) those enjoyed-by enterprises registered with:
(i) the Board of Investments pursuant to Presidential Decree No. 1789, as

amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66,
as amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial

Authority pursuant to Presidential Decree No. 538, as amended;
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instruction No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal Incentives
Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as
amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/of duty exemption that may be restored.
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax
and duty exemptions or preferential treatment in taxation, indicating the source of funding
therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into
consideration the international commitments of the Philippines and the necessary
precautions such that the grant of subsidies does not become the basis for countervailing
action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take
into account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that
the powers conferred upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93
constitute undue delegation of legislative power and is therefore unconstitutional. However, he was
overruled by the respondent Executive Secretary in a letter to the Secretary of Finance dated March 30,
1989. The Executive Secretary, by authority of the President, has the power to modify, alter or reverse the
construction of a statute given by a department secretary.41
A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The
standards of the delegated power are also clearly provided for.
The required "standard" need not be expressed. In Edu vs. Ericta42 and in De la Llana vs. Alba43 this Court
held: "The standard may be either express or implied. If the former, the non-delegated objection is easily
met. The standard though does not have to be spelled out specifically. It could be implied from the policy
and purpose of the act considered as a whole."
In People vs. Rosenthal44 the broad standard of "public interest" was deemed sufficient. In Calalang vs.
Williams,45, it was "public welfare" and in Cervantes vs. Auditor General,46 it was the purpose of promotion
of "simplicity, economy and efficiency." And, implied from the purpose of the law as a whole, "national
security" was considered sufficient standard47 and so was "protection of fish fry or fish eggs.48
The observation of petitioner that the approval of the President was not even required in said Executive
Order of the tax exemption privilege approved by the FIRB unlike in previous similar issuances, is not well-
taken. On the contrary, under Section l(f) of Executive Order No. 93, aforestated, such tax and duty
exemptions extended by the FIRB must be approved by the President. In this case, FIRB Resolution No.
17-87 was approved by the respondent Executive Secretary, by authority of the President, on October 15,
1987.49
Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated
The latest in our jurisprudence indicates that delegation of legislative power has become the rule
and its non-delegation the exception. The reason is the increasing complexity of modern life and
many technical fields of governmental functions as in matters pertaining to tax exemptions. This is
coupled by the growing inability of the legislature to cope directly with the many problems
demanding its attention. The growth of society has ramified its activities and created peculiar and
sophisticated problems that the legislature cannot be expected reasonably to comprehend.
Specialization even in legislation has become necessary. To many of the problems attendant upon
present day undertakings, the legislature may not have the competence, let alone the interest and
the time, to provide the required direct and efficacious, not to say specific solutions.50
Thus, in the case of Tablarin vs. Gutierrez,51 this Court enunciated the rationale in favor of delegation of
legislative functions
One thing however, is apparent in the development of the principle of separation of powers and
that is that the maxim of delegatus non potest delegare or delegati potestas non potest delegare,
adopted this practice (Delegibus et Consuetudiniis Anglia edited by G.E. Woodline, Yale University
Press, 1922, Vol. 2, p. 167) but which is also recognized in principle in the Roman Law d.
17.18.3) has been made to adapt itself to the complexities of modern government, giving rise to
the adoption, within certain limits, of the principle of subordinate legislation, not only in the United
States and England but in practically all modern governments. (People vs. Rosenthal and
Osmea, 68 Phil. 318, 1939). Accordingly, with the growing complexities of modern life, the
multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency toward the delegation of greater
power by the legislative, and toward the approval of the practice by the Courts. (Emphasis
supplied.)
The legislative authority could not or is not expected to state all the detailed situations wherein the tax
exemption privileges of persons or entities would be restored. The task may be assigned to an
administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such
presumption can be overturned if its invalidity is proved beyond reasonable doubt. Otherwise, a liberal
interpretation in favor of constitutionality of legislation should be adopted.52
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as
above discussed, the tax exemption privilege that was restored to NPC by FIRB Resolution No. 17-87 of
June 1987 includes exemption from indirect taxes and duties on petroleum products used in its operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld
in Albay.53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by President
Marcos in 1984 are invalid as they were presumably promulgated under the infamous Amendment No. 6
and that as they cover tax exemption, under Section 17(4), Article VIII of the 1973 Constitution, the same
cannot be passed "without the concurrence of the majority of all the members of the Batasan Pambansa."
And, even conceding that the reservation of legislative power in the President was valid, it is opined that it
was not validly exercised as there is no showing that such presidential encroachment was justified under
the conditions then existing. Consequently, it is concluded that Executive Order No. 93, which was
intended to implement said decrees, is also illegal. The authority of the President to sub-delegate to the
FIRB powers delegated to him is also questioned.
In Albay,54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree
withdrew tax exemptions of government-owned or controlled corporations including their subsidiaries but
authorized the FIRB to restore the same. Nevertheless, in Albay, as above-discussed, this Court ruled that
the tax exemptions under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions
were only recommendatory and were not duly approved by the President of the Philippines as required by
P.D. No. 776.55 The Court also sustained in Albay the validity of Executive Order No. 93, and of the tax
exemptions restored under FIRB Resolution No. 17-87 which was issued pursuant thereto, as it was duly
approved by the President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is provided
that:
All existing laws, decrees, executive orders, proclamation, letters of instructions, and other
executive issuances not inconsistent with this constitution shall remain operative until amended,
repealed or revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with
the Constitution.1wphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are
unconstitutional, the result would be the same, as then the latest applicable law would be P.D. No. 938
which amended the NPC charter by granting exemption to NPC from all forms of taxes. As above
discussed, this exemption of NPC covers direct and indirect taxes on petroleum products used in its
operation. This is as it should be, if We are to hold as invalid and inoperative the withdrawal of such tax
exemptions under P.D. No. 1931 as well as under Executive Order No. 93 and the delegation of the power
to restore these exemptions to the FIRB.
The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court
ruled that the NPC is liable for real estate taxes as of June 11, 1984 (the date of promulgation of P.D. No.
1931) when NPC had ceased to enjoy tax exemption privileges since FIRB Resolution Nos. 1085 and 1-
86 were not validly issued. The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is
estimated to amount to P7.49 billion plus another P4.76 billion in fuel import duties the firm had earlier
paid to the government which the NPC now proposed to pass on to the consumers by another 33-centavo
increase per kilowatt hour in power rates on top of the 17-centavo increase per kilowatt hour that took
effect just over a week ago.,56 Hence, another case has been filed in this Court to stop this proposed
increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated
August 24, 1975 was already amended by P.D. No. 1931 ,57 wherein it is provided that such FIRB
resolutions may be approved not only by the President of the Philippines but also by the Minister of
Finance. Such resolutions were promulgated by the Minister of Finance in his own right and also in his
capacity as FIRB Chairman. Thus, a separate approval thereof by the Minister of Finance or by the
President is unnecessary.
As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and
consequently, Albay must be considered superseded to this extent by this decision. This is because P.D.
No. 938 which is the latest amendment to the NPC charter granting the NPC exemption from all forms of
taxes certainly covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the
country but more importantly, to assure cheaper rates to be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil companies is not quite correct. There are
1a\^/phi 1
various arrangements in the payment of crude oil purchased by NPC from oil companies. Generally, the
custom duties paid by the oil companies are added to the selling price paid by NPC. As to the specific
and ad valorem taxes, they are added a part of the seller's price, but NPC pays the price net of tax, on
condition that NPC would seek a tax refund to the oil companies. No tax component on fuel had been
charged or recovered by NPC from the consumers through its power rates.58 Thus, this is not a case of tax
evasion of the oil companies but of tax relief for the NPC. The billions of pesos involved in these
exemptions will certainly inure to the ultimate good and benefit of the consumers who are thereby spared
the additional burden of increased power rates to cover these taxes paid or to be paid by the NPC if it is
held liable for the same.
The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors may
claim the same privilege should be dispelled by the fact that (a) this decision particularly treats of only the
exemption of the NPC from all taxes, duties, fees, imposts and all other charges imposed by the
government on the petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A. No.
6395 and Section 13(d) of P.D. No. 380, both specifically exempt the NPC from all taxes, duties, fees,
imposts and all other charges imposed by the government on all petroleum products used in its operation
only, which is the very exemption which this Court deems to be carried over by the passage of P.D. No.
938. As a matter of fact in Section 13(d) of P.D. No. 380 it is specified that the aforesaid exemption from
taxes, etc. covers those "directly or indirectly" imposed by the "Republic of the Philippines, its provincies,
cities, municipalities and other government agencies and instrumentalities" on said petroleum products.
The exemption therefore from direct and indirect tax on petroleum products used by NPC cannot benefit
the suppliers, importers and contractors of NPC of other products or services.
The Court realizes the laudable objective of petitioner to improve the revenue of the government. The
amount of revenue received or expected to be received by this tax exemption is, however, not going to
any of the oil companies. There would be no loss to the government. The said amount shall accrue to the
benefit of the NPC, a government corporation, so as to enable it to sustain its tremendous task of
providing electricity for the country and at the least cost to the consumers. Denying this tax exemption
would mean hampering if not paralyzing the operations of the NPC. The resulting increased revenue in the
government will also mean increased power rates to be shouldered by the consumers if the NPC is to
survive and continue to provide our power requirements.59The greater interest of the people must be
paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs.
SO ORDERED.
Narvasa, Melencio-Herrera, Feliciano, Bidin, Medialdea and Regalado, JJ., concur.

Fernan C.J., No part.
Paras, J., I dissent, but the NPC should be refunded not by the consuming public but by the oil companies
for ultimately these oil companies get the benefit of the alleged tax exemption.
Padilla, J., took no part.
Separate Opinions
CRUZ, J., Dissenting:
I join Mr. Justice Abraham F. Sarmiento in his excellent dissent and would stress only the following
additional observations.
A tax exemption represents a loss of revenue to the State and must therefore not be lightly granted or
inferred. When claimed, it must be strictly construed against the taxpayer, who must prove that he comes
under the exemption rather than the rule that every one must contribute his just share in the maintenance
of the government.
In the case at bar, the ponencia would justify the tax exemption as having been validly granted under P.D.
Nos. 1931 and 1955 and Resolutions Nos. 10-85 and 1-86 of the Fiscal Incentives Review Board. It is also
asserted that FIRB Resolution No. 17-87, which restored MPC's tax exemption effective March 10 1987,
was lawfully adopted pursuant to a valid delegation of power made by Executive Order No. 93.
When P.D. Nos. 1931 and 1955 were issued by President Marcos in 1984, the Batasang Pambansa was
already in existence and discharging its legislative powers. Presumably, these decrees were promulgated
under the infamous Amendment No. 6. Assuming that the reservation of legislative power in the President
was then valid, I submit that the power was nevertheless not validly exercised. My reason is that the
President could legislate under the said amendment only if the Batasang Pambansa "failed or was unable
to act adequately on any matter that in his judgment required immediate action" to meet the "exigency."
There is no showing that the presidential encroachment on legislative prerogatives was justified under
these conditions. Simply because the rubber-stamp legislature then meekly submitted did not make the
usurpation valid.
By these decrees, President Marcos, exercising legislative power, delegated it to himself as executive and
empowered himself and/or the Minister of Finance to restore the exemptions previously withdrawn.
As the decrees themselves were invalid it should follow that Executive Order No. 93, which was intended
only to implement them, should also be illegal. But even assuming the legality of the said decrees, I would
still question the authority of the President to sub-delegate the powers delegated to her thereunder.
Such sub-delegation was not permissible because potestas delegata non delegari potest Even if we were
to disregard the opinion of Secretary of Justice Sedfrey A. Ordoez that there were no sufficient standards
in Executive Order No. 93 (although he was reversed on this legal questions by the Executive Secretary),
the President's delegated authority could still not be extended to the FIRB which was not a delegate of the
legislature.
It is remarkable that the respondents could seriously argue that a mere administrative body like the FIRB
can exercise the legislative power to grant tax exemptions. I am not aware that any other such agency,
including the Bureau of Internal Revenue and the Bureau of Customs, has this authority. An administrative
body can apply tax exemptions under existing law but it cannot itself create such exemptions. This is a
prerogative of the Congress that cannot be usurped by or even delegated to a mere administrative body.
In fact, the decrees clearly provided that it was the President and/or the Minister of Finance who could
restore the exemption, subject only to the recommendation of the FIRB. The FIRB was not empowered to
directly restore the exemption. And even if it be accepted that the FIRB merely recommended the
exemption, which was approved by the Finance Minister, there would still be the curious anomaly of
Minister Virata upholding his very own act as chairman of the FIRB.
This Court called it a "travesty of justice" when in Zambales Chromite vs. Court of Appeals, 94 SCRA 261,
the Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he
was the Director of Mines, and in Anzaldo vs. Clave, 119 SCRA 353, where the respondent, as
presidential executive assistant, affirmed on appeal to Malacaang his own decision as chairman of the
Civil Service Commission.
It is important to note that when P.D. Nos. 1931 and 1955 were issued by President Marcos, the rule
under the 1973 Constitution was that "no law granting a tax exemption shall be passed without the
concurrence of a majority of all the members of the Batasang Pambansa." (Art. VIII, Sec. 17[4]). Laws are
usually passed by only a majority of those present in the chamber, there being a quorum, but not where it
grants a tax exemption. This requires an absolute majority. Yet, despite this stringent limitation on the
national legislature itself, such stricture does not inhibit the President and the FIRB in the exercise of their
delegated power. It would seem that the delegate has more power than the principal. Significantly, this
limitation is maintained in the present Constitution under Article VI, Section 28(4).
The ponencia holds that the rule of strict construction is not applicable where the grantee is an agency of
the government itself, like the MPC in the case before us. I notice, however, that the ultimate beneficiaries
of the expected tax credit will be the oil companies, which certainly are not part of the Republic of the
Philippines. As the tax refunds will not be enjoyed by the MPC itself, I see no reason why we should be
exceptionally lenient in applying the exception.
The tax credits involved in this petition are tremendousno less than Pl.58 billion. This amount could go a
long way in improving the national economy and the well-being of the Filipino people, who deserve the
continuing solicitude of the government, including this Court. I respectfully submit that it is to them that we
owe our foremost loyalty.
Gutierrez, Jr., J., concurs
SARMIENTO, J., dissenting:
I would like to point out specifically two things in connection with the majority's disposition as to: (1)
Finance Incentives Review Board FIRB Resolutions Nos. 10-85 and 186; and (2) the National Power
Corporation's tax exemption vis-a-vis our decision in the case of Philippine Acetylene Co., Inc. vs.
Commission of Internal Revenue,1 and in the light of the provisions of its charter, Republic Act No. 6395,
and the various amendments entered into it.
(1)
On pages 20-23 of the Decision, the majority suggests that FIRB Resolutions Nos. 10-85 and 1-86 had
validly restored the National Power Corporation's tax exemption privileges, which Presidential Decree No.
1931 had meanwhile suspended. I wish to stress that in the case of National Power Corporation vs.
Province of Albay,2 the Court held that the FIRB Resolutions Nos. 10-85 and 1-86 had the bare force of
recommendations and did not operate as a restoration, in the absence of an approval by the President (in
then President Marcos' exercise of legislative powers), of tax exemptions. The Court noted that there is
nothing in Presidential Decree No. 776, the FIRB charter, conferring on it the authority to grant or restore
exemptions, other than to make recommendations on what exemptions to grant or restore. I quote:
xxx xxx xxx
It is to be pointed out that under Presidential Decree No. 776, the power of the FIRB was merely to
"recommend to the President of the Philippines and for reasons of compatibility with the declared
economic policy, the withdrawal, modification, revocation or suspension of the enforceability of any
of the abovecited statutory subsidies or tax exemption grants, except those granted by the
Constitution." It has no authority to impose taxes or revoke existing ones, which, after all, under
the Constitution, only the legislature may accomplish. . . .3
xxx xxx xxx
As the Court held there, it was only on March 10, 1987 that the restoration became effective, not because
Resolutions Nos. 10-85 and 1-86 decreed a restoration, but because of Resolution No. 17-87 which, on
the other hand, carried the approval of the Office of the President .4 (FIRB Resolution No. 17-87 made the
National Power Corporation's exemption effective March 10, 1987.) Hence, the National Power
Corporation, so the Court held, was liable for payment of real property taxes to the Province of Albay
between. June 11, 1984, the date Presidential Decree No. 1931 (withdrawing its tax exemptions) took
effect, and March 10, 1987,
As far therefore as the majority in the present case rules that the National Power Corporation is also
entitled to a refund as a result of FIRB Resolutions Nos. 10-15 and 1-86, I respectfully submit that a
serious conflict has arisen.
While it is true that FIRB Resolutions Nos. 10-85 and 1-86 were signed by the Finance Minister Cesar
Virata,5 I submit nonetheless, as Albay in fact held, that the signature of the Mr. Virata is not enough to
restore an exemption. The reason is that Mr. Virata signed them (FIRB Resolutions Nos. 10-85 and 1-86)
in his capacity as chairman of the Finance Incentives Review Board FIRB. I find this clear from the very
Resolutions in question:
FISCAL INCENTIVES REVIEW BOARD

RESOLUTION NO. 10-85
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power
Corporation under C.A. No. 120 as amended are restored up to June 30, 1985.
2. Provided, That this restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing agreements, the
NPC is hereby required to furnish the FIRB on a periodic basis the particulars of items received or
to be received through such arrangements, for purposes of tax and duty exemption privileges.
(Sgd.) ALFREDO PIO DE RODA, JR.

Acting Minister of Finance
Acting Chairman, FIRB
FISCAL INCENTIVES REVIEW BOARD

RESOLUTION NO. 1-86
BE IT RESOLVED, AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power
Corporation (NPC) under Commonwealth Act No. 120, as amended, are restored; Provided, That
importations of fuel oil (crude oil equivalent) and coal of the herein grantee shall be subject to the
basic and additional import duties; Provided, further, That the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other
monetary benefits from deposit substitutes, trust fund and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and
improvements owned by it provided that the beneficial use of the property is not transferred to
another pursuant to the provisions of Sec. 40(a) of the Real Property Tax Code, as amended.
(Sgd.) CESAR E.A. VIRATA

Minister of Finance
Chairman-FIRB
I respectfully submit that to say that Mr. Virata's signature is sufficient (please note that Resolution No. 10-
85 was not even signed by Mr. Virata, but rather by Mr. Alfredo Pio de Roda, Jr.) is in fact to confer on the
Board actual "restoration" or even exemption powers, because in all cases, FIRB Resolutions are signed
by Mr. Virata (or the acting chairman) in his capacity as Board Chairman. I submit that we can not
consider an FIRB Resolution as an act of Mr. Virata in his capacity as Minister of Finance (and therefore,
as a grant or restoration of tax exemption) although Mr. Virata also happened to be concurrently, Minister
of Finance, because to do so would be to blur the distinction between the capacities in which he, Mr.
Virata, actually acted. I submit that he, Mr. Virata, need have issued separate approvals of the Resolutions
in question, in his capacity as Finance Minister.
Parenthetically, on the issue of the constitutional validity of Executive Order No. 93, insofar as it
"delegates" the power to restore exemptions to the FIRB, I hold that in the first place, Executive Order No.
93 makes no delegation at all. As the majority points out, "[u]nder Section 1 (f) of Executive Order No. 93,
aforestated, such tax and duty exemptions extended by the FIRB must be approved by the
President."6 Hence, the FIRB does not exercise any powerand as I had held, its powers does not merely
recommendatoryand it is the President who in fact exercises it. It is true that Executive Order No. 93
has set out certain standards by which the FIRB as a reviewing body, may act, but I do not believe that a
genuine delegation question has arisen because precisely, the acts of the Board are subject to approval
by the President, in the exercise of her legislative powers under the Freedom Constitution.7
(2)
According to the Decision, the National Power Corporation, under its charter, is also exempt from indirect
taxes, and that there is nothing irregular about what is apparently standard operating procedure between
the Corporation and the oil firms in which the latter sell to the Corporation of "net of tax" and that
thereafter, the Corporation assigns to them its tax credit.
I gather first, and with all due respect, that there has been a misunderstanding about so-called indirect
taxes and the theory of shifting taxes. In Philippine Acetylene Co., Inc., supra, the Court intimated that
there are no such things as indirect taxes for purposes of exemption, and that the National Power
Corporation's exemption from taxes can not be claimed, as well, by a manufacturer (who sells his
products to the Corporation) on the theory that the taxes he will shift will be shifted to a tax-exempt entity.
According to the Court, "the purchaser does not pay the tax . . . [h]e pays or may pay the seller more for
the goods because of the seller's obligation, but that is all and the amount added because of the tax is
paid to get the goods and for nothing else."8
It is true that a tax may be shifted, that is, to enable the payor to escape its effects by adding it to the
price, thereby transferring the burden to the purchaser of whom the incidence of the tax settles (indirect
tax). I submit, however, that it is only for purposes of escape from taxation. As Acetylene has clarified, the
tax which the manufacturer is liable to pay directly under a statute is still a personal tax and in "passing
and tax on" to the purchaser, he does not really make the latter pay the tax, and what the latter pays
actually is just the price. Thus, for purposes of exemption, and so Acetylene tells us, the manufacturer can
not claim one because the purchaser happens to be exempted from taxes. Mutatis mutandis and so I
respectfully submit, the purchaser can not be allowed to accept the goods "net of tax" because it never
paid for the tax in the first place, and was never liable therefor in the second place.
According to the majority, Philippine Acetylene has been "abrogated," and the majority points to the
various amendments to the charter of the National Power Corporation as authority for its view.
First, there is nothing in those amendments that would remotely point to this conclusion.
Second, Acetylene's pronouncement is founded on the very science of taxationthat indirect taxes are no
taxes for purposes of exemption, and that consequently, one who did not pay taxes can not claim an
exemption although the price he paid for the goods included taxes. To enable him to claim an exemption,
as the majority would now enable him (Acetylene having been "abrogated"), is, I submit, to defeat the very
laws of science.
The theory of "indirect taxes" and that no exemption is possible therefrom, so I reiterate, are well-settled
concepts of taxation, as the law of supply and demand is to the law of economics. A President is said
(unfairly) to have attempted it, but one can not repeal the law on supply and demand.
I do not find the National Power Corporation's alleged exemption from indirect tax evident, as the majority
finds it evident, from the Corporation's charter, Republic Act No. 6395, as amended by Presidential
Decrees Nos. 380 and 938. It is true that since Commonwealth Act No. 120 (the Corporation's original
charter, which Republic Act No. 6395 repealed), the Corporation has enjoyed a "preferential tax
treatment," I seriously doubt, however, whether or not that preference embraces "indirect taxes" as well
which, as I said, are no taxes for purposes of claims for exemptions by the "indirect payor." And albeit
Presidential Decree No. 938 refers to "all forms of taxes," I can not take that to include, as a matter of
logic, "indirect taxes," and as discussed above, that scenario is not possible.
I quite agree that the legislative intent, based on a perusal of Republic Act No. 6395 and subsequent
amendatory statutes was to give the National Power Corporation a broad tax preference on account of the
vital functions it performs, indeed, "to enable the Corporation to pay the indebtedness and obligation and
in furtherance and effective implementation of the policy initiated" by its charter. I submit, however, that
that alone can not entitle the Corporation to claim an exemption for indirect taxes. I also believe that its
existing exemption from direct taxes is sufficient to serve the legislative purpose.
The fact that the National Power Corporation has been tasked with an enormous undertaking "to improve,"
as the majority puts it, "the quality of life of the people" pursuant to constitutional mandates is no reason, I
believe, to include indirect taxes within the coverage of its preferential tax treatment. After all, it is exempt
from direct taxes, and the fact that it will be made to shoulder indirect taxes (which are no taxes) will not
defeat its exemption or frustrate the intent of both legislature and Constitution.
I do not think that the majority can point to the various executive constructions as authorities for its own
construction. First and foremost, with respect to then Commissioner Ruben Ancheta's ruling of May 8,
1985 cited on pages 32-33 of the Decision, it is notable that in his BIR Ruling No. 183-85, dated October
22, 1985, he in fact reversed himself, I quote:
In reply please be informed that after a re-study of Section 13, R.A. 6395 as amended by P.D. No.
938, this Office is of the opinion, and so holds, that the scope of the tax exemption privilege
enjoyed by NPC under said section covers only taxes for which it is directly liable and not on taxes
which are merely shifted to it. (Phil. Acetylene Co. vs. Comm. of Internal Revenue, 20 SCRA
1056,1967). Since contractor's tax is directly payable by the contractor, not by NPC, your request
for exemption, based on the stipulation in the aforesaid contract that NPC shall assume payment
of your contractor's tax liability, cannot be granted for lack of legal basis. (emphasis added)9
In yet another ruling, then Commissioner Bienvenido Tan likewise declared, in connection with an
apparent claim for refund by the Philippine Airlines, that "PAL's tax exemption is limited to taxes for which
PAL is directly liable, and that the payment of specific and ad valorem taxes on petroleum products is a
direct liability of the manufacturer or producer thereof . . ."10
Again, under BIR Ruling No. 152-86, the Bureau of Internal Revenue reiterated, as to the National Power
Corporation's claim for a refund I quote:
. . . this Office has maintained the stand that your tax exemption privileges covers only taxes for
which you are directly liable.11
Per BIR Ruling No. 70-043, dated August 27, 1970, the Bureau likewise held that the term "all forms of
taxes" covers only direct taxes,12
In his letter addressed to former BIR Commissioner Tan, Atty. Reynoso Floreza, BIR Assistant
Commissioner for Legal, opposed Caltex Philippines' claim for a P58-million refund, and although the
Commissioner at that time hedged he was later persuaded by Special Assistant Abraham De la Via and
in fact, instructed Atty. De la Via to "prepare [the] corresponding notice to NPC and Caltex"13 to inform
them that their claim has been denied. (Although strangely, he changed his mind later.)
Hence, I do not think that we can judiciously rely on executive construction because executive
construction has been at best, erratic, and at worst, conflicting.
I do not find that majority's historical construction a reliable yardstick in this case, for if the historical
development of the law were any indication, the legislative intent is, on the contrary, to exclude indirect
taxes from the coverage of the National Power Corporation's tax exemption. Thus, under Commonwealth
Act No. 120, the Corporation was made exempt from the payment of all taxes in connection with the
issuance of bonds. Under Republic Act No. 358, it was made exempt from the payment of all taxes,
duties, fees, imposts, and charges of the national and local governments.
Under Republic Act No. 6395, the National Power Corporation was further declared exempt:
(e) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
instrumentalities, on all petroleum products used by the Corporation . . .
By virtue of Presidential Decree No. 380, it was made exempt:

(d) from all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the
instrumentalities, on all petroleum products used by the corporation in the generation,
transmission, utilization and sale of electric power.
By virtue however of Presidential Decree No. 938, reference to "indirect taxes" was omitted thus:
. . .To enable the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section One of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties,
fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or administrative proceedings.
The deletion of "indirect taxes" in the Decree is, so I hold, significant, because if the intent of the law were
truly to exempt the National Power Corporation from so-called indirect taxes as well, the law would have
said so specifically, as it said so specifically in Presidential Decree No. 380.
I likewise do not think that the reference to the whereas clauses of Presidential Decree No. 938 is
warranted, in particular, the following whereas clause:
WHEREAS, in the application of the tax exemption provisions of the Revised Charter, the non-
profit character of NPC has not been fully utilized because of the restrictive interpretations of the
taxing agencies of the government on said provisions;
I am not certain whether it can be basis for a "liberal" construction. I am more inclined to believe that the
term "restrictive interpretations" refers to BIR rulings confining the exemption to the Corporation alone (but
not its subsidiaries), and not, rather, to the scope of its exemption. Indeed, as Presidential Decree No. 938
specifically declares, "the Corporation, including its subsidiaries, is hereby declared exempt . . . "14
The majority expresses the apprehension that if the National Power Corporation were to be made to
assume "indirect taxes," the latter will be forced to pass them on to the consuming public.
First, and as Acetylene held, we do not even know if the payor will in fact "pass them on." "A decision to
absorb the burden of the tax is largely a matter of economics."15 Furthermore:
In the long run a sales tax is probably shifted to the consumer, but during the period when supply
is being adjusted to changes in demand it must be in part absorbed. In practice the businessman
will treat the levy as an added cost of operation and distribute it over his sales as he would any
other cost, increasing by more than the amount of the tax prices of goods demand for which will be
least affected and leaving other prices unchanged. 47 Harv. Ld. Rev. 860, 869 (1934).16
It therefore appears to me that any talk of the public ultimately absorbing the tax is pure speculation.
Second, it has typically been the bogeyman that business, with due respect, has invoked to avoid the
payment of tax. And to be sure, the populist allure of that argument has appealed to many, yet it has
probably also obscured what is as fundamental as protecting consumerspreserving public revenue, the
very lifeblood of the nation. I am afraid that this is not healthy policy, and what occurs to meand what
indeed leaves me very uncomfortableis that by the stroke of the pen, we should have in fact given away
P13,750,214,639.00 (so it is said) of legitimate government money.
According moreover to Committee Report No. 474 of the Senate, "NPC itself says that it does not use
taxes to increase prices of electricity to consumers because the cost of electric generation and sale
already takes into account the tax component. "17
I can not accept finally, what to me is an unabashed effort by the oil firms to evade taxes, the arrangement
(as I gather from the Decision) between the National Power Corporation and the oil companies in which
the former assigns its tax credit to the latter. I also presume that this is the natural consequence of the
"understanding," as I discussed above, to purchase oil "net of tax" between NAPOCOR and the oil firms,
because logically, the latter will look for other sources from which to recoup the taxes they had failed to
shift and recover their losses as a result. According to the Decision, no tax is left unpaid because they
have been pre-paid before the oil is delivered to the National Power Corporation. But whatever taxes are
paid are in fact wiped out because the subsequent credit transfer will enable the oil companies to recover
the taxes pre- paid.
According to the majority, "[t]his is not a case of tax evasion of the oil companies but a tax relief for the
NPC."18The problem, precisely, is that while it is NPC which is entitled to "tax relief," the arrangement
between NPC and the oil companies has enabled instead the latter to enjoy relief when relief is due to
NPC alone. The point still remains that no tax money actually reaches our coffers because as I said, that
arrangement enables them to wipe it out. If the NPC were the direct importer, I would then have no reason
to object, after all, the NPC is exempt from direct taxation and secondly, the money it is paying to finance
its importations belongs to the government. The law, however, gave the exemption to NPC, not the oil
companies.
According to the Decision: "The amount of revenue received or expected to be received by this tax
exemption is, however, not going to any of the oil companies. . . "19 and that "[t]here would be no loss to
the government."20
With due respect to the majority, it is erroneous, if not misleading, to say that no money is going to the oil
companies and that the government is not losing anything. Definitely, the tax credit assignment
arrangement between the NPC and the oil firms enables the latter to recover revenue they have paid. And
definitely, that means loss for the government.
The majority is concerned with the high cost of electricity. The increasing cost of electricity is however due
to myriad factors, foremost of which, is the devaluation of the peso21 and as recent events have suggested,
"miscalculations" at the top levels of NPC. I can not however attribute it, as the majority in all earnest
attributes it, to the fact, far-fetched as it is, that the NPC has not been allowed to enjoy exemption from
indirect taxes.
Tax exemptions furthermore are a matter of personal privilege of the grantee. It has been held that as
such, they can not be assigned, unless the statute granting them permits an assignment.22
While "shifting the burden of tax" is a permissible method of avoiding a tax, evading it is a totally different
matter. And while I agree with the National Power Corporation should be given the widest financial
assistance possible, assistance should not be an excuse for plain tax evasion, if not tax fraud, by Big
Business, in particular, Big Oil.
(3) Postscripts
With all due respect, I do not think that the majority has appreciated enough the serious implications of its
decisionto the contrary, in particular, its shrinking coffers. I do not think that we are, after all, talking here
of "simple" billions, but in fact, billions upon billions in lost revenue looming large.
I am also afraid that the majority is not quite aware that it is setting a precedent not only for the oil
companies but in fact, for the National Power Corporation's suppliers, importers, and contractors.
Although I am not, as of this writing, aware of their exact number or the precise amount the National
Power Corporation has spent in payment of supplies and equipment, I can imagine that the Corporation's
assets consisting of those supplies and equipment, machines and machinery, are worth no fewer than
billions.
With this precedent, there is no stopping indeed the NAPOCOR's suppliers, from makers of storage tanks,
steel towers, cables and cable poles, to builders of dikes, to layers of pipelines, and pipes, from claiming
the same privilege.
There is no stopping the NPC's contractors, from suppliers of cement for plant fixtures and lumber for
edifices, to the very engineers and technicians who designed them, from demanding equal rights.
There will be no stopping the Corporation's transporters, from container van and rig owners to suppliers of
service vehicles of NPC executives, from demanding the privilege.
What is to stop, indeed, caterers of food served in board meetings or in NAPOCOR cafeterias from asking
for exemption, since food billed includes sales taxes shifted to a tax-exempt entity and, following the
theory of the majority, taxes that may be refunded?
What is, indeed, to stop all imagined claimants from demanding all imagined claims, since as we are
aware, the rule of taxationand consequently, tax exemptionis uniform and equitable?23
Of course, we have discussed NAPOCOR alone; we have not touched other tax-exempt entities, say, the
Marinduque Mining Corporation and Nonoc Mining Corporation. Per existing records and per reliable
information, Caltex Philippines, between 1979 and 1986, successfully recovered the total sum of
P49,835,791.00. In 1985, Caltex was said to have been refunded the amount of P4,217,423.00 arising
from the same tax arrangement with the Nonoc Mining Corporation.
Again, what is stoppingby virtue of this decision notonly the oil firms but also Marinduque's and
Nonoc's suppliers, importers, and ridiculously, caterers, from claiming a future refund?
The Decision, to be sure, attempts to allay these apprehensions and "dispel[s] [them] by the fact that . . .
the decision particularly treats of only the exemption of the NPC from all taxes, duties, fees, imposts and
all other charges imposed by the government on the petroleum products it need or uses for its operation . .
. "24 Firstly, under Presidential Decree No. 938, the supposed tax exemption of the National Power
Corporation covers "all forms of taxes.25 If therefore "all forms of taxes covers as well indirect taxes
because Presidential Decree No. 380 supposedly extended the Corporation's exemption to indirect taxes
(and the majority "deems Presidential Decree No. 380 to have been carried over to Presidential Decree
No. 938"), then the conclusion seems in escapablefollowing the logic of the majoritythat the
Corporation is exempt from all indirect taxes, on petroleum and any and all other products and services.
The fact of the matter, second of all, is that the Decision is premised on the alleged exemption of the
National Power Corporation from all forms of taxes, meaning, direct and indirect taxes. It is a premise that
is allegedly supported by statutory history, and the legislature's alleged intent to grant the Corporation
awesome exemptions. If that were the case, the Corporation must logically be exempt from all kinds of
taxes payable. Logically, the majority can not limit the sweep of its pronouncement by exempting the
National Power Corporation from "indirect taxes on petroleum" alone. What is sauce for the goose (taxes
on petroleum) is also sauce for the gander (all other taxes).
I still would have reason for my fears.
I can not, in all candor, accept the majority's efforts, and going back to the Corporation's charters, to "carry
over," in particular, Section 13(d) of Presidential Decree No. 380, to Presidential Decree No. 938. First of
all, if Presidential Decree No. 938 meant to absorb Presidential Decree No. 380 it would have said so
specifically, or at the very least, left it alone. Obviously, Presidential Decree No. 938 meant otherwise, to
begin with, because it is precisely an amendatory statute. Secondly, a "carry-over" would have allowed
this Court to make law, so only it can fit in its theories.
The country has gone to lengths fashioning an elaborate tax system and an efficient tax collection
machinery. Planners' efforts have seen various shifts in the taxing system, from specific, to ad valorem, to
value-added taxation, purportedly to minimize collection. For this year, the Bureau of Internal Revenue
has a collection target of P130 billion, and significantly, it has been unrelenting in its tax and tax-
consciousness drive. I am not prepared to cite numbers but I figure that the money it will lose by virtue of
this Decision is a meaningful chunk off its target, and a significant setback to the government's programs.
I am afraid that by this Decision, the majority has ignored the forest (the welfare of the entire nation) in
favor of a tree (the welfare of a government corporation). The issue, in my opinion, is not the viability of
the National Power Corporationas if the fate of the nation depended alone on itbut the very survival of
the Republic. I am not of course to be mistaken as being less concerned with NAPOCOR's fiscal chart.
The picture, as I see it however, is that we are in fact assisting the oil companies, out of that alleged
concern, in evading taxes at the expense, needless to state, of our coffers. I do not think that that is a
question of legal hermeneutics, but rather, of plain love of country.
Grio-Aquino, Davide, Jr. and Gutierrez, Jr., JJ., concur
G.R. No. 88291 June 8, 1993

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President,
HON. VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this matter of indirect tax
exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second
time. Unfazed by the Decision We promulgated on May 31, 19911 petitioner Ernesto Maceda asks this
Court to reconsider said Decision. Lest We be criticized for denying due process to the petitioner. We
have decided to take a second look at the issues. In the process, a hearing was held on July 9, 1992
where all parties presented their respective arguments. Etched in this Court's mind are the paradoxical
claims by both petitioner and private respondents that their respective positions are for the benefit of the
Filipino people.
A Chronological review of the relevant NPC laws, specially with respect to its tax exemption 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
Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the
Philippines.2 The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury for the
purpose of organizing the NPC and conducting its preliminary work.3 The main source of funds for the
NPC was the flotation of bonds in the capital markets4 and these bonds
. . . issued under the authority of this Act shall be exempt from the payment of all taxes by
the Commonwealth of the Philippines, or by any authority, branch, division or political
subdivision thereof and subject to the provisions of the Act of Congress, approved March
24, 1934, otherwise known as the Tydings McDuffle Law, which facts shall be stated upon
the face of said bonds. . . . .5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial
operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first
construction of any hydraulic power project was to be decided by the NPC Board.6 The provision on tax
exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's
principal and interest in "gold coins" but adding that payment could be made in United States dollars.7 The
provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor
deleted.
On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to
guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC loans.8 He
was also authorized to contract on behalf of the NPC with the International Bank for Reconstruction and
Development (IBRD) for NPC loans for the accomplishment of NPC's corporate objectives9 and for the
reconstruction and development of the economy of the country. 10 It was expressly stated that:
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
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur
other types of indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent
tax exemption provision, the law stated as follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the
President of the Philippines was authorized to negotiate, contract and guarantee loans with the Export-
Import Bank of of Washigton, D.C., U.S.A., or any other international financial institution. 14 The tax
provision for repayment of these loans, as stated in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate
taxes. As enacted, the law states as follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, except real property tax, and from all duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, its provinces, cities, and municipalities.15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the
increased indebtedness 16 should bear the National Economic Council's stamp of approval. The tax
exemption provision related to the payment of this total indebtedness was not amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was
authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax
provision related to the repayment of these loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,
2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were expressly
repealed. 19
On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock
corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a
par value of P100.00 each, with said capital stock wholly subscribed to by the Government. 20 No tax
exemption was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock to
P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax provision was
incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to
P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was
incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as
amended. Declared as primary objectives of the nation were:
Declaration of Policy. Congress hereby declares that (1) the comprehensive

development, 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 from all sources to meet the needs of industrial development
and dispersal and the needs of rural electrification are primary objectives of the nation
which shall be pursued coordinately and supported by all instrumentalities and agencies of
the government, including the financial institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to incur
Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:
The bonds issued under the authority of this subsection shall be exempt from the payment
of all taxes by the Republic of the Philippines, or by any authority, branch, division or
political subdivision thereof which facts shall be stated upon the face of said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as
follows:
The loans, credits and indebtedness contracted under this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid from the proceeds of any loan,
credit or indebtedeness incurred under this Act, shall also be exempt from all taxes, fees,
imposts, other charges and restrictions, including import restrictions, by the Republic of the
Philippines, or any of its agencies and political subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the
non-profit character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital
investment, as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the Corporation is
hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in
any court or administrative proceedings in which it may be a party, restrictions and duties
to the Republic of the Philippines, its provinces, cities, and municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees
on import of foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities,
municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of
electric power. 26
On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country. And in
connection with this, it was specifically stated that:
The setting up of transmission line grids and the construction of associated generation
facilities in Luzon, Mindanao and major islands of the country, including the Visayas, shall
be the responsibility of the National Power Corporation (NPC) as the authorized
implementing agency of the State. 27
xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single
integrated system all generating facilities supplying electric power to the entire area
embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role
under aforesaid P.D. No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total
domestic indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time, 30 and the NPC
was authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these foreign loans states as follows:
equipment, materials, supplies and services, by the Corporation, paid from the proceeds of
any loan, credit or indebtedness incurred under this Act, shall also be exempt from all
direct and indirect taxes, fees, imposts, other charges and restrictions, including import
restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 32 (Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:
(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the
Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities including the taxes, duties, fees, imposts and other charges
provided for under the Tariff and Customs Code of the Philippines, Republic Act
Numbered Nineteen Hundred Thirty-Seven, as amended, and as further amended by
Presidential Decree No. 34 dated October 27, 1972, and Presidential Decree No. 69,
dated November 24, 1972, and costs and service fees in any court or administrative
proceedings in which it may be a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization and sale of electric
power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of
electricity to its different customers. 34 No tax exemption provision was amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated
annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which
amount would be taken from taxes accruing to the General Funds of the Government, proceeds from
loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of Finance for this particular
purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for generation and transmission facilities
which includes nuclear power generation, the present capitalization of National Power
Corporation (NPC) and the ceilings for domestic and foreign borrowings are deemed
insufficient; 36
xxx xxx xxx
(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit
character of NPC has not been fully utilized because of restrictive interpretation of the
taxing agencies of the government on said provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated expansion program and attain the declared objective of
total electrification of the country, further amendments of certain sections of Republic Act
No. 6395, as amended by Presidential Decrees Nos. 380, 395 and 758, have become
imperative; 38
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:
investment as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay to its indebtedness and obligations and in furtherance and effective
implementation of the policy 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 service fees including filing fees, appeal
bonds, supersedeas bonds, in any court or administrative proceedings. 42
II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and
Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to
imports as follows:
WHEREAS, importations by certain government agencies, including government-owned or

controlled corporation, are exempt from the payment of customs duties and compensating
tax; and
WHEREAS, in order to reduce foreign exchange spending and to protect domestic

industries, it is necessary to restrict and regulate such tax-free importations.
NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of

the powers vested in me by the Constitution, and do hereby decree and order the
following:
Sec. 1. All importations of any government agency, including government-owned or

controlled corporations which are exempt from the payment of customs duties and internal
revenue taxes, shall be subject to the prior approval of an Inter-Agency Committee which
shall insure compliance with the following conditions:
(a) That no such article of local manufacture are available in sufficient quantity and
comparable quality at reasonable prices;
(b) That the articles to be imported are directly and actually needed and will be used
exclusively by the grantee of the exemption for its operations and projects or in the
conduct of its functions; and
(c) The shipping documents covering the importation are in the name of the grantee to
whom the goods shall be delivered directly by customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power to regulate and control the tax-free
importation of government agencies in accordance with the conditions set forth in Section
1 hereof and the regulations to be promulgated to implement the provisions of this Decree.
Provided, however, That any government agency or government-owned or controlled
corporation, or any local manufacturer or business firm adversely affected by any decision
or ruling of the Inter-Agency Committee may file an appeal with the Office of the President
within ten days from the date of notice thereof. . . . .
xxx xxx xxx
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
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and implement a National Budget that is
an instrument of national development, reflective of national objectives, strategies and
plans. The budget shall be supportive of and consistent with the socio-economic
development plan and shall be oriented towards the achievement of explicit objectives and
expected results, to ensure that funds are utilized and operations are conducted
effectively, economically and efficiently. The national budget shall be formulated within a
context of a regionalized government structure and of the totality of revenues and other
receipts, expenditures and borrowings of all levels of government-owned or controlled
corporations. The budget shall likewise be prepared within the context of the national long-
term plan and of a long-term budget program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or controlled corporations, shall pay income taxes,
customs duties and other taxes and fees are imposed under revenues laws: provided, that organizations
otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General
Fund in the exact amount of taxes/duties due: provided, further, that a procedure shall be established by
the Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall automatically
be considered as both revenue and expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are
inconsistent with the provisions of the Decree are hereby repealed and/or modified
accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino
assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax
privileges to any government-owned or controlled corporation and all other units of
government; 46
and since there was a
. . . need for government-owned or controlled corporations and all other units of

government enjoying tax privileges to share in the requirements of development, fiscal or
otherwise, by paying the duties, taxes and other charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore
granted in favor of government-owned or controlled corporations including their
subsidiaries, are hereby withdrawn.
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential Decree
No. 776, is hereby empowered to restore, partially or totally, the exemptions withdrawn by
Section 1 above, any applicable tax and duty, taking into account, among others, any or all
of the following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation to the revenue generation effort;
3) The nature of the activity in which the corporation is engaged in; or
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees,
executive orders, administrative orders, rules, regulations or parts thereof which are
inconsistent with this Decree are hereby repealed, amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or
grant of tax exemption to other government and private entities without benefit of review by the Fiscal
Incentives Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including
the preferential tax treatment, of government and private entities with certain exceptions, in
order that the requirements of national economic development, in terms of fiscals and
other resources, may be met more adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption privileges were restored by the
Fiscal Incentives Review Board (FIRB), a number of affected entities, government and
private, had their tax and duty exemption privileges restored or granted by Presidential
action without benefit or review by the Fiscal Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be better provided where necessary
by explicit subsidy and budgetary support rather than tax and duty exemption privileges if
only to improve the fiscal monitoring aspects of government operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax
and duty incentives granted to government and private entities are hereby withdrawn,
except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective internation agreement to which the Government of the

Republic of the Philippines is a signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment pursuant to Presidential Decree No. 1789, as

amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree

No. 66 as amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial

Authority pursuant to Presidential Decree No. 538, was amended.
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instructions No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal

Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as
amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/or duty exemption that may be restored;
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax
and duty exemptions or preferential treatment in taxation, indicating the source of funding
therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into
consideration the international commitment of the Philippines and the necessary
precautions such that the grant of subsidies does not become the basis for countervailing
action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board
shall take into account any or all of the following considerations:
a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to be
issued by the Ministry of Finance. 49 Said rules and regulations were promulgated and published in the
Official Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official
Gasetter, 51which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their
TAXATION I course, which fro convenient reference, is as follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear the burden:
a. Direct Tax the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's
tax), residence tax, immigration tax
b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.
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
IV
To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the
following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms
of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does
not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC
was to be completely tax exempt from all forms of taxes direct and indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon
its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to
be completely tax exempt.
After the NPC was authorized to borrow from other sources of funds aside issuance of bonds it was
again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when
the ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges
of the NPC were maintained.
NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as
above stated. The exemption was, however, restored by R.A. No. 6395.
Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed
NPC. Its section 13(d) is the starting point of this bone of contention among the parties. For easy
reference, it is reproduced as follows:
[T]he Corporation is hereby declared exempt:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
transmission, utilization, and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization and sale of electric power.
(Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as
follows:
investment as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any court or administrative proceedings. (Emphasis
supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential Decree Nos. 380

and 938 were issued by one man, acting as such the Executive and Legislative. 53
xxx xxx xxx
[S]ince both presidential decrees were made by the same person, it would have been very
easy for him to retain the same or similar language used in P.D. No. 380 P.D. No. 938 if
his intention were to preserve the indirect tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault
were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the following
items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations and projects;
13(d) : petroleum products used in generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,",
included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax
exemptions.
This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or
issuance as narrated above in part I hereof. President Marcos must have considered all the NPC statutes
from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came
up 55 with a very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as
of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total
foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal
is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay
the government share in its capital stock P.D. No. 758 was issued mandating that P200 Million would be
appropriated annually to cover the said unpaid subscription of the Government in NPC's authorized capital
stock. And significantly one of the sources of this annual appropriation of P200 million is TAX MONEY
accruing to the General Fund of the Government. It does not stand to reason then that former President
Marcos would order P200 Million to be taken partially or totally from tax money to be used to pay the
Government subscription in the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on
the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the
phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax exemption
provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:
equipment, materials and supplies by the Corporation, paid from the proceeds of any loan,
credit or indebtedness incurred under this Act, shall also be exempt from all taxes, fees,
imposts, other charges and restrictions, including import restrictions, by the Republic of the
Philippines, or any of its agencies and political subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness contracted this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials, supplies and services, by the Corporation, paid from the proceeds of
any loan, credit or indebtedness incurred under this Act, shall also be exempt from
all direct and indirect taxes, fees, imposts, other charges and restrictions, including import
restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No.
6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8 (b)
had to do only with loans and machinery imported, paid for from the proceeds of these foreign
loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption
stood as is with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes,
fees, imposts, other charges . . . to be imposed" in the future surely, an indication that the lawmakers
wanted the NPC to be exempt from ALL FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to rationalize
government receipts and expenditures by formulating and implementing a National Budget. 60 The NPC,
being a government owned and controlled corporation had to be shed off its tax exemption status
privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the General Fund in the
exact amount of taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It
allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-free
importation privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed
created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of the State,
was allowed to continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's
tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents'
"Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER the motion for
Reconsideration had been filed. During oral arguments heard on July 9, 1992, he proceeded to discuss
this tax exemption withdrawal as explained by then Secretary of Justice Vicente Abad Santos in opinion
No. 133 (S '77). 62A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the
basis of the petition at bar, fails to yield any mention of said P.D. No. 1177's effect on NPC's tax
exemption privileges. 63 Applying by analogy Pulido vs. Pablo, 64 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.
Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption
privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax privileges
of any government-owned or controlled corporation (GOCC). NPC included, was reiterated in the fourth
whereas clause of P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177,
being inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue
Board was tasked with recommending the partial or total restoration of tax exemptions withdrawn by
Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in Section
23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had to submit to
the Office of the President its request for the P200 million mandated by P.D. No. 758 to be appropriated
annually by the Government to cover its unpaid subscription to the NPC 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 the government (P.D. No. 758) and to the
national government's guarantee of the domestic and foreign indebtedness of the NPC, it is clear that
NPC was covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly found
themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that the
Secretary of Finance and the Commissioner of the Budget had to establish the necessary procedure to
accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC, did not put any cash
to pay any tax as it got from the General Fund the amounts necessary to pay different revenue collectors
for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and
tax exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to
be restored under P.D. No. 1931, issued on June 11, 1984. This is evident from sections 1
and 2 of said P.D. No. 1931, which reads:
"Section 1. The provisions of special or general law to the contrary

notwithstanding, all exemptions from the payment of duties, taxes, fees,
imports and other charges heretofore granted in favor of government-
owned or controlled corporations including their subsidiaries are hereby
withdrawn."
Sec. 2. The President of the Philippines and/or the Minister of Finance,

upon the recommendation of the Fiscal Incentives Review Board created
under P.D. No. 776, is hereby empowered to restore partially or totally, the
exemptions withdrawn by section 1 above. . . .
Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had
already lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7)
years earlier or on July 30, 1977, there were no tax exemptions to be withdrawn by section
1 which could later be restored by the Minister of Finance upon the recommendation of the
FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB resolutions No. 10-85, and 1-
86, were all illegally and validly issued since FIRB acted beyond their statutory authority by
creating and not merely restoring the tax exempt status of NPC. The same is true for FIRB
Res. No. 17-87 which restored NPC's tax exemption under E.O. No. 93 which likewise
abolished all duties and tax exemptions but allowed the President upon recommendation
of the FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same or substantially the same
terms the provisions of the act or acts so revised and consolidated, the revision and
consolidation shall be taken to be a continuation of the former act or acts, although the
former act or acts may be expressly repealed by the revised and consolidated act; and all
rights
and liabilities under the former act or acts are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23,
P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was
deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the second half of
Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had been expressly
repealed by Section 2 with its institution of the FIRB recommendation of partial/total restoration of tax
exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax
exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for
the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax
exemption privileges, which, it did, and the same were granted under FIRB Resolutions Nos. 10-85 67 and
1-86 68 as approved by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both
legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax
exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather
infamous Amendment No. 6 70 as there was no showing that President Marcos' encroachment on
legislative prerogatives was justified under the then prevailing condition that he could legislate "only if the
Batasang Pambansa 'failed or was unable to act inadequately on any matter that in his judgment required
immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the
Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason that in
his (Marcos') judgment required immediate action, but also when there existed a grave emergency or a
threat or thereof. It must be remembered that said Presidential Decree was issued only around nine (9)
months after the Philippines unilaterally declared a moratorium on its foreign debt payments 72 as a result
of the economic crisis triggered by loss of confidence in the government brought about by the Aquino
assassination. The Philippines was then trying to reschedule its debt payments. 73 One of the big
borrowers was the NPC 74 which had a US$ 2.1 billion white elephant of a Bataan Nuclear Power Plant on
its back. 75 From all indications, it must have been this grave emergency of a debt rescheduling which
compelled Marcos to issue P.D. No. 1931, under his Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed
without the concurrence of a majority of all the members of the Batasang Pambansa" 77 does not apply as
said P.D. No. 1931 was not passed by the Interim Batasang Pambansa but by then President Marcos
under His Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6
authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President
Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The same
was granted under FIRB Resolution No. 17-87 78 dated June 24, 1987 which restored NPC's tax exemption
privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication,
however, from the records of the case whether or not similar approvals were given by then President
Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe that a "travesty
of justice" might have occurred when the Minister of Finance approved his own recommendation as
Chairman of the Fiscal Incentives Review Board as what happened in Zambales 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, 81 and in Anzaldo vs. Clave 82 where Presidential Executive
Assistant Clave affirmed, on appeal to Malacaang, his own decision as Chairman of the Civil Service
Commission. 83
Upon deeper analysis, the question arises as to whether one can talk about "due process" being violated
when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance when the same
were recommended by him in his capacity as Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientist-
doctors, respectively. Thus, there was a need for procedural due process to be followed.
In the case of the tax exemption restoration of NPC, there is no other comparable entity not even a
single public or private corporation whose rights would be violated if NPC's tax exemption privileges
were to be restored. While there might have been a MERALCO before Martial Law, it is of public
knowledge that the MERALCO generating plants were sold to the NPC in line with the State policy that
NPC was to be the State implementing arm for the electrification of the entire country. Besides,
MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO as a
producer of electricity which could have objected to the restoration of NPC's tax exemption privileges.
It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was
just asking that its tax exemption privileges be restored. It is for these reasons that, at least in NPC's case,
the recommendation and approval of NPC's tax exemption privileges under FIRB Resolution Nos. 10-85
and 1-86, done by the same person acting in his dual capacities as Chairman of the Fiscal Incentives
Review Board and Minister of Finance, respectively, do not violate procedural due process.
While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5,
1987, the view has been expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no
authority to sub-delegate to the FIRB, which was allegedly not a delegate of the legislature, the power
delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative
powers. Thus, there was no power delegated to her, rather it was she who was delegating her power. She
delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly,
she was not sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the policy to be carried
out 85 and it fixed the standard to which the delegate had to conform in the performance of his
functions, 86 both qualities having been enunciated by this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June
11, 1984 up to the present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the Commissaries of the Armed
Forces of the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but
groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other
taxes on the goods earmarked for AFP Commissaries as an added cost of operation and distribute it over
the total units of goods sold as it would any other cost. Thus, even the ordinary supermarket buyer
probably pays for the specific, ad valorem and other taxes which theses suppliers do not charge the AFP
Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the
taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an
opinion, 90wherein he stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties,
fees, imposts, charges, and restrictions of the Republic of the Philippines and its
provinces, cities, and municipalities." This exemption is broad enough to include all taxes,
whether direct or indirect, which the National Power Corporation may be required to pay,
such as the specific tax on petroleum products. That it is indirect or is of no amount
[should be of no moment], for it is the corporation that ultimately pays it. The view which
refuses to accord the exemption because the tax is first paid by the seller disregards
realities and gives more importance to form than to substance. Equity and law always exalt
substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as

knowledge that many impositions taxpayers have to pay are in the nature of indirect taxes.
To limit the exemption granted the National Power Corporation to direct taxes
notwithstanding the general and broad language of the statue will be to thwrat the
legislative intention in giving exemption from all forms of taxes and impositions without
distinguishing between those that are direct and those that are not. (Emphasis supplied)
In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel
oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of
indirect taxation, the economic burden of such taxation is expected to be passed on through the channels
of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted
from both direct and indirect taxation, the NPC must beheld exempted from absorbing the economic
burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC
absorb all or part of the economic burden of the taxes previously paid to BIR, which could they shift to
NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the
NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil which represents all or
part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from
the oil companies because to do so may be more convenient and ultimately less costly for NPC than
NPC itself importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed by
the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil
company-vendor to the BIR.
It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS
BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which
the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195
reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF
CERTAIN PETROLEUM PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended,
is hereby amended to read as follows:
Par. (b) For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less
the same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.
Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred
and eighty-seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to
bear the economic burden of the ad valorem taxes. What this Court will now dispose of are petitioner's
complaints that some indirect tax money has been illegally refunded by the Bureau of Internal Revenue to
the NPC and that more claims for refunds by the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last
July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during
the period from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo
illegal as the PNC did not have indirect tax exemptions with the enactment of P.D. No. 938. As We have
already ruled otherwise, the only questions left are whether NPC Is entitled to a tax refund for the tax
component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau
of Internal Revenue properly refunded the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the BIR issues its letter
authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to
FIRB Resolution No. 10-85. 92 Since the tax exemption restoration was retroactive to June 11, 1984 there
was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific
and ad valorem taxes on the bunker oil it sold NPC during the period above indicated and had billed NPC
correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11, 1985 to the
Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY
STATE that itself paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex
(Phils) Inc. 94
The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National
Internal Revenue Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or illegally collected. No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been
excessive or in any Manner wrongfully collected. until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may be maintained, whether
or not such tax, penalty, or sum has been paid under protest or duress.
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 after payment; Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly, to have been erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the Commissioner
correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.
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 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 exemption
privileges. Neither can We order the BIR to refund said amount to NPC as there is no pending petition for
review on certiorari of a suit for its collection before Us. At any rate, at this point 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 after payment. . . . (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 AFFIRMED.
SO ORDERED.
Inherent limitations
Roxas v. CTA, 23 SCRA 276 (1968)
G.R. No. L-25043 April 26, 1968
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as
judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by
hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu,
Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and
Jose Roxas, formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for
generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually
occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big
landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to
part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally
the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants
for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase price, and so a
special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the
amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the
farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but
by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the
proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and
P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of
capital asset held for more than one year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila,
which they inherited from their grandparents. After Antonio and Eduardo got married, they resided
somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia.
rentals for the house in the sum of P8,000.00 a year.
ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of
real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late
payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late
payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received
house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an
owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is
considered a real estate dealer and is liable to pay the corresponding fixed tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities
against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of
securities.
In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:
1953 1955
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00
Jose Roxas 6,323.00 5,588.00
The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50%
of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and
the disallowance of deductions from gross income of various business expenses and contributions
claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu
farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as
engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed.
The following deductions were disallowed:
ROXAS Y CIA.:
1953
Tickets for Banquet in honor of P
S. Osmea 40.00
Gifts of San Miguel beer 28.00
Contributions to
Philippine Air Force Chapel 100.00

Manila Police Trust Fund 150.00
Philippines Herald's fund for Manila's

neediest families 100.00
1955
Contributions to Contribution to
Our Lady of Fatima Chapel,
FEU 50.00
ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund 25.00
Pasay City Police Dept. X'mas fund 50.00
1955
Contributions to
Baguio City Police Christmas fund 25.00
Pasay City Firemen Christmas fund 25.00

Pasay City Police Christmas fund 50.00
EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de Manresa 450.00
Philippines Herald's fund for Manila's

1955
Contributions to Philippines
Herald's fund for Manila's
JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an
appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered
judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax
on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force
Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio
Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent
Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00,
respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1%
monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to
the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's
tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal
Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100%
taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate
dealer because it engaged in the business of selling real estate. The business activity alluded to was the
act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To
bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of
partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella
en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo
aquellas que a juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue
cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of
the fact that there were hundreds of vendees. Although they paid for their respective holdings in
installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate
dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for
generations was not only in consonance with, but more in obedience to the request and pursuant to the
policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to
pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to
subsequently subdivide them among the farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the same way and
under the same terms as would have been the case had the Government done it itself. For this
magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's
gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general
public's trust and confidence in the Government this power must be used justly and not treacherously. It
does not conform with Our sense of justice in the instant case for the Government to persuade the
taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to
Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the
sale thereof is capital gain, taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor
of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were
claimed as representation expenses. Representation expenses are deductible from gross income as
expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the
taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection
with his business. In the case at bar, the evidence does not show such link between the expenses and the
business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and
Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's
neediest families and Our Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City
Police are not deductible for the reason that the Christmas funds were not spent for public purposes but
as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a
government entity is deductible when used exclusively for public purposes. For this reason, the
disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be
used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the
ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of
the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald
but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes.
There is no question that the members of this group of citizens do not receive profits, for all the funds they
raised were for Manila's neediest families. Such a group of citizens may be classified as an association
organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at
the Far Eastern University on the ground that the said university gives dividends to its stockholders.
Located within the premises of the university, the chapel in question has not been shown to belong to the
Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to
the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code
for the reason that the net income of said university injures to the benefit of its stockholders. The
disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because
although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose
Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of
real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the
persons paying the rentals. The law, which states: 1wph1.t
. . . "Real estate dealer" includes any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding himself out as
a full or part-time dealer in real estate or as an owner of rental property or properties rented or
offered to rent for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis
supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is
sustained.1wph1.t
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose
Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00,
respectively, computed as follows: *
ANTONIO ROXAS
Net income per return P315,476.59
Add: 1/3 share, profits in Roxas y

P 153,249.15
Cia.
Less amount declared 146,135.46
Amount understated P 7,113.69
Contributions disallowed 115.00
P 7,228.69
Less 1/3 share of contributions

amounting to P21,126.06 disallowed
from partnership but allowed to
partners 7,042.02 186.67
Net income per review P315,663.26
Less: Exemptions 4,200.00
Net taxable income P311,463.26
Tax due 154,169.00

Tax paid 154,060.00
Deficiency P 109.00
==========
EDUARDO ROXAS
P
Net income per return
304,166.92
P 153,249.15
Cia
Less profits declared 146,052.58

Amount understated P 7,196.57
Less 1/3 share in contributions

amounting to P21,126.06 disallowed
from partnership but allowed to
partners 7,042.02 155.55
Less: Exemptions 4,800.00
Net taxable income P299,592.47

Tax Due P147,250.00
Tax paid 147,159.00
Deficiency P91.00
===========
JOSE ROXAS
Net income per return P222,681.76
P153,429.15
Cia.
Less amount reported 146,135.46
Amount understated 7,113.69
Less 1/3 share of contributions

disallowed from partnership but
allowed as deductions to partners 7,042.02 71.67

Less: Exemption 1,800.00
Net income subject to tax P220,953.43
Tax due P102,763.00

Tax paid 102,714.00
Deficiency P 49.00
===========
WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of
P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas
are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency
income tax all corresponding for the year 1955. No costs. So ordered.
Public Purpose
Pascual v. Secretary of Public Works, 110 Phil 331 (1960) *
G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-

appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued, without
costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this action
for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An Act
Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a) thereof,
an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and improvement" of
Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen. Capinpin Gen.
Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the time of the passage and approval of
said Act, the aforementioned feeder roads were "nothing but projected and planned subdivision roads, not
yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the
tracings attached to the petition as Annexes A and B, near Shaw Boulevard, not far away from the
intersection between the latter and Highway 54), which projected feeder roads "do not connect any
government property or any important premises to the main highway"; that the aforementioned Antonio
Subdivision (as well as the lands on which said feeder roads were to be construed) were private
properties of respondent Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a
member of the Senate of the Philippines; that on May, 1953, respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the municipality of
Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council, subject to the condition "that
the donor would submit a plan of the said roads and agree to change the names of two of them"; that no
deed of donation in favor of the municipality of Pasig was, however, executed; that on July 10, 1953,
respondent Zulueta wrote another letter to said council, calling attention to the approval of Republic Act.
No. 920, and the sum of P85,000.00 appropriated therein for the construction of the projected feeder
roads in question; that the municipal council of Pasig endorsed said letter of respondent Zulueta to the
District Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that inasmuch
as the projected feeder roads in question were private property at the time of the passage and approval of
Republic Act No. 920, the appropriation of P85,000.00 therein made, for the construction, reconstruction,
repair, extension and improvement of said projected feeder roads, was illegal and, therefore, void ab
initio"; that said appropriation of P85,000.00 was made by Congress because its members were made to
believe that the projected feeder roads in question were "public roads and not private streets of a private
subdivision"'; that, "in order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed on December 12, 1953, while he was a
member of the Senate of the Philippines, an alleged deed of donation copy of which is annexed to the
petition of the four (4) parcels of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed of donation was, on the same date,
accepted by the then Executive Secretary; that being subject to an onerous condition, said donation
partook of the nature of a contract; that, such, said donation violated the provision of our fundamental law
prohibiting members of Congress from being directly or indirectly financially interested in any contract with
the Government, and, hence, is unconstitutional, as well as null and void ab initio, for the construction of
the projected feeder roads in question with public funds would greatly enhance or increase the value of
the aforementioned subdivision of respondent Zulueta, "aside from relieving him from the burden of
constructing his subdivision streets or roads at his own expense"; that the construction of said projected
feeder roads was then being undertaken by the Bureau of Public Highways; and that, unless restrained by
the court, the respondents would continue to execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the irreparable damage, detriment and prejudice not only to the
petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and void;
that the alleged deed of donation of the feeder roads in question be "declared unconstitutional and,
therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta from
ordering or allowing the continuance of the above-mentioned feeder roads project, and from making and
securing any new and further releases on the aforementioned item of Republic Act No. 920, and the
disbursing officers of the Department of Public Works and Highways from making any further payments
out of said funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a writ
of preliminary injunction be issued enjoining the aforementioned parties respondent from making and
securing any new and further releases on the aforesaid item of Republic Act No. 920 and from making any
further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue",
and that the petition did "not state a cause of action". In support to this motion, respondent Zulueta alleged
that the Provincial Fiscal of Rizal, not its provincial governor, should represent the Province of Rizal,
pursuant to section 1683 of the Revised Administrative Code; that said respondent is " not aware of any
law which makes illegal the appropriation of public funds for the improvements of . . . private property";
and that, the constitutional provision invoked by petitioner is inapplicable to the donation in question, the
same being a pure act of liberality, not a contract. The other respondents, in turn, maintained that
petitioner could not assail the appropriation in question because "there is no actual bona fide case . . . in
which the validity of Republic Act No. 920 is necessarily involved" and petitioner "has not shown that he
has a personal and substantial interest" in said Act "and that its enforcement has caused or will cause him
a direct injury."
Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated October
29, 1953, holding that, since public interest is involved in this case, the Provincial Governor of Rizal and
the provincial fiscal thereof who represents him therein, "have the requisite personalities" to question the
constitutionality of the disputed item of Republic Act No. 920; that "the legislature is without power
appropriate public revenues for anything but a public purpose", that the instructions and improvement of
the feeder roads in question, if such roads where private property, would not be a public purpose; that,
being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the Republic of the
Philippines will use the parcels of land hereby donated for street purposes only and for no other
purposes whatsoever; it being expressly understood that should the Government of the Republic
of the Philippines violate the condition hereby imposed upon it, the title to the land hereby donated
shall, upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA. (Emphasis
supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is "absolutely
forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning contracts "whose cause, objector
purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not be
contested, however, by petitioner herein, because his "interest are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of fact
made in the petition of appellant herein. According to said petition, respondent Zulueta is the owner of
several parcels of residential land situated in Pasig, Rizal, and known as the Antonio Subdivision, certain
portions of which had been reserved for the projected feeder roads aforementioned, which, admittedly,
were private property of said respondent when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and improvement" of said roads, was passed by Congress,
as well as when it was approved by the President on June 20, 1953. The petition further alleges that the
construction of said roads, to be undertaken with the aforementioned appropriation of P85,000.00, would
have the effect of relieving respondent Zulueta of the burden of constructing his subdivision streets or
roads at his own expenses, 1and would "greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in question was
"clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However, respondent
Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because Congress
is the source of all laws . . . Aside from the fact that movant is not aware of any law which makes
illegal the appropriation of public funds for the improvement of what we, in the meantime, may
assume as private property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the nature of the
Government established under the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a public purpose, the principle according to
Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for anything
but a public purpose. . . . It is the essential character of the direct object of the expenditure which
must determine its validity as justifying a tax, and not the magnitude of the interest to be affected
nor the degree to which the general advantage of the community, and thus the public welfare, may
be ultimately benefited by their promotion. Incidental to the public or to the state, which results
from the promotion of private interest and the prosperity of private enterprises or business, does
not justify their aid by the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public purposes only,
discussed supra sec. 14, money raised by taxation can be expended only for public purposes and
not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may be used
only for public purpose. The right of the legislature to appropriate funds is correlative with its right
to tax, and, under constitutional provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than for a public purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the use of public funds is whether the statute
is designed to promote the public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might incidentally serve the public. (81 C.J.S.
pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being patently
sound, are a necessary corollary to our democratic system of government, which, as such, exists primarily
for the promotion of the general welfare. Besides, reflecting as they do, the established jurisprudence in
the United States, after whose constitutional system ours has been patterned, said views and
jurisprudence are, likewise, part and parcel of our own constitutional law. lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon the
ground that petitioner may not contest the legality of the donation above referred to because the same
does not affect him directly. This conclusion is, presumably, based upon the following premises, namely:
(1) that, if valid, said donation cured the constitutional infirmity of the aforementioned appropriation; (2)
that the latter may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and admits of no
exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not
upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an
amendment of the organic law, removing, with retrospective operation, the constitutional limitation
infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in
question, the legality thereof depended upon whether said roads were public or private property when the
bill, which, latter on, became Republic Act 920, was passed by Congress, or, when said bill was approved
by the President and the disbursement of said sum became effective, or on June 20, 1953 (see section 13
of said Act). Inasmuch as the land on which the projected feeder roads were to be constructed belonged
then to respondent Zulueta, the result is that said appropriation sought a private purpose, and hence, was
null and void. 4 The donation to the Government, over five (5) months after the approval and effectivity of
said Act, made, according to the petition, for the purpose of giving a "semblance of legality", or legalizing,
the appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions. For
instance, the creditors of a party to an illegal contract may, under the conditions set forth in Article 1177 of
said Code, exercise the rights and actions of the latter, except only those which are inherent in his person,
including therefore, his right to the annulment of said contract, even though such creditors are not affected
by the same, except indirectly, in the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a direct
injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of
taxpayers, laws providing for the disbursement of public funds, 5upon the theory that "the expenditure of
public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes
a misapplication of such funds," which may be enjoined at the request of a taxpayer. 6Although there are
some decisions to the contrary, 7the prevailing view in the United States is stated in the American
Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to attack the
constitutionality of a statute, the general rule is that not only persons individually affected, but
also taxpayers, have sufficient interest in preventing the illegal expenditure of moneys raised by
taxation and may therefore question the constitutionality of statutes requiring expenditure of public
moneys. (11 Am. Jur. 761; emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon (262 U.S.
447), insofar as federal laws are concerned, upon the ground that the relationship of a taxpayer of the
U.S. to its Federal Government is different from that of a taxpayer of a municipal corporation to its
government. Indeed, under the composite system of government existing in the U.S., the states of the
Union are integral part of the Federation from an international viewpoint, but, each state enjoys internally a
substantial measure of sovereignty, subject to the limitations imposed by the Federal Constitution. In fact,
the same was made by representatives of each state of the Union, not of the people of the U.S., except
insofar as the former represented the people of the respective States, and the people of each State has,
independently of that of the others, ratified said Constitution. In other words, the Federal Constitution and
the Federal statutes have become binding upon the people of the U.S. in consequence of an act of, and,
in this sense, through the respective states of the Union of which they are citizens. The peculiar nature of
the relation between said people and the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by electors chosen by each State, in
such manner as the legislature thereof may direct (Article II, section 2, of the Federal Constitution). lawphi 1.net
The relation between the people of the Philippines and its taxpayers, on the other hand, and the Republic
of the Philippines, on the other, is not identical to that obtaining between the people and taxpayers of the
U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that existing between the
people and taxpayers of each state and the government thereof, except that the authority of the Republic
of the Philippines over the people of the Philippines is more fully direct than that of the states of the Union,
insofar as the simple and unitary type of our national government is not subject to limitations analogous to
those imposed by the Federal Constitution upon the states of the Union, and those imposed upon the
Federal Government in the interest of the Union. For this reason, the rule recognizing the right of
taxpayers to assail the constitutionality of a legislation appropriating local or state public funds which
has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) has greater
application in the Philippines than that adopted with respect to acts of Congress of the United States
appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by the
Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of contesting the
price being paid to the owner thereof, as unduly exorbitant. It is true that in Custodio vs. President of the
Senate (42 Off. Gaz., 1243), a taxpayer and employee of the Government was not permitted to question
the constitutionality of an appropriation for backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and Barredo vs. Commission on Elections (84 Phil., 368; 45
Off. Gaz., 4411), we entertained the action of taxpayers impugning the validity of certain appropriations of
public funds, and invalidated the same. Moreover, the reason that impelled this Court to take such position
in said two (2) cases the importance of the issues therein raised is present in the case at bar. Again,
like the petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The
Province of Rizal, which he represents officially as its Provincial Governor, is our most populated political
subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of taxation, in the
Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should not have
been dismissed by the lower court; and that the writ of preliminary injunction should have been
maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the lower
court for further proceedings not inconsistent with this decision, with the costs of this instance against
respondent Jose C. Zulueta. It is so ordered.
Caltex v. Commissioner, supra

(SEE ABOVE)
Tio v. Videogram Regulatory Board, 151 SCRA 208 (1987)

June 18, 1987
G.R. No. L-75697
VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION,
CITY MAYOR and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.
MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on behalf of
other videogram operators adversely affected. It assails the constitutionality of Presidential Decree No.
1987 entitled "An Act Creating the Videogram Regulatory Board" with broad powers to regulate and
supervise the videogram industry (hereinafter briefly referred to as the BOARD). The Decree was
promulgated on October 5, 1985 and took effect on April 10, 1986, fifteen (15) days after completion of its
publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential
Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each processed video-tape cassette, ready
for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax.
On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers, Importers
and Distributors Association of the Philippines, and Philippine Motion Pictures Producers Association,
hereinafter collectively referred to as the Intervenors, were permitted by the Court to intervene in the case,
over petitioner's opposition, upon the allegations that intervention was necessary for the complete
protection of their rights and that their "survival and very existence is threatened by the unregulated
proliferation of film piracy." The Intervenors were thereafter allowed to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:
1. WHEREAS, the proliferation and unregulated circulation of videograms including, among

others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp decline
in theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection of
sales, contractor's specific, amusement and other taxes, thereby resulting in substantial losses
estimated at P450 Million annually in government revenues;
2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum from
rentals, sales and disposition of videograms, and such earnings have not been subjected to tax,
thereby depriving the Government of approximately P180 Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due to the
shutdown of numerous moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the Government
to create an environment conducive to growth and development of all business industries,
including the movie industry which has an accumulated investment of about P3 Billion;
5. WHEREAS, proper taxation of the activities of videogram establishments will not only alleviate
the dire financial condition of the movie industry upon which more than 75,000 families and
500,000 workers depend for their livelihood, but also provide an additional source of revenue for
the Government, and at the same time rationalize the heretofore uncontrolled distribution of
videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram features constitutes a
clear and present danger to the moral and spiritual well-being of the youth, and impairs the
mandate of the Constitution for the State to support the rearing of the youth for civic efficiency and
the development of moral character and promote their physical, intellectual, and social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb these
blatant malpractices which have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people
and betraying the national economic recovery program, bold emergency measures must be
adopted with dispatch; ... (Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution;
3. There is no factual nor legal basis for the exercise by the President of the vast powers conferred
upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one subject which shall be expressed
in the title thereof" 1 is sufficiently complied with if the title be comprehensive enough to include the general
purpose which a statute seeks to achieve. It is not necessary that the title express each and every end
that the statute wishes to accomplish. The requirement is satisfied if all the parts of the statute are related,
and are germane to the subject matter expressed in the title, or as long as they are not inconsistent with or
foreign to the general subject and title. 2 An act having a single general subject, indicated in the title, may
contain any number of provisions, no matter how diverse they may be, so long as they are not inconsistent
with or foreign to the general subject, and may be considered in furtherance of such subject by providing
for the method and means of carrying out the general object." 3 The rule also is that the constitutional
requirement as to the title of a bill should not be so narrowly construed as to cripple or impede the power
of legislation. 4 It should be given practical rather than technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a rider is
without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision of
law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or
rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a
reproduction of any motion picture or audiovisual program. Fifty percent (50%) of the proceeds of
the tax collected shall accrue to the province, and the other fifty percent (50%) shall acrrue to the
municipality where the tax is collected; PROVIDED, That in Metropolitan Manila, the tax shall be
shared equally by the City/Municipality and the Metropolitan Manila Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably necessary for the accomplishment of,
the general object of the DECREE, which is the regulation of the video industry through the Videogram
Regulatory Board as expressed in its title. The tax provision is not inconsistent with, nor foreign to that
general subject and title. As a tool for regulation 6 it is simply one of the regulatory and control
mechanisms scattered throughout the DECREE. The express purpose of the DECREE to include taxation
of the video industry in order to regulate and rationalize the heretofore uncontrolled distribution of
videograms is evident from Preambles 2 and 5, supra. Those preambles explain the motives of the
lawmaker in presenting the measure. The title of the DECREE, which is the creation of the Videogram
Regulatory Board, is comprehensive enough to include the purposes expressed in its Preamble and
reasonably covers all its provisions. It is unnecessary to express all those objectives in the title or that the
latter be an index to the body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive, confiscatory,
and in restraint of trade. However, it is beyond serious question that a tax does not cease to be valid
merely because it regulates, discourages, or even definitely deters the activities taxed. 8 The power to
impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to
declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority
which exercises it. 9 In imposing a tax, the legislature acts upon its constituents. This is, in general, a
sufficient security against erroneous and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments of around P600 million per annum have not been
subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user
tax, imposed on retailers for every videogram they make available for public viewing. It is similar to the
30% amusement tax imposed or borne by the movie industry which the theater-owners pay to the
government, but which is passed on to the entire cost of the admission ticket, thus shifting the tax burden
on the buying or the viewing public. It is a tax that is imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating
the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual
property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the
DECREE to protect the movie industry, the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled the legislature to
impose the tax was to favor one industry over another. 11
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that "inequities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation". 12 Taxation has been made the
implement of the state's police power.13
At bottom, the rate of tax is a matter better addressed to the taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by the
former President under Amendment No. 6 of the 1973 Constitution providing that "whenever in the
judgment of the President ... , there exists a grave emergency or a threat or imminence thereof, or
whenever the interim Batasang Pambansa or the regular National Assembly fails or is unable to act
adequately on any matter for any reason that in his judgment requires immediate action, he may, in order
to meet the exigency, issue the necessary decrees, orders, or letters of instructions, which shall form part
of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of the
people and betraying the national economic recovery program necessitated bold emergency measures to
be adopted with dispatch. Whatever the reasons "in the judgment" of the then President, considering that
the issue of the validity of the exercise of legislative power under the said Amendment still pends
resolution in several other cases, we reserve resolution of the question raised at the proper time.
4. Neither can it be successfully argued that the DECREE contains an undue delegation of legislative
power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the direct assistance
of other agencies and units of the government and deputize, for a fixed and limited period, the heads or
personnel of such agencies and units to perform enforcement functions for the Board" is not a delegation
of the power to legislate but merely a conferment of authority or discretion as to its execution,
enforcement, and implementation. "The true distinction is between the delegation of power to make the
law, which necessarily involves a discretion as to what it shall be, and conferring authority or discretion as
to its execution to be exercised under and in pursuance of the law. The first cannot be done; to the latter,
no valid objection can be made." 14 Besides, in the very language of the decree, the authority of the
BOARD to solicit such assistance is for a "fixed and limited period" with the deputized agencies concerned
being "subject to the direction and control of the BOARD." That the grant of such authority might be the
source of graft and corruption would not stigmatize the DECREE as unconstitutional. Should the
eventuality occur, the aggrieved parties will not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or different
testimony than the law required at the time of the commission of the offense." It is petitioner's position that
Section 15 of the DECREE in providing that:
All videogram establishments in the Philippines are hereby given a period of forty-five (45) days
after the effectivity of this Decree within which to register with and secure a permit from the
BOARD to engage in the videogram business and to register with the BOARD all their inventories
of videograms, including videotapes, discs, cassettes or other technical improvements or
variations thereof, before they could be sold, leased, or otherwise disposed of. Thereafter any
videogram found in the possession of any person engaged in the videogram business without the
required proof of registration by the BOARD, shall be prima facie evidence of violation of the
Decree, whether the possession of such videogram be for private showing and/or public exhibition.
raises immediately a prima facie evidence of violation of the DECREE when the required proof of
registration of any videogram cannot be presented and thus partakes of the nature of an ex post facto law.
The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to the passage of a law providing
that the presumption of innocence may be overcome by a contrary presumption founded upon the
experience of human conduct, and enacting what evidence shall be sufficient to overcome such
presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A
TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the "legislature may enact
that when certain facts have been proved that they shall be prima facie evidence of the existence
of the guilt of the accused and shift the burden of proof provided there be a rational connection
between the facts proved and the ultimate facts presumed so that the inference of the one from
proof of the others is not unreasonable and arbitrary because of lack of connection between the
two in common experience". 16
Applied to the challenged provision, there is no question that there is a rational connection between the
fact proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE,
besides the fact that the prima facie presumption of violation of the DECREE attaches only after a forty-
five-day period counted from its effectivity and is, therefore, neither retrospective in character.
6. We do not share petitioner's fears that the video industry is being over-regulated and being eased out of
existence as if it were a nuisance. Being a relatively new industry, the need for its regulation was
apparent. While the underlying objective of the DECREE is to protect the moribund movie industry, there
is no question that public welfare is at bottom of its enactment, considering "the unfair competition posed
by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability
of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent
sequences; and losses in government revenues due to the drop in theatrical attendance, not to mention
the fact that the activities of video establishments are virtually untaxed since mere payment of Mayor's
permit and municipal license fees are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video
industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of the
DECREE. These considerations, however, are primarily and exclusively a matter of legislative concern.
Only congressional power or competence, not the wisdom of the action taken, may be the basis
for declaring a statute invalid. This is as it ought to be. The principle of separation of powers has in
the main wisely allocated the respective authority of each department and confined its jurisdiction
to such a sphere. There would then be intrusion not allowable under the Constitution if on a matter
left to the discretion of a coordinate branch, the judiciary would substitute its own. If there be
adherence to the rule of law, as there ought to be, the last offender should be courts of justice, to
which rightly litigants submit their controversy precisely to maintain unimpaired the supremacy of
legal norms and prescriptions. The attack on the validity of the challenged provision likewise
insofar as there may be objections, even if valid and cogent on its wisdom cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity which attaches to a challenged statute. We
find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No.
1987 as unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed. No costs. SO ORDERED.
Gaston v. Republic Planter, 158 SCRA 626 (1988) *

G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR VILLANUEVA, JOSE

ABELLO, REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI, MANUEL LACSON, JAVIER LACSON,
TITO TAGARAO, EDUARDO SUATENGCO, AUGUSTO LLAMAS, RODOLFO SIASON, PACIFICO
MAGHARI, JR., JOSE JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR COMMISSION, and SUGAR REGULATORY
ADMINISTRATION, respondents, ANGEL H. SEVERINO, JR., GLICERIO JAVELLANA, GLORIA P.
DE LA PAZ, JOEY P. DE LA PAZ, ET AL., and NATIONAL FEDERATION OF SUGARCANE
PLANTERS, intervenors.
Petitioners are sugar producers, sugarcane planters and millers, who have come to this Court in their individual capacities and in representation of
other sugar producers, planters and millers, said to be so numerous that it is impracticable to bring them all before the Court although the subject
matter of the present controversy is of common interest to all sugar producers, whether parties in this action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the government office
tasked with the function of regulating and supervising the sugar industry until it was superseded by its co-
respondent Sugar Regulatory Administration (SRA, for brevity) under Executive Order No. 18 on May 28,
1986. Although said Executive Order abolished the PHILSUCOM, its existence as a juridical entity was
mandated to continue for three (3) more years "for the purpose of prosecuting and defending suits by or
against it and enables it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets."
Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting and milling their sugarcane in different
mill districts of Negros Occidental, were allowed to intervene by the Court, since they have common cause
with petitioners and respondents having interposed no objection to their intervention. Subsequently, on
January 14,1988, the National Federation of Sugar Planters (NFSP) also moved to intervene, which the
Court allowed on February 16,1988.
Petitioners and Intervenors have come to this Court praying for a Writ of mandamus commanding
respondents:
TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS

BANK BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE
SAID BANK; NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE
SUGAR COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND MILLERS,
WHO ARE THE TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES
VALUED AT P36,548.000.00, AND 53,005,045 PREFERRED SHARES (A, B & C) WITH
A TOTAL PAR VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT OF
P290,972,224.72, THE SAID INVESTMENT HAVING BEEN FUNDED BY THE
DEDUCTION OF Pl.00 PER PICUL FROM SUGAR PROCEEDS OF THE SUGAR
PRODUCERS COMMENCING THE YEAR 1978-79 UNTIL THE PRESENT AS
STABILIZATION FUND PURSUANT TO P.D. # 388.
Respondent Bank does not take issue with either petitioners or its correspondents as it has no beneficial
or equitable interest that may be affected by the ruling in this Petition, but welcomes the filing of the
Petition since it will settle finally the issue of legal ownership of the questioned shares of stock.
Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing that no trust
results from Section 7 of P.D. No. 388; that the stabilization fees collected are considered government
funds under the Government Auditing Code; that the transfer of shares of stock from PHILSUCOM to the
sugar producers would be irregular, if not illegal; and that this suit is barred by laches.
The Solicitor General aptly summarizes the basic issues thus: (1) whether the stabilization fees collected
from sugar planters and millers pursuant to Section 7 of P.D. No. 388 are funds in trust for them, or public
funds; and (2) whether shares of stock in respondent Bank paid for with said stabilization fees belong to
the PHILSUCOM or to the different sugar planters and millers from whom the fees were collected or
levied.
P. D. No. 388, promulgated on February 2,1974, which created the PHILSUCOM, provided for the
collection of a Stabilization Fund as follows:
SEC. 7. Capitalization, Special Fund of the Commission, Development and Stabilization

Fund. There is hereby established a fund for the commission for the purpose of
financing the growth and development of the sugar industry and all its components,
stabilization of the domestic market including the foreign market to
be administered in trust by the Commission and deposited in the Philippine National Bank
derived in the manner herein below cited from the following sources:
a. Stabilization fund shall be collected as provided for in the various provisions of this
Decree.
b. Stabilization fees shall be collected from planters and millers in the amount of Two
(P2.00) Pesos for every picul produced and milled for a period of five years from the
approval of this Decree and One (Pl.00) Peso for every picul produced and milled every
year thereafter.
Provided: That fifty (P0.50) centavos per picul of the amount levied on planters, millers and
traders under Section 4(c) of this Decree will be used for the payment of salaries and
wages of personnel, fringe benefits and allowances of officers and employees for the
purpose of accomplishing and employees for the purpose of accomplishing the efficient
performance of the duties of the Commission.
Provided, further: That said amount shall constitute a lien on the sugar quedan and/or
warehouse receipts and shall be paid immediately by the planters and mill companies,
sugar centrals and refineries to the Commission. (paragraphing and bold supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be administered in trust
by the Commission." However, while the element of an intent to create a trust is present, a resulting trust
in favor of the sugar producers, millers and planters cannot be said to have ensued because the
presumptive intention of the parties is not reasonably ascertainable from the language of the statute itself.
The doctrine of resulting trusts is founded on the presumed intention of the parties; and as
a general rule, it arises where, and only where such may be reasonably presumed to be
the intention of the parties, as determined from the facts and circumstances existing at the
time of the transaction out of which it is sought to be established (89 C.J.S. 947).
No implied trust in favor of the sugar producers either can be deduced from the imposition of the levy.
"The essential Idea of an implied trust involves a certain antagonism between the cestui que trust and the
trustee even when the trust has not arisen out of fraud nor out of any transaction of a fraudulent or
immoral character (65 CJ 222). It is not clearly shown from the statute itself that the PHILSUCOM
imposed on itself the obligation of holding the stabilization fund for the benefit of the sugar producers. It
must be categorically demonstrated that the very administrative agency which is the source of such
regulation would place a burden on itself (Batchelder v. Central Bank of the Philippines, L-25071, July
29,1972,46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640 [1954]).
Neither can petitioners place reliance on the history of respondents Bank. They recite that at the
beginning, the Bank was owned by the Roman-Rojas Group. Because it underwent difficulties early in the
year 1978, Mr. Roberto S. Benedicto, then Chairman of the PHILSUCOM, submitted a proposal to the
Central Bank for the rehabilitation of the Bank. The Central Bank acted favorably on the proposal at the
meeting of the Monetary Board on March 31, 1978 subject to the infusion of fresh capital by the Benedicto
Group. Petitioners maintain that this infusion of fresh capital was accomplished, not by any capital
investment by Mr. Benedicto, but by PHILSUCOM, which set aside the proceeds of the P1.00 per picul
stabilization fund to pay for its subscription in shares of stock of respondent Bank. It is petitioners'
submission that all shares were placed in PHILSUCOM's name only out of convenience and necessity
and that they are the true and beneficial owners thereof.
In point of fact, we cannot see our way clear to upholding petitioners' position that the investment of the
proceeds from the stabilization fund in subscriptions to the capital stock of the Bank were being made for
and on their behalf. That could have been clarified by the Trust Agreement, dated May 28, 1986, entered
into between PHILSUCOM, as "Trustor" acting through Mr. Fred J. Elizalde as Officer-in-Charge, and
respondent RPB- Trust Department' as "Trustee," acknowledging that PHILSUCOM holds said shares for
and in behalf of the sugar producers," the latter "being the true and beneficial owners thereof." The
Agreement, however, did not get off the ground because it failed to receive the approval of the
PHILSUCOM Board of Commissioners as required in the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the Agreement because of the adverse
opinion of the SRA, Resident Auditor, dated June 25,1986, which was aimed by the Chairman of the
Commission on Audit, on January 26,1987.
On February 19, 1987, the SRA, resolved to revoke the Trust Agreement "in the light of the ruling of the
Commission on Audit that the aforementioned Agreement is of doubtful validity."
From the legal standpoint, we find basis for the opinion of the Commission on Audit reading:
That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory

Administration, in particular, owns and stocks. While it is true that the collected
stabilization fees were set aside by PHILSUCOM to pay its subscription to RPB, it did not
collect said fees for the account of the sugar producers. That stabilization fees are
charges/levies on sugar produced and milled which accrued to PHILSUCOM under PD
338, as amended. ...
The stabilization fees collected are in the nature of a tax, which is within the power of the State to impose
for the promotion of the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec.
7[b], P.D. No. 388). The collections made accrue to a "Special Fund," a "Development and Stabilization
Fund," almost Identical to the "Sugar Adjustment and Stabilization Fund" created under Section 6 of
Commonwealth Act 567. 1 The tax collected is not in a pure exercise of the taxing power. It is levied with a
regulatory purpose, to provide means for the stabilization of the sugar industry. The levy is primarily in the
exercise of the police power of the State (Lutz vs. Araneta, supra.).
The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great a portion of the
population of the State is affected to such an extent by public interests as to be within the
police power of the sovereign. (Johnson vs. State ex rel. Marey, 128 So. 857, cited in Lutz
vs. Araneta, supra).
The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a
special purpose that of "financing the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign market the fact that the State has
taken possession of moneys pursuant to law is sufficient to constitute them state funds, even though they
are held for a special purpose (Lawrence vs. American Surety Co., 263 Mich 586, 249 ALR 535, cited in
42 Am. Jur. Sec. 2, p. 718). Having been levied for a special purpose, the revenues collected are to be
treated as a special fund, to be, in the language of the statute, "administered in trust' for the purpose
intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is to be transferred to the
general funds of the Government. That is the essence of the trust intended (See 1987 Constitution, Article
VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(l]). 2
The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are
deposited in the Philippine National Bank and not in the Philippine Treasury, moneys from which may be
paid out only in pursuance of an appropriation made by law (1987) Constitution, Article VI, Sec. 29[1],1973
Constitution, Article VIII, Sec. 18[l]).
That the fees were collected from sugar producers, planters and millers, and that the funds were
channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fired
for their benefit nor make them the beneficial owners of the shares so purchased. It is but rational that the
fees be collected from them since it is also they who are to be benefited from the expenditure of the funds
derived from it. The investment in shares of respondent Bank is not alien to the purpose intended because
of the Bank's character as a commodity bank for sugar conceived for the industry's growth and
development. Furthermore, of note is the fact that one-half, (1/2) or PO.50 per picul, of the amount levied
under P.D. No. 388 is to be utilized for the "payment of salaries and wages of personnel, fringe benefits
and allowances of officers and employees of PHILSUCOM" thereby immediately negating the claim that
the entire amount levied is in trust for sugar, producers, planters and millers.
To rule in petitioners' favor would contravene the general principle that revenues derived from taxes
cannot be used for purely private purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the entire sugar industry, "and all its components,
stabilization of the domestic market," including the foreign market the industry being of vital importance to
the country's economy and to national interest.
WHEREFORE, the Writ of mandamus is denied and the Petition hereby dismissed. No costs. This
Decision is immediately executory. SO ORDERED.
Inherently legislative
General rule
Tan v. Del Rosario, 237 SCRA 324 (1994)
G.R. No. 109289 October 3, 1994
RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER
OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O.
CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his
capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.
VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation
Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one
subject which shall be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Article III, Section 1 No person shall be deprived of . . . property without due process of
law, nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional
partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's directive,
have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the
Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and
Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29
of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as
now amended, provide:
Sec. 21. Tax on citizens or residents.
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the
Practice of Profession. A tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable year from all sources, other than
income covered by paragraphs (b), (c), (d) and (e) of this section by every individual
whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%

Over P120,000 P15,600 + 20%

Over P350,000 P61,600 + 30%

of excess over P350,000
Sec. 29. Deductions from gross income. In computing taxable income subject to tax
under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this section: Provided, however,
That in computing taxable income subject to tax under Section 21 (f) in the case of
individuals engaged in business or practice of profession, only the following direct costs
shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to the
business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with the
conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to
answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still
retained the net income, taxation scheme. The allowance for deductible items, it is true, may have
significantly been reduced by the questioned law in comparison with that which has prevailed prior to the
amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor
opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by
no means inconsequential, continue to be well provided under the new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people,
through such publications of its proceedings as are usually made, of the subjects of legislation.1 The
above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would
be to require a virtual compendium of the law which could not have been the intendment of the
constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation
"shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on corporations and partnerships. The
contention clearly forgets, however, that such a system of income taxation has long been the prevailing
rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna
Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the
standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to
achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future
conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi
Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment3 on taxable corporations.
We certainly do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those
who are not. With the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve
into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax
measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not
hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional
proscriptions. This stage, however, has not been demonstrated to have been reached within any
appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when
there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No
such transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to
carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional partnership (GPP)

and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining
the net profit of the partnership, only the direct costs mentioned in said law are to be
deducted from partnership income. Also, the expenses paid or incurred by partners in their
individual capacities in the practice of their profession which are not reimbursed or paid by
the partnership but are not considered as direct cost, are not deductible from his gross
income.
The real objection of petitioners is focused on the administrative interpretation of public respondents that
would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable
Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech
by way of commenting on the questioned implementing regulation of public respondents following the
effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression
of this bill. Do we speak here of individuals who are earning, I mean, who
earn through business enterprises and therefore, should file an income tax
return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of
the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or to

partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax treatment
between individuals engaged in business or in the practice of their respective professions and partners in
general professional partnerships. The fact of the matter is that a general professional partnership, unlike
an ordinary business partnership (which is treated as a corporation for income tax purposes and so
subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on
the professional partnership, which is tax exempt, but on the partners themselves in their individual
capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which
has not been amended at all by Republic Act 7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons
exercising a common profession in general partnership shall be liable for income tax only
in their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or
otherwise, shall be returned for taxation and the tax paid in accordance with the provisions
of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner

(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent provided
by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he

declares his distributive share of the gross income undiminished by his
share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not) with
others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and
the final tax on passive investment income, under the present income tax system all individuals deriving
income from any source whatsoever are treated in almost invariably the same manner and under a
common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No.
7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily
become myopic, however, when the law is understood, as it should be, as only forming part of, and
subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue
Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code,
and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the
most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens,
regardless of residence, and resident aliens subject to income tax liability on their income from all
sources) and of the generally accepted and internationally recognized income taxable base (that can
subject non-resident aliens and foreign corporations to income tax on their income from Philippine
sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as
to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within
the context of, and so legally contemplated as, corporations. Except for few variances, such as in the
application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to
both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the
discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations
and partnerships which are independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A general professional partnership is
such an example.4Here, the partners themselves, not the partnership (although it is still obligated to file an
income tax return [mainly for administration and data]), are liable for the payment of income tax in
their individual capacity computed on their respective and distributive shares of profits. In the
determination of the tax liability, a partner does so as an individual, and there is no choice on the matter.
In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no
more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate
distribution of such income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as
now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on
their non-compensation income. There is no evident intention of the law, either before or after the
amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of
professionals who practice their respective professions individually and of those who do it through a
general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
Sison v. Ancheta, 130 SCRA 654 (1984) *

G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,

vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy
Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of
Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman,
Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity
of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of
the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable
net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross
income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax
upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual
taxpayers. 4 He characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in character 5 For petitioner,
therefore, there is a transgression of both the equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity
in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from
notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was filed on
May 28, 1982. 8 The facts as alleged were admitted but not the allegations which to their mind are "mere
arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in
their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Big. 135 is a valid
exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph
do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly
set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and
initiative and which the government was called upon to enter optionally, and only 'because it was better
equipped to administer for the public welfare than is any private individual or group of individuals,'
continue to lose their well-defined boundaries and to be absorbed within activities that the government
must undertake in its sovereign capacity if it is to meet the increasing social challenges of the
times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital
state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt
and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of
government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution
sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay properly be invoked, all
petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring
to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of
absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully
conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax
is not the power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative
or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the
challenged statutory provision as petitioner here alleges fails to abide by its command, then this
Court must so declare and adjudge it null. The injury thus is centered on the question of whether the
imposition of a higher tax rate on taxable net income derived from business or profession than on
compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as
here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void or its face, he has not made out a case. This is
merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are
invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty
of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the
Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in
case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act
is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It
suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be
allowed. For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical are
analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever
restrictions cast on some in the group equally binding on the rest." 20 That same formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs of
men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as
realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are
expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution
does not require things which are different in fact or opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of
the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice
J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of
taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco,25 decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does
not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when the Supreme
Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 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
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time reducing the applicable tax rate.
Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must
rest upon substantial distinctions that make real differences. In the case of the gross income taxation
embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the
income to the application of generalized rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically no overhead expense, these
taxpayers are e not entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would
not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately
impose on all alike the same tax rates on the basis of gross income. There is ample justification then for
the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling
doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the
distinction between compensation and taxable net income of professionals and businessman certainly not
a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and
Cuevas, JJ., concur.
Teehankee, J., concurs in the result.
Plana, J., took no part.
Separate Opinions
AQUINO, J., concurring:
I concur in the result. The petitioner has no cause of action for prohibition.
ABAD SANTOS, J., dissenting:
This is a frivolous suit. While the tax rates for compensation income are lower than those for net income
such circumtance does not necessarily result in lower tax payments for these receiving compensation
income. In fact, the reverse will most likely be the case; those who file returns on the basis of net income
will pay less taxes because they claim all sort of deduction justified or not I vote for dismissal.
Separate Opinions
AQUINO, J., concurring:
I concur in the result. The petitioner has no cause of action for prohibition.
ABAD SANTOS, J., dissenting:
This is a frivolous suit. While the tax rates for compensation income are lower than those for net income
such circumtance does not necessarily result in lower tax payments for these receiving compensation
income. In fact, the reverse will most likely be the case; those who file returns on the basis of net income
will pay less taxes because they claim all sort of deduction justified or not I vote for dismissal.
Kapatiran v. Tan, 163 SCRA 372 (1988) *

G.R. No. 81311 June 30, 1988
KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C.

DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of Internal Revenue, respondent.
G.R. No. 81820 June 30, 1988
KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and
alliances, petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL
REVENUE, and SECRETARY OF BUDGET, respondents.
G.R. No. 81921 June 30, 1988
INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B.

BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO C. VALMONTE, petitioner,

vs.
THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, COMMISSIONER OF INTERNAL
REVENUE and SECRETARY OF BUDGET, respondent.
Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.
Jaime C. Opinion for individual petitioners in G.R. No. 81311.
Banzuela, Flores, Miralles, Raeses, Sy, Taquio and Associates for petitioners in G.R. No 81820.
Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No 81820.
Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.
PADILLA, J.:
These four (4) petitions, which have been consolidated because of the similarity of the main issues involved therein, seek to nullify Executive Order
No. 273 (EO 273, for short), issued by the President of the Philippines on 25 July 1987, to take effect on 1 January 1988, and which amended
certain sections of the National Internal Revenue Code and adopted the value-added tax (VAT, for short), for being unconstitutional in that its
enactment is not alledgedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the due process
and equal protection clauses and other provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed
to show justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2)
an interest, personal and substantial, of the party raising the constitutional questions; (3) the constitutional
question should be raised at the earliest opportunity; and (4) the question of constitutionality is directly and
necessarily involved in a justiciable controversy and its resolution is essential to the protection of the rights
of the parties. According to the Solicitor General, only the third requisite that the constitutional question
should be raised at the earliest opportunity has been complied with. He also questions the legal
standing of the petitioners who, he contends, are merely asking for an advisory opinion from the Court,
there being no justiciable controversy for resolution.
Objections to taxpayers' suit for lack of sufficient personality standing, or interest are, however, in the main
procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the
Court's duty, under the 1987 Constitution, to determine wether or not the other branches of government
have kept themselves within the limits of the Constitution and the laws and that they have not abused the
discretion given to them, the Court has brushed aside technicalities of procedure and has taken
cognizance of these petitions.
But, before resolving the issues raised, a brief look into the tax law in question is in order.
The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every
seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00, to his
purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross
selling price of goods or gross receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and
producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it is
principally aimed to rationalize the system of taxing goods and services; simplify tax administration; and
make the tax system more equitable, to enable the country to attain economic recovery.
The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As
pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was
essentially a single stage value added tax system computed under the "cost subtraction method" or "cost
deduction method" and was imposed only on original sale, barter or exchange of articles by
manufacturers, producers, or importers. Subsequent sales of such articles were not subject to sales tax.
However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was imposed on a second sale,
which was reduced to 1.5% upon the issuance of PD 2006 on 31 December 1985, to take effect 1 January
1986. Reduced sales taxes were imposed not only on the second sale, but on every subsequent sale, as
well. EO 273 merely increased the VAT on every sale to 10%, unless zero-rated or exempt.
Petitioners first contend that EO 273 is unconstitutional on the Ground that the President had no authority
to issue EO 273 on 25 July 1987.
The contention is without merit.
It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole
legislative authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution states:
Sec. 1. Until a legislature is elected and convened under a new Constitution, the President
shall continue to exercise legislative powers.
On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic
of the Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of
said Constitution, hereafter referred to as the 1987 Constitution, provides:
Sec. 6. The incumbent President shall continue to exercise legislative powers until the first
Congress is convened.
It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with
legislative powers until a legislature under a new Constitution is convened. The first Congress, created
and elected under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO
273 on 25 July 1987, two (2) days before Congress convened on 27 July 1987, was within the President's
constitutional power and authority to legislate.
Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July
1987). He contends that the word "convene" is synonymous with "the date when the elected members of
Congress assumed office."
The contention is without merit. The word "convene" which has been interpreted to mean "to call together,
cause to assemble, or convoke," 1 is clearly different from assumption of office by the individual
members of Congress or their taking the oath of office. As an example, we call to mind the interim
National Assembly created under the 1973 Constitution, which had not been "convened" but some
members of the body, more particularly the delegates to the 1971 Constitutional Convention who had
opted to serve therein by voting affirmatively for the approval of said Constitution, had taken their oath of
office.
To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit
too far. It would also defeat the purpose of the framers of the 1987 Constitutional and render meaningless
some other provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring
Congress to convene once every year on the fourth Monday of July for its regular session would be a
contrariety, since Congress would already be deemed to be in session after the individual members have
taken their oath of office. A portion of the provisions of Art. VII, sec. 10, requiring Congress to convene for
the purpose of enacting a law calling for a special election to elect a President and Vice-President in case
a vacancy occurs in said offices, would also be a surplusage. The portion of Art. VII, sec. 11, third
paragraph, requiring Congress to convene, if not in session, to decide a conflict between the President
and the Cabinet as to whether or not the President and the Cabinet as to whether or not the President can
re-assume the powers and duties of his office, would also be redundant. The same is true with the portion
of Art. VII, sec. 18, which requires Congress to convene within twenty-four (24) hours following the
declaration of martial law or the suspension of the privilage of the writ of habeas corpus.
The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the
framers of said Constitution had intended to terminate the exercise of legislative powers by the President
at the beginning of the term of office of the members of Congress, they should have so stated (but did not)
in clear and unequivocal terms. The Court has not power to re-write the Constitution and give it a meaning
different from that intended.
The Court also finds no merit in the petitioners' claim that EO 273 was issued by the President in grave
abuse of discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been
defined, as follows:
Grave abuse of discretion" implies such capricious and whimsical exercise of judgment as
is equivalent to lack of jurisdiction (Abad Santos vs. Province of Tarlac, 38 Off. Gaz. 834),
or, in other words, where the power is exercised in an arbitrary or despotic manner by
reason of passion or personal hostility, and it must be so patent and gross as to amount to
an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all
in contemplation of law. (Tavera-Luna, Inc. vs. Nable, 38 Off. Gaz. 62). 2
Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or
despotic manner by reason of passion or personal hostility. It appears that a comprehensive study of the
VAT had been extensively discussed by this framers and other government agencies involved in its
implementation, even under the past administration. As the Solicitor General correctly sated. "The signing
of E.O. 273 was merely the last stage in the exercise of her legislative powers. The legislative process
started long before the signing when the data were gathered, proposals were weighed and the final
wordings of the measure were drafted, revised and finalized. Certainly, it cannot be said that the President
made a jump, so to speak, on the Congress, two days before it convened." 3
Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of
the provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:
Sec. 28 (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.
The petitioners" assertions in this regard are not supported by facts and circumstances to warrant their
conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust.
Petitioners merely rely upon newspaper articles which are actually hearsay and have evidentiary value. To
justify the nullification of a law. there must be a clear and unequivocal breach of the Constitution, not a
doubtful and argumentative implication. 4
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The court, in City of
Baguio vs. De Leon, 5 said:
... In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the
Court, stated: "A tax is considered uniform when it operates with the same force and effect
in every place where the subject may be found."
There was no occasion in that case to consider the possible effect on such a constitutional
requirement where there is a classification. The opportunity came in Eastern Theatrical
Co. v. Alfonso (83 Phil. 852, 862). Thus: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate. The
taxing power has the authority to make reasonable and natural classifications for purposes
of taxation; . . ." About two years later, Justice Tuason, speaking for this Court in Manila
Race Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above
excerpt in his opinion and continued; "Taking everything into account, the differentiation
against which the plaintiffs complain conforms to the practical dictates of justice and equity
and is not discriminatory within the meaning of the Constitution."
To satisfy this requirement then, all that is needed as held in another case decided two
years later, (Uy Matias v. City of Cebu, 93 Phil. 300) is that the statute or ordinance in
question "applies equally to all persons, firms and corporations placed in similar situation."
This Court is on record as accepting the view in a leading American case (Carmichael v.
Southern Coal and Coke Co., 301 US 495) that "inequalities which result from a singling
out of one particular class for taxation or exemption infringe no constitutional limitation."
(Lutz v. Araneta, 98 Phil. 148, 153).
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which
are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engage in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-
sari stores are consequently exempt from its application. Likewise exempt from the tax are sales of farm
and marine products, spared as they are from the incidence of the VAT, are expected to be relatively
lower and within the reach of the general public. 6
The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers
Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National Internal
Revenue Code, unduly discriminates against customs brokers. The contested provision states:
Sec. 103. Exempt transactions. The following shall be exempt from the value-added
tax:
xxx xxx xxx
(r) Service performed in the exercise of profession or calling (except customs brokers)
subject to the occupation tax under the Local Tax Code, and professional services
performed by registered general professional partnerships;
The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was
inserted in Sec. 103(r) to complement the provisions of Sec. 102 of the Code, which makes the services of
customs brokers subject to the payment of the VAT and to distinguish customs brokers from other
professionals who are subject to the payment of an occupation tax under the Local Tax Code. Pertinent
provisions of Sec. 102 read:
Sec. 102. Value-added tax on sale of services. There shall be levied, assessed and
collected, a value-added tax equivalent to 10% percent of gross receipts derived by any
person engaged in the sale of services. The phrase sale of services" means the
performance of all kinds of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; stock, real
estate, commercial, customs and immigration brokers; lessors of personal property;
lessors or distributors of cinematographic films; persons engaged in milling, processing,
manufacturing or repacking goods for others; and similar services regardless of whether or
not the performance thereof call for the exercise or use of the physical or mental faculties:
...
With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict
between the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted.
At any rate, the distinction of the customs brokers from the other professionals who are subject to
occupation tax under the Local Tax Code is based upon material differences, in that the activities of
customs brokers (like those of stock, real estate and immigration brokers) partake more of a business,
rather than a profession and were thus subjected to the percentage tax under Sec. 174 of the National
Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the percentage tax and
replaced it with the VAT. If the petitioner Association did not protest the classification of customs brokers
then, the Court sees no reason why it should protest now.
The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears
expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic
commodities and services, as well as mass actions and demonstrations against the VAT should by now
be evident. The fact that nothing of the sort has happened shows that the fears and apprehensions of the
petitioners appear to be more imagined than real. It would seem that the VAT is not as bad as we are
made to believe.
In any event, if petitioners seriously believe that the adoption and continued application of the VAT are
prejudicial to the general welfare or the interests of the majority of the people, they should seek recourse
and relief from the political branches of the government. The Court, following the time-honored doctrine of
separation of powers, cannot substitute its judgment for that of the President as to the wisdom, justice and
advisability of the adoption of the VAT. The Court can only look into and determine whether or not EO 273
was enacted and made effective as law, in the manner required by, and consistent with, the Constitution,
and to make sure that it was not issued in grave abuse of discretion amounting to lack or excess of
jurisdiction; and, in this regard, the Court finds no reason to impede its application or continued
implementation. WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs. SO
ORDERED.
Exceptions
Delegation to local governments

Basco v. PAGCOR, 197 SCRA 52 (1991) *
G.R. No. 91649 May 14, 1991
ATTORNEYS HUMBERTO BASCO, EDILBERTO BALCE, SOCRATES MARANAN AND LORENZO

SANCHEZ,petitioners,
vs.
PHILIPPINE AMUSEMENTS AND GAMING CORPORATION (PAGCOR), respondent.
H.B. Basco & Associates for petitioners.

Valmonte Law Offices collaborating counsel for petitioners.
Aguirre, Laborte and Capule for respondent PAGCOR.
PARAS, J.:
A TV ad proudly announces:
"The new PAGCOR responding through responsible gaming."
But the petitioners think otherwise, that is why, they filed the instant petition seeking to annul the
Philippine Amusement and Gaming Corporation (PAGCOR) Charter PD 1869, because it is allegedly
contrary to morals, public policy and order, and because
A. It constitutes a waiver of a right prejudicial to a third person with a right recognized by law. It
waived the Manila City government's right to impose taxes and license fees, which is recognized
by law;
B. For the same reason stated in the immediately preceding paragraph, the law has intruded into
the local government's right to impose local taxes and license fees. This, in contravention of the
constitutionally enshrined principle of local autonomy;
C. It violates the equal protection clause of the constitution in that it legalizes PAGCOR
conducted gambling, while most other forms of gambling are outlawed, together with prostitution,
drug trafficking and other vices;
D. It violates the avowed trend of the Cory government away from monopolistic and crony
economy, and toward free enterprise and privatization. (p. 2, Amended Petition; p. 7, Rollo)
In their Second Amended Petition, petitioners also claim that PD 1869 is contrary to the declared national
policy of the "new restored democracy" and the people's will as expressed in the 1987 Constitution. The
decree is said to have a "gambling objective" and therefore is contrary to Sections 11, 12 and 13 of Article
II, Sec. 1 of Article VIII and Section 3 (2) of Article XIV, of the present Constitution (p. 3, Second Amended
Petition; p. 21, Rollo).
The procedural issue is whether petitioners, as taxpayers and practicing lawyers (petitioner Basco being
also the Chairman of the Committee on Laws of the City Council of Manila), can question and seek the
annulment of PD 1869 on the alleged grounds mentioned above.
The Philippine Amusements and Gaming Corporation (PAGCOR) was created by virtue of P.D. 1067-A
dated January 1, 1977 and was granted a franchise under P.D. 1067-B also dated January 1, 1977 "to
establish, operate and maintain gambling casinos on land or water within the territorial jurisdiction of the
Philippines." Its operation was originally conducted in the well known floating casino "Philippine Tourist."
The operation was considered a success for it proved to be a potential source of revenue to fund
infrastructure and socio-economic projects, thus, P.D. 1399 was passed on June 2, 1978 for PAGCOR to
fully attain this objective.
Subsequently, on July 11, 1983, PAGCOR was created under P.D. 1869 to enable the Government to
regulate and centralize all games of chance authorized by existing franchise or permitted by law, under
the following declared policy
Sec. 1. Declaration of Policy. It is hereby declared to be the policy of the State to centralize and
integrate all games of chance not heretofore authorized by existing franchises or permitted by law
in order to attain the following objectives:
(a) To centralize and integrate the right and authority to operate and conduct games of chance into
one corporate entity to be controlled, administered and supervised by the Government.
(b) To establish and operate clubs and casinos, for amusement and recreation, including sports
gaming pools, (basketball, football, lotteries, etc.) and such other forms of amusement and
recreation including games of chance, which may be allowed by law within the territorial
jurisdiction of the Philippines and which will: (1) generate sources of additional revenue to fund
infrastructure and socio-civic projects, such as flood control programs, beautification, sewerage
and sewage projects, Tulungan ng Bayan Centers, Nutritional Programs, Population Control and
such other essential public services; (2) create recreation and integrated facilities which will
expand and improve the country's existing tourist attractions; and (3) minimize, if not totally
eradicate, all the evils, malpractices and corruptions that are normally prevalent on the conduct
and operation of gambling clubs and casinos without direct government involvement. (Section 1,
P.D. 1869)
To attain these objectives PAGCOR is given territorial jurisdiction all over the Philippines. Under its
Charter's repealing clause, all laws, decrees, executive orders, rules and regulations, inconsistent
therewith, are accordingly repealed, amended or modified.
It is reported that PAGCOR is the third largest source of government revenue, next to the Bureau of
Internal Revenue and the Bureau of Customs. In 1989 alone, PAGCOR earned P3.43 Billion, and directly
remitted to the National Government a total of P2.5 Billion in form of franchise tax, government's income
share, the President's Social Fund and Host Cities' share. In addition, PAGCOR sponsored other socio-
cultural and charitable projects on its own or in cooperation with various governmental agencies, and other
private associations and organizations. In its 3 1/2 years of operation under the present administration,
PAGCOR remitted to the government a total of P6.2 Billion. As of December 31, 1989, PAGCOR was
employing 4,494 employees in its nine (9) casinos nationwide, directly supporting the livelihood of Four
Thousand Four Hundred Ninety-Four (4,494) families.
But the petitioners, are questioning the validity of P.D. No. 1869. They allege that the same is "null and
void" for being "contrary to morals, public policy and public order," monopolistic and tends toward "crony
economy", and is violative of the equal protection clause and local autonomy as well as for running
counter to the state policies enunciated in Sections 11 (Personal Dignity and Human Rights), 12 (Family)
and 13 (Role of Youth) of Article II, Section 1 (Social Justice) of Article XIII and Section 2 (Educational
Values) of Article XIV of the 1987 Constitution.
This challenge to P.D. No. 1869 deserves a searching and thorough scrutiny and the most deliberate
consideration by the Court, involving as it does the exercise of what has been described as "the highest
and most delicate function which belongs to the judicial department of the government." (State v. Manuel,
20 N.C. 144; Lozano v. Martinez, 146 SCRA 323).
As We enter upon the task of passing on the validity of an act of a co-equal and coordinate branch of the
government We need not be reminded of the time-honored principle, deeply ingrained in our
jurisprudence, that a statute is presumed to be valid. Every presumption must be indulged in favor of its
constitutionality. This is not to say that We approach Our task with diffidence or timidity. Where it is clear
that the legislature or the executive for that matter, has over-stepped the limits of its authority under the
constitution, We should not hesitate to wield the axe and let it fall heavily, as fall it must, on the offending
statute (Lozano v. Martinez, supra).
In Victoriano v. Elizalde Rope Workers' Union, et al, 59 SCRA 54, the Court thru Mr. Justice Zaldivar
underscored the
. . . thoroughly established principle which must be followed in all cases where questions of
constitutionality as obtain in the instant cases are involved. All presumptions are indulged in favor
of constitutionality; one who attacks a statute alleging unconstitutionality must prove its invalidity
beyond a reasonable doubt; that a law may work hardship does not render it unconstitutional; that
if any reasonable basis may be conceived which supports the statute, it will be upheld and the
challenger must negate all possible basis; that the courts are not concerned with the wisdom,
justice, policy or expediency of a statute and that a liberal interpretation of the constitution in favor
of the constitutionality of legislation should be adopted. (Danner v. Hass, 194 N.W. 2nd 534, 539;
Spurbeck v. Statton, 106 N.W. 2nd 660, 663; 59 SCRA 66; see also e.g. Salas v. Jarencio, 46
SCRA 734, 739 [1970]; Peralta v. Commission on Elections, 82 SCRA 30, 55 [1978]; and Heirs of
Ordona v. Reyes, 125 SCRA 220, 241-242 [1983] cited in Citizens Alliance for Consumer
Protection v. Energy Regulatory Board, 162 SCRA 521, 540)
Of course, there is first, the procedural issue. The respondents are questioning the legal personality of
petitioners to file the instant petition.
Considering however the importance to the public of the case at bar, and in keeping with the Court's duty,
under the 1987 Constitution, to determine whether or not the other branches of government have kept
themselves within the limits of the Constitution and the laws and that they have not abused the discretion
given to them, the Court has brushed aside technicalities of procedure and has taken cognizance of this
petition. (Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas Inc. v. Tan, 163 SCRA 371)
With particular regard to the requirement of proper party as applied in the cases before us, We
hold that the same is satisfied by the petitioners and intervenors because each of them has
sustained or is in danger of sustaining an immediate injury as a result of the acts or measures
complained of. And even if, strictly speaking they are not covered by the definition, it is still within
the wide discretion of the Court to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions raised.
In the first Emergency Powers Cases, ordinary citizens and taxpayers were allowed to question
the constitutionality of several executive orders issued by President Quirino although they were
involving only an indirect and general interest shared in common with the public. The Court
dismissed the objection that they were not proper parties and ruled that "the transcendental
importance to the public of these cases demands that they be settled promptly and definitely,
brushing aside, if we must technicalities of procedure." We have since then applied the exception
in many other cases. (Association of Small Landowners in the Philippines, Inc. v. Sec. of Agrarian
Reform, 175 SCRA 343).
Having disposed of the procedural issue, We will now discuss the substantive issues raised.
Gambling in all its forms, unless allowed by law, is generally prohibited. But the prohibition of gambling
does not mean that the Government cannot regulate it in the exercise of its police power.
The concept of police power is well-established in this jurisdiction. It has been defined as the "state
authority to enact legislation that may interfere with personal liberty or property in order to promote the
general welfare." (Edu v. Ericta, 35 SCRA 481, 487) As defined, it consists of (1) an imposition or restraint
upon liberty or property, (2) in order to foster the common good. It is not capable of an exact definition but
has been, purposely, veiled in general terms to underscore its all-comprehensive embrace. (Philippine
Association of Service Exporters, Inc. v. Drilon, 163 SCRA 386).
Its scope, ever-expanding to meet the exigencies of the times, even to anticipate the future where it could
be done, provides enough room for an efficient and flexible response to conditions and circumstances
thus assuming the greatest benefits. (Edu v. Ericta, supra)
It finds no specific Constitutional grant for the plain reason that it does not owe its origin to the charter.
Along with the taxing power and eminent domain, it is inborn in the very fact of statehood and sovereignty.
It is a fundamental attribute of government that has enabled it to perform the most vital functions of
governance. Marshall, to whom the expression has been credited, refers to it succinctly as the plenary
power of the state "to govern its citizens". (Tribe, American Constitutional Law, 323, 1978). The police
power of the State is a power co-extensive with self-protection and is most aptly termed the "law of
overwhelming necessity." (Rubi v. Provincial Board of Mindoro, 39 Phil. 660, 708) It is "the most essential,
insistent, and illimitable of powers." (Smith Bell & Co. v. National, 40 Phil. 136) It is a dynamic force that
enables the state to meet the agencies of the winds of change.
What was the reason behind the enactment of P.D. 1869?
P.D. 1869 was enacted pursuant to the policy of the government to "regulate and centralize thru an
appropriate institution all games of chance authorized by existing franchise or permitted by law" (1st
whereas clause, PD 1869). As was subsequently proved, regulating and centralizing gambling operations
in one corporate entity the PAGCOR, was beneficial not just to the Government but to society in
general. It is a reliable source of much needed revenue for the cash strapped Government. It provided
funds for social impact projects and subjected gambling to "close scrutiny, regulation, supervision and
control of the Government" (4th Whereas Clause, PD 1869). With the creation of PAGCOR and the direct
intervention of the Government, the evil practices and corruptions that go with gambling will be minimized
if not totally eradicated. Public welfare, then, lies at the bottom of the enactment of PD 1896.
Petitioners contend that P.D. 1869 constitutes a waiver of the right of the City of Manila to impose taxes
and legal fees; that the exemption clause in P.D. 1869 is violative of the principle of local autonomy. They
must be referring to Section 13 par. (2) of P.D. 1869 which exempts PAGCOR, as the franchise holder
from paying any "tax of any kind or form, income or otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local."
(2) Income and other taxes. a) Franchise Holder: No tax of any kind or form, income or
otherwise as well as fees, charges or levies of whatever nature, whether National or Local, shall
be assessed and collected under this franchise from the Corporation; nor shall any form or tax or
charge attach in any way to the earnings of the Corporation, except a franchise tax of five (5%)
percent of the gross revenues or earnings derived by the Corporation from its operations under
this franchise. Such tax shall be due and payable quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial or national government authority
(Section 13 [2]).
Their contention stated hereinabove is without merit for the following reasons:
(a) The City of Manila, being a mere Municipal corporation has no inherent right to impose taxes (Icard v.
City of Baguio, 83 Phil. 870; City of Iloilo v. Villanueva, 105 Phil. 337; Santos v. Municipality of Caloocan,
7 SCRA 643). Thus, "the Charter or statute must plainly show an intent to confer that power or the
municipality cannot assume it" (Medina v. City of Baguio, 12 SCRA 62). Its "power to tax" therefore must
always yield to a legislative act which is superior having been passed upon by the state itself which has
the "inherent power to tax" (Bernas, the Revised [1973] Philippine Constitution, Vol. 1, 1983 ed. p. 445).
(b) The Charter of the City of Manila is subject to control by Congress. It should be stressed that
"municipal corporations are mere creatures of Congress" (Unson v. Lacson, G.R. No. 7909, January 18,
1957) which has the power to "create and abolish municipal corporations" due to its "general legislative
powers" (Asuncion v. Yriantes, 28 Phil. 67; Merdanillo v. Orandia, 5 SCRA 541). Congress, therefore, has
the power of control over Local governments (Hebron v. Reyes, G.R. No. 9124, July 2, 1950). And if
Congress can grant the City of Manila the power to tax certain matters, it can also provide for exemptions
or even take back the power.
(c) The City of Manila's power to impose license fees on gambling, has long been revoked. As early as
1975, the power of local governments to regulate gambling thru the grant of "franchise, licenses or
permits" was withdrawn by P.D. No. 771 and was vested exclusively on the National Government, thus:
Sec. 1. Any provision of law to the contrary notwithstanding, the authority of chartered cities and
other local governments to issue license, permit or other form of franchise to operate, maintain
and establish horse and dog race tracks, jai-alai and other forms of gambling is hereby revoked.
Sec. 2. Hereafter, all permits or franchises to operate, maintain and establish, horse and dog race
tracks, jai-alai and other forms of gambling shall be issued by the national government upon
proper application and verification of the qualification of the applicant . . .
Therefore, only the National Government has the power to issue "licenses or permits" for the operation of
gambling. Necessarily, the power to demand or collect license fees which is a consequence of the
issuance of "licenses or permits" is no longer vested in the City of Manila.
(d) Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a
government owned or controlled corporation with an original charter, PD 1869. All of its shares of stocks
are owned by the National Government. In addition to its corporate powers (Sec. 3, Title II, PD 1869) it
also exercises regulatory powers thus:
Sec. 9. Regulatory Power. The Corporation shall maintain a Registry of the affiliated entities,
and shall exercise all the powers, authority and the responsibilities vested in the Securities and
Exchange Commission over such affiliating entities mentioned under the preceding section,
including, but not limited to amendments of Articles of Incorporation and By-Laws, changes in
corporate term, structure, capitalization and other matters concerning the operation of the affiliated
entities, the provisions of the Corporation Code of the Philippines to the contrary notwithstanding,
except only with respect to original incorporation.
PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is governmental,
which places it in the category of an agency or instrumentality of the Government. Being an instrumentality
of the Government, PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by a mere Local government.
The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the powers
vested in the federal government. (MC Culloch v. Marland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them. (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has
the inherent power to wield it.
(e) Petitioners also argue that the Local Autonomy Clause of the Constitution will be violated by P.D.
1869. This is a pointless argument. Article X of the 1987 Constitution (on Local Autonomy) provides:
Sec. 5. Each local government unit shall have the power to create its own source of revenue and
to levy taxes, fees, and other charges subject to such guidelines and limitation as the congress
may provide, consistent with the basic policy on local autonomy. Such taxes, fees and charges
shall accrue exclusively to the local government. (emphasis supplied)
The power of local government to "impose taxes and fees" is always subject to "limitations" which
Congress may provide by law. Since PD 1869 remains an "operative" law until "amended, repealed or
revoked" (Sec. 3, Art. XVIII, 1987 Constitution), its "exemption clause" remains as an exception to the
exercise of the power of local governments to impose taxes and fees. It cannot therefore be violative but
rather is consistent with the principle of local autonomy.
Besides, the principle of local autonomy under the 1987 Constitution simply means "decentralization" (III
Records of the 1987 Constitutional Commission, pp. 435-436, as cited in Bernas, The Constitution of the
Republic of the Philippines, Vol. II, First Ed., 1988, p. 374). It does not make local governments sovereign
within the state or an "imperium in imperio."
Local Government has been described as a political subdivision of a nation or state which is
constituted by law and has substantial control of local affairs. In a unitary system of government,
such as the government under the Philippine Constitution, local governments can only be an intra
sovereign subdivision of one sovereign nation, it cannot be an imperium in imperio. Local
government in such a system can only mean a measure of decentralization of the function of
government. (emphasis supplied)
As to what state powers should be "decentralized" and what may be delegated to local government units
remains a matter of policy, which concerns wisdom. It is therefore a political question. (Citizens Alliance
for Consumer Protection v. Energy Regulatory Board, 162 SCRA 539).
What is settled is that the matter of regulating, taxing or otherwise dealing with gambling is a State
concern and hence, it is the sole prerogative of the State to retain it or delegate it to local governments.
As gambling is usually an offense against the State, legislative grant or express charter power is
generally necessary to empower the local corporation to deal with the subject. . . . In the absence
of express grant of power to enact, ordinance provisions on this subject which are inconsistent
with the state laws are void. (Ligan v. Gadsden, Ala App. 107 So. 733 Ex-Parte Solomon, 9, Cals.
440, 27 PAC 757 following in re Ah You, 88 Cal. 99, 25 PAC 974, 22 Am St. Rep. 280, 11 LRA
480, as cited in Mc Quinllan Vol. 3 Ibid, p. 548, emphasis supplied)
Petitioners next contend that P.D. 1869 violates the equal protection clause of the Constitution, because
"it legalized PAGCOR conducted gambling, while most gambling are outlawed together with
prostitution, drug trafficking and other vices" (p. 82, Rollo).
We, likewise, find no valid ground to sustain this contention. The petitioners' posture ignores the well-
accepted meaning of the clause "equal protection of the laws." The clause does not preclude classification
of individuals who may be accorded different treatment under the law as long as the classification is not
unreasonable or arbitrary (Itchong v. Hernandez, 101 Phil. 1155). A law does not have to operate in equal
force on all persons or things to be conformable to Article III, Section 1 of the Constitution (DECS v. San
Diego, G.R. No. 89572, December 21, 1989).
The "equal protection clause" does not prohibit the Legislature from establishing classes of individuals or
objects upon which different rules shall operate (Laurel v. Misa, 43 O.G. 2847). The Constitution does not
require situations which are different in fact or opinion to be treated in law as though they were the same
(Gomez v. Palomar, 25 SCRA 827).
Just how P.D. 1869 in legalizing gambling conducted by PAGCOR is violative of the equal protection is
not clearly explained in the petition. The mere fact that some gambling activities like cockfighting (P.D
449) horse racing (R.A. 306 as amended by RA 983), sweepstakes, lotteries and races (RA 1169 as
amended by B.P. 42) are legalized under certain conditions, while others are prohibited, does not render
the applicable laws, P.D. 1869 for one, unconstitutional.
If the law presumably hits the evil where it is most felt, it is not to be overthrown because there are
other instances to which it might have been applied. (Gomez v. Palomar, 25 SCRA 827)
The equal protection clause of the 14th Amendment does not mean that all occupations called by
the same name must be treated the same way; the state may do what it can to prevent which is
deemed as evil and stop short of those cases in which harm to the few concerned is not less than
the harm to the public that would insure if the rule laid down were made mathematically exact.
(Dominican Hotel v. Arizona, 249 US 2651).
Anent petitioners' claim that PD 1869 is contrary to the "avowed trend of the Cory Government away from
monopolies and crony economy and toward free enterprise and privatization" suffice it to state that this is
not a ground for this Court to nullify P.D. 1869. If, indeed, PD 1869 runs counter to the government's
policies then it is for the Executive Department to recommend to Congress its repeal or amendment.
The judiciary does not settle policy issues. The Court can only declare what the law is and not
what the law should be. Under our system of government, policy issues are within the domain of
1wphi 1
the political branches of government and of the people themselves as the repository of all state
power. (Valmonte v. Belmonte, Jr., 170 SCRA 256).
On the issue of "monopoly," however, the Constitution provides that:
Sec. 19. The State shall regulate or prohibit monopolies when public interest so requires. No
combinations in restraint of trade or unfair competition shall be allowed. (Art. XII, National
Economy and Patrimony)
It should be noted that, as the provision is worded, monopolies are not necessarily prohibited by the
Constitution. The state must still decide whether public interest demands that monopolies be regulated or
prohibited. Again, this is a matter of policy for the Legislature to decide.
On petitioners' allegation that P.D. 1869 violates Sections 11 (Personality Dignity) 12 (Family) and 13
(Role of Youth) of Article II; Section 13 (Social Justice) of Article XIII and Section 2 (Educational Values) of
Article XIV of the 1987 Constitution, suffice it to state also that these are merely statements of principles
and, policies. As such, they are basically not self-executing, meaning a law should be passed by
Congress to clearly define and effectuate such principles.
In general, therefore, the 1935 provisions were not intended to be self-executing principles ready
for enforcement through the courts. They were rather directives addressed to the executive and
the legislature. If the executive and the legislature failed to heed the directives of the articles the
available remedy was not judicial or political. The electorate could express their displeasure with
the failure of the executive and the legislature through the language of the ballot. (Bernas, Vol. II,
p. 2)
Every law has in its favor the presumption of constitutionality (Yu Cong Eng v. Trinidad, 47 Phil. 387;
Salas v. Jarencio, 48 SCRA 734; Peralta v. Comelec, 82 SCRA 30; Abbas v. Comelec, 179 SCRA 287).
Therefore, for PD 1869 to be nullified, it must be shown that there is a clear and unequivocal breach of the
Constitution, not merely a doubtful and equivocal one. In other words, the grounds for nullity must be clear
and beyond reasonable doubt. (Peralta v. Comelec, supra) Those who petition this Court to declare a law,
or parts thereof, unconstitutional must clearly establish the basis for such a declaration. Otherwise, their
petition must fail. Based on the grounds raised by petitioners to challenge the constitutionality of P.D.
1869, the Court finds that petitioners have failed to overcome the presumption. The dismissal of this
petition is therefore, inevitable. But as to whether P.D. 1869 remains a wise legislation considering the
issues of "morality, monopoly, trend to free enterprise, privatization as well as the state principles on
social justice, role of youth and educational values" being raised, is up for Congress to determine.
As this Court held in Citizens' Alliance for Consumer Protection v. Energy Regulatory Board, 162 SCRA
521
Presidential Decree No. 1956, as amended by Executive Order No. 137 has, in any case, in its
favor the presumption of validity and constitutionality which petitioners Valmonte and the KMU
have not overturned. Petitioners have not undertaken to identify the provisions in the Constitution
which they claim to have been violated by that statute. This Court, however, is not compelled to
speculate and to imagine how the assailed legislation may possibly offend some provision of the
Constitution. The Court notes, further, in this respect that petitioners have in the main put in
question the wisdom, justice and expediency of the establishment of the OPSF, issues which are
not properly addressed to this Court and which this Court may not constitutionally pass upon.
Those issues should be addressed rather to the political departments of government: the
President and the Congress.
Parenthetically, We wish to state that gambling is generally immoral, and this is precisely so when the
gambling resorted to is excessive. This excessiveness necessarily depends not only on the financial
resources of the gambler and his family but also on his mental, social, and spiritual outlook on life.
However, the mere fact that some persons may have lost their material fortunes, mental control, physical
health, or even their lives does not necessarily mean that the same are directly attributable to
gambling. Gambling may have been the antecedent, but certainly not necessarily the cause. For the same
consequences could have been preceded by an overdose of food, drink, exercise, work, and even sex.
WHEREFORE, the petition is DISMISSED for lack of merit.
SO ORDERED.
Fernan, C.J., Narvasa, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Bidin, Sarmiento, Grio-Aquino,
Medialdea, Regalado and Davide, Jr., JJ., concur.
Separate Opinions
PADILLA, J., concurring:
I concur in the result of the learned decision penned by my brother Mr. Justice Paras. This means that I
agree with the decision insofar as it holds that the prohibition, control, and regulation of the entire activity
known as gambling properly pertain to "state policy." It is, therefore, the political departments of
government, namely, the legislative and the executive that should decide on what government should do
in the entire area of gambling, and assume full responsibility to the people for such policy.
The courts, as the decision states, cannot inquire into the wisdom, morality or expediency of policies
adopted by the political departments of government in areas which fall within their authority, except only
when such policies pose a clear and present danger to the life, liberty or property of the individual. This
case does not involve such a factual situation.
However, I hasten to make of record that I do not subscribe to gambling in any form. It demeans the
human personality, destroys self-confidence and eviscerates one's self-respect, which in the long run will
corrode whatever is left of the Filipino moral character. Gambling has wrecked and will continue to wreck
families and homes; it is an antithesis to individual reliance and reliability as well as personal industry
which are the touchstones of real economic progress and national development.
Gambling is reprehensible whether maintained by government or privatized. The revenues realized by the
government out of "legalized" gambling will, in the long run, be more than offset and negated by the
irreparable damage to the people's moral values.
Also, the moral standing of the government in its repeated avowals against "illegal gambling" is fatally
flawed and becomes untenable when it itself engages in the very activity it seeks to eradicate.
One can go through the Court's decision today and mentally replace the activity referred to therein
as gambling, which is legal only because it is authorized by law and run by the government, with the
activity known as prostitution. Would prostitution be any less reprehensible were it to be authorized by law,
franchised, and "regulated" by the government, in return for the substantial revenues it would yield the
government to carry out its laudable projects, such as infrastructure and social amelioration? The
question, I believe, answers itself. I submit that the sooner the legislative department outlaws all forms of
gambling, as a fundamental state policy, and the sooner the executive implements such policy, the better
it will be for the nation.
Melencio-Herrera, J., concur.
NPC v. City of Cabanatuan, G.R. No. 149110, April 9, 2003 *

G.R. No. 149110 April 9, 2003
NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12,
2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay
franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120,
as amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the
production of electricity from nuclear, geothermal and other sources, as well as, the transmission of
electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others,
the power to construct, operate and maintain power plants, auxiliary plants, power stations and
substations for the purpose of developing hydraulic power and supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross
income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent
assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's
gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government,10 refused to
pay the tax assessment. It argued that the respondent has no authority to impose tax on government
entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all
forms of taxes, charges, duties or fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended,
viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts
and Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be
non-profit and shall devote all its return from its capital investment, as well as excess revenues
from its operation, for expansion. To enable the Corporation to pay its indebtedness and
of this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any
instrumentalities;
its provinces, cities, municipalities and other government agencies and instrumentalities;
import of foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
transmission, utilization, and sale of electric power."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that
petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2%
monthly interest.13Respondent alleged that petitioner's exemption from local taxes has been repealed by
section 193 of Rep. Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
juridical, including government owned or controlled corporations, except local water districts,
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax exemption
privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons:
(1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a
general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not
favored; and (3) local governments have no power to tax instrumentalities of the national government.
Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the particular law or laws, and
portions thereof, that are intended to be repealed. A declaration in a statute, usually in its
repealing clause, that a particular and specific law, identified by its number or title is repealed is an
express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing
clause because it fails to identify the act or acts that are intended to be repealed. It is a well-settled
rule of statutory construction that repeals of statutes by implication are not favored. The
presumption is against inconsistency and repugnancy for the legislative is presumed to know the
existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a
well-settled rule that, generally, general law does not repeal a special law unless it clearly appears
that the legislative has intended by the latter general act to modify or repeal the earlier special law.
Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was
based, the tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the case
of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held
that:
'Local governments have no power to tax instrumentalities of the National Government.

PAGCOR is a government owned or controlled corporation with an original charter, PD
1869. All of its shares of stocks are owned by the National Government. xxx Being an
instrumentality of the government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by
mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing power of
the Local Government. Corollary to this, it should be noted here that in the NPC Charter's
declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the needs of industrial development
and dispersal and needs of rural electrification are primary objectives of the nations which shall be
pursued coordinately and supported by all instrumentalities and agencies of the
government, including its financial institutions.' (underscoring supplied). To allow plaintiff to subject
defendant to its tax-ordinance would be to impede the avowed goal of this government
instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited
to that which is provided for in its charter or other statute. Any grant of taxing power is to be
construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff
could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in
relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum of
P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the tax due
every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of
25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This
was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that
the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely
to private persons or corporations in which category it (NPC) does not belong, and that the LGC
(RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a special
lawfinds the answer in Section 193 of the LGC to the effect that 'tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or juridical, including government-
owned or controlled corporations except local water districts xxx are hereby withdrawn.' The repeal
is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-
PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER
THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION

FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A
GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE

OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL
GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92
and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to
section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding
year based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
x x x
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy
the taxes, fees, and charges which the province or municipality may impose: Provided, however,
That the taxes, fees and charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the provisions of this
Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city
government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing
power of the respondent city government to private entities that are engaged in trade or occupation for
profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which
is conferred upon private persons or corporations, under such terms and conditions as the government
and its political subdivisions may impose in the interest of the public welfare, security and safety." From
the phraseology of this provision, the petitioner claims that the word "private" modifies the terms "persons"
and "corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it should refer
specifically to franchises granted to private natural persons and to private corporations.23 Ergo, its charter
should not be considered a "franchise" for the purpose of imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly
engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an
activity for profit, in as much as its charter specifically provides that it is a "non-profit organization." In any
case, petitioner argues that the accumulation of profit is merely incidental to its operation; all these profits
are required by law to be channeled for expansion and improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may not be
taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation26 where this Court held that local governments have no power to tax instrumentalities
of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere
local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in such a
way as to prevent it from consummating its federal responsibilities, or even seriously
burden it from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2, p.
140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as '
a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-
owned or controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be
amended or modified impliedly by the local government code which is a general law. Consequently,
petitioner claims that its exemption from all taxes, fees or charges under its charter subsists despite the
passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic
Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a
later legislation which is a general law cannot be construed to have repealed a special law. Where
there is a conflict between a general law and a special statute, the special statute should prevail
since it evinces the legislative intent more clearly than the general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should
prevail over the LGC. It alleges that the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the least
limitable and most demanding of all powers, including the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very
existence of the state whose social contract with its citizens obliges it to promote public interest and
common good. The theory behind the exercise of the power to tax emanates from necessity;32 without
taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and similar objectives.33 Taxation
assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to
tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to
levy taxes, fees and other charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation
and imaginative resilience in matters of local development on the part of local government leaders."35 The
only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic
services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this
goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code
that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant
of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the
different local government units their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and functions and duties
of local officials, and all other matters relating to the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government Code of
1991 (LGC), various measures have been enacted to promote local autonomy. These include the Barrio
Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local
Government Code of 1983.40 Despite these initiatives, however, the shackles of dependence on the
national government remained. Local government units were faced with the same problems that hamper
their capabilities to participate effectively in the national development efforts, among which are: (a)
inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to
prioritize and approve development projects, (d) heavy dependence on external sources of income, and
(e) limited supervisory control over personnel of national line agencies.41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals
with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were
prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires,
mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to impose
tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed rates but
merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to
the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation. Although as
a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the
LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government Units.- Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
x x x
(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and
Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize,
the Basco case was decided prior to the effectivity of the LGC, when no law empowering the local
government units to tax instrumentalities of the National Government was in effect. However, as this Court
ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents
Congress from decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax.46 In enacting the LGC, Congress exercised its prerogative
to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government,
was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general
rule, as laid down in section 133, the taxing power of local governments cannot extend to the levy
of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies and
instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities
and municipalities in the Metropolitan Manila Area may impose the real property tax except
on, inter alia, 'real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted for consideration or
otherwise, to a taxable person as provided in the item (a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city
government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which does not
belong to citizens of the country generally as a matter of common right.48 In its specific sense, a franchise
may refer to a general or primary franchise, or to a special or secondary franchise. The former relates to
the right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant
to a special law creating the corporation.49 The right under a primary or general franchise is vested in the
individuals who compose the corporation and not in the corporation itself.50 On the other hand, the latter
refers to the right or privileges conferred upon an existing corporation such as the right to use the streets
of a municipality to lay pipes of tracks, erect poles or string wires.51 The rights under a secondary or
special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a
general power granted to a corporation to dispose of its property, except such special or secondary
franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or
special franchise. This is to avoid any confusion when the word franchise is used in the context of
taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state
and exercising corporate franchises granted by the state."53 It is not levied on the corporation simply for
existing as a corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges
granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased
to do business and exercise its franchise.56 It is within this context that the phrase "tax on businesses
enjoying a franchise" in section 137 of the LGC should be interpreted and understood. Verily, to determine
whether the petitioner is covered by the franchise tax in question, the following requisites should concur:
(1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is
exercising its rights or privileges under this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its
composition, capitalization, the appointment and the specific duties of its corporate officers, and its
corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as amended, vests the
petitioner the following powers which are not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power in any part of the
Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for
the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian
owners and from persons owning or interested in waters which are or may be necessary for said
purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase
the flow of water in streams or water channels intersecting or connecting therewith or contiguous
to its works or any part thereof: Provided, That just compensation shall be paid to any person or
persons whose property is, directly or indirectly, adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and
supplying such power to the inhabitants thereof; to acquire, construct, install, maintain, operate,
and improve gas, oil, or steam engines, and/or other prime movers, generators and machinery in
plants and/or auxiliary plants for the production of electric power; to establish, develop, operate,
maintain and administer power and lighting systems for the transmission and utilization of its
power generation; to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or
provincial systems and other government institutions, (3) electric cooperatives, (4) franchise
holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes for
which the Corporation was created: Provided, That in case a right of way is necessary for its
transmission lines, easement of right of way shall only be sought: Provided, however, That in case
the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at
the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street,
avenue, highway or railway of private and public ownership, as the location of said works may
require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by
law for instituting condemnation proceedings by the national, provincial and municipal
governments;
x x x
(m) To cooperate with, and to coordinate its operations with those of the National Electrification
Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of
plants and/or projects constructed or proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for watersheds for a specific project, the
Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written
advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced
within the watersheds, subject to existing private rights, the needs of waterworks systems, and the
requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to
prevent environmental pollution and promote the conservation, development and maximum
utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity.
This monopoly was strengthened with the issuance of Pres. Decree No. 40,59 nationalizing the electric
power industry. Although Exec. Order No. 21560 thereafter allowed private sector participation in the
generation of electricity, the transmission of electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial
jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its
operations in the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992.
Fulfilling both requisites, petitioner is, and ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its
stocks are wholly owned by the National Government, and its charter characterized it as a "non-profit"
organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of
a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the
individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity
from the National Government. It can sue and be sued under its own name,61 and can exercise all the
powers of a corporation under the Corporation Code.62
To be sure, the ownership by the National Government of its entire capital stock does not necessarily
imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 202963 classifies
government-owned or controlled corporations (GOCCs) into those performing governmental functions and
those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock corporation, whether

performing governmental or proprietary functions, which is directly chartered by special law or if
organized under the general corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority
of its outstanding voting capital stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such, are treated
as absolute obligation on the part of the state to perform while proprietary functions are those that are
undertaken only by way of advancing the general interest of society, and are merely optional on the
government.64 Included in the class of GOCCs performing proprietary functions are "business-like" entities
such as the National Steel Corporation (NSC), the National Development Corporation (NDC), the Social
Security System (SSS), the Government Service Insurance System (GSIS), and the National Water
Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric
power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and sells electricity
in bulk. Certainly, these activities do not partake of the sovereign functions of the government. They are
purely private and commercial undertakings, albeit imbued with public interest. The public interest involved
in its activities, however, does not distract from the true nature of the petitioner as a commercial
enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad
companies, water supply and irrigation companies, gas, coal or light companies, power plants, ice plant
among others; all of which are declared by this Court as ministrant or proprietary functions of government
aimed at advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the proper
transaction of its business or to carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the President upon recommendation of the
Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry out
the business and purposes for which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its
electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its capital
investment, as well as excess revenues from its operation, for expansion"70 while other franchise holders
have the option to distribute their profits to its stockholders by declaring dividends. We do not see why this
fact can be a source of difference in tax treatment. In both instances, the taxable entity is the corporation,
which exercises the franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist
despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist
clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the petitioner's sole
refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise
taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other
government agencies and instrumentalities." However, section 193 of the LGC withdrew, subject to limited
exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to
the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes
granting tax exemptions from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
educational institutions, are hereby withdrawn upon the effectivity of this Code." (emphases
supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-stock
and non-profit hospital or educational institution, petitioner clearly does not belong to the exception. It is
therefore incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it
exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose
franchise tax "notwithstanding any exemption granted by any law or other special law." This particular
provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v.
Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an issue before this
Court. The same issue was involved in the subsequent case of Manila Electric Company v. Province of
Laguna.75 Ruling in favor of the local government in both instances, we ruled that the franchise tax in
question is imposable despite any exemption enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to
support their position that MERALCO's tax exemption has been withdrawn. The explicit language
of section 137 which authorizes the province to impose franchise tax 'notwithstanding any
exemption granted by any law or other special law' is all-encompassing and clear. The franchise
tax is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless
otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by
all persons, whether natural or juridical, including government-owned or controlled corporations
except (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock
and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this
code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic
precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius. In the absence of any provision of the Code to the contrary, and we find no other
provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing
law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local
government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law
or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically
withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only
tedious and impractical to attempt to enumerate all the existing statutes providing for special tax
exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such
exemptions or privileges. No more unequivocal language could have been used."76 (emphases
supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-
92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or other special
law," the respondent city government clearly did not intend to exempt the petitioner from the coverage
thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.
As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax exemption
privileges granted to government-owned or controlled corporations and all other units of government were
that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly
situated enterprises."78 With the added burden of devolution, it is even more imperative for government
entities to share in the requirements of development, fiscal or otherwise, by paying taxes or other charges
due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.
Delegation to the President

Garcia v. Executive Secretary, 210 SCRA 219 (1992) *
G.R. No. 101273 July 3, 1992
CONGRESSMAN ENRIQUE T. GARCIA (Second District of Bataan), petitioner,

vs.
THE EXECUTIVE SECRETARY, THE COMMISSIONER OF CUSTOMS, THE NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY, THE
TARIFF COMMISSION, THE SECRETARY OF FINANCE, and THE ENERGY REGULATORY BOARD, respondents.
FELICIANO, J.:
On 27 November 1990, the President issued Executive Order No. 438 which imposed, in addition to any other duties, taxes and charges imposed by
law on all articles imported into the Philippines, an additional duty of five percent (5%) ad valorem. This additional duty was imposed across the
board on all imported articles, including crude oil and other oil products imported into the Philippines. This additional duty was subsequently
increased from five percent (5%) ad valorem to nine percent (9%) ad valorem by the promulgation of Executive Order No. 443, dated 3 January
1991.
On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the process required by the Tariff and Customs Code for the
imposition of a specific levy on crude oil and other petroleum products, covered by HS Heading Nos. 27.09, 27.10 and 27.11 of Section 104 of the
Tariff and Customs Code as amended. Accordingly, the Tariff Commission, following the procedure set forth in Section 401 of the Tariff and Customs
Code, scheduled a public hearing to give interested parties an opportunity to be heard and to present evidence in support of their respective
positions.
Meantime, Executive Order No. 475 was issued by the President, on 15 August 1991 reducing the rate of additional duty on all imported articles from
nine percent (9%) to five percent (5%) ad valorem, except in the cases of crude oil and other oil products which continued to be subject to the
additional duty of nine percent (9%) ad valorem.
Upon completion of the public hearings, the Tariff Commission submitted to the President a "Report on Special Duty on Crude Oil and Oil Products"
dated 16 August 1991, for consideration and appropriate action. Seven (7) days later, the President issued Executive Order No. 478, dated 23
August 1991, which levied (in addition to the aforementioned additional duty of nine percent (9%) ad valorem and all other existing ad
valorem duties) a special duty of P0.95 per liter or P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil products.
In the present Petition for Certiorari, Prohibition and Mandamus, petitioner assails the validity of Executive Orders Nos. 475 and 478. He argues that
Executive Orders Nos. 475 and 478 are violative of Section 24, Article VI of the 1987 Constitution which provides as follows:
Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with
amendments.
He contends that since the Constitution vests the authority to enact revenue bills in Congress, the President may not assume such power
by issuing Executive Orders Nos. 475 and 478 which are in the nature of revenue-generating measures.
Petitioner further argues that Executive Orders No. 475 and 478 contravene Section 401 of the Tariff and Customs Code, which Section authorizes
the President, according to petitioner, to increase, reduce or remove tariff duties or to impose additional duties only when necessary to protect local
industries or products but not for the purpose of raising additional revenue for the government.
Thus, petitioner questions first the constitutionality and second the legality of Executive Orders Nos. 475 and 478, and asks us to restrain the
implementation of those Executive Orders. We will examine these questions in that order.
Before doing so, however, the Court notes that the recent promulgation of Executive Order No. 507 did not render the instant Petition moot and
academic. Executive Order No. 517 which is dated 30 April 1992 provides as follows:
Sec. 1. Lifting of the Additional Duty. The additional duty in the nature of ad valorem imposed on all imported articles
prescribed by the provisions of Executive Order No. 443, as amended, is hereby lifted; Provided, however, that the selected
articles covered by HS Heading Nos. 27.09 and 27.10 of Section 104 of the Tariff and Customs Code, as amended, subject of
Annex "A" hereof, shall continue to be subject to the additional duty of nine (9%) percent ad valorem.
Under the above quoted provision, crude oil and other oil products continue to be subject to the additional duty of nine percent (9%) ad
valorem under Executive Order No. 475 and to the special duty of P0.95 per liter of imported crude oil and P1.00 per liter of imported oil
products under Executive Order No. 478.
Turning first to the question of constitutionality, under Section 24, Article VI of the Constitution, the enactment of appropriation, revenue and tariff
bills, like all other bills is, of course, within the province of the Legislative rather than the Executive Department. It does not follow, however, that
therefore Executive Orders Nos. 475 and 478, assuming they may be characterized as revenue measures, are prohibited to the President, that they
must be enacted instead by the Congress of the Philippines. Section 28(2) of Article VI of the Constitution provides as follows:
(2) The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and
restrictions as it may impose, tariff rates, import and export quotas, tonage and wharfage dues, and other duties or
imposts within the framework of the national development program of the Government. (Emphasis supplied)
There is thus explicit constitutional permission 1 to Congress to authorize the President "subject to such limitations and restrictions is [Congress]
may impose" to fix "within specific limits" "tariff rates . . . and other duties or imposts . . ."
The relevant congressional statute is the Tariff and Customs Code of the Philippines, and Sections 104 and 401, the pertinent provisions thereof.
These are the provisions which the President explicitly invoked in promulgating Executive Orders Nos. 475 and 478. Section 104 of the Tariff and
Customs Code provides in relevant part:
Sec. 104. All tariff sections, chapters, headings and subheadings and the rates of import duty under Section 104 of Presidential
Decree No. 34 and all subsequent amendments issued under Executive Orders and Presidential Decrees are hereby adopted
and form part of this Code.
There shall be levied, collected, and paid upon all imported articles the rates of duty indicated in the Section under this section
except as otherwise specifically provided for in this Code: Provided, that, the maximum rate shall not exceed one hundred per
cent ad valorem.
The rates of duty herein provided or subsequently fixed pursuant to Section Four Hundred One of this Code shall be subject to
periodic investigation by the Tariff Commission and may be revised by the President upon recommendation of the National
Economic and Development Authority.
xxx xxx xxx
(Emphasis supplied)
Section 401 of the same Code needs to be quoted in full:
Sec. 401. Flexible Clause.
a. In the interest of national economy, general welfare and/or national security, and subject to the limitations herein
prescribed, the President, upon recommendation of the National Economic and Development Authority (hereinafter referred to
as NEDA), is hereby empowered: (1) to increase, reduce or remove existing protective rates of import duty (including any
necessary change in classification). The existing rates may be increased or decreased but in no case shall the reduced rate of
import duty be lower than the basic rate of ten (10) per cent ad valorem, nor shall the increased rate of import duty be higher
than a maximum of one hundred (100) per cent ad valorem; (2) to establish import quota or to ban imports of any commodity,
as may be necessary; and (3) to impose an additional duty on all imports not exceeding ten (10) per cent ad valorem,
whenever necessary; Provided, That upon periodic investigations by the Tariff Commission and recommendation of the NEDA,
the President may cause a gradual reduction of protection levels granted in Section One hundred and four of this Code,
including those subsequently granted pursuant to this section.
b. Before any recommendation is submitted to the President by the NEDA pursuant to the provisions of this section, except in
the imposition of an additional duty not exceeding ten (10) per cent ad valorem, the Commission shall conduct an investigation
in the course of which they shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be
present, produce evidence and to be heard. The Commission shall also hear the views and recommendations of any
government office, agency or instrumentality concerned. The Commission shall submit their findings and recommendations to
the NEDA within thirty (30) days after the termination of the public hearings.
c. The power of the President to increase or decrease rates of import duty within the limits fixed in subsection "a" shall include
the authority to modify the form of duty. In modifying the form of duty, the corresponding ad valorem or specific equivalents of
the duty with respect to imports from the principal competing foreign country for the most recent representative period shall be
used as bases.
d. The Commissioner of Customs shall regularly furnish the Commission a copy of all customs import entries as filed in the
Bureau of Customs. The Commission or its duly authorized representatives shall have access to, and the right to copy all
liquidated customs import entries and other documents appended thereto as finally filed in the Commission on Audit.
e. The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this section.
f. Any Order issued by the President pursuant to the provisions of this section shall take effect thirty (30) days after
promulgation, except in the imposition of additional duty not exceeding ten (10) per cent ad valorem which shall take effect at
the discretion of the President. (Emphasis supplied)
Petitioner, however, seeks to avoid the thrust of the delegated authorizations found in Sections 104 and 401 of the Tariff and Customs Code, by
contending that the President is authorized to act under the Tariff and Customs Code only "to protect local industries and products for the sake of the
national economy, general welfare and/or national security." 2 He goes on to claim that:
E.O. Nos. 478 and 475 having nothing to do whatsoever with the protection of local industries and products for the sake of
national economy, general welfare and/or national security. On the contrary, they work in reverse, especially as to crude oil, an
essential product which we do not have to protect, since we produce only minimal quantities and have to import the rest of
what we need.
These Executive Orders are avowedly solely to enable the government to raise government finances, contrary to Sections 24
and 28 (2) of Article VI of the Constitution, as well as to Section 401 of the Tariff and Customs Code. 3 (Emphasis in the
original)
The Court is not persuaded. In the first place, there is nothing in the language of either Section 104 or of 401 of the Tariff and Customs Code that
suggest such a sharp and absolute limitation of authority. The entire contention of petitioner is anchored on just two (2) words, one found in Section
401 (a)(1): "existing protective rates of import duty," and the second in the proviso found at the end of Section 401 (a): "protection levels granted in
Section 104 of this Code . . . . " We believe that the words "protective" and ''protection" are simply not enough to support the very broad and
encompassing limitation which petitioner seeks to rest on those two (2) words.
In the second place, petitioner's singular theory collides with a very practical fact of which this Court may take judicial notice that the Bureau of
Customs which administers the Tariff and Customs Code, is one of the two (2) principal traditional generators or producers of governmental revenue,
the other being the Bureau of Internal Revenue. (There is a third agency, non-traditional 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 like taxes which are frequently imposed for both
revenue-raising and for regulatory purposes. 4 Thus, it has been held that "customs duties" is "the name given to taxes on the importation and
exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country." 5 The levying of customs
duties on imported goods may have in some measure the effect of protecting local industries where such local industries actually exist and are
producing comparable goods. Simultaneously, however, the very same customs duties inevitably have the effect of producing governmental
revenues. Customs duties like internal revenue taxes are rarely, if ever, designed to achieve one policy objective only. Most commonly, customs
duties, which constitute taxes in the sense of exactions the proceeds of which become public funds 6 have either or both the generation of
revenue and the regulation of economic or social activity as their moving purposes and frequently, it is very difficult to say which, in a particular
instance, is the dominant or principal objective. In the instant case, since the Philippines in fact produces ten (10) to fifteen percent (15%) of the
crude oil consumed here, the imposition of increased tariff rates and a special duty on imported crude oil and imported oil products may be seen to
have some "protective" impact upon indigenous oil production. For the effective, price of imported crude oil and oil products is increased. At the
same time, it cannot be gainsaid that substantial revenues for the government are raised by the imposition of such increased tariff rates or special
duty.
In the fourth place, petitioner's concept which he urges us to build into our constitutional and customs law, is a stiflingly narrow one. Section 401 of
the Tariff and Customs Code establishes general standards with which the exercise of the authority delegated by that provision to the President must
be consistent: that authority must be exercised in "the interest of national economy, general welfare and/or national security." Petitioner, however,
insists that the "protection of local industries" is the only permissible objective that can be secured by the exercise of that delegated authority, and
that therefore "protection of local industries" is the sum total or the alpha and the 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 summed up in
Section 401. We believe, for instance, that the protection of consumers, who after all constitute the very great bulk of our population, is at the very
least as important a dimension of "the national economy, general welfare and national security" as the protection of local industries. And so customs
duties may be reduced or even removed precisely for the purpose of protecting consumers from the high prices and shoddy quality and inefficient
service that tariff-protected and subsidized local manufacturers may otherwise impose upon the community.
It seems also important to note that tariff rates are commonly established and the corresponding customs duties levied and collected upon articles
and goods which are not found at all 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 taken from the beaver (Chapter 5,
5.14); Olives (Chapter 7, Notes); truffles or European fungi growing under the soil on tree roots (Chapter 7, Notes); dates (Chapter 8,
8.01); figs (Chapter 8, 8.03); caviar (Chapter 16, 16.01); aircraft (Chapter 88, 88.0l); special diagnostic instruments and apparatus for human
medicine and surgery (Chapter 90, Notes); X-ray generators; X-ray tubes;
X-ray screens, etc. (Chapter 90, 90.20); etc. In such cases, customs duties may be seen to be imposed either for revenue purposes purely or
perhaps, in certain cases, to discourage any importation of the items involved. In either case, it is clear that customs duties are levied and imposed
entirely apart from whether or not there are any competing local industries to protect.
Accordingly, we believe and so hold that Executive Orders Nos. 475 and 478 which may be conceded to be substantially moved by the desire to
generate additional public revenues, are not, for that reason alone, either constitutionally flawed, or legally infirm under Section 401 of the Tariff and
Customs Code. Petitioner has not successfully overcome the presumptions of constitutionality and legality to which those Executive Orders are
entitled. 7
The conclusion we have reached above renders it unnecessary to deal with petitioner's additional contention that, should Executive Orders Nos. 475
and 478 be declared unconstitutional and illegal, there should be a roll back of prices of petroleum products equivalent to the "resulting excess
money not be needed to adequately maintain the Oil Price Stabilization Fund (OPSF)." 8
WHEREFORE, premises considered, the Petition for Certiorari, Prohibition and Mandamus is hereby DISMISSED for lack of merit. Costs against
petitioner.
SO ORDERED.
Delegation to administrative agencies

(SEE ABOVE)
Maceda v. ERB, 192 SCRA 365 (1990)
G.R. No. 96266 July 18, 1991

vs.
ENERGY REGULATORY BOARD, CALTEX (Philippines), INC., PILIPINAS SHELL PETROLEUM
CORPORATION AND PETRON CORPORATION, respondents.
G.R. No. 96349 July 18, 1991
EUGENIO O. ORIGINAL, IRENEO N. AARON, JR., RENE LEDESMA, ROLANDO VALLE, ORLANDO
MONTANO, STEVE ABITANG, NERI JINON, WILFREDO DELEONIO, RENATO BORRO, RODRIGO
DE VERA, ALVIN BAYUANG, JESUS MELENDEZ, NUMERIANO CAJILIG JR., RUFINO DE LA CRUZ
AND JOVELINO G. TIPON, petitioners,
vs.
ENERGY REGULATORY BOARD, CALTEX (Philippines), INC., PILIPINAS SHELL PETROLEUM
CORPORATION AND PETRON CORPORATION, respondents.
G.R. No. 96284 July 18,1991

CEFERINO S. PAREDES, JR., petitioner,
vs.
ENERGY REGULATORY BOARD, CALTEX (Philippines), INC., PILIPINAS SHELL, INC. AND
PETROPHIL CORPORATION, respondents.
RESOLUTION
MEDIALDEA, J.:
In G.R. No. 96266, petitioner Maceda seeks nullification of the Energy Regulatory Board (ERB) Orders
dated December 5 and 6, 1990 on the ground that the hearings conducted on the second provisional
increase in oil prices did not allow him substantial cross-examination, in effect, allegedly, a denial of due
process.
The facts of the case are as follows:
Upon the outbreak of the Persian Gulf conflict on August 2, 1990, private respondents oil companies filed
with the ERB their respective applications on oil price increases (docketed as ERB Case Nos. 90-106, 90-
382 and 90-384, respectively).
On September 21, 1990, the ERB issued an order granting a provisional increase of P1.42 per liter.
Petitioner Maceda filed a petition for Prohibition on September 26, 1990 (E. Maceda v. ERB, et al., G.R.
No. 95203), seeking to nullify the provisional increase. We dismissed the petition on December 18, 1990,
reaffirming ERB's authority to grant provisional increase even without prior hearing, pursuant to Sec. 8 of
E.O. No. 172, clarifying as follows:
What must be stressed is that while under Executive Order No. 172, a hearing is indispensable, it
does not preclude the Board from ordering, ex-parte, a provisional increase, as it did here, subject
to its final disposition of whether or not: (1) to make it permanent; (2) to reduce or increase it
further; or (3) to deny the application. Section 3, paragraph (e) is akin to a temporary restraining
order or a writ of preliminary attachment issued by the courts, which are given ex-parte and which
are subject to the resolution of the main case.
Section 3, paragraph (e) and Section 8 do not negate each other, or otherwise, operate
exclusively of the other, in that the Board may resort to one but not to both at the same time.
Section 3(e) outlines the jurisdiction of the Board and the grounds for which it may decree a price
adjustment, subject to the requirements of notice and hearing. Pending that, however, it may
order, under Section 8, an authority to increase provisionally, without need of a hearing, subject to
the final outcome of the proceeding. The Board, of course, is not prevented from conducting a
hearing on the grant of provisional authority-which is of course, the better procedure however, it
cannot be stigmatized later if it failed to conduct one. (pp. 129-130, Rollo) (Emphasis supplied)
In the same order of September 21, 1990, authorizing provisional increase, the ERB set the applications
for hearing with due notice to all interested parties on October 16, 1990. Petitioner Maceda failed to
appear at said hearing as well as on the second hearing on October 17, 1990.
To afford registered oppositors the opportunity to cross-examine the witnesses, the ERB set the
continuation of the hearing to October 24, 1990. This was postponed to November 5, 1990, on written
notice of petitioner Maceda.
On November 5, 1990, the three oil companies filed their respective motions for leave to file or admit
amended/supplemental applications to further increase the prices of petroleum products.
The ERB admitted the respective supplemental/amended petitions on November 6, 1990 at the same time
requiring applicants to publish the corresponding Notices of Public Hearing in two newspapers of general
circulation (p. 4, Rollo and Annexes "F" and "G," pp. 60 and 62, Rollo).
Hearing for the presentation of the evidence-in-chief commenced on November 21, 1990 with ERB ruling
that testimonies of witnesses were to be in the form of Affidavits (p. 6, Rollo). ERB subsequently outlined
the procedure to be observed in the reception of evidence, as follows:
CHAIRMAN FERNANDO:
Well, at the last hearing, applicant Caltex presented its evidence-in-chief and there is an
understanding or it is the Board's wish that for purposes of good order in the presentation of the
evidence considering that these are being heard together, we will defer the cross-examination of
applicant Caltex's witness and ask the other applicants to present their evidence-in-chief so that
the oppositors win have a better Idea of what an of these will lead to because as I mentioned
earlier, it has been traditional and it is the intention of the Board to act on these applications on an
industry-wide basis, whether to accept, reject, modify or whatever, the Board win do it on an
industry wide basis, so, the best way to have (sic) the oppositors and the Board a clear picture of
what the applicants are asking for is to have all the evidence-in-chief to be placed on record first
and then the examination will come later, the cross-examination will come later. . . . (pp. 5-6, tsn.,
November 23, 1990, ERB Cases Nos. 90-106, 90382 and 90-384). (p. 162, Rollo)
Petitioner Maceda maintains that this order of proof deprived him of his right to finish his cross-
examination of Petron's witnesses and denied him his right to cross-examine each of the witnesses of
Caltex and Shell. He points out that this relaxed procedure resulted in the denial of due process.
We disagree. The Solicitor General has pointed out:
. . . The order of testimony both with respect to the examination of the particular witness and to the
general course of the trial is within the discretion of the court and the exercise of this discretion in
permitting to be introduced out of the order prescribed by the rules is not improper (88 C.J.S. 206-
207).
Such a relaxed procedure is especially true in administrative bodies, such as the ERB which in
matters of rate or price fixing is considered as exercising a quasi-legislative, not quasi-judicial,
function As such administrative agency, it is not bound by the strict or technical rules of evidence
governing court proceedings (Sec. 29, Public Service Act; Dickenson v. United States, 346, U.S.
389, 98 L. ed. 132, 74 S. St. 152). (Emphasis supplied)
In fact, Section 2, Rule I of the Rules of Practice and Procedure Governing Hearings Before the
ERB provides that
These Rules shall govern pleadings, practice and procedure before the Energy Regulatory Board
in all matters of inquiry, study, hearing, investigation and/or any other proceedings within the
jurisdiction of the Board. However, in the broader interest of justice, the Board may, in any
particular matter, except itself from these rules and apply such suitable procedure as shall
promote the objectives of the Order.
(pp. 163-164, Rollo)
Petitioner Maceda also claims that there is no substantial evidence on record to support the provisional
relief.
We have, in G.R. Nos. 95203-05, previously taken judicial notice of matters and events related to the oil
industry, as follows:
. . . (1) as of June 30, 1990, the OPSF has incurred a deficit of P6.1 Billion; (2) the exchange rate
has fallen to P28.00 to $1.00; (3) the country's balance of payments is expected to reach $1
Billion; (4) our trade deficit is at P2.855 Billion as of the first nine months of the year.
. . . (p. 150, Rollo)
The Solicitor General likewise commented:
Among the pieces of evidence considered by ERB in the grant of the contested provisional relief
were: (1) certified copies of bins of lading issued by crude oil suppliers to the private respondents;
(2) reports of the Bankers Association of the Philippines on the peso-dollar exchange rate at the
BAP oil pit; and (3) OPSF status reports of the Office of Energy Affairs. The ERB was likewise
guided in the determination of international crude oil prices by traditional authoritative sources of
information on crude oil and petroleum products, such as Platt's Oilgram and Petroleum
Intelligence Weekly. (p. 158, Rollo)
Thus, We concede ERB's authority to grant the provisional increase in oil price, as We note that the Order
of December 5, 1990 explicitly stated:
in the light, therefore, of the rise in crude oil importation costs, which as earlier mentioned,
reached an average of $30.3318 per barrel at $25.551/US $ in September-October 1990; the huge
OPSF deficit which, as reported by the Office of Energy Affairs, has amounted to P5.7 Billion
(based on filed claims only and net of the P5 Billion OPSF) as of September 30, 1990, and is
estimated to further increase to over P10 Billion by end December 1990; the decision of the
government to discontinue subsidizing oil prices in view of inflationary pressures; the apparent
inadequacy of the proposed additional P5.1 Billion government appropriation for the OPSF and the
sharp drop in the value of the peso in relation to the US dollar to P28/US $, this Board is left with
no other recourse but to grant applicants oil companies further relief by increasing the prices of
petroleum products sold by them. (p. 161, Rollo)
Petitioner Maceda together with petitioner Original (G.R. No. 96349) also claim that the provisional
increase involved amounts over and above that sought by the petitioning oil companies.
The Solicitor General has pointed out that aside from the increase in crude oil prices, all the applications
of the respondent oil companies filed with the ERB covered claims from the OPSF.
We shall thus respect the ERB's Order of December 5, 1990 granting a provisional price increase on
petroleum products premised on the oil companies' OPSF claims, crude cost peso differentials, forex risk
for a subsidy on sale to NPC (p. 167, Rollo), since the oil companies are "entitled to as much relief as the
fact alleged constituting the course of action may warrant," (Javellana v. D.O. Plaza Enterprises, Inc., G.R.
No. L-28297, March 30, 1970, 32 SCRA 261 citing Rosales v. Reyes, 25 Phil. 495; Aguilar v. Rubiato, 40
Phil. 470) as follows:
Per Liter
Weighted
Petron Shell Caltex Average
Crude Cost P3.11 P3.6047 P2.9248 P3.1523
Peso Cost
Diffn'l 2.1747 1.5203 1.5669 1.8123
Forex Risk
Fee -0.1089 -0,0719 -0.0790 -0.0896
Subsidy on
Sales to NPC 0.1955 0.0685 0.0590 0.1203
Total Price
Increase
Applied for P59.3713 P5.1216 P4.4717 P4.9954
Less: September 21 Price
Relief
Actual Price Increase P1.42
Actual Tax Reduction:
Ad Valorem Tax
(per Sept. 1, 1990
price build-up) P1.3333
Specific Tax (per
Oct. 5, 1990 price
build-up) .6264 .7069 2.1269
Net Price Increase
Applied for 2.8685
Nonetheless, it is relevant to point out that on December 10, 1990, the ERB, in response to the
President's appeal, brought back the increases in Premium and Regular gasoline to the levels mandated
by the December 5, 1990 Order (P6.9600 and P6.3900, respectively), as follows:
Product In Pesos Per Liter
OPSF
Premium Gasoline 6.9600

Regular Gasoline 6.3900
Avturbo 4.9950
Kerosene 1.4100
Diesel Oil 1.4100
Fuel Oil/Feedstock 0.2405
LPG 1.2200
Asphalt 2.5000
Thinner 2.5000
In G.R. No. 96349, petitioner Original additionally claims that if the price increase will be used to augment
the OPSF this will constitute illegal taxation. In the Maceda case, (G.R. Nos. 95203-05, supra) this Court
has already ruled that "the Board Order authorizing the proceeds generated by the increase to be
deposited to the OPSF is not an act of taxation but is authorized by Presidential Decree No. 1956, as
amended by Executive Order No. 137.
The petitions of E.O. Original et al. (G.R. No. 96349) and C.S. Povedas, Jr. (G.R. No. 96284), insofar as
they question the ERB's authority under Sec. 8 of E.O. 172, have become moot and academic.
We lament Our helplessness over this second provisional increase in oil price. We have stated that this "is
a question best judged by the political leadership" (G.R. Nos. 95203-05, G.R. Nos. 95119-21, supra). We
wish to reiterate Our previous pronouncements therein that while the government is able to justify a
provisional increase, these findings "are not final, and it is up to petitioners to demonstrate that the present
economic picture does not warrant a permanent increase."
In this regard, We also note the Solicitor General's comments that "the ERB is not averse to the idea of a
presidential review of its decision," except that there is no law at present authorizing the same. Perhaps,
as pointed out by Justice Padilla, our lawmakers may see the wisdom of allowing presidential review of
the decisions of the ERB since, despite its being a quasi-judicial body, it is still "an administrative body
under the Office of the President whose decisions should be appealed to the President under the
established principle of exhaustion of administrative remedies," especially on a matter as transcendental
as oil price increases which affect the lives of almost an Filipinos.
ACCORDINGLY, the petitions are hereby DISMISSED.
SO ORDERED.
Narvasa, Melencio-Herrera, Feliciano, Gancayco, Bidin, Grio-Aquino and Regalado, JJ., concur.
Davide, J., concurs in the result.
Fernan, C.J., took no part.
Separate Opinions
PARAS, J., dissenting:
I dissent. As I have long previously indicated, the ERB has absolutely no power to tax which is solely the
prerogative of Congress. This is what the ERB is precisely doing by getting money from the people
to ultimately subsidize the ravenous oil companies. Additionally, the stubborn refusal of the ERB to
effectively rollback oil prices is a continuing bestial insult to the intelligence of our countrymen, and a gross
abandonment of the people in their hour of economic misery. I therefore vote for a complete and effective
rollback of all oil prices.
Cruz, J., concurs.
PADILLA, J., dissenting:
I regret that I can not concur in the majority opinion.

In the matter of price increases of oil products, which vitally affects the people, especially those in the
middle and low income groups, any increase, provisional or otherwise, should be allowed only after the
Energy Regulatory Board (ERB) shall have fully determined, through bona fide and full-dress hearings,
that it is absolutely necessary and by how much it shall be effected. The people, represented by reputable
oppositors, deserve to be given full opportunity to be heard in their opposition to any increase in the prices
of fuel. The right to be heard includes not only the right to present one's case and submit evidence in
support thereof, but also the right to confront and cross-examine the witnesses of the adverse parties.
Because of the procedure adopted by the ERB in the reception of evidence leading to the price increases
of 5 and 6 December 1990, petitioner Maceda was not able to finish his cross-examination of Petron's
sole witness. And, even before each of the witnesses of Shell and Caltex could be cross-examined by
petitioners and before they could present evidence in support of their opposition to the increase, the ERB
had already issued its 5 December 1990 order allowing a "provisional increase" sought by the oil
companies in their respective supplemental applications.
That there were postponements of scheduled hearings before the ERB, at the instance of oppositor
Maceda, did not justify a denial of the right of oppositors to be heard. The postponements were not
intended to delay the proceedings. In fact, the resetting of the scheduled hearings on November 14, 15
and 16 to a later date, upon motion of petitioner Maceda, was to enable him to file a written opposition to
the supplemental applications filed by the oil companies.
The ERB acted hastily in granting the provisional increases sought by the oil companies even before the
oppositors could submit evidence in support of their opposition. The fact that the questioned orders merely
allowed a provisional increase is beside the point, for past experiences have shown that so-called
provisional increases" allowed by the ERB ultimately became permanent.
ERB's claim that the second provisional increase was duly supported by evidence, is belied by its own act
of modifying said order (of provisional increase) not only once but twice, upon the "request" of the
President. First, the ERB rolled back the prices of fuel just a day after it issued the questioned order,
altering the allocation of the increase. Second, on 10 December 1990, the ERB further modified the price
of petroleum products resulting in reduction of the weighted average provisional increase from P2.82 to
P2.05 per liter, but only after the President had announced that she would meet with the leaders of both
Houses of Congress, to discuss the creation of a special fund to be raised from additional taxes, to
subsidize the prices of petroleum products.1
These acts of the ERB ostensibly sparked by "presidential requests" clearly demonstrate that the evidence
did not, in the first place, justify the price increases it had ordered on 5 and 6 December 1990.
Furthermore, the ERB never came out with a categorical and official declaration of how much was the so-
called deficit of the Oil Price Stabilization Fund (OPSF) and how much of the oil price increases was
intended to cover such deficit.
In the midst of a national crisis related to oil price increases, each and every one is called upon to assume
his/its share of continuing sacrifices. The public, the government, as well as the oil companies should work
hand in hand in solving the present problem that confronts us. We are not unmindful of the fact that the oil
companies are profit-oriented. However, profits should not be their only concern in times of deepening
inability of the people to cope with their prices with "built-in-margins". A reduction of profits during these
crucial and trying times, is certainly in order considering that in the past, the oil companies had
unquestionably made tremendous profits.
In view of the foregoing, I vote to GRANT the petition for the nullification of the 5 and 6 December 1990
orders of the ERB and for a roll-back of the prices of oil products to levels existing before 5 and 6
December 1990 until hearings before the ERB are finally concluded.
Before closing, I also would like to submit for congressional consideration two (2) proposals in the public
interest. They are:
(1) to do away with the present scheme of allowing provisional price increases of oil products. This
scheme, to my mind, is misleading and serves as an excuse for unilateral and arbitrary ERB-action. As
already noted, these provisional price increases are, to all intents and purposes, permanent when fixed.
To that extent, the scheme is a fraud on the people.
(2) all decisions and orders of the ERB should be expressly made appealable by statute to the President
of the Philippines whose decisions shall be final, except in cases involving questions of law or grave
abuse of discretion which may be elevated to the Supreme Court in a special civil action
for certiorari under Rule 65 of the Rules of Court.
While at present, decisions and orders of the ERB are, in my considered opinion, appealable to the
President under the principle of "exhaustion of administrative remedies", it is nevertheless desirable that
the appealability of ERB decisions and orders to the President be placed beyond any and all doubts. In
this way, the President of the Philippines has to assume full responsibility for all price increases in oil
products, which should be the case because the matter involved is not only one of national interest but
profoundly one of people's survival.
Gutierrez, Jr. and Cruz, JJ., concur.
SARMIENTO, J., separate opinion:
I would like to point out a few things in view of the majority's reliance on the first Maceda case.1
The first Maceda case was a challenge on provisional oil price increases decreed by the Energy
Regulatory Board (ERB). This Court sustained the Board, as it is sustaining the Board in this case, on a
few economic outputs, namely, the Oil Price Stabilization Fund (OPSF) deficit, the deteriorating exchange
rate, and the balance of payments and trade gaps.
As I held in my dissent in yet another Maceda case, Maceda v. Macaraig,2 the current oil price increases
were (are) also the result of the devaluation of the currency, since a devalued peso forced oil companies
to pay more pesos for oil worth in dollars.
I simply wish to state what has apparently been left unstated in the course of debate and perhaps, the real
score behind recurring oil price hikes and why the ERB has been very quick in granting them.
The truth is that petroleum prices have been dictated by the Government's economic maneuvers, and not
rather the vagaries of the world market. The truth is that the recent oil hikes have nothing to do with
Saddam Hussein or the Gulf crisis (during which oil prices in fact dropped) and are, rather, the natural
consequences of calculated moves by the Government in its effort to meet so-called International
Monetary Fund (IMF) targets.
In 1989, the Government of the Republic of the Philippines submitted its letter of intent to the IMF outlining
the country's economic program from 1989 through 1992. In its paragraph 19, it states that:
The Government intends to continue with the floating exchange rate system established in
October 1984 . . .3
Since exchange control was abolished and the floating rate system was established, the Philippine peso
has seen a series of devaluations that have progressively pushed up prices, significantly, prices of
petroleum. According to one authority, devaluation has been a "standard prescription" to correct balance
of payments (BOP) deficits.4 It makes dollars expensive, discourages import and encourages exports, and
forces dollars conservation.5
It is a matter of opinion whether or not devaluation has been good for the country and whether or not it has
realized these objectives. The truth is that, whatever it has accomplished, oil which is imported has
been subject to the effects of devaluation.
Early this year, Governor Jose Cuisia of the Central Bank, Secretary Jesus Estanislao of the Department
of Finance, and Secretary Guillermo Carague of the Budget and Management Department, wrote Mr.
Michael Camdessus of the International Monetary Fund (the letter of intent) and informed him of the
country's "Economic Stabilization Plan, 1991-92". The Plan recognized certain economic imbalances that
have supposedly inhibited growth, in particular, inflation and an increasing balance of payments deficit,
and drew a program centered on "a strong effort to bring down the overall fiscal deficit "through, among
other things, "the gradual elimination of the deficit of the Oil Price Stabilization Fund."6 It spelled out,
among other things, a "[r]estoration of a sustainable external position requir[ing] the continuation of a
flexible exchange rate policy . . . "7 and described in detail an "Oil Price and Energy Policy" focused on
wiping out the OPSF deficit, to wit:
xxx xxx xxx
A substantial erosion in the overall fiscal position occurred in 1989 and 1990 as a result of official
price support for oil products provided through the OPSF. Despite a lowering of the excise tax on
oil in September 1990 and average domestic oil price increases of about 30 percent in September
and 32 percent in December 1990, the fund continued to incur a deficit during the second half of
1990. The cumulative OPSF deficit (excluding unfiled claims) at end December 1990 is estimated
at P8.8 billion, and this deficit will rise in the first part of 1991. However the cumulative OPSF
deficit is to be eliminated by the end of the third quarter of 1991. To this end, the Government
intends to follow a pricing policy that ensures attainment of zero balance within the specific time. In
particular, the Government will maintain present price levels despite projected world price
declines. In addition, a budgetary transfer of P5 billion will be provided in 1991 to settle
outstanding claim of the OPSF.
15. Full deregulation of oil prices continues to be an important objective of the Government once
calm has been restored to world oil markets. Meanwhile the technical and legal groundwork is
being laid with a view to full deregulation as soon as practicable.
16. The principal objectives of the Government's policy in the energy sector are: (i) the
development of economically viable indigenous energy resources, mainly thermal, geothermal and
hydro-electric power, together with ensuring adequate maintenance of existing facilities; (ii)
promoting more efficient use of energy resources through various energy conservation measures;
and (ii) the elimination of distortions in every resource allocation through appropriate pricing
policies.8
xxx xxx xxx
As I said, Philippine oil prices today have nothing to do with the law on supply and demand, if they had
anything to do with it in recent years. (I also gather that the Government is intending to re-adjust the prices
of gasoline and diesel fuel soon since apparently, low diesel prices have reduced the demand for gasoline
resulting in "distortions".)
As the Court held in the first Maceda v. Energy Regulatory Board,9 oil pricing "is a question best judged by
the political leadership" and oil prices are (and have been apparently), political, rather than economic,
decisions.
I am not to be mistaken as accepting the "letter of intent" as a correct prescription much less a
necessary medicine although I will be lacking in candor if I did not say that it is a bitter pill to swallow.
What I must be understood as saying is that "oil" is a political card to be played on a political board rather
than the courts, so long, of course, as nobody has done anything illegal.
The "politics of oil" as spelled out in the Government's letter of intent likewise bring to light the true nature
of the ERB Under the Memorandum on Philippine Economic Stabilization Plan:
xxx xxx xxx
In the past, energy prices had been set to broadly reflect the average cost of supply. However, the
lack of transparency of the pricing mechanism and subsidization of consumption have increasingly
become a cause for concern. To alleviate some of these problems, in mid-1987, the Government
established the Energy Regulatory Board ERB a quasi-judicial body empowered with the setting
and regulation of the pricing of petroleum products and electricity tariffs, the regulation of additions
to oil refining capacity, and the regulation of importing, transporting, processing and distributing all
energy resources. (Petroleum pricing policy is described in paragraphs 14 and 15.) In addition to
the full pass-through of changes in oil prices to power tariffs, the Government is committed to the
adoption of longrun marginal cost pricing for electricity. To this end, NPC intends to introduce a
marginal cost imported-has tariff structure to ensure that it meets its target of achieving a rate of
return of eight percent on its rate base.10
it is apparent that the Board, in spite of its "independence" (from the Office of the President), is bound by
the terms of the program and that it has after all, no genuine discretion to deny requests for price
adjustments by oil companies. I seriously doubt whether or not it is possessed of that discretion judging,
first, from its performance since 1987 (in which it has not overruled the Government on "oil cases") and
the fact that the exchange rate, the balance of payment deficit, and the OPSF deficiency are matters of
simple arithmetic.
And certainly, the Board can not possibly overrule the Government's "letter of intent."
The first Maceda case sustained the grant of provisional price increases ex parte not only because
Section 8 of Executive Order No. 172 authorized the grant of provisional relief without a hearing but
because fluctuations in the foreign exchange rates, for instance, were, and are, a matter of judicial notice,
and a hearing thereafter was necessary only to see whether or not the ERB determined the rates
correctly.
This likewise brings to light the necessity for an ERB to fix rates since it does not, after all fix (meaning
decide) rates but merely announces their imminence on demonstrable figures of higher rates. The Court
however can not question the wisdom of a statute and after all, I suppose the Government can make use
of an accountant.
I agree with Justice Padilla insofar as he refers to the "present scheme of allowing provisional price
increase" as a "scheme [to defraud] the people." I would like to go further. As I indicated the ERB does no
more than to punch calculators for the Government-which decides oil price increases. The comedy of
December, 1990, when the Board adjusted prices in a matter of days, is a confirmation of this point. As
Justice Padilla noted, the re-adjustment of December 10, 1990 was in fact prompted by "presidential
requests" which does not speak well of the Board's independence and which in fact bares the truth as to
who really makes the decision. (The readjustment, consisting in the reduction in diesel fuel and a
corresponding increase in gasoline, sought to mollify the indignation of the public.)
I agree with Justice Padilla that it amounts to fraud on the people to make them believe that the ERB can
give them a fair hearing, indeed, if it can do anything at all.
I agree, finally, with Justice Padilla that the nation is one in crisis, and evidently, the "ravenous" oil
companies Justice Paras refers to, have not helped any. I submit however that we have not succeeded in
fingering the real villain the letter of intent. Saddam's Middle East folly has nothing to do with that.
Separate Opinions
PARAS, J., dissenting:
I dissent. As I have long previously indicated, the ERB has absolutely no power to tax which is solely the
prerogative of Congress. This is what the ERB is precisely doing by getting money from the people
to ultimately subsidize the ravenous oil companies. Additionally, the stubborn refusal of the ERB to
effectively rollback oil prices is a continuing bestial insult to the intelligence of our countrymen, and a gross
abandonment of the people in their hour of economic misery. I therefore vote for a complete and effective
rollback of all oil prices.
Cruz, J., concurs.
PADILLA, J., dissenting:
I regret that I can not concur in the majority opinion.
In the matter of price increases of oil products, which vitally affects the people, especially those in the
middle and low income groups, any increase, provisional or otherwise, should be allowed only after the
Energy Regulatory Board (ERB) shall have fully determined, through bona fide and full-dress hearings,
that it is absolutely necessary and by how much it shall be effected. The people, represented by reputable
oppositors, deserve to be given full opportunity to be heard in their opposition to any increase in the prices
of fuel. The right to be heard includes not only the right to present one's case and submit evidence in
support thereof, but also the right to confront and cross-examine the witnesses of the adverse parties.
Because of the procedure adopted by the ERB in the reception of evidence leading to the price increases
of 5 and 6 December 1990, petitioner Maceda was not able to finish his cross-examination of Petron's
sole witness. And, even before each of the witnesses of Shell and Caltex could be cross-examined by
petitioners and before they could present evidence in support of their opposition to the increase, the ERB
had already issued its 5 December 1990 order allowing a "provisional increase" sought by the oil
companies in their respective supplemental applications.
That there were postponements of scheduled hearings before the ERB, at the instance of oppositor
Maceda, did not justify a denial of the right of oppositors to be heard. The postponements were not
intended to delay the proceedings. In fact, the resetting of the scheduled hearings on November 14, 15
and 16 to a later date, upon motion of petitioner Maceda, was to enable him to file a written opposition to
the supplemental applications filed by the oil companies.
The ERB acted hastily in granting the provisional increases sought by the oil companies even before the
oppositors could submit evidence in support of their opposition. The fact that the questioned orders merely
allowed a provisional increase is beside the point, for past experiences have shown that so-called
provisional increases" allowed by the ERB ultimately became permanent.
ERB's claim that the second provisional increase was duly supported by evidence, is belied by its own act
of modifying said order (of provisional increase) not only once but twice, upon the "request" of the
President. First, the ERB rolled back the prices of fuel just a day after it issued the questioned order,
altering the allocation of the increase. Second, on 10 December 1990, the ERB further modified the price
of petroleum products resulting in reduction of the weighted average provisional increase from P2.82 to
P2.05 per liter, but only after the President had announced that she would meet with the leaders of both
Houses of Congress, to discuss the creation of a special fund to be raised from additional taxes, to
subsidize the prices of petroleum products.1
These acts of the ERB ostensibly sparked by "presidential requests" clearly demonstrate that the evidence
did not, in the first place, justify the price increases it had ordered on 5 and 6 December 1990.
Furthermore, the ERB never came out with a categorical and official declaration of how much was the so-
called deficit of the Oil Price Stabilization Fund (OPSF) and how much of the oil price increases was
intended to cover such deficit.
In the midst of a national crisis related to oil price increases, each and every one is called upon to assume
his/its share of continuing sacrifices. The public, the government, as well as the oil companies should work
hand in hand in solving the present problem that confronts us. We are not unmindful of the fact that the oil
companies are profit-oriented. However, profits should not be their only concern in times of deepening
inability of the people to cope with their prices with "built-in-margins". A reduction of profits during these
crucial and trying times, is certainly in order considering that in the past, the oil companies had
unquestionably made tremendous profits.
In view of the foregoing, I vote to GRANT the petition for the nullification of the 5 and 6 December 1990
orders of the ERB and for a roll-back of the prices of oil products to levels existing before 5 and 6
December 1990 until hearings before the ERB are finally concluded.
Before closing, I also would like to submit for congressional consideration two (2) proposals in the public
interest. They are:
(1) to do away with the present scheme of allowing provisional price increases of oil products. This
scheme, to my mind, is misleading and serves as an excuse for unilateral and arbitrary ERB-action. As
already noted, these provisional price increases are, to all intents and purposes, permanent when fixed.
To that extent, the scheme is a fraud on the people.
(2) all decisions and orders of the ERB should be expressly made appealable by statute to the President
of the Philippines whose decisions shall be final, except in cases involving questions of law or grave
abuse of discretion which may be elevated to the Supreme Court in a special civil action
for certiorari under Rule 65 of the Rules of Court.
While at present, decisions and orders of the ERB are, in my considered opinion, appealable to the
President under the principle of "exhaustion of administrative remedies", it is nevertheless desirable that
the appealability of ERB decisions and orders to the President be placed beyond any and all doubts. In
this way, the President of the Philippines has to assume full responsibility for all price increases in oil
products, which should be the case because the matter involved is not only one of national interest but
profoundly one of people's survival.
Gutierrez, Jr. and Cruz, JJ., concur.
SARMIENTO, J., separate opinion:
I would like to point out a few things in view of the majority's reliance on the first Maceda case.1
The first Maceda case was a challenge on provisional oil price increases decreed by the Energy
Regulatory Board (ERB). This Court sustained the Board, as it is sustaining the Board in this case, on a
few economic outputs, namely, the Oil Price Stabilization Fund (OPSF) deficit, the deteriorating exchange
rate, and the balance of payments and trade gaps.
As I held in my dissent in yet another Maceda case, Maceda v. Macaraig,2 the current oil price increases
were (are) also the result of the devaluation of the currency, since a devalued peso forced oil companies
to pay more pesos for oil worth in dollars.
I simply wish to state what has apparently been left unstated in the course of debate and perhaps, the real
score behind recurring oil price hikes and why the ERB has been very quick in granting them.
The truth is that petroleum prices have been dictated by the Government's economic maneuvers, and not
rather the vagaries of the world market. The truth is that the recent oil hikes have nothing to do with
Saddam Hussein or the Gulf crisis (during which oil prices in fact dropped) and are, rather, the natural
consequences of calculated moves by the Government in its effort to meet so-called International
Monetary Fund (IMF) targets.
In 1989, the Government of the Republic of the Philippines submitted its letter of intent to the IMF outlining
the country's economic program from 1989 through 1992. In its paragraph 19, it states that:
The Government intends to continue with the floating exchange rate system established in
October 1984 . . .3
Since exchange control was abolished and the floating rate system was established, the Philippine peso
has seen a series of devaluations that have progressively pushed up prices, significantly, prices of
petroleum. According to one authority, devaluation has been a "standard prescription" to correct balance
of payments (BOP) deficits.4 It makes dollars expensive, discourages import and encourages exports, and
forces dollars conservation.5
It is a matter of opinion whether or not devaluation has been good for the country and whether or not it has
realized these objectives. The truth is that, whatever it has accomplished, oil which is imported has
been subject to the effects of devaluation.
Early this year, Governor Jose Cuisia of the Central Bank, Secretary Jesus Estanislao of the Department
of Finance, and Secretary Guillermo Carague of the Budget and Management Department, wrote Mr.
Michael Camdessus of the International Monetary Fund (the letter of intent) and informed him of the
country's "Economic Stabilization Plan, 1991-92". The Plan recognized certain economic imbalances that
have supposedly inhibited growth, in particular, inflation and an increasing balance of payments deficit,
and drew a program centered on "a strong effort to bring down the overall fiscal deficit "through, among
other things, "the gradual elimination of the deficit of the Oil Price Stabilization Fund."6 It spelled out,
among other things, a "[r]estoration of a sustainable external position requir[ing] the continuation of a
flexible exchange rate policy . . . "7 and described in detail an "Oil Price and Energy Policy" focused on
wiping out the OPSF deficit, to wit:
xxx xxx xxx

A substantial erosion in the overall fiscal position occurred in 1989 and 1990 as a result of official
price support for oil products provided through the OPSF. Despite a lowering of the excise tax on
oil in September 1990 and average domestic oil price increases of about 30 percent in September
and 32 percent in December 1990, the fund continued to incur a deficit during the second half of
1990. The cumulative OPSF deficit (excluding unfiled claims) at end December 1990 is estimated
at P8.8 billion, and this deficit will rise in the first part of 1991. However the cumulative OPSF
deficit is to be eliminated by the end of the third quarter of 1991. To this end, the Government
intends to follow a pricing policy that ensures attainment of zero balance within the specific time. In
particular, the Government will maintain present price levels despite projected world price
declines. In addition, a budgetary transfer of P5 billion will be provided in 1991 to settle
outstanding claim of the OPSF.
15. Full deregulation of oil prices continues to be an important objective of the Government once
calm has been restored to world oil markets. Meanwhile the technical and legal groundwork is
being laid with a view to full deregulation as soon as practicable.
16. The principal objectives of the Government's policy in the energy sector are: (i) the
development of economically viable indigenous energy resources, mainly thermal, geothermal and
hydro-electric power, together with ensuring adequate maintenance of existing facilities; (ii)
promoting more efficient use of energy resources through various energy conservation measures;
and (ii) the elimination of distortions in every resource allocation through appropriate pricing
policies.8
xxx xxx xxx
As I said, Philippine oil prices today have nothing to do with the law on supply and demand, if they had
anything to do with it in recent years. (I also gather that the Government is intending to re-adjust the prices
of gasoline and diesel fuel soon since apparently, low diesel prices have reduced the demand for gasoline
resulting in "distortions".)
As the Court held in the first Maceda v. Energy Regulatory Board,9 oil pricing "is a question best judged by
the political leadership" and oil prices are (and have been apparently), political, rather than economic,
decisions.
I am not to be mistaken as accepting the "letter of intent" as a correct prescription much less a
necessary medicine although I will be lacking in candor if I did not say that it is a bitter pill to swallow.
What I must be understood as saying is that "oil" is a political card to be played on a political board rather
than the courts, so long, of course, as nobody has done anything illegal.
The "politics of oil" as spelled out in the Government's letter of intent likewise bring to light the true nature
of the ERB Under the Memorandum on Philippine Economic Stabilization Plan:
xxx xxx xxx
In the past, energy prices had been set to broadly reflect the average cost of supply. However, the
lack of transparency of the pricing mechanism and subsidization of consumption have increasingly
become a cause for concern. To alleviate some of these problems, in mid-1987, the Government
established the Energy Regulatory Board ERB a quasi-judicial body empowered with the setting
and regulation of the pricing of petroleum products and electricity tariffs, the regulation of additions
to oil refining capacity, and the regulation of importing, transporting, processing and distributing all
energy resources. (Petroleum pricing policy is described in paragraphs 14 and 15.) In addition to
the full pass-through of changes in oil prices to power tariffs, the Government is committed to the
adoption of longrun marginal cost pricing for electricity. To this end, NPC intends to introduce a
marginal cost imported-has tariff structure to ensure that it meets its target of achieving a rate of
return of eight percent on its rate base.10
it is apparent that the Board, in spite of its "independence" (from the Office of the President), is bound by
the terms of the program and that it has after all, no genuine discretion to deny requests for price
adjustments by oil companies. I seriously doubt whether or not it is possessed of that discretion judging,
first, from its performance since 1987 (in which it has not overruled the Government on "oil cases") and
the fact that the exchange rate, the balance of payment deficit, and the OPSF deficiency are matters of
simple arithmetic.
And certainly, the Board can not possibly overrule the Government's "letter of intent."
The first Maceda case sustained the grant of provisional price increases ex parte not only because
Section 8 of Executive Order No. 172 authorized the grant of provisional relief without a hearing but
because fluctuations in the foreign exchange rates, for instance, were, and are, a matter of judicial notice,
and a hearing thereafter was necessary only to see whether or not the ERB determined the rates
correctly.
This likewise brings to light the necessity for an ERB to fix rates since it does not, after all fix (meaning
decide) rates but merely announces their imminence on demonstrable figures of higher rates. The Court
however can not question the wisdom of a statute and after all, I suppose the Government can make use
of an accountant.
I agree with Justice Padilla insofar as he refers to the "present scheme of allowing provisional price
increase" as a "scheme [to defraud] the people." I would like to go further. As I indicated the ERB does no
more than to punch calculators for the Government-which decides oil price increases. The comedy of
December, 1990, when the Board adjusted prices in a matter of days, is a confirmation of this point. As
Justice Padilla noted, the re-adjustment of December 10, 1990 was in fact prompted by "presidential
requests" which does not speak well of the Board's independence and which in fact bares the truth as to
who really makes the decision. (The readjustment, consisting in the reduction in diesel fuel and a
corresponding increase in gasoline, sought to mollify the indignation of the public.)
I agree with Justice Padilla that it amounts to fraud on the people to make them believe that the ERB can
give them a fair hearing, indeed, if it can do anything at all.
I agree, finally, with Justice Padilla that the nation is one in crisis, and evidently, the "ravenous" oil
companies Justice Paras refers to, have not helped any. I submit however that we have not succeeded in
fingering the real villain the letter of intent. Saddam's Middle East folly has nothing to do with that.
Situs of income tax
From sources within the Philippines

Commissioner v. BOAC (1987)
G.R. No. L-65773-74 April 30, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the
Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its
Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and partly
in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry
passengers and/or cargo to or from the Philippines, although during the period covered by the
assessments, it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd.,
and later Qantas Airways which was responsible for selling BOAC tickets covering passengers and
cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This
was protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new
assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount
paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a
letter, dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First
Case but also re-issued in the Second Case the deficiency income tax assessment for 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. This prompted BOAC to
file the Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax
for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place where services are
rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered
petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways
Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while
having no landing rights here, constitute income of BOAC from Philippine sources, and,
accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation
doing business in the Philippines or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign
corporation but a non-resident foreign corporation, then it is liable to Philippine income tax
at the rate of thirty-five per cent (35%) of its gross income received from all sources within
the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident 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
It is our considered opinion that BOAC is a resident foreign corporation. 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 a 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 incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. 2 "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. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities
were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through
a local agent during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable year from all sources
within the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or existing under the

laws of any foreign country, except a foreign fife insurance company, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in
the Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax
laws.
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 transactions of any business carried on
for gain or profile, 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 ...; 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. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71
amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 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 site 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 wealth should share the burden of supporting
the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) 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. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative of the source of income
or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to
this case. The test of taxability is the "source"; and the source of an income is that activity ... which
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The
word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the questioned deficiency income tax
assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November,
1972, international carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2- per cent on their
cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
"gross Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the
world by any international carrier doing business in the Philippines of passage documents
sold therein, whether for passenger, excess baggage or mail provided the cargo or mail
originates from the Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources. The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an excise
or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the
appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case was to the effect 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. As elucidated by the Tax Court, however, the common
carrier's tax is an excise tax, being a tax on the activity of transporting, 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 the acts, privileges or businesses are done or
performed within the jurisdiction of the Philippines. The subject matter of the case under consideration 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 one
cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed
joint decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the
majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income
derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its
general sales agent in the Philippines gas become moot after November 24, 1972. Booth opinions state
that by amendment through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the
Tax Code providing dor the rate of income tax on foreign corporations, international carriers such as
respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine
billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as to the
present 2-% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations to and from
the Philippines, is liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines
through a general sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of
BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a
"resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on
whether or not such income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or
having an office or place of business in the Philippines is subject to Philippine income taxation only in
respect of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal
Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it
existed up to 3 August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business with in

the Philippines (expect foreign life insurance companies) shall be taxable as provided in
subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall
be livied, collected, and paid annually upon the total net income received in the preceeding
taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... . (Emphasis
supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended
once more Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. A corporation, organized, authorized or existing under the

laws of any foreign counrty, except foreign life insurance company, engaged in trade or
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign
corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as
follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding
paragraph upon the amount received by every foreign corporation not engaged in trade or
business within the Philippines, from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains, profits and income
a tax equal to thirty per centum of such amount: provided, however, that premiums shall
not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign
corporation, it is liable to income tax only to the extent that it derives income from sources within the
Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference
that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine
source income creates no presumption that the recipient foreign corporation is a resident of the
Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income
from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or
service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The
Court said:
The source of an income is the property, activity or services that produced the income.
The reinsurance premiums remitted to appellants by virtue of the reinsurance contract,
accordingly, had for their source the undertaking to indemnify Commonwealth Insurance
Co. against liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance Co., upon which
the reinsurance premiums and indemnity were based, were all situated in the Philippines.
4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
was the indemnification of the local insurance company. Such indemnification could take place only in the
Philippines where the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums
paid by the local insurance companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income
tax system. The phrase "sources within the United States" was first introduced into the U.S. tax system in
1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income
may be derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the
sale of capital assets. While the three elements of this attempt at definition need not be
accepted as all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an investigation into
the nature and location of the activities or property which produce the income. If the
income is from labor (services) the place where the labor is done should be decisive; if it is
done in this counrty, the income should be from "source within the United States." If the
income is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the United States". If
the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations. The intention of Congress in the
1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make the test of taxability the "source",
or situs of the activities or property which produce the income . . . . Thus, if income is to
taxed, the recipient thereof must be resident within the jurisdiction, or the property or
activities out of which the income issue or is derived must be situated within the jurisdiction
so that the source of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of life and property and
that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are
two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in
respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated
as follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a)
(3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:
xxx xxx xxx

(3) Services. Compensation for labor or personal services performed in
the Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the
Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following items of gross
income shall be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ...
(Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of
services rendered by individual natural persons; they also apply to services rendered by or through the
medium of a juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax
Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
as follows:
(e) Income form sources partly within and partly without the Philippines. Items of gross
income, expenses, losses and deductions, other than those specified in subsections (a)
and (c) of this section shall be allocated or apportioned to sources within or without the
Philippines, under the rules and regulations prescribed by the Secretary of Finance. ...
Gains, profits, and income from (1) transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel property produced (in
whole or in part) by the taxpayer within and sold without the Philippines, or produced (in
whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S.
Tax Code which "was based upon a recognition that transportation was a service and that the source of
the income derived therefrom was to be treated as being the place where the service of transportation was
rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations
No. 2 (implementing Section 37 of the Tax Code) provides in part as follows:
Section 155. Compensation for labor or personnel services. Gross income from sources
within the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for
services was made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies i.e., foreign steamship companies deriving
income from sources partly within and partly without the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross income,
the total receipts of all out-going business whether freight or passengers. With the gross
income thus ascertained, the ratio existing between it and the gross income from all ports,
both within and without the Philippines of all vessels, whether touching of the Philippines
or not, should be determined as the basis upon which allowable deductions may be
computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2
(again implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the
business of transmission of telegraph or cable messages between points in the Philippines
and points outside the Philippines derives income partly form source within and partly from
sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give
rise to income wholly from sources outside the Philippines, and therefore not subject to Philippine income
taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and
to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a)
the place where the sale of such personal property occurs; and (b) the place where such personal
property was produced or manufactured. If the personal property involved was both produced or
manufactured and sold outside the Philippines, the income derived therefrom will be regarded as sourced
entirely outside the Philippines, although the personal property had been produced outside the
Philippines, or if the sale of the property takes place outside the Philippines and the personal was
produced in the Philippines, then, the income derived from the sale will be deemed partly as income
sourced without the Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the Philippines. Thus, Section
37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits
and income from (1) transportation or other services rendered partly within and partly
without the Philippines; or (2) from the sale of personal property produced (in whole or in
part) by the taxpayer within and sold without the Philippines, or produced (in whole or in
part) by the taxpayer without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the Philippines. ... (Emphasis
supplied)
In contrast, income derived from the purchase and sale of personal property i. e., trading is, under
the Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e)
of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits
and income derived from the purchase of personal property within and its sale without the
Philippines or from the purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the country in which
sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of
personal property shall be treated as derived entirely from the country in which sold. The
word "sold" includes "exchange." The "country" in which "sold" ordinarily means the place
where the property is marketed. This Section does not apply to income from the sale
personal property produced (in whole or in part) by the taxpayer within and sold without
the Philippines or produced (in whole or in part) by the taxpayer without and sold within the
Philippines. (See Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by
BOAC in the Philippines. Those transactions may be characterized either as sales of personal property (i.
e., "sales of airline tickets") or as entering into a lease of services or a contract of service or carriage. The
applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts
of service, i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct
as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The
value of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the
one point to another outside the Philippines. The ticket is really the evidence of the contract of
carriage entered into between BOAC and the passenger. The money paid by the passenger changes
hands in the Philippines. But the passenger does not receive undertaken to be delivered by BOAC. The
"purchase price of the airline ticket" is quite different from the purchase price of a physical good or
commodity such as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid for
the undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and
sales of personal property, appear entirely inappropriate from other viewpoint. Consider first purchases
and sales: is BOAC properly regarded as engaged in trading in the purchase and sale of personal
property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as "selling" "a product"
its service. However, for the technical purposes of the law on income taxation, BOAC is in fact entering
into contracts of service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source rules" applying
generally to sales, and purchases and sales, of personal property which can be invoked only by the grace
of popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized
as derived from a "service", rather than from an "activity" (a broader term than service and including the
activity of selling) or from the here involved is income taxation, and not a sales tax or
an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree
No. 1355, promulgated on 21 April 1978, in the following manner:

laws of any foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in
the preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether
for passenger, excess baggege or mail, provide the cargo or mail originates from the
Philippines. The gross revenue realized from the said cargo or mail shall include the gross
freight charge up to final destination. Gross revenues from chartered flights originating
from the Philippines shall likewise form part of "gross Philippine billings" regardless of the
place of sale or payment of the passage documents. For purposes of determining the
taxability to revenues from chartered flights, the term "originating from the Philippines"
shall include flight of passsengers who stay in the Philippines for more than forty-eight (48)
hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in
the Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating
from the Philippines). Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any port or point in the
Philippines. Thus, the source of income rule applicable, as above discussed, to transportation or other
services rendered partly within and partly without the Philippines, or wholly without the Philippines, has
been set aside. in place of Philippine income taxation, the Tax Code now imposes this 2 per cent tax
computed on the basis of billings in respect of passengers and cargo originating from the Philippines
regardless of where embarkation and debarkation would be taking place. This 2- per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses,
losses and deductions. Because taxes are the very lifeblood of government, the resulting potential "loss"
or "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees of
consciousness, considered in choosing from among competing possible characterizations under or
interpretation of tax statutes. It is hence perhaps useful to point out that the determination of the
appropriate characterization here that of contracts of air carriage rather than sales of airline tickets
entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government
takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of
international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed
joint decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the
majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income
derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its
general sales agent in the Philippines gas become moot after November 24, 1972. Booth opinions state
that by amendment through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the
Tax Code providing dor the rate of income tax on foreign corporations, international carriers such as
respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine
billings. There is, therefore, no longer ant source of substantial conflict between the two opinions as to the
present 2-% tax on their gross Philippine billings charged against such international carriers as herein
respondent foreign corporation.
FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations to and from
the Philippines, is liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines
through a general sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of
BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a
"resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on
whether or not such income is derived from "source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or
having an office or place of business in the Philippines is subject to Philippine income taxation only in
respect of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal
Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it
existed up to 3 August 1969, read as follows:
(2) Resident corporations. A foreign corporation engaged in trade or business with in

the Philippines (expect foreign life insurance companies) shall be taxable as provided in
subsection (a) of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax shall
be livied, collected, and paid annually upon the total net income received in the preceeding
taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... . (Emphasis
supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended
once more Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. A corporation, organized, authorized or existing under the

laws of any foreign counrty, except foreign life insurance company, engaged in trade or
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign
corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as
follows:
(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding
paragraph upon the amount received by every foreign corporation not engaged in trade or
business within the Philippines, from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premium, annuities, compensations, remunerations,
emoluments, or other fixed or determinative annual or periodical gains, profits and income
a tax equal to thirty per centum of such amount: provided, however, that premiums shall
not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign
corporation, it is liable to income tax only to the extent that it derives income from sources within the
Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference
that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine
source income creates no presumption that the recipient foreign corporation is a resident of the
Philippines. The critical issue, for present purposes, is therefore whether of not BOAC is deriving income
from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or
service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the
court dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local
insurance company to a foreign reinsurance company in respect of risks located in the Philippines. The
Court said:
The source of an income is the property, activity or services that produced the income.
The reinsurance premiums remitted to appellants by virtue of the reinsurance contract,
accordingly, had for their source the undertaking to indemnify Commonwealth Insurance
Co. against liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance Co., upon which
the reinsurance premiums and indemnity were based, were all situated in the Philippines.
4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
was the indemnification of the local insurance company. Such indemnification could take place only in the
Philippines where the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums
paid by the local insurance companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income
tax system. The phrase "sources within the United States" was first introduced into the U.S. tax system in
1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income
may be derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the
sale of capital assets. While the three elements of this attempt at definition need not be
accepted as all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an investigation into
the nature and location of the activities or property which produce the income. If the
income is from labor (services) the place where the labor is done should be decisive; if it is
done in this counrty, the income should be from "source within the United States." If the
income is from capital, the place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "source within the United States". If
the income is from the sale of capital assets, the place where the sale is made should be
likewise decisive. Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place; it is an activity or property. As such, it has a situs or
location; and if that situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations. The intention of Congress in the
1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing
nonresident aliens and foreign corporations and to make the test of taxability the "source",
or situs of the activities or property which produce the income . . . . Thus, if income is to
taxed, the recipient thereof must be resident within the jurisdiction, or the property or
activities out of which the income issue or is derived must be situated within the jurisdiction
so that the source of the income may be said to have a situs in this country. The
underlying theory is that the consideration for taxation is protection of life and property and
that the income rightly to be levied upon to defray the burdens of the United States
Government is that income which is created by activities and property protected by this
Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are
two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in
respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated
as follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a)
(3) of our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. Compensation for labor or personal services performed in

the Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the
Philippines in the following manner:
(c) Gross income from sources without the Philippines. The following items of gross
income shall be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ...
(Emphasis supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of
services rendered by individual natural persons; they also apply to services rendered by or through the
medium of a juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax
Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides
as follows:
(e) Income form sources partly within and partly without the Philippines. Items of gross
income, expenses, losses and deductions, other than those specified in subsections (a)
and (c) of this section shall be allocated or apportioned to sources within or without the
Philippines, under the rules and regulations prescribed by the Secretary of Finance. ...
Gains, profits, and income from (1) transportation or other services rendered partly within
and partly without the Philippines, or (2) from the sale of personnel property produced (in
whole or in part) by the taxpayer within and sold without the Philippines, or produced (in
whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S.
Tax Code which "was based upon a recognition that transportation was a service and that the source of
the income derived therefrom was to be treated as being the place where the service of transportation was
rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations
No. 2 (implementing Section 37 of the Tax Code) provides in part as follows:
Section 155. Compensation for labor or personnel services. Gross income from sources
within the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for
services was made, or of the place of payment (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies i.e., foreign steamship companies deriving
income from sources partly within and partly without the Philippines:
Section 163 Foreign steamship companies. The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross income,
the total receipts of all out-going business whether freight or passengers. With the gross
income thus ascertained, the ratio existing between it and the gross income from all ports,
both within and without the Philippines of all vessels, whether touching of the Philippines
or not, should be determined as the basis upon which allowable deductions may be
computed, . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2
(again implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. A foreign corporation carrying on the
business of transmission of telegraph or cable messages between points in the Philippines
and points outside the Philippines derives income partly form source within and partly from
sources without the Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give
rise to income wholly from sources outside the Philippines, and therefore not subject to Philippine income
taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and
to the purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a)
the place where the sale of such personal property occurs; and (b) the place where such personal
property was produced or manufactured. If the personal property involved was both produced or
manufactured and sold outside the Philippines, the income derived therefrom will be regarded as sourced
entirely outside the Philippines, although the personal property had been produced outside the
Philippines, or if the sale of the property takes place outside the Philippines and the personal was
produced in the Philippines, then, the income derived from the sale will be deemed partly as income
sourced without the Philippines. In other words, the income (and the related expenses, losses and
deductions) will be allocated between sources within and sources without the Philippines. Thus, Section
37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits
and income from (1) transportation or other services rendered partly within and partly
without the Philippines; or (2) from the sale of personal property produced (in whole or in
part) by the taxpayer within and sold without the Philippines, or produced (in whole or in
part) by the taxpayer without and sold within the Philippines, shall be treated as derived
partly from sources within and partly from sources without the Philippines. ... (Emphasis
supplied)
In contrast, income derived from the purchase and sale of personal property i. e., trading is, under
the Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e)
of the Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits
and income derived from the purchase of personal property within and its sale without the
Philippines or from the purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the country in which
sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of
personal property shall be treated as derived entirely from the country in which sold. The
word "sold" includes "exchange." The "country" in which "sold" ordinarily means the place
where the property is marketed. This Section does not apply to income from the sale
personal property produced (in whole or in part) by the taxpayer within and sold without
the Philippines or produced (in whole or in part) by the taxpayer without and sold within the
Philippines. (See Section 162 of these regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by
BOAC in the Philippines. Those transactions may be characterized either as sales of personal property (i.
e., "sales of airline tickets") or as entering into a lease of services or a contract of service or carriage. The
applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts
of service, i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct
as a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The
value of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a
prestation from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the
one point to another outside the Philippines. The ticket is really the evidence of the contract of
carriage entered into between BOAC and the passenger. The money paid by the passenger changes
hands in the Philippines. But the passenger does not receive undertaken to be delivered by BOAC. The
"purchase price of the airline ticket" is quite different from the purchase price of a physical good or
commodity such as a pair of shoes of a refrigerator or an automobile; it is really the compensation paid for
the undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and
sales of personal property, appear entirely inappropriate from other viewpoint. Consider first purchases
and sales: is BOAC properly regarded as engaged in trading in the purchase and sale of personal
property? Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the
Philippines. Consider next sales: can BOAC be regarded as "selling" personal property produced or
manufactured by it? In a popular or journalistic sense, BOAC might be described as "selling" "a product"
its service. However, for the technical purposes of the law on income taxation, BOAC is in fact entering
into contracts of service or carriage. The very existance of "source rules" specifically and precisely
applicable to the rendition of services must preclude the application here of "source rules" applying
generally to sales, and purchases and sales, of personal property which can be invoked only by the grace
of popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized
as derived from a "service", rather than from an "activity" (a broader term than service and including the
activity of selling) or from the here involved is income taxation, and not a sales tax or
an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree
No. 1355, promulgated on 21 April 1978, in the following manner:

laws of any foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in
the preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether
for passenger, excess baggege or mail, provide the cargo or mail originates from the
Philippines. The gross revenue realized from the said cargo or mail shall include the gross
freight charge up to final destination. Gross revenues from chartered flights originating
from the Philippines shall likewise form part of "gross Philippine billings" regardless of the
place of sale or payment of the passage documents. For purposes of determining the
taxability to revenues from chartered flights, the term "originating from the Philippines"
shall include flight of passsengers who stay in the Philippines for more than forty-eight (48)
hours prior to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in
the Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating
from the Philippines). Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any port or point in the
Philippines. Thus, the source of income rule applicable, as above discussed, to transportation or other
services rendered partly within and partly without the Philippines, or wholly without the Philippines, has
been set aside. in place of Philippine income taxation, the Tax Code now imposes this 2 per cent tax
computed on the basis of billings in respect of passengers and cargo originating from the Philippines
regardless of where embarkation and debarkation would be taking place. This 2- per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses,
losses and deductions. Because taxes are the very lifeblood of government, the resulting potential "loss"
or "gain" in the amount of taxes collectible by the state is sometimes, with varying degrees of
consciousness, considered in choosing from among competing possible characterizations under or
interpretation of tax statutes. It is hence perhaps useful to point out that the determination of the
appropriate characterization here that of contracts of air carriage rather than sales of airline tickets
entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the Government
takes in revenues generated by the 2- per cent tax on the gross Philippine billings or receipts of
international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.
Narvasa, Gutierrez, Jr., and Cruz, JJ., dissent.
CIR v. Japan Air Lines, Inc. (1991)

[G.R. No. 60714. October 4, 1991.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JAPAN AIR LINES, INC., and THE COURT OF TAX
APPEALS, Respondents.
Felicisimo R. Quiogue and Felipe T . Dumpit for Private Respondent.
SYLLABUS
1. TAXATION; INCOME TAX; PROCEEDS FROM SALES OF AIRLINE TICKET SOLD IN THE PHILIPPINES; TAXABLE
AS INCOME FROM SOURCES WITHIN THE PHILIPPINES. In Commissioner of Internal Revenue v. Air India and
the Court of Tax Appeals (G.R. No. 72443, January 29, 1988, 157 SCRA 648) the Court held 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 v. 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.
2. ID.; ID.; FOREIGN AIRLINE COMPANIES SELLING TICKET IN THE PHILIPPINES THROUGH LOCAL AGENT;
CONSIDERED RESIDENT FOREIGN CORPORATION DOING BUSINESS IN THE PHILIPPINES. 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 v. British Overseas Airways Corporation, [149 SCRA 395]).
3. ID.; ID.; ID.; ID.; TAXABLE INCOME; RULE. 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.
4. ID.; ID.; SURCHARGES; IMPOSITION THEREOF; NOT PROPER IN CASE AT BAR. 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 respondents 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 v.
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.
5. ID.; EXCISE TAX; COMMON CARRIER TAX; NOT APPLICABLE IN CASE AT BAR. 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 carriers tax. The common carriers tax is an excise tax, being
a tax on the activity of transporting, 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, 149 SCRA 395).
DECISION
PARAS, J.:
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 petitioners assessment of deficiency income tax inclusive of
interest and surcharge as well as compromise penalty for violation of bookkeeping regulations charged
against Respondent.
The antecedent facts of the case are as follows: chanrob 1es vi rtual 1aw lib rary
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 office at the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell tickets but was
maintained merely for the promotion of the companys 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.
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: chan rob1es v irt ual 1aw l ibra ry
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.(3 yrs.) 24,049.44 24,300.18 38,239.92
Total due P224,461.44 P226,801.68 P356,905.92
========= ========= =========
1962 1963 S U M M A R 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 P523,642.56 P767,875.92 P2,099,687.52
========= ========= =========
Compromise Penalty P1,500.00
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 JALs request for cancellation of the assessment (Ibid., p. 29).
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:chan rob1e s virtual 1 aw lib rary
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 less than three cases resolved by this Court. Anent
the first issue, the landmark case of Commissioner of Internal Revenue v. British Overseas Airways Corporation
(G.R. Nos.-65773-74, April 30, 1987, 149 SCRA 395) has categorically ruled: jgc:c han robles. com.ph
"The Tax Code defines gross income thus: jgc:chanro bles. com.ph
"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 . . . 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 v. Rafferty and Concepcion, 38 Phil. 414 [1918]).
"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 BOACs 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
wealth should share the burden of supporting the government.
"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. v. Commissioner of Internal Revenue, 13 SCRA 719 [1965]).
"x x x
"The absence of flight operations to and from the Philippines is not determinative of the source of income or the
situs of income taxation . . . The test of taxability is the `source; and the source of an income is that activity . . .
which produced the income (Howden & Co., Ltd. v. 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 . . . The word source
conveys one essential idea, that of origin, end the origin of the income herein is the Philippines (Manila Gas
Corporation v. Collector of Internal Revenue, 62 Phil. 895 [1935])." cralaw vi rtua1aw l ib rary
The above ruling was adopted en toto in the subsequent case of Commissioner of Internal Revenue v. Air India
and the Court of Tax Appeals (G.R. No. 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 v. 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 resident foreign corporation under Section 84 (g) of the National Internal Revenue Code of 1939.
Definition of what a resident foreign corporation is was likewise reproduced under Section 20 of the 1977 Tax
Code.
The BOAC Doctrine has expressed in unqualified terms: jg c:chan rob l es.com.ph
"Under Section 20 of the 1977 Tax Code: jgc:chan robles. com.ph
"(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." cralaw virtua1aw l ibra ry
". . . 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 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. v. 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. v. Del Rosario and Peligon, 96 Phil. 23, 30, citing Thompson on Corporations, Vol. 8, 3rd ed., pp. 844-
847 and Fishers 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 v. British Overseas Airways Corporation, supra). The case of CIR v. American Airlines, Inc.
(supra) sums it up as follows: jgc:chan roble s.com.p h
". . . 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." cralaw virtua1aw l ibra ry
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
v. Air India (supra):
jgc:chanrob les.com. ph
"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
"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." cralaw virtua 1aw lib rary
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 respondents 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 v. 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 . . . 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." cralaw virtua1aw lib rary
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 | Add 25 % | Add 6% interest | Summary of
| | income as | surcharge | per annum for a | Total Tax
| | Income Tax | under Sec. | for a maximum | Due from
| | Due under Secs | 72 NIRC of | of 3 years under | the Private
| | 24(a) and b(2) | 1939 | Sec. 51(d) NIRC | Respondent
| | NIRC of 1939 | | 1939 |
|||||
1959 | P472,025.16 | P141,607.54 | P35,401.88 | P25,489.35 | P202,498.77
1960 | 476,671.48 | 143,001.44 | 35,750.36 | 25,740.25 | 204,492.05
1961 | 734,812.77 | 220,443.83 | 55,110.95 | 39,679.83 | 315,234.66
1962 | 1,065,641.63 | 319,692.48 | 79,923.12 | | 399,615.60
1963 | 1,550,230.43 | 465,069.14 | 116,267.28 | | 581,336.42
| | | | |
| | | | | P1,703,177.40
| | | | | ==========
Accordingly, private respondent is liable for unpaid taxes and charges in the total amount of ONE MILLION SEVEN
HUNDRED THREE THOUSAND ONE HUNDRED SEVENTY SEVEN AND 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 carriers tax. The common carriers tax is an excise tax, being a tax on the activity
of transporting, 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 under consideration 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.
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 and surcharges.
SO ORDERED.
Fernan, C.J., Melencio-Herrera, Padilla, Bidin, Sarmiento, Grio-Aquino, Medialdea and Regalado, JJ., concur.
Narvasa, Gutierrez, Jr., Cruz and Davide, JJ., Join Justice Felicianos dissent in the BOAC case.
Gancayco, J., Retired.
Separate Opinions
FELICIANO, J., dissenting: chanrob1e s virtual 1aw libra ry
As my learned brother Mr. Justice Paras has indicated in his opinion for the majority in this case, the basic issues
raised by this case were dealt with in Commissioner of Internal Revenue v. British Overseas Airways Corp. (BOAC)
(149 SCRA 397 [1987]), a decision reached en banc. The majority rule in BOAC has been reiterated in two (2)
cases: Commissioner of Internal Revenue v. Air India (157 SCRA 648 [1988]), 1 decided by the First Division of
the Court; and Commissioner of Internal Revenue v. American Air Lines, Et. Al. (180 SCRA 274 [1989]), rendered
by the Second Division of the Court. Since the case at bar appears to be the first en banc case raising the same
questions as BOAC, I would like to reiterate, in very summary fashion, the principal points made in my dissenting
opinion in BOAC. 2 Since these points were developed at some length in the BOAC dissent, there is no necessity
for once more referring to or quoting the detailed statutory bases of the conclusions here reiterated (i.e.,
provisions of the National Internal Revenue Code [NIRC] and Revenue Regulations No. 2 issued by the Secretary
of Finance).
1. Whether or not Japan Air Lines (JAL) is a resident foreign corporation doing business in the Philippines, is not a
relevant consideration under the statutory provisions here involved, as they existed during the taxable years from
1959 through to 1963. Whether a foreign corporation be a resident one doing business in the Philippines, or a
non-resident not doing business in the Philippines, is subject to Philippine income tax only in respect of its
Philippine-source income. The critical issue, in other words, is always whether or not JAL was, during the taxable
years involved, deriving income from sources within the Philippines.
2. The tax involved here is the tax on income: we are not concerned with a sales tax nor with an excise or
privilege tax. For purposes of income taxation, I respectfully submit, the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment, but rather to the" property, activity or
service which produced the income" (Howden and Co. Ltd. v. Collector of Internal Revenue, 13 SCRA 601 [1965];
British Traders Insurance Co. Ltd. v. Commissioner of Internal Revenue, 13 SCRA 719 [1965]; and Commissioner
of Internal Revenue v. Phoenix Assurance Co. Ltd. 14 SCRA 52 [1965]. Also: 8 Mertens, Law of Federal Income
Taxation, Section 45.27 [1957]).
3. The problem is, therefore, one of appropriate characterization of the transactions involved, that is, identifying
or determining "the activity or service which produced the income" and the situs or physical location of such
activity or service.
In my view, the activity or service giving rise to income, in the present case, is not the sale of personal property
(so-called "sale of airline tickets") the generative activity is rather entering into and performing a contract of
service or carriage from one point of the globe (outside the Philippines) to another point in the globe (also outside
the Philippines). This was explained in the BOAC dissenting opinion in the following terms: jgc:chan rob les.com. ph
"The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase sale of airline tickets, while widely used in popular parlance, does not appear to be correct as a
matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the
ticket lies wholly in the right acquired by the purchaser the passenger to demand a presentation from
BOAC, which presentation consists of the carriage of the purchaser or passenger from one point to another
outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and
the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not
receive in the Philippines the consideration therefor the service undertaken to be delivered by BOAC. The
purchase price of the airline ticket is quite different from the purchase price of a physical good or commodity
such as a pair of shoes or a refrigerator or an automobile; it is really the compensation paid for the undertaking of
BOAC to transport the passenger or cargo outside the Philippines. (Underscoring in the original).
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from another viewpoint. Consider first purchases and sales; is
BOAC properly regarded as engaged in trading in the purchase and sale of personal property? Certainly, BOAC
was not purchasing tickets outside the Philippines and selling them in the Philippines. Consider next sales: can
BOAC be regarded as selling personal property produced or manufactured by it? In a popular or journalistic
sense, BOAC might be described as selling a product its services. However, for the technical purposes of the
law on income taxation, BOAC is in fact entering into contracts of service or marriage. The very existence of
source rules specifically and precisely applicable to the rendition of services must preclude the application here of
source rules applying generally to sales, and purchases and sales of personal property which can be invoked only
by the grace of popular language . . . ." (149 SCRA 421-422; Italics supplied).
4. When the BOAC and JAL transactions are appropriately characterized as contracts of carriage or service, the
ordinary "source rule" under our NIRC and Revenue Regulations No. 2 relating to contracts of service or carriage
that the income generated is sourced or earned in the place where the contract is performed becomes
applicable. Applying this "source rule," it will be seen that the income earned by BOAC or JAL by transporting
persons and goods between two (2) points both outside the Philippines, must be regarded as non-Philippine source
income, and hence not taxable to a foreign corporation.
5. The unfairness arising from characterizing the transactions here as sales of personal property is obvious, when
one recalls that a corporate tax payer subject to income taxation is entitled to deduct business expenses
necessarily incurred in carrying out the activity or service generating the income. If the issuance of airline passage
documents is properly determined as a sale of personal property, then all the tax payer can deduct are logically
the cost of paper and printing of the air passage documents, as well as the salaries of the sales personnel, office
rentals, cost of utilities and similar items. But what about the cost of rendering the service that the carrier
becomes bound to deliver "to the buyer" of the "airline ticket," the depreciation of the aircraft, the cost of aircraft
maintenance and repairs, the cost of high octane aviation fuel, the salaries of the pilots and cabin crew members,
landing fees, interest paid on borrowed capital, etc. In other words, the price paid for the "airline ticket" even
after deducting the cost of printing the documents and the salaries of the sales personnel is far from pure profit.
I believe this is the very reason why the law in respect of taxation of international carriers was changed from
taxation of net income (involving normal income tax rates of 25%-35%) to a gross receipts or excise or privilege
tax of 2.5% on "gross Philippine billings," i.e., to avoid unfairness to international carriers and to cure what
appeared to be a conspicuous lack of economic realism.
6. Finally, we should note the provisions of the Convention between the Philippines and the United States of
America with respect to taxes on income, signed on 1 October 1976 (Text in 7 Philippine Treaty Series 523) and
which went into force and effect on 16 October 1982, upon ratification by both governments and exchange of
instruments of ratification. Under Article 9 of the RP-US Tax Convention, profits derived by a resident of one of the
Contracting State from sources within the other Contracting State "from the operation of ships in international
traffic" or "from operation of aircraft in international traffic" may be taxed. Article 4, entitled "Source of Income",
of the Convention provides as follows: jgc:chan roble s.com.p h
"(7) Gross revenue from the operation of ships or aircraft in international traffic shall be treated as income from
sources within a Contracting State to the extent they are derived from outgoing traffic originating in that State."
(Emphasis supplied).
It seems to me that the foregoing reflects the understanding of both States Parties as to the correct source rule
applicable for income taxation of revenues derived from the operation in international traffic of aircraft: that is,
that they are sourced within a contracting state only to the extent that such revenues arise" from outgoing traffic
originating in that state," or, in terms of the present case, only to the extent that they are derived from
passengers and cargo transported from the Philippines to some other part of the world. This is entirely in line with
the view respectfully submitted in the BOAC dissenting opinion and here reiterated.
I vote to deny the Petition for Review and to affirm the Decision of the Court of Tax Appeals in CTA Case No.
2480.
From sources without the Philippines

Wells Fargo v. Collector (1940)
G.R. No. L-46720 June 28, 1940
WELLS FARGO BANK & UNION TRUST COMPANY, petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
De Witt, Perkins and Ponce Enrile for appellant.

Office of the Solicitor-General Ozaeta and Assistant Solicitor-General Concepcion for appellee.
Ross, Lawrence, Selph and Carrascoso, James Madison Ross and Federico Agrava as amici curi.
MORAN, J.:
An appeal from a declaratory judgment rendered by the Court of First Instance of Manila.
Birdie Lillian Eye, wife of Clyde Milton Eye, died on September 16, 1932, at Los Angeles, California, the
place of her alleged last residence and domicile. Among the properties she left her one-half conjugal
share in 70,000 shares of stock in the Benguet Consolidated Mining Company, an anonymous partnership
(sociedad anonima), organized and existing under the laws of the Philippines, with is principal office in the
City of Manila. She left a will which was duly admitted to probate in California where her estate was
administered and settled. Petitioner-appellant, Wells Fargo Bank & Union Trust Company, was duly
appointed trustee of the created by the said will. The Federal and State of California's inheritance taxes
due on said shares have been duly paid. Respondent Collector of Internal Revenue sought to subject
anew the aforesaid shares of stock to the Philippine inheritance tax, to which petitioner-appellant objected.
Wherefore, a petition for a declaratory judgment was filed in the lower court, with the statement that, "if it
should be held by a final declaratory judgment that the transfer of the aforesaid shares of stock is legally
subject to the Philippine inheritance tax, the petitioner will pay such tax, interest and penalties (saving
error in computation) without protest and will not file to recover the same; and the petitioner believes and t
herefore alleges that it should be held that such transfer is not subject to said tax, the respondent will not
proceed to assess and collect the same." The Court of First Instance of Manila rendered judgment,
holding that the transmission by will of the said 35,000 shares of stock is subject to Philippine inheritance
tax. Hence, this appeal by the petitioner.
Petitioner concedes (1) that the Philippine inheritance tax is not a tax property, but upon transmission by
inheritance (Lorenzo vs. Posadas, 35 Off. Gaz., 2393, 2395), and (2) that as to real and tangible personal
property of a non-resident decedent, located in the Philippines, the Philippine inheritance tax may be
imposed upon their transmission by death, for the self-evident reason that, being a property situated in this
country, its transfer is, in some way, defendant, for its effectiveness, upon Philippine laws. It is contended,
however, that, as to intangibles, like the shares of stock in question, their situs is in the domicile of the
owner thereof, and, therefore, their transmission by death necessarily takes place under his domiciliary
laws.
Section 1536 of the Administrative Code, as amended, provides that every transmission by virtue of
inheritance of any share issued by any corporation of sociedad anonima organized or constituted in the
Philippines, is subject to the tax therein provided. This provision has already been applied to shares of
stock in a domestic corporation which were owned by a British subject residing and domiciled in Great
Britain. (Knowles vs. Yatco, G. R. No. 42967. See also Gibbs vs. Government of P. I., G. R. No. 35694.)
Petitioner, however, invokes the rule laid down by the United States Supreme Court in four cases
(Farmers Loan & Trust Company vs. Minnesota, 280 U.S. 204; 74 Law. ed., 371; Baldwin vs. Missouri,
281 U.S., 586; 74 Law. ed., 1056, Beidler vs. South Carolina Tax Commission 282 U. S., 1; 75 Law. ed.,
131; First National Bank of Boston vs. Maine, 284 U. S., 312; 52 S. Ct., 174, 76 Law. ed., 313; 77 A. L. R.,
1401), to the effect that an inheritance tax can be imposed with respect to intangibles only by the State
where the decedent was domiciled at the time of his death, and that, under the due-process clause, the
State in which a corporation has been incorporated has no power to impose such tax if the shares of stock
in such corporation are owned by a non-resident decedent. It is to be observed, however, that in a later
case (Burnet vs. Brooks, 288 U. S., 378; 77 Law. ed., 844), the United States Supreme Court upheld the
authority of the Federal Government to impose an inheritance tax on the transmission, by death of a non-
resident, of stock in a domestic (America) corporation, irrespective of the situs of the corresponding
certificates of stock. But it is contended that the doctrine in the foregoing case is not applicable, because
the due-process clause is directed at the State and not at the Federal Government, and that the federal or
national power of the United States is to be determined in relation to other countries and their subjects by
applying the principles of jurisdiction recognized in international relations. Be that as it may, the truth is
that the due-process clause is "directed at the protection of the individual and he is entitled to its immunity
as much against the state as against the national government." (Curry vs. McCanless, 307 U. S., 357,
370; 83 Law. ed., 1339, 1349.) Indeed, the rule laid down in the four cases relied upon by the appellant
was predicated on a proper regard for the relation of the states of the American Union, which requires that
property should be taxed in only one state and that jurisdiction to tax is restricted accordingly. In other
words, the application to the states of the due-process rule springs from a proper distribution of their
powers and spheres of activity as ordained by the United States Constitution, and such distribution is
enforced and protected by not allowing one state to reach out and tax property in another. And these
considerations do not apply to the Philippines. Our status rests upon a wholly distinct basis and no
analogy, however remote, cam be suggested in the relation of one state of the Union with another or with
the United States. The status of the Philippines has been aptly defined as one which, though a part of the
United States in the international sense, is, nevertheless, foreign thereto in a domestic sense.
(Downes vs. Bidwell, 182 U. S., 244, 341.)
At any rate, we see nothing of consequence in drawing any distinct between the operation and effect of
the due-process clause as it applies to the individual states and to the national government of the United
States. The question here involved is essentially not one of due-process, but of the power of the Philippine
Government to tax. If that power be conceded, the guaranty of due process cannot certainly be invoked to
frustrate it, unless the law involved is challenged, which is not, on considerations repugnant to such
guaranty of due process of that of the equal protection of the laws, as, when the law is alleged to be
arbitrary, oppressive or discriminatory.
Originally, the settled law in the United States is that intangibles have only one situs for the purpose of
inheritance tax, and that such situs is in the domicile of the decedent at the time of his death. But this rule
has, of late, been relaxed. The maxim mobilia sequuntur personam, upon which the rule rests, has been
described as a mere "fiction of law having its origin in consideration of general convenience and public
policy, and cannot be applied to limit or control the right of the state to tax property within its jurisdiction"
(State Board of Assessors vs. Comptoir National D'Escompte, 191 U. S., 388, 403, 404), and must "yield
to established fact of legal ownership, actual presence and control elsewhere, and cannot be applied if to
do so result in inescapable and patent injustice." (Safe Deposit & Trust Co. vs. Virginia, 280 U. S., 83, 91-
92) There is thus a marked shift from artificial postulates of law, formulated for reasons of convenience, to
the actualities of each case.
An examination of the adjudged cases will disclose that the relaxation of the original rule rests on either of
two fundamental considerations: (1) upon the recognition of the inherent power of each government to tax
persons, properties and rights within its jurisdiction and enjoying, thus, the protection of its laws; and (2)
upon the principle that as o intangibles, a single location in space is hardly possible, considering the
multiple, distinct relationships which may be entered into with respect thereto. It is on the basis of the first
consideration that the case of Burnet vs. Brooks, supra, was decided by the Federal Supreme Court,
sustaining the power of the Government to impose an inheritance tax upon transmission, by death of a
non-resident, of shares of stock in a domestic (America) corporation, regardless of the situs of their
corresponding certificates; and on the basis of the second consideration, the case of Cury vs. McCanless,
supra.
In Burnet vs. Brooks, the court, in disposing of the argument that the imposition of the federal estate tax is
precluded by the due-process clause of the Fifth Amendment, held:
The point, being solely one of jurisdiction to tax, involves none of the other consideration raised by
confiscatory or arbitrary legislation inconsistent with the fundamental conceptions of justice which
are embodied in the due-process clause for the protection of life, liberty, and property of all
persons citizens and friendly aliens alike. Russian Volunteer Fleet vs. United States, 282 U. S.,
481, 489; 75 Law ed., 473, 476; 41 S. Ct., 229; Nicholas vs. Coolidge, 274 U. S., 531; 542, 71 Law
ed., 1184, 1192; 47 S. Ct., 710; 52 A. L. R., 1081; Heiner vs. Donnon, 285 U.S., 312, 326; 76 Law
ed., 772, 779; 52 S. Ct., 358. If in the instant case the Federal Government had jurisdiction to
impose the tax, there is manifestly no ground for assailing it. Knowlton vs. Moore, 178 U.S., 41,
109; 44 Law. ed., 969, 996; 20 S. Ct., 747; MaGray vs. United States, 195 U.S., 27, 61; 49 Law.
ed., 78; 97; 24 S. Ct., 769; 1 Ann. Cas., 561; Flint vs. Stone Tracy Co., 220 U.S., 107, 153, 154;
55 Law. ed., 389, 414, 415; 31 S. Ct., 342; Ann. Cas., 1912B, 1312; Brushaber vs. Union p. R.
Co., 240 U.S., 1, 24; 60 Law. ed., 493, 504; 36 S. Ct., 236; L. R. A., 1917 D; 414, Ann. Cas,
1917B, 713; United States vs. Doremus, 249 U. S., 86, 93; 63 Law. ed., 439, 496; 39 S. Ct., 214.
(Emphasis ours.)
And, in sustaining the power of the Federal Government to tax properties within its borders, wherever its
owner may have been domiciled at the time of his death, the court ruled:
. . . There does not appear, a priori, to be anything contrary to the principles of international law, or
hurtful to the polity of nations, in a State's taxing property physically situated within its borders,
wherever its owner may have been domiciled at the time of his death. . . .
As jurisdiction may exist in more than one government, that is, jurisdiction based on distinct
grounds the citizenship of the owner, his domicile, the source of income, the situs of the
property efforts have been made to preclude multiple taxation through the negotiation of
appropriate international conventions. These endeavors, however, have proceeded upon express
or implied recognition, and not in denial, of the sovereign taxing power as exerted by governments
in the exercise of jurisdiction upon any one of these grounds. . . . (See pages 396-397; 399.)
In Curry vs. McCanless, supra, the court, in deciding the question of whether the States of Alabama and
Tennessee may each constitutionally impose death taxes upon the transfer of an interest in intangibles
held in trust by an Alabama trustee but passing under the will of a beneficiary decedent domiciles in
Tennessee, sustained the power of each State to impose the tax. In arriving at this conclusion, the court
made the following observations:
In cases where the owner of intangibles confines his activity to the place of his domicile it has
been found convenient to substitute a rule for a reason, cf. New York ex rel., Cohn vs. Graves,
300 U.S., 308, 313; 81 Law. ed., 666, 670; 57 S. Ct., 466; 108 A. L. R., 721; First Bank Stock
Corp. vs. Minnesota, 301 U. S., 234, 241; 81 Law. ed., 1061, 1065; 57 S. Ct., 677; 113 A. L. R.,
228, by saying that his intangibles are taxed at their situs and not elsewhere, or perhaps less
artificially, by invoking the maxim mobilia sequuntur personam. Blodgett vs. Silberman, 277 U.S.,
1; 72 Law. ed., 749; S. Ct., 410, supra; Baldwin vs. Missouri, 281 U. S., 568; 74 Law. ed., 1056; 50
S. Ct., 436; 72 A. L. R., 1303, supra, which means only that it is the identify owner at his domicile
which gives jurisdiction to tax. But when the taxpayer extends his activities with respect to his
intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such
a way as to bring his person or properly within the reach of the tax gatherer there, the reason for a
single place of taxation no longer obtains, and the rule even workable substitute for the reasons
may exist in any particular case to support the constitutional power of each state concerned to tax.
Whether we regard the right of a state to tax as founded on power over the object taxed, as
declared by Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat., 316; 4 Law. ed., 579,
supra, through dominion over tangibles or over persons whose relationships are source of
intangibles rights, or on the benefit and protection conferred by the taxing sovereignty, or both, it is
undeniable that the state of domicile is not deprived, by the taxpayer's activities elsewhere, of its
constitutional jurisdiction to tax, and consequently that there are many circumstances in which
more than one state may have jurisdiction to impose a tax and measure it by some or all of the
taxpayer's intangibles. Shares or corporate stock be taxed at the domicile of the shareholder and
also at that of the corporation which the taxing state has created and controls; and income may be
taxed both by the state where it is earned and by the state of the recipient's domicile. protection,
benefit, and power over the subject matter are not confined to either state. . . .(p. 1347-1349.)
. . . We find it impossible to say that taxation of intangibles can be reduced in every case to the
mere mechanical operation of locating at a single place, and there taxing, every legal interest
growing out of all the complex legal relationships which may be entered into between persons.
This is the case because in point of actuality those interests may be too diverse in their
relationships to various taxing jurisdictions to admit of unitary treatment without discarding modes
of taxation long accepted and applied before the Fourteen Amendment was adopted, and still
recognized by this Court as valid. (P. 1351.)
We need not belabor the doctrines of the foregoing cases. We believe, and so hold, that the issue here
involved is controlled by those doctrines. In the instant case, the actual situs of the shares of stock is in
the Philippines, the corporation being domiciled therein. And besides, the certificates of stock have
remained in this country up to the time when the deceased died in California, and they were in possession
of one Syrena McKee, secretary of the Benguet Consolidated Mining Company, to whom they have been
delivered and indorsed in blank. This indorsement gave Syrena McKee the right to vote the certificates at
the general meetings of the stockholders, to collect dividends, and dispose of the shares in the manner
she may deem fit, without prejudice to her liability to the owner for violation of instructions. For all practical
purposes, then, Syrena McKee had the legal title to the certificates of stock held in trust for the true owner
thereof. In other words, the owner residing in California has extended here her activities with respect to
her intangibles so as to avail herself of the protection and benefit of the Philippine laws. Accordingly, the
jurisdiction of the Philippine Government to tax must be upheld.
Judgment is affirmed, with costs against petitioner-appellant.

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Tax amnesty Distinguished from tax exemption

Republic v. IAC, 196 SCRA 335 (1991)

Roberto L. Bautista for private respondents GRIO-AQUINO, J.:

The petition is devoid of merit.

People v. Castaeda, 165 SCRA 327 (1988)

CONTRARY to the provisions of Section 170, paragraph 2 of the National Internal

CONTRARY to Section 174 of the National Internal Revenue Code, as amended. 3

d. Tax liabilities with assessment notices issued as of December 31, 1 973;

f. Property transferred by reason of death or by donation during the year 1972.

xxx xxx xxx

Pascual v. Com., 166 SCRA 560 (1988)

The distinction between co-ownership and an unregistered partnership or

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE

The petition is meritorious.

In resolving the issue, this Court held as follows:

Article 1767 of the Civil Code of the Philippines provides:

I. DEFICIENCY INCOME TAX

xxx xxx xxx"1

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

Before us, petitioner raises the following issues:

xxx xxx xxx

xxx xxx xxx43

xxx xxx xxx50

Tax exemption and exclusion

COMMISSIONER OF INTERNAL REVENUE, petitioner,

On July 8, 1983, private respondent received from petitioner Commissioner of Internal

WHEREFORE, in view of the foregoing, respondent's decision is SET

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%

Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's

xxx xxx xxx

(16) Business agents and other independent contractors except persons,

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural)

c. Regional or area headquarters established in the Philippines by multinational

Petitioner submits before us the following issues:

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's

xxx xxx xxx

xxx xxx xxx

The Ateneo de Manila University Did Not Contract

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

For another, it bears stressing that private respondent is a non-stock, non-profit

xxx xxx xxx

xxx xxx xxx

Public Service, Not Profit, is the Motive

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has

Misamis Oriental Asso. v. Dept. of Finance, 238 SCRA 63 (1994) *

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., petitioner,

Damasing Law Office for petitioner.

The pertinent provision of the NIRC states:

Mr. VICTOR A. DEOFERIO, JR.

Dear Mr. Deoferio:

(3) In case of opposition, the rules on contested cases shall be observed. 4

WHEREFORE, the petition is DISMISSED.

Com. of Customs v. Phil. Acetylene Co., 39 SCRA 70 (1971) *