THIRD DIVISION

while we agree with the arguments

advanced in your letter protest, we
LASCONA LAND CO., INC.,
G.R. No. 171251
regret, however, that we cannot
Petitioner,
Present:
give
due
course
to
your
request to cancel or set aside
VELASCO, JR., J., Chairperson the assessment notice issued
PERALTA,
to your client for the reason
- versus ABAD,
that the case was not elevated
VILLARAMA, JR.,* and
to the Court of Tax Appeals as
MENDOZA, JJ.
mandated by the provisions of
the last paragraph of Section
Promulgated:
228 of the Tax Code.By virtue
COMMISSIONER OF INTERNAL
thereof, the said assessment notice
REVENUE,
March 5, 2012
has become final, executory and
demandable.
Respondent.
In view of the foregoing, please
x------------------------------------------------------------------x
advise your client to pay its 1993
deficiency income tax liability in the
amount of P753,266.56.
DECISION
x x x x (Emphasis ours)
PERALTA, J.:
Before this Court is a Petition for Review
on Certiorari under Rule 45 of the Rules of Court
seeking the reversal of the Decision [1] dated
October 25, 2005 and Resolution[2] dated January
20, 2006 of the Court of Appeals (CA) in CA-G.R.
SP
No.
58061
which
set
aside
the
Decision[3] dated
January
4,
2000
and
Resolution[4] dated March 3, 2000 of the Court of
Tax Appeals (CTA) in C.T.A. Case No. 5777 and
declared Assessment Notice No. 0000047-93-407
dated March 27, 1998 to be final, executory and
demandable.
The facts, as culled from the records, are as
follows:
On March 27, 1998, the Commissioner of Internal
Revenue (CIR) issued Assessment Notice No.
0000047-93-407[5] against Lascona Land Co., Inc.
(Lascona) informing the latter of its alleged
deficiency income tax for the year 1993 in the
amount of P753,266.56.
Consequently, on April 20, 1998, Lascona filed a
letter protest, but was denied by Norberto R.
Odulio, Officer-in-Charge (OIC), Regional Director,
Bureau of Internal Revenue, Revenue Region No.
8, Makati City, in his Letter[6] dated March 3,
1999, which reads, thus:
xxxx
Subject: LASCONA LAND CO., INC.
1993 Deficiency Income Tax
Madam,
Anent the 1993 tax case of subject
taxpayer, please be informed that

On April 12, 1999, Lascona appealed the decision

before the CTA and was docketed as C.T.A. Case
No. 5777. Lascona alleged that the Regional
Director erred in ruling that the failure to appeal
to the CTA within thirty (30) days from the lapse
of the 180-day period rendered the assessment
final and executory.
The CIR, however, maintained that Lascona's
failure to timely file an appeal with the CTA after
the lapse of the 180-day reglementary period
provided under Section 228 of the National
Internal Revenue Code (NIRC) resulted to the
finality of the assessment.
On January 4, 2000, the CTA, in its Decision,
[7]
nullified the subject assessment. It held that in
cases of inaction by the CIR on the protested
assessment, Section 228 of the NIRC provided
two options for the taxpayer: (1) appeal to the
CTA within thirty (30) days from the lapse of the
one hundred eighty (180)-day period, or (2) wait
until the Commissioner decides on his protest
before he elevates the case.
The CIR moved for reconsideration. It argued that
in declaring the subject assessment as final,
executory and demandable, it did so pursuant to
Section 3 (3.1.5) of Revenue Regulations No. 1299 dated September 6, 1999 which reads, thus:
If the Commissioner or his duly
authorized representative fails to
act on the taxpayer's protest within
one hundred eighty (180) days
from date of submission, by the
taxpayer,
of
the
required

documents in support of his

protest, the taxpayer may appeal
to the Court of Tax Appeals within
thirty (30) days from the lapse of
the said 180-day period; otherwise,
the assessment shall become final,
executory and demandable.
On March 3, 2000, the CTA denied the CIR's
motion for reconsideration for lack of merit. [8] The
CTA held that Revenue Regulations No. 12-99
must conform to Section 228 of the NIRC. It
pointed out that the former spoke of an
assessment becoming final, executory and
demandable by reason of the inaction by the
Commissioner, while the latter referred to
decisions
becoming
final,
executory
and
demandable should the taxpayer adversely
affected by the decision fail to appeal before the
CTA within the prescribed period. Finally, it
emphasized that in cases of discrepancy, Section
228 of the NIRC must prevail over the revenue
regulations.
Dissatisfied, the CIR filed an appeal before the
CA.[9]
In the disputed Decision dated October 25, 2005,
the Court of Appeals granted the CIR's petition
and set aside the Decision dated January 4,
2000 of the CTA and its Resolution dated March
3, 2000.It further declared that the subject
Assessment
Notice
No.
0000047-93-407
dated March 27, 1998 as final, executory and
demandable.
Lascona moved for reconsideration, but was
denied for lack of merit.
Thus, the instant petition, raising the following
issues:
I

THE HONORABLE COURT HAS, IN

THE REVISED RULES OF COURT OF
TAX APPEALS WHICH IT RECENTLY
PROMULGATED, RULED THAT AN
APPEAL FROM THE INACTION OF
RESPONDENT COMMISSIONER IS
NOT MANDATORY.
II
THE COURT OF APPEALS SERIOUSLY
ERRED WHEN IT HELD THAT THE
ASSESSMENT HAS BECOME FINAL
AND
DEMANDABLE
BECAUSE,
ALLEGEDLY, THE WORD DECISION
IN THE LAST PARAGRAPH OF
SECTION 228 CANNOT BE STRICTLY

CONSTRUED AS REFERRING ONLY

TO THE DECISION PER SE OF THE
COMMISSIONER, BUT SHOULD ALSO
BE
CONSIDERED
SYNONYMOUS
WITH AN ASSESSMENT WHICH HAS
BEEN
PROTESTED,
BUT
THE
PROTEST ON WHICH HAS NOT BEEN
ACTED
UPON
BY
THE
COMMISSIONER.[10]
In a nutshell, the core issue to be resolved is:
Whether the subject assessment has become
final, executory and demandable due to the
failure of petitioner to file an appeal before the
CTA within thirty (30) days from the lapse of the
One Hundred Eighty (180)-day period pursuant to
Section 228 of the NIRC.
Petitioner Lascona, invoking Section 3,
Rule 4 of the Revised Rules of the Court of Tax
Appeals, maintains that in case of inaction by the
CIR on the protested assessment, it has the
option to either: (1) appeal to the CTA within 30
days from the lapse of the 180-day period; or (2)
await the final decision of the Commissioner on
the disputed assessment even beyond the 180day period in which case, the taxpayer may
appeal such final decision within 30 days from the
receipt of the said decision. Corollarily, petitioner
posits that when the Commissioner failed to act
on its protest within the 180-day period, it had
the option to await for the final decision of the
Commissioner on the protest, which it did.
The petition is meritorious.
[11]

Section 228 of the NIRC is instructional as to the

remedies of a taxpayer in case of the inaction of
the Commissioner on the protested assessment,
to wit:
SEC. 228. Protesting of
Assessment. x x x
xxxx
Within a period to be
prescribed by implementing rules
and regulations, the taxpayer shall
be required to respond to said
notice. If the taxpayer fails to
respond, the Commissioner or his
duly
authorized
representative
shall issue an assessment based on
his findings.
Such assessment may be protested
administratively by filing a request for
reconsideration
or
reinvestigation
within thirty (30) days from receipt of
the assessment in such form and
manner as may be prescribed by
implementing rules and regulations.

Within sixty (60) days from

filing of the protest, all relevant
supporting documents shall have
been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole
or in part, or is not acted upon
within one hundred eighty (180)
days
from
submission
of
documents,
the
taxpayer
adversely affected by the decision
or inaction may appeal to the
Court of Tax Appeals within (30)
days from receipt of the said
decision, or from the lapse of the
one hundred eighty (180)-day
period; otherwise the decision
shall become final, executory and
demandable. (Emphasis supplied).
Respondent, however, insists that in case of the
inaction by the Commissioner on the protested
assessment within the 180-day reglementary
period, petitioner should have appealed the
inaction to the CTA. Respondent maintains that
due to Lascona's failure to file an appeal with the
CTA after the lapse of the 180-day period, the
assessment became final and executory.
We do not agree.
In RCBC v. CIR,[12] the Court has held that in case
the Commissioner failed to act on the disputed
assessment within the 180-day period from date
of submission of documents, a taxpayer can
either: (1) file a petition for review with the Court
of Tax Appeals within 30 days after the expiration
of the 180-day period; or (2) await the final
decision of the Commissioner on the disputed
assessments and appeal such final decision to the
Court of Tax Appeals within 30 days after receipt
of a copy of such decision.[13]
This is consistent with Section 3 A (2), Rule 4 of
the Revised Rules of the Court of Tax Appeals,
[14]
to wit:

SEC. 3. Cases within the

jurisdiction
of
the
Court
in
Divisions. The Court in Divisions
shall exercise:
(a) Exclusive original or
appellate jurisdiction to review by
appeal the following:

(1) Decisions of the

Commissioner
of
Internal Revenue in
cases
involving
disputed
assessments,
refunds of internal
revenue taxes, fees
or other charges,
penalties in relation
thereto,
or
other
matters
arising
under the National
Internal
Revenue
Code or other laws
administered by the
Bureau of Internal
Revenue;
(2) Inaction by the
Commissioner
of
Internal Revenue in
cases
involving
disputed
assessments,
refunds of internal
revenue taxes, fees
or other charges,
penalties in relation
thereto,
or
other
matters
arising
under the National
Internal
Revenue
Code or other laws
administered by the
Bureau of Internal
Revenue, where the
National
Internal
Revenue Code or
other applicable law
provides a specific
period
for
action: Provided,
that in case of
disputed
assessments, the
inaction
of
the
Commissioner
of
Internal Revenue
within
the
one
hundred
eighty
day-period under
Section 228 of the
National
Internal
revenue Code shall
be
deemed
a
denial
for
purposes
of
allowing
the
taxpayer to appeal
his case to the

Court and does

not
necessarily
constitute a formal
decision
of
the
Commissioner
of
Internal Revenue
on the tax case;
Provided, further,
that should the
taxpayer opt to
await
the
final
decision
of
the
Commissioner
of
Internal Revenue
on the disputed
assessments
beyond the one
hundred
eighty
day-period
abovementioned,
the taxpayer may
appeal such final
decision
to
the
Court
under Section 3(a),
Rule 8 of these
Rules; and Provided,
still further, that in
the case of claims for
refund
of
taxes
erroneously
or
illegally
collected,
the taxpayer must
file a petition for
review with the Court
prior
to
the
expiration of the twoyear period under
Section 229 of the
National
Internal
Revenue Code;
(Emphasis ours)
In arguing that the assessment became final and
executory by the sole reason that petitioner failed
to appeal the inaction of the Commissioner within
30 days after the 180-day reglementary period,
respondent, in effect, limited the remedy of
Lascona, as a taxpayer, under Section 228 of the
NIRC to just one, that is - to appeal the inaction of
the Commissioner on its protested assessment
after the lapse of the 180-day period. This is
incorrect.
As early as the case of CIR v. Villa,[15] it was
already established that the word "decisions" in
paragraph 1, Section 7 of Republic Act No. 1125,
quoted above, has been interpreted to mean
thedecisions of the Commissioner of Internal
Revenue on the protest of the taxpayer against

the assessments. Definitely, said word does not

signify the assessment itself. We quote what this
Court said aptly in a previous case:
In the first place, we believe
the respondent court erred in
holding that the assessment in
question
is
the
respondent
Collector's
decision
or
ruling
appealable
to
it,
and
that
consequently, the period of thirty
days prescribed by section 11 of
Republic Act No. 1125 within which
petitioner should have appealed to
the respondent court must be
counted from its receipt of said
assessment. Where a taxpayer
questions an assessment and
asks the Collector to reconsider
or cancel the same because he
(the taxpayer) believes he is
not
liable
therefor,
the
assessment
becomes
a
"disputed assessment" that the
Collector must decide, and the
taxpayer can appeal to the
Court of Tax Appeals only upon
receipt of the decision of the
Collector
on
the
disputed
assessment, . . . [16]
Therefore, as in Section 228, when the law
provided for the remedy to appeal the inaction of
the CIR, it did not intend to limit it to a single
remedy of filing of an appeal after the lapse of
the 180-day prescribed period. Precisely, when a
taxpayer protested an assessment, he naturally
expects the CIR to decide either positively or
negatively. A taxpayer cannot be prejudiced if he
chooses to wait for the final decision of the CIR on
the protested assessment. More so, because the
law and jurisprudence have always contemplated
a scenario where the CIR will decide on the
protested assessment.
It must be emphasized, however, that in case of
the inaction of the CIR on the protested
assessment, while we reiterate the taxpayer
has two options, either: (1) file a petition for
review with the CTA within 30 days after the
expiration of the 180-day period; or (2) await the
final decision of the Commissioner on the
disputed assessment and appeal such final
decision to the CTA within 30 days after the
receipt of a copy of such decision, these options
are mutually exclusive and resort to one
bars the application of the other.
Accordingly, considering that Lascona opted to
await the final decision of the Commissioner on

the protested assessment, it then has the right to

appeal such final decision to the Court by filing a
petition for review within thirty days after receipt
of a copy of such decision or ruling, even after
the expiration of the 180-day period fixed by law
for the Commissioner of Internal Revenue to act
on the disputed assessments.[17] Thus, Lascona,
when it filed an appeal on April 12, 1999 before
the
CTA,
after
its
receipt
of
the
Letter[18] dated March 3, 1999 on March 12, 1999,
the appeal was timely made as it was filed within
30 days after receipt of the copy of the decision.
Finally, the CIR should be reminded that
taxpayers cannot be left in quandary by its
inaction on the protested assessment. It is
imperative that the taxpayers are informed of its
action in order that the taxpayer should then at
least be able to take recourse to the tax court at
the opportune time. As correctly pointed out by
the tax court:
x x x to adopt the interpretation of
the respondent will not only
sanction inefficiency, but will
likewise condone the Bureau's
inaction. This is especially true in
the instant case when despite the
fact
that
respondent
found
petitioner's arguments to be in
order, the assessment will become
final, executory and demandable
for petitioner's failure to appeal
before us within the thirty (30) day
period.[19]

SO ORDERED.

EN BANC
RENATO V. DIAZ and G.R. No. 193007
AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

x ------------------------------------------------- x
DECISION
ABAD, J.:
May toll fees collected by tollway operators be
subjected to value- added tax?
The Facts and the Case

Taxes are the lifeblood of the government and so

should
be
collected
without
unnecessary
hindrance. On the other hand, such collection
should be made in accordance with law as any
arbitrariness will negate the very reason for
government itself. It is therefore necessary to
reconcile the apparently conflicting interests of
the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the
common good, may be achieved.[20] Thus, even as
we concede the inevitability and indispensability
of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in
accordance with the prescribed procedure. [21]
WHEREFORE, the petition is GRANTED. The
Decision dated October 25, 2005 and the
Resolution dated January 20, 2006 of the Court
of
Appeals
in
CA-G.R.
SP
No.
58061
areREVERSED and SET
ASIDE. Accordingly,
the Decision dated January 4, 2000 of the Court
of Tax Appeals in C.T.A. Case No. 5777 and its
Resolution
dated
March
3,
2000
areREINSTATED.

Petitioners Renato V. Diaz and Aurora Ma.

F. Timbol (petitioners) filed this petition for
declaratory relief[1] assailing the validity of the
impending imposition of value-added tax (VAT) by
the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would
result in increased toll fees, they have an interest
as regular users of tollways in stopping the BIR
action. Additionally,
Diaz
claims
that
he
sponsored the approval of Republic Act 7716 (the
1994 Expanded VAT Law or EVAT Law) and
Republic Act 8424 (the 1997 National Internal
Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand,
claims that she served as Assistant Secretary of
the Department of Trade and Industry and
consultant of the Toll Regulatory Board (TRB) in
the past administration.
Petitioners allege that the BIR attempted
during the administration of President Gloria

Macapagal-Arroyo to impose VAT on toll fees. The

imposition was deferred, however, in view of the
consistent opposition of Diaz and other sectors to
such move. But, upon President Benigno C.
Aquino IIIs assumption of office in 2010, the BIR
revived the idea and would impose the
challenged tax on toll fees beginning August 16,
2010 unless judicially enjoined.
Petitioners hold the view that Congress did
not, when it enacted the NIRC, intend to include
toll fees within the meaning of sale of services
that are subject to VAT; that a toll fee is a users
tax, not a sale of services; that to impose VAT on
toll fees would amount to a tax on public service;
and that, since VAT was never factored into the
formula for computing toll fees, its imposition
would violate the non-impairment clause of the
constitution.
On August 13, 2010 the Court issued a
temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required
the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of
Finance,
and
Kim
S.
Jacinto-Henares,
Commissioner of Internal Revenue, to comment
on the petition within 10 days from notice.
[2]
Later, the Court issued another resolution
treating the petition as one for prohibition. [3]
On August 23, 2010 the Office of the Solicitor
General filed the governments comment.[4] The
government avers that the NIRC imposes VAT on
all kinds of services of franchise grantees,
including tollway operations, except where the
law provides otherwise; that the Court should
seek the meaning and intent of the law from the
words used in the statute; and that the imposition
of VAT on tollway operations has been the subject
as early as 2003 of several BIR rulings and
circulars.[5]
The
government
also
argues
that
petitioners have no right to invoke the nonimpairment of contracts clause since they clearly
have no personal interest in existing toll
operating agreements (TOAs) between the
government and tollway operators. At any rate,
the non-impairment clause cannot limit the
States sovereign taxing power which is generally
read into contracts.
Finally, the government contends that the noninclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway
operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a
reasonable rate of return will be impaired by the
VAT since this is imposed on top of the toll
rate. Further, the imposition of VAT on toll fees

would have very minimal effect on motorists

using the tollways.
In their reply[6] to the governments
comment, petitioners point out that tollway
operators cannot be regarded as franchise
grantees under the NIRC since they do not hold
legislative franchises.Further, the BIR intends to
collect the VAT by rounding off the toll rate and
putting any excess collection in an escrow
account. But this would be illegal since only the
Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum
Circular 63-2010 (BIR RMC 63-2010), which
directs toll companies to record an accumulated
input VAT of zero balance in their books as of
August 16, 2010, contravenes Section 111 of the
NIRC which grants entities that first become liable
to VAT a transitional input tax credit of 2% on
beginning inventory. For this reason, the VAT on
toll fees cannot be implemented.

The Issues Presented

The case presents two procedural issues:
1. Whether or not the Court may treat the
petition for declaratory relief as one for
prohibition; and
2. Whether or not petitioners Diaz and
Timbol have legal standing to file the action.
issues:

The case also presents two substantive

1. Whether or not the government is

unlawfully expanding VAT coverage by including
tollway operators and tollway operations in the
terms franchise grantees and sale of services
under Section 108 of the Code; and
2. Whether or not the imposition of VAT on
tollway operators a) amounts to a tax on tax and
not a tax on services; b) will impair the tollway
operators right to a reasonable return of
investment under their TOAs; and c) is not
administratively
feasible
and
cannot
be
implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a
resolution, treating the petition as one for

prohibition rather than one for declaratory relief,

the characterization that petitioners Diaz and
Timbol gave their action. The government has
sought reconsideration of the Courts resolution,
[7]
however, arguing that petitioners allegations
clearly made out a case for declaratory relief, an
action over which the Court has no original
jurisdiction. The government adds, moreover,
that the petition does not meet the requirements
of Rule 65 for actions for prohibition since the BIR
did not exercise judicial, quasi-judicial, or
ministerial functions when it sought to impose
VAT on toll fees. Besides, petitioners Diaz and
Timbol has a plain, speedy, and adequate remedy
in the ordinary course of law against the BIR
action in the form of an appeal to the Secretary of
Finance.
But there are precedents for treating a petition
for declaratory relief as one for prohibition if the
case has far-reaching implications and raises
questions that need to be resolved for the public
good.[8]The Court has also held that a petition for
prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to
usurpation of legislative authority. [9]
Here, the imposition of VAT on toll fees has
far-reaching implications. Its imposition would
impact, not only on the more than half a million
motorists who use the tollways everyday, but
more so on the governments effort to raise
revenue for funding various projects and for
reducing budgetary deficits.
To dismiss the petition and resolve the
issues later, after the challenged VAT has been
imposed, could cause more mischief both to the
tax-paying public and the government. A belated
declaration of nullity of the BIR action would
make any attempt to refund to the motorists
what they paid an administrative nightmare with
no solution. Consequently, it is not only the right,
but the duty of the Court to take cognizance of
and resolve the issues that the petition raises.
Although the petition does not strictly
comply with the requirements of Rule 65, the
Court has ample power to waive such technical
requirements when the legal questions to be
resolved are of great importance to the public.
The same may be said of the requirement
of locus standi which is a mere procedural
requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is
Section 108 of the NIRC, as amended. VAT is
levied, assessed, and collected, according to
Section 108, on the gross receipts derived from

the sale or exchange of services as well as from

the use or lease of properties. The third
paragraph of Section 108 defines sale or
exchange of services as follows:
The
phrase
sale
or
exchange of services means
the performance of all kinds of
services in the Philippines 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
property, whether personal or
real;
warehousing
services;
lessors
or
distributors
of
cinematographic films; persons
engaged in milling, processing,
manufacturing or repacking
goods for others; proprietors,
operators or keepers of hotels,
motels, resthouses, pension
houses,
inns,
resorts;
proprietors or operators of
restaurants,
refreshment
parlors, cafes and other eating
places, including clubs and
caterers; dealers in securities;
lending
investors;
transportation contractors on
their transport of goods or
cargoes, including persons who
transport goods or cargoes for
hire
and
other
domestic
common
carriers
by
land
relative to their transport of
goods or cargoes; common
carriers by air and sea relative
to
their
transport
of
passengers, goods or cargoes
from
one
place
in
the
Philippines to another place in
the
Philippines;
sales
of
electricity
by
generation
companies, transmission, and
distribution
companies; services
of
franchise grantees of electric
utilities,
telephone
and
telegraph, radio and television
broadcasting and all other
franchise
grantees
except
those under Section 119 of this
Code and non-life insurance
companies (except their crop
insurances), including surety,
fidelity, indemnity and bonding
companies;
and
similar

services regardless of whether

or not the performance thereof
calls for the exercise or use of
the
physical
or
mental
faculties. (Underscoring supplied)
It is plain from the above that the law
imposes VAT on all kinds of services rendered in
the Philippines for a fee, including those specified
in the list. The enumeration of affected services is
not exclusive.[11] By qualifying services with the
words all kinds, Congress has given the term
services an all-encompassing meaning. The
listing of specific services are intended to
illustrate how pervasive and broad is the VATs
reach rather than establish concrete limits to its
application. Thus, every activity that can be
imagined as a form of service rendered for a fee
should be deemed included unless some
provision of law especially excludes it.
Now, do tollway operators render services for a
fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for
the
services
that
tollway
operators
render. Essentially, tollway operators construct,
maintain, and operate expressways, also called
tollways, at the operators expense. Tollways
serve as alternatives to regular public highways
that meander through populated areas and
branch out to local roads. Traffic in the regular
public highways is for this reason slow-moving. In
consideration for constructing tollways at their
expense, the operators are allowed to collect
government-approved fees from motorists using
the tollways until such operators could fully
recover their expenses and earn reasonable
returns from their investments.
When a tollway operator takes a toll fee from a
motorist, the fee is in effect for the latters use of
the tollway facilities over which the operator
enjoys private proprietary rights[12] that its
contract and the law recognize. In this sense, the
tollway operator is no different from the following
service providers under Section 108 who allow
others to use their properties or facilities for a
fee:
1. Lessors
of
property,
whether personal or real;
2. Warehousing
service
operators;
3. Lessors or distributors of
cinematographic films;
4. Proprietors, operators or
keepers
of
hotels,
motels,
resthouses, pension houses, inns,
resorts;
5. Lending investors (for use
of money);

6. Transportation
contractors on their transport of
goods
or
cargoes,
including
persons who transport goods or
cargoes for hire and other domestic
common carriers by land relative to
their transport of goods or cargoes;
and
7. Common carriers by air
and sea relative to their transport
of passengers, goods or cargoes
from one place in the Philippines to
another place in the Philippines.
It does not help petitioners cause that
Section 108 subjects to VAT all kinds of services
rendered for a fee regardless of whether or not
the performance thereof calls for the exercise or
use of the physical or mental faculties. This
means that services to be subject to VAT need
not fall under the traditional concept of services,
the personal or professional kinds that require the
use of human knowledge and skills.
And not only do tollway operators come under
the broad term all kinds of services, they also
come under the specific class described in
Section 108 as all other franchise grantees who
are subject to VAT, except those under Section
119 of this Code.
Tollway operators are franchise grantees
and they do not belong to exceptions (the lowincome radio and/or television broadcasting
companies with gross annual incomes of less
than P10 million and gas and water utilities) that
Section 119[13] spares from the payment of
VAT. The
word
franchise
broadly
covers
government grants of a special right to do an act
or series of acts of public concern.[14]
Petitioners of course contend that tollway
operators cannot be considered franchise
grantees under Section 108 since they do not
hold legislative franchises. But nothing in Section
108 indicates that the franchise grantees it
speaks of are those who hold legislative
franchises. Petitioners give no reason, and the
Court cannot surmise any, for making a
distinction between franchises granted by
Congress and franchises granted by some other
government
agency. The
latter,
properly
constituted, may grant franchises. Indeed,
franchises conferred or granted by local
authorities, as agents of the state, constitute as
much a legislative franchise as though the grant
had been made by Congress itself. [15] The term
franchise has been broadly construed as
referring, not only to authorizations that Congress
directly issues in the form of a special law, but
also to those granted by administrative agencies

to which the power to grant franchises has been

delegated by Congress.[16]
Tollway operators are, owing to the nature
and object of their business, franchise grantees.
The construction, operation, and maintenance of
toll facilities on public improvements are
activities of public consequence that necessarily
require a special grant of authority from the
state. Indeed, Congress granted special franchise
for the operation of tollways to the Philippine
National Construction Company, the former
tollway concessionaire for the North and South
Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB,
pursuant to the exercise of its delegated powers
under P.D. 1112.[17] The franchise in this case is
evidenced by a Toll Operation Certificate.[18]
Petitioners contend that the public nature
of the services rendered by tollway operators
excludes such services from the term sale of
services under Section 108 of the Code. But,
again, nothing in Section 108 supports this
contention. The reverse is true. In specifically
including by way of example electric utilities,
telephone,
telegraph,
and
broadcasting
companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering
public service for a fee to the imposition of
VAT. Businesses of a public nature such as public
utilities and the collection of tolls or charges for
its use or service is a franchise.[19]
Nor can petitioners cite as binding on the
Court statements made by certain lawmakers in
the course of congressional deliberations of the
would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,
[20]
statements made by individual members of
Congress in the consideration of a bill do not
necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation
of law. The congressional will is ultimately
determined by the language of the law that the
lawmakers voted on. Consequently, the meaning
and intention of the law must first be sought in
the words of the statute itself, read and
considered in their natural, ordinary, commonly
accepted and most obvious significations,
according to good and approved usage and
without resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a
users tax and to impose VAT on toll fees is
tantamount
to
taxing
a
tax.[21] Actually,
petitioners base this argument on the following
discussion inManila International Airport Authority
(MIAA) v. Court of Appeals:[22]

No one can dispute that

properties of public dominion
mentioned in Article 420 of the
Civil Code, like roads, canals,
rivers, torrents, ports and
bridges constructed by the
State, are owned by the State.
The
term
ports
includes
seaports
and
airports.
The MIAA Airport Lands and
Buildings constitute a port
constructed
by
the
State.
Under Article 420 of the Civil
Code,
the MIAA Airport Landsand
Buildings are properties of
public
dominion
and
thus
owned by the State or the
Republic of the Philippines.
x x x The operation by
the government of a tollway
does not change the character
of the road as one for public
use. Someone must pay for the
maintenance
of
the
road,
either the public indirectly
through the taxes they pay the
government, or only those
among the public who actually
use the road through the toll
fees they pay upon using the
road. The tollway system is
even a more efficient and
equitable manner of taxing the
public for the maintenance of
public roads.
The charging of fees to
the public does not determine
the character of the property
whether
it
is
for
public
dominion or not. Article 420 of
the Civil Code defines property
of public dominion as one
intended for public use. Even if
the government collects toll
fees, the road is still intended
for public use if anyone can use
the road under the same terms
and conditions as the rest of
the public. The charging of
fees, the limitation on the kind
of vehicles that can use the
road, the speed restrictions
and other conditions for the
use of the road do not affect
the public character of the
road.

The terminal fees MIAA

charges to passengers, as well
as the landing fees MIAA
charges to airlines, constitute
the bulk of the income that
maintains the operations of
MIAA. The collection of such
fees does not change the
character of MIAA as an airport
for public use. Such fees are
often termed users tax. This
means taxing those among the
public who actually use a
public facility instead of taxing
all the public including those
who never use the particular
public facility. A users tax is
more equitable a principle of
taxation mandated in the 1987
Constitution.[23] (Underscoring
supplied)
Petitioners assume that what the Court
said above, equating terminal fees to a users tax
must also pertain to tollway fees. But the main
issue
in
the MIAA case
was whether or
not Paraaque Citycould sell airport lands and
buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since
local governments have no power to tax the
national government, the Court held that the City
could not proceed with the auction sale. MIAA
forms part of the national government although
not integrated in the department framework.
[24]
Thus, its airport lands and buildings are
properties of public dominion beyond the
commerce of man under Article 420(1)[25] of the
Civil Code and could not be sold at public auction.
As can be seen, the discussion in
the MIAA case on toll roads and toll fees was
made, not to establish a rule that tollway fees are
users tax, but to make the point that airport lands
and buildings are properties of public dominion
and that the collection of terminal fees for their
use
does
not
make
them
private
properties. Tollway fees are not taxes. Indeed,
they are not assessed and collected by the BIR
and do not go to the general coffers of the
government.
It would of course be another matter if
Congress enacts a law imposing a users tax,
collectible from motorists, for the construction
and maintenance of certain roadways. The tax in
such a case goes directly to the government for
the replenishment of resources it spends for the
roadways. This is not the case here. What the
government seeks to tax here are fees collected
from tollways that are constructed, maintained,
and operated by private tollway operators at their
own expense under the build, operate, and

transfer scheme that the government has

adopted for expressways.[26]Except for a fraction
given to the government, the toll fees essentially
end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway
operators for use of the tollways, are not taxes in
any sense. A tax is imposed under the taxing
power of the government principally for the
purpose of raising revenues to fund public
expenditures.[27] Toll fees, on the other hand, are
collected by private tollway operators as
reimbursement for the costs and expenses
incurred in the construction, maintenance and
operation of the tollways, as well as to assure
them a reasonable margin of income. Although
toll fees are charged for the use of public
facilities, therefore, they are not government
exactions that can be properly treated as a
tax. Taxes may be imposed only by the
government under its sovereign authority, toll
fees may be demanded by either the government
or private individuals or entities, as an attribute
of ownership.[28]
Parenthetically, VAT on tollway operations cannot
be deemed a tax on tax due to the nature of VAT
as an indirect tax. In indirect taxation, a
distinction is made between the liability for the
tax and burden of the tax. The seller who is liable
for the VAT may shift or pass on the amount of
VAT it paid on goods, properties or services to the
buyer. In such a case, what is transferred is not
the sellers liability but merely the burden of the
VAT.[29]
Thus, the seller remains directly and
legally liable for payment of the VAT, but the
buyer bears its burden since the amount of VAT
paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax [30] and
simply becomes part of the cost that the buyer
must pay in order to purchase the good, property
or service.
Consequently, VAT on tollway operations is
not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the
Code, [31] VAT is imposed on any person who, in
the course of trade or business, sells or renders
services for a fee. In other words, the seller of
services, who in this case is the tollway operator,
is the person liable for VAT. The latter merely
shifts the burden of VAT to the tollway user as
part of the toll fees.
For this reason, VAT on tollway operations
cannot be a tax on tax even if toll fees were
deemed as a users tax. VAT is assessed against
the tollway operators gross receipts and not
necessarily on the toll fees. Although the tollway
operator may shift the VAT burden to the tollway

user, it will not make the latter directly liable for

the VAT. The shifted VAT burden simply becomes
part of the toll fees that one has to pay in order
to use the tollways.[32]
Three. Petitioner Timbol has no personality to
invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects.
She will neither be prejudiced by nor be affected
by the alleged diminution in return of
investments that may result from the VAT
imposition. She has no interest at all in the profits
to be earned under the TOAs. The interest in and
right to recover investments solely belongs to the
private tollway investors.
Besides, her allegation that the private
investors rate of recovery will be adversely
affected by imposing VAT on tollway operations is
purely speculative. Equally presumptuous is her
assertion that a stipulation in the TOAs known as
the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court
cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on
uncertain, prophetic grounds.
Four. Finally, petitioners assert that the
substantiation requirements for claiming input
VAT make the VAT on tollway operations
impractical and incapable of implementation.
They cite the fact that, in order to claim input
VAT, the name, address and tax identification
number of the tollway user must be indicated in
the VAT receipt or invoice. The manner by which
the BIR intends to implement the VAT by rounding
off the toll rate and putting any excess collection
in an escrow account is also illegal, while the
alternative of giving change to thousands of
motorists in order to meet the exact toll rate
would be a logistical nightmare. Thus, according
to them, the VAT on tollway operations is not
administratively feasible.[33]
Administrative feasibility is one of the
canons of a sound tax system. It simply means
that the tax system should be capable of being
effectively administered and enforced with the
least inconvenience to the taxpayer. Nonobservance of the canon, however, will not render
a tax imposition invalid except to the extent that
specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on
tollway operations may seem burdensome to
implement, it is not necessarily invalid unless
some aspect of it is shown to violate any law or
the Constitution.
Here, it remains to be seen how the taxing
authority will actually implement the VAT on

tollway operations. Any declaration by the Court

that the manner of its implementation is illegal or
unconstitutional would be premature. Although
the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR
intends to go about it,[35] the facts pertaining to
the matter are not sufficiently established for the
Court to pass judgment on. Besides, any concern
about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on
whom the task of implementing tax laws
primarily and exclusively rests. The Court cannot
preempt the BIRs discretion on the matter,
absent any clear violation of law or the
Constitution.
For the same reason, the Court cannot
prematurely declare as illegal, BIR RMC 63-2010
which directs toll companies to record an
accumulated input VAT of zero balance in their
books as of August 16, 2010, the date when the
VAT imposition was supposed to take effect. The
issuance allegedly violates Section 111(A) [36] of
the Code which grants first time VAT payers a
transitional input VAT of 2% on beginning
inventory.
In this connection, the BIR explained that
BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have
been assessed VAT as early as 2005, but failed to
charge VAT-inclusive toll fees which by now can
no longer be collected. The tollway operators
agreed to waive the 2% transitional input VAT, in
exchange for cancellation of their past due VAT
liabilities. Notably, the right to claim the 2%
transitional input VAT belongs to the tollway
operators who have not questioned the circulars
validity. They are thus the ones who have a right
to challenge the circular in a direct and proper
action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal
Revenue did not usurp legislative prerogative or
expand the VAT laws coverage when she sought
to impose VAT on tollway operations. Section
108(A) of the Code clearly states that services of
all other franchise grantees are subject to VAT,
except as may be provided under Section 119 of
the Code. Tollway operators are not among the
franchise grantees subject to franchise tax under
the latter provision. Neither are their services
among the VAT-exempt transactions under
Section 109 of the Code.
If the legislative intent was to exempt
tollway operations from VAT, as petitioners so
strongly allege, then it would have been well for
the law to clearly say so. Tax exemptions must be

justified by clear statutory grant and based on

language in the law too plain to be mistaken.
[37]
But as the law is written, no such exemption
obtains for tollway operators. The Court is thus
duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a
matter of legislative policy that is within the
exclusive prerogative of Congress. The Courts
role is to merely uphold this legislative policy, as
reflected first and foremost in the language of the
tax statute. Thus, any unwarranted burden that
may be perceived to result from enforcing such
policy must be properly referred to Congress. The
Court has no discretion on the matter but simply
applies the law.
The VAT on franchise grantees has been in
the statute books since 1994 when R.A. 7716 or
the Expanded Value-Added Tax law was passed. It
is only now, however, that the executive has
earnestly pursued the VAT imposition against
tollway
operators. The
executive
exercises
exclusive discretion in matters pertaining to the
implementation
and
execution
of
tax
laws. Consequently, the executive is more
properly suited to deal with the immediate and
practical consequences of the VAT imposition.
WHEREFORE,
the
Court DENIES respondents Secretary of Finance
and Commissioner of Internal Revenues motion
for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V.
Diaz and Aurora Ma. F. Timbols petition for lack of
merit, and SETS ASIDE the Courts temporary
restraining order dated August 13, 2010.
SO ORDERED.

EN BANC
G.R. No. 204429

February 18, 2014

SMART COMMUNICATIONS, INC., Petitioner,

vs.
MUNICIPALITY
OF
MALVAR,
BATANGAS, Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 challenges the 26 June
2012
Decision2 and
13
November
2012
Resolution3 of the Court of Tax. Appeals (CTA) En
Banc.
Th e CTA En Banc affirmed the 17 December
2010 Decision4 and 7 April 2011 Resolution5 of
the CTA First Division, which in turn affirmed the 2
December 2008 Decision6 and 21 May 2009
Order7 of the Regional Trial Court of Tanauan City,
Batangas, Branch 6. The trial court declared void
the
assessment
imposed
by
respondent
Municipality
of
Malvar,
Batangas
against
petitioner Smart Communications, Inc. for its
telecommunications tower for 2001 to July 2003
and directed respondent to assess petitioner only
for the period starting 1 October 2003.
The Facts
Petitioner Smart Communications, Inc. (Smart) is
a domestic corporation engaged in the business
of providing telecommunications services to the
general public while respondent Municipality of
Malvar, Batangas (Municipality) is a local
government unit created by law.
In the course of its business, Smart constructed a
telecommunications tower within the territorial
jurisdiction of the Municipality. The construction
of the tower was for the purpose of receiving and
transmitting cellular communications within the
covered area.

On 30 July 2003, the Municipality passed

Ordinance No. 18, series of 2003, entitled "An
Ordinance Regulating the Establishment of
Special Projects."
On 24 August 2004, Smart received from the
Permit and Licensing Division of the Office of the
Mayor of the Municipality an assessment letter
with a schedule of payment for the total amount
of P389,950.00 for Smarts telecommunications
tower. The letter reads as follows:
This is to formally submit to your good office your
schedule of payments in the Municipal Treasury of
the Local Government Unit of Malvar, province of
Batangas which corresponds to the tower of your
company built in the premises of the
municipality, to wit:
TOTAL
COST:

PROJECT PHP
11,000,000.00

For the Year 20012003

50% of 1% of the Php55,000.00
total project cost
Add:
surcharge

45% 24,750.00
Php79,750.00

Multiply by 3 yrs. (2001, 2002, Php239,250.

2003)
00
For the year 2004
1% of the
project cost

total Php110,000.0
0

37% surcharge

40,700.00
========
==

In a letter dated 28 September 2004, the

Municipality denied Smarts protest.
On 17 November 2004, Smart filed with Regional
Trial Court of Tanauan City, Batangas, Branch 6,
an "Appeal/Petition" assailing the validity of
Ordinance No. 18. The case was docketed as SP
Civil Case No. 04-11-1920.
On 2 December 2008, the trial court rendered a
Decision partly granting Smarts Appeal/Petition.
The trial court confined its resolution of the case
to the validity of the assessment, and did not rule
on the legality of Ordinance No. 18. The trial
court held that the assessment covering the
period from 2001 to July 2003 was void since
Ordinance No. 18 was approved only on 30 July
2003. However, the trial court declared valid the
assessment starting 1 October 2003, citing Article
4 of the Civil Code of the Philippines, 9 in relation
to the provisions of Ordinance No. 18 and Section
166 of Republic Act No. 7160 or the Local
Government
Code
of
1991
(LGC).10 The
dispositive portion of the trial courts Decision
reads:
WHEREFORE, in light of the foregoing, the Petition
is partly GRANTED. The assessment dated August
24, 2004 against petitioner is hereby declared
null and void insofar as the assessment made
from year 2001 to July 2003 and respondent is
hereby prohibited from assessing and collecting,
from petitioner, fees during the said period and
the Municipal Government of Malvar, Batangas is
directed to assess Smart Communications, Inc.
only for the period starting October 1, 2003.
No costs.

Php150,700.
00
TOTAL

Ordinance No. 18 on which the assessment was

based.

Php389,950.
00

Hoping that you will give this matter your

preferential attention.8
Due to the alleged arrears in the payment of the
assessment, the Municipality also caused the
posting
of
a
closure
notice
on
the
telecommunications tower.
On 9 September 2004, Smart filed a protest,
claiming lack of due process in the issuance of
the assessment and closure notice. In the same
protest, Smart challenged the validity of

SO ORDERED.11
The trial court denied the motion
reconsideration in its Order of 21 May 2009.

for

On 8 July 2009, Smart filed a petition for review

with the CTA First Division, docketed as CTA AC
No. 58.
On 17 December 2010, the CTA First Division
denied the petition for review. The dispositive
portion of the decision reads:
WHEREFORE, the Petition for Review is hereby
DENIED, for lack of merit. Accordingly, the
assailed Decision dated December 2, 2008 and
the Order dated May 21, 2009 of Branch 6 of the

Regional Trial Court of Tanauan City, Batangas in

SP. Civil Case No. 04-11-1920 entitled "Smart
Communications, Inc. vs. Municipality of Malvar,
Batangas" are AFFIRMED.
SO ORDERED.12
On 7 April 2011, the CTA First Division issued a
Resolution
denying
the
motion
for
reconsideration.
Smart filed a petition for review with the CTA En
Banc, which affirmed the CTA First Divisions
decision and resolution. The dispositive portion of
the CTA En Bancs 26 June 2012 decision reads:
WHEREFORE, premises considered, the present
Petition for Review is hereby DISMISSED for lack
of merit.1wphi1
Accordingly,
the
assailed
Decision
dated
December 17, 2010 and Resolution dated April 7,
2011 are hereby AFFIRMED.
SO ORDERED.13
The CTA En Banc
reconsideration.

denied

the

motion

for

Hence, this petition.

The Ruling of the CTA En Banc
The CTA En Banc dismissed the petition on the
ground of lack of jurisdiction. The CTA En Banc
declared that it is a court of special jurisdiction
and as such, it can take cognizance only of such
matters as are clearly within its jurisdiction. Citing
Section 7(a), paragraph 3, of Republic Act No.
9282, the CTA En Banc held that the CTA has
exclusive appellate jurisdiction to review on
appeal, decisions, orders or resolutions of the
Regional Trial Courts in local tax cases originally
resolved by them in the exercise of their original
or appellate jurisdiction. However, the same
provision does not confer on the CTA jurisdiction
to resolve cases where the constitutionality of a
law or rule is challenged.
The Issues
The petition raises the following arguments:
1. The [CTA En Banc Decision and
Resolution] should be reversed and set
aside for being contrary to law and
jurisprudence considering that the CTA En
Banc should have exercised its jurisdiction
and declared the Ordinance as illegal.

2. The [CTA En Banc Decision and

Resolution] should be reversed and set
aside for being contrary to law and
jurisprudence
considering
that
the
doctrine of exhaustion of administrative
remedies does not apply in [this case].
3. The [CTA En Banc Decision and
Resolution] should be reversed and set
aside for being contrary to law and
jurisprudence
considering
that
the
respondent has no authority to impose the
so-called "fees" on the basis of the void
ordinance.14
The Ruling of the Court
The Court denies the petition.
On whether the CTA has jurisdiction over the
present case
Smart contends that the CTA erred in dismissing
the case for lack of jurisdiction. Smart maintains
that the CTA has jurisdiction over the present
case
considering
the
"unique"
factual
circumstances involved.
The CTA refuses to take cognizance of this case
since it challenges the constitutionality of
Ordinance No. 18, which is outside the province
of the CTA.
Jurisdiction is conferred by law. Republic Act No.
1125, as amended by Republic Act No. 9282,
created the Court of Tax Appeals. Section 7,
paragraph (a), sub-paragraph (3)15 of the law
vests the CTA with the exclusive appellate
jurisdiction over "decisions, orders or resolutions
of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the
exercise of their original or appellate jurisdiction."
The question now is whether the trial court
resolved a local tax case in order to fall within the
ambit of the CTAs appellate jurisdiction This
question, in turn, depends ultimately on whether
the fees imposed under Ordinance No. 18 are in
fact taxes.
Smart argues that the "fees" in Ordinance No. 18
are actually taxes since they are not regulatory,
but revenue-raising. Citing Philippine Airlines, Inc.
v. Edu,16 Smart contends that the designation of
"fees" in Ordinance No. 18 is not controlling.
The Court finds that the fees imposed under
Ordinance No. 18 are not taxes.

Section 5, Article X of the 1987 Constitution

provides that "each local government unit shall
have the power to create its own sources of
revenues and 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
government."
Consistent with this constitutional mandate, the
LGC grants the taxing powers to each local
government unit. Specifically, Section 142 of the
LGC grants municipalities the power to levy
taxes, fees, and charges not otherwise levied by
provinces. Section 143 of the LGC provides for
the scale of taxes on business that may be
imposed by municipalities17 while Section 14718 of
the same law provides for the fees and charges
that may be imposed by municipalities on
business and occupation.
The LGC defines the term "charges" as referring
to pecuniary liability, as rents or fees against
persons or property, while the term "fee" means
"a charge fixed by law or ordinance for the
regulation or inspection of a business or
activity."19
In this case, the Municipality issued Ordinance
No. 18, which is entitled "An Ordinance
Regulating the Establishment of Special Projects,"
to regulate the "placing, stringing, attaching,
installing, repair and construction of all gas
mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus, and
provide for the correction, condemnation or
removal of the same when found to be
dangerous, defective or otherwise hazardous to
the welfare of the inhabitant[s]." 20 It was also
envisioned
to
address
the
foreseen
"environmental depredation" to be brought about
by
these
"special
projects"
to
the
Municipality.21 Pursuant to these objectives, the
Municipality imposed fees on various structures,
which included telecommunications towers.
As clearly stated in its whereas clauses, the
primary purpose of Ordinance No. 18 is to
regulate the "placing, stringing, attaching,
installing, repair and construction of all gas
mains, electric, telegraph and telephone wires,
conduits, meters and other apparatus" listed
therein,
which
included
Smarts
telecommunications tower. Clearly, the purpose
of the assailed Ordinance is to regulate the
enumerated activities particularly related to the
construction and maintenance of various
structures. The fees in Ordinance No. 18 are not
impositions on the building or structure itself;

rather, they are impositions on the activity

subject of government regulation, such as the
installation and construction of the structures. 22
Since the main purpose of Ordinance No. 18 is to
regulate certain construction activities of the
identified special projects, which included "cell
sites" or telecommunications towers, the fees
imposed in Ordinance No. 18 are primarily
regulatory in nature, and not primarily revenueraising. While the fees may contribute to the
revenues of the Municipality, this effect is merely
incidental. Thus, the fees imposed in Ordinance
No. 18 are not taxes.
In Progressive Development Corporation v.
Quezon City,23 the Court declared that "if the
generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the
fact that incidentally revenue is also obtained
does not make the imposition a tax."
In Victorias Milling Co., Inc. v. Municipality of
Victorias,24 the Court reiterated that the purpose
and effect of the imposition determine whether it
is a tax or a fee, and that the lack of any
standards for such imposition gives the
presumption that the same is a tax.
We accordingly say that the designation given by
the municipal authorities does not decide
whether the imposition is properly a license tax or
a license fee. The determining factors are the
purpose and effect of the imposition as may be
apparent from the provisions of the ordinance.
Thus, "[w]hen no police inspection, supervision,
or regulation is provided, nor any standard set for
the applicant to establish, or that he agrees to
attain or maintain, but any and all persons
engaged in the business designated, without
qualification or hindrance, may come, and a
license on payment of the stipulated sum will
issue, to do business, subject to no prescribed
rule of conduct and under no guardian eye, but
according to the unrestrained judgment or fancy
of the applicant and licensee, the presumption is
strong that the power of taxation, and not the
police power, is being exercised."
Contrary to Smarts contention, Ordinance No. 18
expressly provides for the standards which Smart
must satisfy prior to the issuance of the specified
permits, clearly indicating that the fees are
regulatory in nature.
These requirements are as follows:
SECTION 5. Requirements and Procedures in
Securing Preliminary Development Permit.

The following documents shall be submitted to

the SB Secretary in triplicate:

that the mayors permit fees in Ordinance No. 18

(equivalent to 1% of the project cost) are not
among those expressly enumerated in the LGC.

a) zoning clearance
b) Vicinity Map
c) Site Plan
d) Evidence of ownership
e) Certificate true copy of NTC Provisional
Authority in case of Cellsites, telephone or
telegraph line, ERB in case of gasoline
station, power plant, and other concerned
national agencies
f) Conversion order from DAR is located
within agricultural zone.
g) Radiation Protection Evaluation.
h) Written consent from subdivision
association or the residence of the area
concerned if the special projects is located
within the residential zone.
i) Barangay Council Resolution endorsing
the special projects.
SECTION 6. Requirement for Final Development
Permit Upon the expiration of 180 days and the
proponents of special projects shall apply for final
[development permit] and they are require[d] to
submit the following:
a) evaluation from the committee where
the Vice Mayor refers the special project
b) Certification that all local fees have
been paid.
Considering that the fees in Ordinance No. 18 are
not in the nature of local taxes, and Smart is
questioning the constitutionality of the ordinance,
the CTA correctly dismissed the petition for lack
of jurisdiction. Likewise, Section 187 of the
LGC,25 which
outlines
the
procedure
for
questioning the constitutionality of a tax
ordinance, is inapplicable, rendering unnecessary
the resolution of the issue on non-exhaustion of
administrative remedies.
On whether the imposition of the fees in
Ordinance No. 18 is ultra vire Smart argues that
the Municipality exceeded its power to impose
taxes and fees as provided in Book II, Title One,
Chapter 2, Article II of the LGC. Smart maintains

As discussed, the fees in Ordinance No.18 are not

taxes. Logically, the imposition does not appear
in the enumeration of taxes under Section 143 of
the LGC.
Moreover, even if the fees do not appear in
Section 143 or any other provision in the LGC, the
Municipality is empowered to impose taxes, fees
and charges, not specifically enumerated in the
LGC or taxed under the Tax Code or other
applicable law. Section 186 of the LGC, granting
local government units wide latitude in imposing
fees, expressly provides:
Section 186. Power To Levy Other Taxes, Fees or
Charges. - Local government units may exercise
the power to levy taxes, fees or charges on any
base or subject not otherwise specifically
enumerated herein or taxed under the provisions
of the National Internal Revenue Code, as
amended, or other applicable laws: Provided,
That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or
contrary to declared national policy: Provided,
further, That the ordinance levying such taxes,
fees or charges shall not be enacted without any
prior public hearing conducted for the purpose.
Smart further argues that the Municipality is
encroaching on the regulatory powers of the
National Telecommunications Commission (NTC).
Smart cites Section 5(g) of Republic Act No. 7925
which
provides
that
the
National
Telecommunications Commission (NTC), in the
exercise of its regulatory powers, shall impose
such fees and charges as may be necessary to
cover reasonable costs and expenses for the
regulation and supervision of the operations of
telecommunications entities. Thus, Smart alleges
that the regulation of telecommunications entities
and all aspects of its operations is specifically
lodged by law on the NTC.
To repeat, Ordinance No. 18 aims to regulate the
"placing, stringing, attaching, installing, repair
and construction of all gas mains, electric,
telegraph and telephone wires, conduits, meters
and other apparatus" within the Municipality. The
fees are not imposed to regulate the
administrative, technical, financial, or marketing
operations of telecommunications entities, such
as Smarts; rather, to regulate the installation and
maintenance of physical structures Smarts cell
sites or telecommunications tower. The regulation
of the installation and maintenance of such
physical structures is an exercise of the police

power
of
the
Municipality.
Clearly,
the
Municipality does not encroach on NTCs
regulatory powers.
The Court likewise rejects Smarts contention that
the power to fix the fees for the issuance of
development permits and locational clearances is
exercised by the Housing and Land Use
Regulatory Board (HLURB). Suffice it to state that
the HLURB itself recognizes the local government
units power to collect fees related to land use
and development. Significantly, the HLURB issued
locational
guidelines
governing
telecommunications
infrastructure.1wphi1 Guideline No. VI relates to
the collection of locational clearance fees either
by the HLURB or the concerned local government
unit, to wit:
VI. Fees
The Housing and Land Use Regulatory Board in
the performance of its functions shall collect the
locational clearance fee based on the revised
schedule of fees under the special use project as
per Resolution No. 622, series of 1998 or by the
concerned LGUs subject to EO 72.26
On whether Ordinance No. 18 is valid and
constitutional
Smart contends that Ordinance No. 18 violates
Sections 130(b)(3)27 and 186 of the LGC since the
fees are unjust, excessive, oppressive and
confiscatory. Aside from this bare allegation,
Smart
did
not
present
any
evidence
substantiating its claims. In Victorias Milling Co.,
Inc. v. Municipality of Victorias, 28 the Court
rejected the argument that the fees imposed by
respondent therein are excessive for lack of
evidence supporting such claim, to wit:
An ordinance carries with it the presumption of
validity. The question of reasonableness though is
open to judicial inquiry. Much should be left thus
to the discretion of municipal authorities. Courts
will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive
as to be prohibitive, arbitrary, unreasonable,
oppressive, or confiscatory. A rule which has
gained acceptance is that factors relevant to such
an inquiry are the municipal conditions as a
whole and the nature of the business made
subject to imposition.
Plaintiff, has however not sufficiently proven that,
taking these factors together, the license taxes
are unreasonable. The presumption of validity
subsists. For, plaintiff has limited itself to insisting
that the amounts levied exceed the cost of

regulation and the municipality has adequate

funds for the alleged purposes as evidenced by
the municipalitys cash surplus for the fiscal year
ending 1956.
On the constitutionality issue, Smart merely
pleaded for the declaration of unconstitutionality
of Ordinance No. 18 in the Prayer of the Petition,
without any argument or evidence to support its
plea. Nowhere in the body of the Petition was this
issue
specifically
raised
and
discussed.
Significantly,
Smart
failed
to
cite
any
constitutional provision allegedly violated by
respondent when it issued Ordinance No. 18.
Settled is the rule that every law, in this case an
ordinance, is presumed valid. To strike down a law
as unconstitutional, Smart has the burden to
prove a clear and unequivocal breach of the
Constitution, which Smart miserably failed to do.
In Lawyers Against Monopoly and Poverty (LAMP)
v. Secretary of Budget and Management, 29 the
Court held, thus:
To justify the nullification of the law or its
implementation, there must be a clear and
unequivocal, not a doubtful, breach of the
Constitution. In case of doubt in the sufficiency of
proof establishing unconstitutionality, the Court
must sustain legislation because "to invalidate [a
law] based on xx x baseless supposition is an
affront to the wisdom not only of the legislature
that passed it but also of the executive which
approved it." This presumption of constitutionality
can be overcome only by the clearest showing
that there was indeed an infraction of the
Constitution, and only when such a conclusion is
reached by the required majority may the Court
pronounce, in the discharge of the duty it cannot
escape, that the challenged act must be struck
down.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.

collected by the City Treasurer which shall accrue

to the Socialized Housing Programs of the Quezon
City Government. The special assessment shall
accrue to the General Fund under a special
account to be established for the purpose.
Effective for five (5) years, the Socialized Housing
Tax ( SHT ) shall be utilized by the Quezon City
Government for the following projects: (a) land
purchase/land banking; (b) improvement of
current/existing socialized housing facilities; (c)
land development; (d) construction of core
houses, sanitary cores, medium-rise buildings
and other similar structures; and (e) financing of
public-private partners hip agreement of the
Quezon City Government and National Housing
Authority ( NHA ) with the private sector.3
Under certain conditions, a tax credit shall be
enjoyed by taxpayers regularly paying the special
assessment:

G.R. No. 210551

June 30, 2015

JOSE
J.
FERRER,
JR., Petitioner,
vs.
CITY MAYOR HERBERT BAUTISTA, CITY
COUNCIL OF QUEZON CITY, CITY TREASURER
OF QUEZON CITY, and CITY ASSESSOR OF
QUEZON CITY, Respondents.

SECTION 7. TAX CREDIT. Taxpayers dutifully

paying the special assessment tax as imposed by
this ordinance shall enjoy a tax credit. The tax
credit may be availed of only after five (5) years
of continue[d] payment. Further, the taxpayer
availing this tax credit must be a taxpayer in
good standing as certified by the City Treasurer
and City Assessor.
The tax credit to be granted shall be equivalent
to the total amount of the special assessment
paid by the property owner, which shall be given
as follows:

DECISION
1. 6th year - 20%
PERALTA, J.:
2. 7th year - 20%
Before this Court is a petition for certiorari under
Rule 65 of the Rules of Court with prayer for the
issuance of a temporary restraining order (TRO)
seeking to declare unconstitutional and illegal
Ordinance Nos. SP-2095, S-2011 and SP-2235, S2013 on the Socialized Housing Tax and Garbage
Fee, respectively, which are being imposed by the
respondents.
The Case
On October 17, 2011,1 respondent Quezon City
Council enacted Ordinance No. SP-2095, S2011,2 or the Socialized Housing Tax of Quezon
City, Section 3 of which provides:
SECTION 3. IMPOSITION. A special assessment
equivalent to one-half percent (0.5%) on the
assessed value of land in excess of One Hundred
Thousand Pesos (Php100,000.00) shall be

3. 8th year - 20%

4. 9th year - 20%
5. 10th year - 20%
Furthermore, only the registered owners may
avail of the tax credit and may not be continued
by the subsequent property owners even if they
are buyers in good faith, heirs or possessor of a
right in whatever legal capacity over the subject
property.4
On the other hand, Ordinance No. SP-2235, S20135 was enacted on December 16, 2013 and
took effect ten days after when it was approved
by respondent City Mayor. 6 The proceeds
collected from the garbage fees on residential
properties shall be deposited solely and

exclusively in an earmarked special account

under the general fund to be utilized for garbage
collections.7 Section 1 of the Ordinance se t forth
the schedule and manner for the collection of
garbage fees:
SECTION 1. The City Government of Quezon City
in conformity with and in relation to Republic Act
No. 7160, otherwise known as the Local
Government Code of 1991 HEREBY IMPOSES THE
FOLLOWING SCHEDULE AND MANNER FOR THE
ANNUAL COLLECTION OF GARBAGE FEES, AS
FOLLOWS: On all domestic households in Quezon
City;
LAND AREA

IMPOSABLE
FEE

Less than 200 sq. m.

PHP 100.00

201 sq. m. 500 sq. m.

PHP 200.00

501 sq. m. 1,000 sq. m.

PHP 300.00

1,001 sq. m. 1,500 sq. m.

PHP 400.00

1,501 sq. m. 2,000 sq. m. PHP 500.00

or more

every unit
amortized.

already

so

ld

or

being

b) High-rise apartment units Owners of

high-rise apartment units shall pay the
annual garbage fee on the total lot size of
the entire apartment and an additional
garbage fee based on the schedule
prescribed herein for every unit occupied.
The collection of the garbage fee shall accrue on
the first day of January and shall be paid
simultaneously with the payment of the real
property tax, but not later than the first quarter
installment.8 In case a household owner refuses
to pay, a penalty of 25% of the garbage fee due,
plus an interest of 2% per month or a fraction
thereof, shall be charged. 9
Petitioner alleges that he is a registered co-owner
of a 371-square-meter residential property in
Quezon City which is covered by Transfer
Certificate of Title (TCT ) No. 216288, and that, on
January 7, 2014, he paid his realty tax which
already included the garbage fee in the sum of
Php100.00.10
The instant petition was filed on January 17,
2014. We issued a TRO on February 5, 2014,
which enjoined the enforcement of Ordinance
Nos. SP-2095 and SP-2235 and required
respondents to comment on the petition without
necessarily giving due course thereto.11

FLOOR AREA

IMPOSABLE FEE

Respondents filed their Comment 12 with urgent

motion to dissolve the TRO on February 17, 2014.
Thereafter, petitioner filed a Reply and a
Memorandum on March 3, 2014 and September
8, 2014, respectively.

Less than 40 sq. m.

PHP 25.00

Procedural Matters

41 sq. m. 60 sq. m.

PHP 50.00

61 sq. m. 100 sq. m.

PHP 75.00

101 sq. m. 150 sq. m.

PHP 100.00

On all condominium unit and socialized housing

projects/units in Quezon City;

151 sq. m. 200 sq. [m.] or PHP 200.00

more
On high-rise Condominium Units
a)
High-rise
Condominium

The
Homeowners Association of high- rise
condominiums shall pay the annual
garbage fee on the total size of the entire
condominium and socialized Housing Unit
and an additional garbage fee shall be
collected based on area occupied for

A. Propriety of a Petition for Certiorari

Respondents are of the view that this petition for
certiorari is improper since they are not tribunals,
boards or officers exercising judicial or quasijudicial functions. Petitioner, however, counters
that in enacting Ordinance Nos. SP-2095 and SP2235, the Quezon City Council exercised quasijudicial function because the ordinances ruled
against the property owners who must pay the
SHT and the garbage fee, exacting from them
funds for basic essential public services that they
should not be held liable. Even if a Rule 65
petition is improper, petitioner still asserts that
this Court, in a number of cases like in Rosario v.

Court of Appeals,13 has taken cognizance of an

improper remedy in the interest of justice.
We agree that respondents neither acted in any
judicial or quasi-judicial capacity nor arrogated
unto themselves any judicial or quasi-judicial
prerogatives.
A respondent is said to be exercising judicial
function where he has the power to determine
what the law is and what the legal rights of the
parties are, and then undertakes to determine
these questions and adjudicate upon the rights of
the parties.
Quasi-judicial function, on the other hand, is "a
term which applies to the actions, discretion, etc.,
of public administrative officers or bodies
required to investigate facts or ascertain the
existence of facts, hold hearings, and draw
conclusions from them as a basis for their official
action and to exercise discretion of a judicial
nature."
Before a tribunal, board, or officer may exercise
judicial or quasi-judicial acts, it is necessary that
there be a law that gives rise to some specific
rights of person s or property under which
adverse claims to such rights are made, and the
controversy en suing therefrom is brought before
a tribunal, board, or officer clothed with power
and authority to determine the law and
adjudicate the respective rights of the contending
parties.14
For a writ of certiorari to issue, the following
requisites must concur: (1) it must be directed
against a tribunal, board, or officer exercising
judicial or quasi-judicial functions; (2) the
tribunal, board, or officer must have acted
without or in excess of jurisdiction or with grave
abuse of discretion amounting to lack or excess
of jurisdiction; and (3) there is no appeal or any
plain, speedy, and adequate remedy in the
ordinary course of law. The enactment by the
Quezon City Council of the assailed ordinances
was done in the exercise of its legislative, not
judicial or quasi-judicial, function. Under Republic
Act (R.A.) No.7160, or the Local Government Code
of 1991 (LGC), local legislative power shall be
exercised by the Sangguniang Panlungsod for the
city.15Said law likewise is specific in providing that
the power to impose a tax, fee, or charge , or to
generate revenue shall be exercised by the
sanggunian of the local government unit
concerned through an appropriate ordinance.16
Also, although the instant petition is styled as a
petition for certiorari, it essentially seeks to
declare the unconstitutionality and illegality of

the questioned ordinances. It, thus, partakes of

the nature of a petition for declaratory relief, over
which this Court has only appellate, not original,
jurisdiction.17
Despite these, a petition for declaratory relief
may be treated as one for prohibition or
mandamus, over which we exercise original
jurisdiction,
in
cases
with
far-reaching
implications or one which raises transcendental
issues or questions that need to be resolved for
the public good.18The judicial policy is that this
Court will entertain direct resort to it when the
redress sought cannot be obtained in the proper
courts or when exceptional and compelling
circumstances warrant availment of a remedy
within and calling for the exercise of Our primary
jurisdiction.19
Section 2, Rule 65 of the Rules of Court lay down
under what circumstances a petition for
prohibition may be filed:
SEC. 2. Petition for prohibition. - When the
proceedings of any tribunal, corporation, board,
officer or person, whether exercising judicial,
quasi-judicial or ministerial functions, are without
or in excess of its or his jurisdiction, or with grave
abuse of discretion amounting to lack or excess
of jurisdiction, and there is no appeal or any other
plain, speedy, and adequate remedy in the
ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper
court, alleging the facts with certainty and
praying that judgment be rendered commanding
the respondent to desist from further proceeding
in the action or matter specified therein, or
otherwise granting such incidental reliefs as law
and justice may require.
In a petition for prohibition against any tribunal,
corporation, board, or person whether
exercising judicial, quasi-judicial, or ministerial
functions who has acted without or in excess of
jurisdiction or with grave abuse of discretion, the
petitioner prays that judgment be rendered,
commanding the respondents to desist from
further proceeding in the action or matter
specified in the petition. In this case, petitioner's
primary intention is to prevent respondents from
implementing Ordinance Nos. SP-2095 and SP2235. Obviously, the writ being sought is in the
nature of a prohibition, commanding desistance.
We consider that respondents City Mayor, City
Treasurer, and City Assessor are performing
ministerial functions. A ministerial function is one
that an officer or tribunal performs in the context
of a given set of facts, in a prescribed manner
and without regard for the exercise of his or its

own judgment, upon the propriety or impropriety

of the act done.20 Respondent Mayor, as chief
executive of the city government, exercises such
powers and performs such duties and functions
as provided for by the LGC and other
laws.21 Particularly, he has the duty to ensure that
all taxes and other revenues of the city are
collected, and that city funds are applied to the
payment of expenses and settlement of
obligations of the city, in accordance with law or
ordinance.22 On the other hand, under the LGC,
all local taxes, fees, and charges shall be
collected by the provincial, city, municipal, or
barangay treasurer, or their duly-authorized
deputies, while the assessor shall take charge,
among others, of ensuring that all laws and
policies governing the appraisal and assessment
of real properties for taxation purposes are
properly
executed.23 Anent
the
SHT,
the
Department of Finance (DOF) Local Finance
Circular No. 1-97, dated April 16, 1997, is more
specific:
6.3 The Assessors office of the
Identified LGU shall:
a. immediately undertake
an inventory of lands within
its jurisdiction which shall
be subject to the levy of the
Social Housing Tax (SHT) by
the
local
sanggunian
concerned;
b. inform the affected
registered owners of the
effectivity of the SHT; a list
of the lands and registered
owners shall also be posted
in 3 conspicuous places in
the city/municipality;
c. furnish the Treasurers
office
and
the
local
sanggunian concerned of
the list of lands affected;
6.4 The Treasurers office shall:
a. collect the Social Housing
Tax on top of the Real
Property Tax, SEF Tax and
other special assessments;
b. report to the DOF, thru
the
Bureau
of
Local
Government Finance, and
the Mayors office the
monthly
collections
on
Social Housing Tax (SHT). An

annual
report
should
likewise be submitted to the
HUDCC
on
the
total
revenues raised during the
year pursuant to Sec. 43,
R.A. 7279 and the manner
in which the same was
disbursed.
Petitioner has adduced special and important
reasons as to why direct recourse to us should be
allowed. Aside from presenting a novel question
of law, this case calls for immediate resolution
since the challenged ordinances adversely affect
the property interests of all paying constituents of
Quezon City. As well, this petition serves as a test
case for the guidance of other local government
units (LGUs).Indeed, the petition at bar is of
transcendental
importance
warranting
a
relaxation of the doctrine of hierarchy of courts.
In Social Justice Society (SJS) Officers, et al. v. Lim
,24the Court cited the case of Senator Jaworski v.
Phil. Amusement & Gaming Corp.,25 where We
ratiocinated:
Granting arguendo that the present action cannot
be properly treated as a petition for prohibition,
the transcendental importance of the issues
involved in this case warrants that we set aside
the technical defects and take primary
jurisdiction over the petition at bar . x x x This is
in accordance with the well entrenched principle
that rules of procedure are not inflexible tools
designed to hinder or delay, but to facilitate and
promote the administration of justice. Their strict
and rigid application, which would result in
technicalities that tend to frustrate, rather than
promote substantial justice, must always be
eschewed.26
B. Locus Standi of Petitioner
Respondents challenge petitioners legal standing
to file this case on the ground that, in relation to
Section 3 of Ordinance No. SP-2095, petitioner
failed to allege his ownership of a property that
has
an
assessed
value
of
more
than
Php100,000.00 and, with respect to Ordinance
No. SP-2335, by what standing or personality he
filed the case to nullify the same. According to
respondents, the petition is not a class suit, and
that, for not having specifically alleged that
petitioner filed the case as a taxpayer, it could
only be surmised whether he is a party-in-interest
who stands to be directly benefited or injured by
the judgment in this case.
It is a general rule that every action must be
prosecuted or defended in the name of the real
party-in-interest, who stands to be benefited or

injured by the judgment in the suit, or the party

entitled to the avails of the suit.
Jurisprudence defines interest as "material
interest, an interest in issue and to be affected by
the decree, as distinguished from mere interest in
the question involved, or a mere incidental
interest. By real interest is meant a present
substantial interest, as distinguished from a mere
expectancy or a future, contingent, subordinate,
or consequential interest." "To qualify a person to
be a real party-in-interest in whose name an
action must be prosecuted, he must appear to be
the present real owner of the right sought to be
enforced."27
"Legal standing" or locus standi calls for more
than just a generalized grievance.28 The concept
has been define d as a personal and substantial
interest in the case such that the party has
sustained or will sustain direct injury as a result of
the
government
al
act
that
is
being
challenged.29 The gist of the question of standing
is whether a party alleges such personal stake in
the outcome of the controversy as to assure that
concrete adverseness which sharpens the
presentation of issues upon which the court
depends for illumination of difficult constitutional
questions.30
A party challenging the constitutionality of a law,
act, or statute must show "not only that the law is
invalid, but also that he has sustained or is in
immediate, or imminent danger of sustaining
some direct injury as a result of its enforcement,
and not merely that he suffers thereby in some
indefinite way." It must be shown that he has
been, or is about to be, denied some right or
privilege to which he is lawfully entitled, or that
he is about to be subjected to some burdens or
penalties by reason of the statute complained
of.31
Tested by the foregoing, petitioner in this case
clearly has legal standing to file the petition. He
is a real party-in-interest to assail the
constitutionality and legality of Ordinance Nos.
SP-2095 and SP-2235 because respondents did
not dispute that he is a registered co-owner of a
residential property in Quezon City an d that he
paid property tax which already included the SHT
and the garbage fee. He has substantial right to
seek a refund of the payments he made and to
stop future imposition. While he is a lone
petitioner, his cause of action to declare the
validity of the subject ordinances is substantial
and of paramount interest to similarly situated
property owners in Quezon City.
C. Litis Pendentia

Respondents move for the dismissal of this

petition on the ground of litis pendentia. They
claim that, as early as February 22, 2012, a case
entitled Alliance of Quezon City Homeowners,
Inc., et al., v. Hon. Herbert Bautista, et al. ,
docketed as Civil Case No. Q-12- 7-820, has been
pending in the Quezon City Regional Trial Court,
Branch 104, which assails the legality of
Ordinance No. SP-2095. Relying on City of Makati,
et al. v. Municipality (now City) of Taguig, et
al.,32 respondents assert that there is substantial
identity of parties between the two cases
because petitioner herein and plaintiffs in the civil
case filed their respective cases as taxpayers of
Quezon City.
For petitioner, however, respondents contention
is untenable since he is not a party in Alliance
and does not even have the remotest identity or
association with the plaintiffs in said civil case.
Moreover, respondents arguments would deprive
this Court of its jurisdiction to determine the
constitutionality of laws under Section 5, Article
VIII of the 1987 Constitution. 33
Litis pendentia is a Latin term which literally
means "a pending suit" and is variously referred
to in some decisions as lis pendens and auter
action pendant.34 While it is normally connected
with the control which the court has on a property
involved in a suit during the continuance
proceedings, it is more interposed as a ground for
the dismissal of a civil action pending in
court.35 In Film Development Council of the
Philippines v. SM Prime Holdings, Inc.,36 We
elucidated:
Litis pendentia, as a ground for the dismissal of a
civil action, refers to a situation where two
actions are pending between the same parties for
the same cause of action, so that one of them
becomes unnecessary and vexatious. It is based
on the policy against multiplicity of suit and
authorizes a court to dismiss a case motu proprio.
xxxx
The requisites in order that an action may be
dismissed on the ground of litis pendentia are: (a)
the identity of parties, or at least such as
representing the same interest in both actions;
(b) the identity of rights asserted and relief
prayed for, the relief being founded on the same
facts, and (c) the identity of the two cases such
that judgment in one, regardless of which party is
successful, would amount to res judicata in the
other.
The underlying principle of litis pendentia is the
theory that a party is not allowed to vex another

more than once regarding the same subject

matter and for the same cause of action. This
theory is founded on the public policy that the
same subject matter should not be the subject of
controversy in courts more than once, in order
that possible conflicting judgments may be
avoided for the sake of the stability of the rights
and status of persons, and also to avoid the costs
and expenses incident to numerous suits.
Among the several tests resorted to in
ascertaining whether two suits relate to a single
or common cause of action are: (1) whether the
same evidence would support and sustain both
the first and second causes of action; and (2)
whether the defenses in one case may be used to
substantiate the complaint in the other.
The determination of whether there is an identity
of causes of action for purposes of litis pendentia
is inextricably linked with that of res judicata ,
each constituting an element of the other. In
either case, both relate to the sound practice of
including, in a single litigation, the disposition of
all issues relating to a cause of action that is
before a court.37
There is substantial identity of the parties when
there is a community of interest between a party
in the first case and a party in the second case
albeit the latter was not impleaded in the first
case.38Moreover, the fact that the positions of the
parties are reversed, i.e., the plaintiffs in the first
case are the defendants in the second case or
vice-versa, does not negate the identity of parties
for purposes of determining whether the case is
dismissible on the ground of litis pendentia .39
In this case, it is notable that respondents failed
to attach any pleading connected with the
alleged civil case pending before the Quezon City
trial court.1wphi1 Granting that there is
substantial identity of parties between said case
and this petition, dismissal on the ground of litis
pendentia still cannot be had in view of the
absence of the second and third requisites. There
is no way for us to determine whether both cases
are based on the same set of facts that require
the presentation of the same evidence. Even if
founded on the same set of facts, the rights
asserted and reliefs prayed for could be different.
Moreover, there is no basis to rule that the two
cases are intimately related and/or intertwined
with one another such that the judgment that
may be rendered in one, regardless of which
party would be successful, would amount to res
judicata in the other.
D. Failure to Exhaust Administrative Remedies

Respondents contend that petitioner failed to

exhaust administrative remedies for his noncompliance with Section 187 of the LGC, which
mandates:
Section 187. Procedure for Approval and
Effectivity of Tax Ordinances and Revenue
Measures; Mandatory Public Hearings. The
procedure for approval of local tax ordinances
and revenue measures shall be in accordance
with the provisions of this Code: Provided, That
public hearings shall be conducted for the
purpose prior to the enactment thereof: Provided,
further, That any question on the constitutionality
or legality of tax ordinances or revenue measures
may be raised on appeal within thirty (30) days
from the effectivity thereof to the Secretary of
Justice who shall render a decision within sixty
(60) days from the date of receipt of the appeal:
Provided, however, That such appeal shall not
have the effect of suspending the effectivity of
the ordinance and the accrual and payment of
the tax, fee, or charge levied therein: Provided,
finally, That within thirty (30) days after receipt of
the decision or the lapse of the sixty-day period
without the Secretary of Justice acting upon the
appeal, the aggrieved party may file appropriate
proceedings with a court of competent
jurisdiction.
The provision, the constitutionality of which was
sustained in Drilon v. Lim ,40 has been construed
as mandatory41 considering that
A municipal tax ordinance empowers a local
government unit to impose taxes. The power to
tax is the most effective instrument to raise
needed revenues to finance and support the
myriad activities of local government units for the
delivery of basic services essential to the
promotion
of
the
general
welfare
and
enhancement of peace, progress, and prosperity
of the people. Consequently, any delay in
implementing tax measures would be to the
detriment of the public. It is for this reason that
protests over tax ordinances are required to be
done within certain time frames. x x x.42
The obligatory nature of Section 187 was
underscored in Hagonoy Market Vendor Asso. v.
Municipality of Hagonoy: 43
x x x [T]he timeframe fixed by law fo r parties to
avail of their legal remedies before competent
courts is not a "mere technicality" that can be
easily brushed aside. The periods stated in
Section 187 of the Local Government Code are
mandatory. x x x Being its lifeblood, collection of
revenues by the government is of paramount
importance. The funds for the operation of its

agencies and provision of basic services to its

inhabitants are largely derived from its revenues
and collections. Thus, it is essential that the
validity of revenue measures is not left uncertain
for a considerable length of time. Hence, the law
provided a time limit for an aggrieved party to
assail the legality of revenue measures and tax
ordinances."44
Despite these cases, the Court, in Ongsuco, et al.
v. Hon. Malones,45held that there was no need for
petitioners therein to exhaust administrative
remedies before resorting to the courts,
considering that there was only a pure question
of law, the parties did not dispute any factual
matter on which they had to present evidence.
Likewise, in Cagayan Electric Power and Light Co.,
Inc. v. City of Cagayan de Oro, 46 We relaxed the
application of the rules in view of the more
substantive matters. For the same reasons, this
petition is an exception to the general rule.

The SHT and the garbage fee are actually

increases in the property tax which are not based
on the assessed value of the property or its
reassessment every three years; hence, in
violation of Sections 232 and 233 of the LGC.48
For their part, respondents relied on the
presumption in favor of the constitutionality of
Ordinance Nos. SP-2095 and SP-2235, invoking
Victorias Milling Co., Inc. v. Municipality of
Victorias, etc.,49 People v. Siton, et al.,50 and Hon.
Ermita v. Hon. Aldecoa-Delorino .51 They argue
that the burden of establishing the invalidity of an
ordinance rests heavily upon the party
challenging its constitutionality. They insist that
the questioned ordinances are proper exercises of
police power similar to Telecom. & Broadcast
Attys. of the Phils., Inc. v. COMELEC52 and Social
Justice Society (SJS), et al. v. Hon. Atienza,
Jr.53 and that their enactment finds basis in the
social justice principle enshrined in Section
9,54 Article II of the 1987 Constitution.

Substantive Issues
Petitioner asserts that the protection of real
properties from informal settlers and the
collection of garbage are basic and essential
duties and functions of the Quezon City
Government. By imposing the SHT and the
garbage fee, the latter has shown a penchant and
pattern to collect taxes to pay for public services
that could be covered by its revenues from taxes
imposed on property, idle land, business,
transfer, amusement, etc., as well as the Internal
Revenue Allotment (IRA ) from the National
Government. For petitioner, it is noteworthy that
respondents did not raise the issue that the
Quezon City Government is in dire financial state
and desperately needs money to fund housing for
informal settlers and to pay for garbage
collection. In fact, it has not denied that its
revenue collection in 2012 is in the sum of P13.69
billion.
Moreover, the imposition of the SHT and the
garbage fee cannot be justified by the Quezon
City Government as an exercise of its power to
create sources of income under Section 5, Article
X of the 1987 Constitution. 47According to
petitioner, the constitutional provision is not a
carte blanche for the LGU to tax everything under
its territorial and political jurisdiction as the
provision itself admits of guidelines and
limitations.
Petitioner further claims that the annual property
tax is an ad valorem tax, a percentage of the
assessed value of the property, which is subject
to revision every three (3) years in order to reflect
an increase in the market value of the property.

As to the issue of publication, respondents argue

that where the law provides for its own
effectivity, publication in the Official Gazette is
not necessary so long as it is not punitive in
character, citing Balbuna, et al. v. Hon. Secretary
of Education, et al.55 and Askay v. Cosalan .[56]]
Thus, Ordinance No. SP-2095 took effect after its
publication, while Ordinance No. SP-2235 became
effective after its approval on December 26,
2013.
Additionally, the parties articulate the following
positions:
On the Socialized Housing Tax
Respondents emphasize that the SHT is pursuant
to the social justice principle found in Sections 1
and 2, Article XIII57 of the 1987 Constitution and
Sections 2 (a)58 and 4359 of R.A. No. 7279, or the
"Urban Development and Housing Act of 1992
( UDHA ).
Relying on Manila Race Horse Trainers Assn., Inc.
v. De La Fuente,60and Victorias Milling Co., Inc. v.
Municipality of Victorias, etc.,61respondents assert
that Ordinance No. SP-2095 applies equally to all
real property owners without discrimination.
There is no way that the ordinance could violate
the equal protection clause because real property
owners and informal settlers do not belong to the
same class.
Ordinance No. SP-2095 is also not oppressive
since the tax rate being imposed is consistent
with the UDHA. While the law authorizes LGUs to
collect SHT on properties with an assessed value

of more than P50,000.00, the questioned

ordinance only covers properties with an
assessed value exceeding P100,000.00. As well,
the ordinance provides for a tax credit equivalent
to the total amount of the special assessment
paid by the property owner beginning in the sixth
(6th) year of the effectivity of the ordinance.

Finally, petitioner alleges that 6 Bistekvilles will

be constructed out of the SHT collected. Bistek is
the monicker of respondent City Mayor. The
Bistekvilles makes it clear, therefore, that
politicians will take the credit for the tax imposed
on real property owners.
On the Garbage Fee

On the contrary, petitioner claims that the

collection of the SHT is tantamount to a penalty
imposed on real property owners due to the
failure of respondent Quezon City Mayor and
Council to perform their duty to secure and
protect real property owners from informal
settlers, thereby burdening them with the
expenses to provide funds for housing. For
petitioner, the SHT cannot be viewed as a
"charity" from real property owners since it is
forced, not voluntary.
Also, petitioner argues that the collection of the
SHT is a kind of class legislation that violates the
right of property owners to equal protection of
the laws since it favors informal settlers who
occupy property not their own and pay no taxes
over law-abiding real property owners w ho pay
income and realty taxes.
Petitioner further contends that respondents
characterization of the SHT as "nothing more
than an advance payment on the real property
tax" has no statutory basis. Allegedly, property
tax cannot be collected before it is due because,
under the LGC, chartered cities are authorized to
impose property tax based on the assessed value
and the general revision of assessment that is
made every three (3) years.
As to the rationale of SHT stated in Ordinance No.
SP-2095, which, in turn, was based on Section 43
of the UDHA, petitioner asserts that there is no
specific provision in the 1987 Constitution stating
that the ownership and enjoyment of property
bear a social function. And even if there is, it is
seriously doubtful and far-fetched that the
principle means that property owners should
provide funds for the housing of informal settlers
and for home site development. Social justice and
police power, petitioner believes, does not mean
imposing a tax on one, or that one has to give up
something, for the benefit of another. At best, the
principle that property ownership and enjoyment
bear a social function is but a reiteration of the
Civil Law principle that property should not be
enjoyed and abused to the injury of other
properties and the community, and that the use
of the property may be restricted by police
power, the exercise of which is not involved in
this case.

Respondents claim that Ordinance No. S-2235,

which is an exercise of police power, collects on
the average from every household a garbage fee
in the meager amount of thirty-three (33)
centavos per day compared with the sum
of P1,659.83 that the Quezon City Government
annually spends for every household for garbage
collection and waste management.62
In addition, there is no double taxation because
the ordinance involves a fee. Even assuming that
the garbage fee is a tax, the same cannot be a
direct duplicate tax as it is imposed on a different
subject matter and is of a different kind or
character. Based on Villanueva, et al. v. City of
Iloilo63 and
Victorias
Milling
Co.,
Inc.
v.
Municipality of Victorias, etc.,64 there is no "taxing
twice" because the real property tax is imposed
on ownership based on its assessed value, while
the garbage fee is required on the domestic
household. The only reference to the property is
the determination of the applicable rate and the
facility of collection.
Petitioner argues, however, that Ordinance No. S2235 cannot be justified as an exercise of police
power.
The
cases
of
Calalang
v.
Williams,65 Patalinghug v. Court of Appeals, 66 and
Social Justice Society (SJS), et al. v. Hon. Atienza,
Jr.,67 which were cited by respondents, are
inapplicable since the assailed ordinance is a
revenue measure and does not regulate the
disposal or other aspect of garbage.
The subject ordinance, for petitioner, is
discriminatory as it collects garbage fee only from
domestic households and not from restaurants,
food courts, fast food chains, and other
commercial dining places that spew garbage
much more than residential property owners.
Petitioner likewise contends that the imposition of
garbage fee is tantamount to double taxation
because garbage collection is a basic and
essential public service that should be paid out
from property tax, business tax, transfer tax,
amusement tax, community tax certificate, other
taxes, and the IRA of the Quezon City
Government. To bolster the claim, he states that
the revenue collection of the Quezon City
Government reached Php13.69 billion in 2012. A

small portion of said amount could be spent for

garbage collection and other essential services.
It is further noted that the Quezon City
Government already collects garbage fee under
Section 4768 of R.A. No. 9003, or the Ecological
Solid Waste Management Act of 2000, which
authorizes LGUs to impose fees in amounts
sufficient to pay the costs of preparing, adopting,
and implementing a solid waste management
plan, and that LGUs have access to the Solid
Waste Management (SWM) Fund created under
Section 4669 of the same law. Also, according to
petitioner, it is evident that Ordinance No. S2235
is inconsistent with R.A. No. 9003 for whil e the
law encourages segregation, composting, and
recycling
of
waste,
the
ordinance
only
emphasizes the collection and payment of
garbage fee; while the law calls for an active
involvement of the barangay in the collection,
segregation, and recycling of garbage, the
ordinance skips such mandate. Lastly, in
challenging the ordinance, petitioner avers that
the garbage fee was collected even if the
required publication of its approval had not yet
elapsed. He notes that on January 7, 2014, he
paid his realty tax which already included the
garbage fee.
The Court's Ruling
Respondents correctly argued that an ordinance,
as in every law, is presumed valid.
An ordinance carries with it the presumption of
validity. The question of reasonableness though is
open to judicial inquiry. Much should be left thus
to the discretion of municipal authorities. Courts
will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive
as to be prohibitive, arbitrary, unreasonable,
oppressive, or confiscatory. A rule which has
gained acceptance is that factors relevant to such
an inquiry are the municipal conditions as a
whole and the nature of the business made
subject to imposition.70
For an ordinance to be valid though, it must not
only be within the corporate powers of the LGU to
enact and must be passed according to the
procedure prescribed by law, it should also
conform to the following requirements: (1) not
contrary to the Constitution or any statute; (2)
not unfair or oppressive; (3) not partial or
discriminatory; (4) not prohibit but may regulate
trade; (5) general and consistent with public
policy;
and
(6)
not
unreasonable.71 As
jurisprudence indicates, the tests are divided into
the formal (i.e., whether the ordinance was
enacted within the corporate powers of the LGU

and whether it was passed in accordance with the

procedure
prescribed
by
law),
and
the
substantive ( i.e., involving inherent merit, like
the conformity of the ordinance with the
limitations under the Constitution and the
statutes, as well as with the requirements of
fairness and reason, and its consistency with
public policy).72
An ordinance must pass muster under the test of
constitutionality and the test of consistency with
the prevailing laws.73 If not, it is void.74
Ordinance should uphold the principle of the
supremacy of the Constitution. 75 As to conformity
with existing statutes,
Batangas CATV, Inc. v. Court of Appeals76 has this
to say:
It is a fundamental principle that municipal
ordinances are inferior in status and subordinate
to the laws of the state. An ordinance in conflict
with a state law of general character and
statewide application is universally held to be
invalid. The principle is frequently expressed in
the declaration that municipal authorities, under
a general grant of power, cannot adopt
ordinances which infringe the spirit of a state law
or repugnant to the general policy of the state. In
every power to pass ordinances given to a
municipality, there is an implied restriction that
the ordinances shall be consistent with the
general law. In the language of Justice Isagani
Cruz (ret.), this Court, in Magtajas vs. Pryce
Properties Corp., Inc., ruled that:
The rationale of the requirement that the
ordinances should not contravene a statute is
obvious. Municipal governments are only agents
of the national government. Local councils
exercise only delegated legislative powers
conferred on them by Congress as the national
lawmaking body. The delegate cannot be superior
to the principal or exercise powers higher than
those of the latter. It is a heresy to suggest that
the local government units can undo the acts of
Congress, from which they have derived their
power in the first place, and negate by mere
ordinance the mandate of the statute.
Municipal corporations owe their origin to, and
derive their powers and rights wholly from the
legislature. It breathes into them the breath of
life, without which they cannot exist. As it
creates, so it may destroy. As it may destroy, it
may abridge and control. Unless there is some
constitutional limitation on the right, the
legislature might, by a single act, and if we can
suppose it capable of so great a folly and so great

a wrong, sweep from existence all of the

municipal corporations in the State, and the
corporation could not prevent it. We know of no
limitation on the right so far as to the corporation
themselves are concerned. They are so to phrase
it, the mere tenants at will of the legislature.
This basic relationship between the national
legislature and the local government units has
not been enfeebled by the new provisions in the
Constitution strengthening the policy of local
autonomy. Without meaning to detract from that
policy, we here confirm that Congress retains
control of the local government units although in
significantly reduced degree now than under our
previous Constitutions. The power to create still
includes the power to destroy. The power to grant
still includes the power to withhold or recall. True,
there are certain notable innovations in the
Constitution, like the direct conferment on the
local government units of the power to tax, which
cannot now be withdrawn by mere statute. By
and large, however, the national legislature is still
the principal of the local government units, which
cannot defy its will or modify or violate it.77
LGUs must be reminded that they merely form
part of the whole; that the policy of ensuring the
autonomy of local governments was never
intended by the drafters of the 1987 Constitution
to create an imperium in imperio and install an
intra-sovereign political subdivision independent
of a single sovereign state.78
"[M]unicipal corporations are bodies politic and
corporate, created not only as local units of local
self-government, but as governmental agencies
of the state. The legislature, by establishing a
municipal corporation, does not divest the State
of any of its sovereignty; absolve itself from its
right and duty to administer the public affairs of
the entire state; or divest itself of any power over
the inhabitants of the district which it possesses
before the charter was granted."79
LGUs are able to legislate only by virtue of a valid
delegation of legislative power from the national
legislature; they are mere agents vested with
what is called the power of subordinate
legislation.80 "Congress enacted the LGC as the
implementing law for the delegation to the
various LGUs of the States great powers, namely:
the police power, the power of eminent domain,
and the power of taxation. The LGC was
fashioned to delineate the specific parameters
and limitations to be complied with by each LGU
in the exercise of these delegated powers with
the view of making each LGU a fully functioning
subdivision of the State subject to the
constitutional and statutory limitations."81

Specifically, with regard to the power of taxation,

it is indubitably the most effective instrument to
raise needed revenues in financing and
supporting myriad activities of the LGUs for the
delivery of basic services essential to the
promotion of the general welfare and the
enhancement of peace, progress, and prosperity
of the people.82 As this Court opined in National
Power Corp. v. City of Cabanatuan: 83
In recent years, the increasing social challenges
of the times expanded the scope of state activity,
and taxation has become a tool to realize social
justice and the equitable distribution of wealth,
economic progress and the protection of local
industries as well as public welfare and similar
objectives. Taxation assume s even greater
significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no
longer vested exclusively on Congress; local
legislative bodies are now given direct authority
to levy taxes, fees and other charges pursuant to
Article X, Section 5 of the 1987 Constitution, viz:
"Section 5. Each Local Government unit shall
have the power to create its own sources of
revenue, to levy taxes, fees and charges subject
to such guidelines and limitations as the
Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the local
governments."
This paradigm shift results from the realization
that genuine development can be achieved only
by strengthening local autonomy and promoting
decentralization of governance. For a long time,
the countrys 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." The only way
to shatter this culture of dependence is to give
the LGUs a wider role in the delivery of basic
services, and confer them sufficient powers to
generate their own sources for the purpose. To
achieve this goal, Section 3 of Article X of the
1987 Constitution mandates Congress to enact a
local government code that will, consistent with
the basic policy of local autonomy , set the
guidelines and limitations to this grant of taxing
powers x x x84
Fairly recently, We also stated in Pelizloy Realty
Corporation v. Province of Benguet85 that:
The rule governing the taxing power of provinces,
cities,
municipalities
and
barangays
is
summarized in Icard v. City Council of Baguio :

It is settled that a municipal corporation unlike a

sovereign state is clothed with no inherent power
of taxation. The charter or statute must plainly
show an intent to confer that power or the
municipality, cannot assume it. And the power
when granted is to be construed in strictissimi
juris . Any doubt or ambiguity arising out of the
term used in granting that power must be
resolved against the municipality. Inferences,
implications, deductions all these have no
place in the interpretation of the taxing power of
a municipal corporation. [Underscoring supplied]
xxxx
Per Section 5, Article X of the 1987 Constitution,
"the power to tax is no longer vested exclusively
on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and
other charges." Nevertheless, such authority is
"subject to such guidelines and limitations as the
Congress may provide."
In conformity with Section 3, Article X of the 1987
Constitution, Congress enacted Republic Act No.
7160, otherwise known as the Local Government
Code of 1991. Book II of the LGC governs local
taxation and fiscal matters.86
Indeed, LGUs have no inherent power to tax
except to the extent that such power might be
delegated to them either by the basic law or by
the
statute.87 "Under
the
now
prevailing
Constitution , where there is neither a grant nor a
prohibition by statute , the tax power must be
deemed to exist although Congress may provide
statutory limitations and guidelines. The basic
rationale for the current rule is to safeguard the
viability and self-sufficiency of local government
units by directly granting them general and broad
tax powers. Nevertheless, the fundamental law
did not intend the delegation to be absolute and
unconditional;
the
constitutional
objective
obviously is to ensure that, while the local
government units are being strengthened and
made more autonomous , the legislature must
still see to it that (a) the taxpayer will not be
over-burdened or saddled with multiple and
unreasonable
impositions;
(b)
each
local
government unit will have its fair share of
available resources; (c) the resources of the
national government will not be unduly disturbed;
and (d) local taxation will be fair, uniform, and
just."88
Subject to the provisions of the LGC and
consistent with the basic policy of local
autonomy, every LGU is now empowered and
authorized to create its own sources of revenue
and to levy taxes, fees, and charges which shall

accrue exclusively to the local government unit

as well as to apply its resources and assets for
productive, developmental, or welfare purposes,
in the exercise or furtherance of their
governmental
or
proprietary
powers
and
functions.89 The relevant provisions of the LGC
which establish the parameters of the taxing
power of the LGUs are as follows:
SECTION 130. Fundamental Principles. The
following fundamental principles shall govern th e
exercise of the taxing and other revenue-raising
powers of local government units:
(a) Taxation shall be uniform in each local
government unit;
(b) Taxes, fees,
impositions shall:

charges

and

other

(1) be equitable and based as far

as practicable on the taxpayers
ability to pay;
(2) be levied and collected only for
public purposes;
(3) not be unjust, excessive,
oppressive, or confiscatory;
(4) not be contrary to law, public
policy, national economic policy, or
in restraint of trade;
(c) The collection of local taxes, fees,
charges and other impositions shall in no
case be left to any private person;
(d) The revenue collected pursuant to the
provisions of this Code shall inure solely to
the benefit of, and be subject to the
disposition by, the local government unit
levying the tax, fee, charge or other
imposition unless otherwise specifically
provided herein; and,
(e) Each local government unit shall, as far
as practicable, evolve a progressive
system of taxation.
SECTION 133. Common Limitations on the Taxing
Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the
following:
(a) Income tax, except when levied on
banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts,
legacies and other acquisitions mortis
causa, except as otherwise provided
herein;
(d) Customs duties, registration fees of
vessel and wharage on wharves, tonnage
dues, and all other kinds of customs fees,
charges and dues except wharfage on
wharves constructed and maintained by
the local government unit concerned;
(e) Taxes, fees, and charges and other
impositions upon goods carried into or out
of, or passing through, the territorial
jurisdictions of local government units in
the guise of charges for wharfage, tolls for
bridges or otherwise, or other taxes, fees,
or charges in any form whatsoever upon
such goods or merchandise;
(f) Taxes, fees or charges on agricultural
and aquatic products when sold by
marginal farmers or fishermen;
(g) Taxes on business enterprises certified
to by the Board of Investments as pioneer
or non-pioneer for a period of six (6) and
four (4) years, respectively from the date
of registration;
(h) Excise taxes on articles enumerated
under the National Internal Revenue Code,
as amended, and taxes, fees or charges
on petroleum products;
(i) Percentage or value-added tax (VAT) on
sales, barters or exchanges or similar
transactions on goods or services except
as otherwise provided herein;
(j) Taxes on the gross receipts of
transportation contractors and persons
engaged
in
the
transportation
of
passengers or freight by hire and common
carriers by air, land or water, except as
provided in this Code;
(k) Taxes on premiums paid by way of
reinsurance or retrocession;
(l) Taxes, fees or charges for the
registration of motor vehicles and for the
issuance of all kinds of licenses or permits
for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on

Philippine products actually exported,
except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside
and Barangay Business Enterprises and
cooperatives duly registered under R.A.
No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No.
6938)
otherwise
known
as
the
"Cooperative Code of the Philippines"
respectively; and
(o) Taxes, fees or charges of any kind on
the National Government, its agencies and
instrumentalities, and local government
units.
SECTION 151. Scope of Taxing Powers. Except
as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the
province or municipality may impose: Provided,
however, That the taxes, fees and charges levied
and
collected
by
highly
urbanized
and
independent component cities shall accrue to
them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may
exceed the maximum rates allowed for the
province or municipality by not more than fifty
percent (50%) except the rates of professional
and amusement taxes.
SECTION 186. Power to Levy Other Taxes, Fees or
Charges. Local government units may exercise
the power to levy taxes, fees or charges on any
base or subject not otherwise specifically
enumerated herein or taxed under the provisions
of the National Internal Revenue Code, as
amended, or other applicable laws: Provided,
That the taxes, fees, or charges shall not be
unjust, excessive, oppressive, confiscatory or
contrary to declared national policy: Provided,
further, That the ordinance levying such taxes,
fees or charges shall not be enacted without any
prior public hearing conducted for the purpose.
On the Socialized Housing Tax
Contrary to petitioners submission, the 1987
Constitution explicitly espouses the view that the
use of property bears a social function and that
all economic agents shall contribute to the
common good.90 The Court already recognized
this in Social Justice Society (SJS), et al. v. Hon.
Atienza, Jr.:91
Property has not only an individual function,
insofar as it has to provide for the needs of the

owner, but also a social function insofar as it has

to provide for the needs of the other members of
society. The principle is this:

sufficient funds to initiate, implement and

undertake Socialized Housing Projects and other
related preliminary activities;

Police power proceeds from the principle that

every holder of property, however absolute and
unqualified may be his title, holds it under the
implied liability that his use of it shall not be
injurious to the equal enjoyment of others having
an equal right to the enjoyment of their property,
no r injurious to the right of the community.
Rights of property, like all other social and
conventional rights, are subject to reasonable
limitations in their enjoyment as shall prevent
them from being injurious, and to such
reasonable restraints and regulations established
by law as the legislature, under the governing an
d controlling power vested in them by the
constitution,
may
think
necessary
and
expedient.92

WHEREAS, the imposition of 0.5% tax will benefit

the Socialized Housing Programs and Projects of
the
City
Government,
specifically
the
marginalized sector through the acquisition of
properties for human settlements;

Police power, which flows from the recognition

that salus populi est suprema lex (the welfare of
the people is the supreme law), is the plenary
power vested in the legislature to make statutes
and ordinances to promote the health, morals,
peace, education, good order or safety and
general welfare of the people. 93 Property rights of
individuals may be subjected to restraints and
burdens in order to fulfill the objectives of the
government in the exercise of police power. 94 In
this jurisdiction, it is well-entrenched that
taxation may be made the implement of the
states police power.95
Ordinance No. SP-2095 imposes a Socialized
Housing Tax equivalent to 0.5% on the assessed
value of land in excess of Php100,000.00. This
special assessment is the same tax referred to in
R.A. No. 7279 or the UDHA.96The SHT is one of the
sources of funds for urban development and
housing program.97 Section 43 of the law
provides:
Sec. 43. Socialized Housing Tax . Consistent
with the constitutional principle that the
ownership and enjoyment of property bear a
social function and to raise funds for the Program,
all local government units are hereby authorized
to impose an additional one-half percent (0.5%)
tax on the assessed value of all lands in urban
areas in excess of Fifty thousand pesos
(P50,000.00).
The rationale of the SHT is found in the
preambular clauses of the subject ordinance, to
wit:
WHEREAS, the imposition of additional tax is
intended to provide the City Government with

WHEREAS, the removal of the urban blight will

definitely increase fair market value of properties
in the city[.]
The above-quoted are consistent with the UDHA,
which the LGUs are charged to implement in their
respective localities in coordination with the
Housing and Urban Development Coordinating
Council, the national housing agencies, the
Presidential Commission for the Urban Poor, the
private sector, and other non-government
organizations.98 It is the declared policy of the
State to undertake a comprehensive and
continuing urban development and housing
program that shall, among others, uplift the
conditions of the underprivileged and homeless
citizens in urban areas and in resettlement areas,
and provide for the rational use and development
of urban land in order to bring a bout, among
others,
reduction
in
urban
dysfunctions,
particularly those that adversely affect public
health, safety and ecology, and access to land
and housing by the underprivileged and homeless
citizens.99 Urban renewal and resettlement shall
include the rehabilitation and development of
blighted and slum areas 100 and the resettlement
of program beneficiaries in accordance with the
provisions of the UDHA.101 Under the UDHA,
socialized housing102 shall be the primary strategy
in providing shelter for the underprivileged and
homeless.103 The LGU or the NHA, in cooperation
with the private developers and concerned
agencies, shall provide socialized housing or re
settlement areas with basic services and facilities
such as potable water, power and electricity, and
an adequate power distribution system, sewerage
facilities, and an efficient and adequate solid
waste disposal system; and access to primary
roads
and
transportation
facilities.104 The
provisions for health, education, communications,
security, recreation, relief and welfare shall also
be
planned
and
be
given
priority
for
implementation by the LGU and concerned
agencies in cooperation with the private sector
and the beneficiaries themselves.105
Moreover, within two years from the effectivity of
the UDHA, the LGUs, in coordination with the
NHA, are directed to implement the relocation
and resettlement of persons living in danger

areas such as esteros , railroad tracks, garbage

dumps, riverbanks, shorelines, waterways, and
other public places like sidewalks, roads, parks,
and playgrounds.106 In coordination with the NHA,
the LG Us shall provide relocation or resettlement
sites with basic services and facilities and access
to employment and livelihood opportunities
sufficient to meet the basic needs of the affected
families.107
Clearly, the SHT charged by the Quezon City
Government is a tax which is within its power to
impose. Aside from the specific authority vested
by Section 43 of the UDHA, cities are allowed to
exercise such other powers and discharge such
other functions and responsibilities as are
necessary, appropriate, or incidental to efficient
and effective provision of the basic services and
facilities which include, among others, programs
and projects for low-cost housing and other mass
dwellings.108 The collections made accrue to its
socialized housing programs and projects.
The tax is not a pure exercise of taxing power or
merely to raise revenue; it is levied with a
regulatory purpose. The levy is primarily in the
exercise of the police power for the general
welfare of the entire city. It is greatly imbued with
public interest. Removing slum areas in Quezon
City is not only beneficial to the underprivileged
and homeless constituents but advantageous to
the real property owners as well. The situation
will improve the value of the their property
investments, fully enjoying the same in view of
an orderly, secure, and safe community, and will
enhance the quality of life of the poor, making
them law-abiding constituents and better
consumers of business products.
Though broad and far-reaching, police power is
subordinate to constitutional limitations and is
subject to the requirement that its exercise must
be reasonable and for the public good. 109 In the
words of City of Manila v. Hon. Laguio, Jr.:110
The police power granted to local government
units must always be exercised with utmost
observance of the rights of the people to due
process and equal protection of the law. Such
power cannot be exercised whimsically, arbitrarily
or despotically as its exercise is subject to a
qualification, limitation or restriction demanded
by the respect and regard due to the prescription
of the fundamental law, particularly those
forming part of the Bill of Rights. Individual rights,
it bears emphasis, may be adversely affected
only to the extent that may fairly be required by
the legitimate demands of public interest or
public welfare. Due process requires the intrinsic

validity of the law in interfering with the rights of

the person to his life, liberty and property.
xxxx
To successfully invoke the exercise of police
power as the rationale for the enactment of the
Ordinance, and to free it from the imputation of
constitutional infirmity, not only must it appear
that the interests of the public generally, as
distinguished from those of a particular class,
require an interference with private rights, but
the means adopted must be reasonably
necessary for the accomplishment of the purpose
and not unduly oppressive upon individuals. It
must be evident that no other alternative for the
accomplishment of the purpose less intrusive of
private rights can work. A reasonable relation
must exist between the purposes of the police
measure and the means employed for its
accomplishment, for even under the guise of
protecting the public interest, personal rights and
those pertaining to private property will not be
permitted to be arbitrarily invaded.
Lacking a concurrence of these two requisites,
the police measure shall be struck down as an
arbitrary intrusion into private rights a violation
of the due process clause.111
As with the State, LGUs may be considered as
having properly exercised their police power only
if there is a lawful subject and a lawful method or,
to be precise, if the following requisites are met:
(1) the interests of the public generally, as
distinguished from those of a particular class,
require its exercise and (2) the mean s employed
are reasonably necessary for the accomplishment
of the purpose and not unduly oppressive upon
individuals.112
In this case, petitioner argues that the SHT is a
penalty imposed on real property owners because
it burdens them with expenses to provide funds
for the housing of informal settlers, and that it is
a class legislation since it favors the latter who
occupy properties which is not their own and pay
no taxes.
We disagree.
Equal protection requires that all persons or
things similarly situated should be treated alike,
both as to rights conferred and responsibilities
imposed.113 The guarantee means that no person
or class of persons shall be denied the same
protection of laws which is enjoyed by other
persons
or
other
classes
in
like
circumstances.114Similar subjects should not be
treated differently so as to give undue favor to

some
and
unjustly
discriminate
against
others.115 The law may, therefore, treat and
regulate one class differently from another class
provided there are real and substantial
differences to distinguish one class from
another.116

source of disease and preventing and abating

nuisances; and (2) to defray costs and ensure
financial stability of the system for the benefit of
the entire community, with the sum of all charges
marshalled and designed to pay for the expense
of a systemic refuse disposal scheme.122

An ordinance based on reasonable classification

does not violate the constitutional guaranty of
the equal protection of the law. The requirements
for a valid and reasonable classification are: (1) it
must rest on substantial distinctions; (2) it must
be germane to the purpose of the law; (3) it must
not be limited to existing conditions only; and (4)
it must apply equally to all members of the same
class.117For the purpose of undertaking a
comprehensive
and
continuing
urban
development
and
housing
program,
the
disparities between a real property owner and an
informal settler as two distinct classes are too
obvious and need not be discussed at length. The
differentiation conforms to the practical dictates
of justice and equity and is not discriminatory
within the meaning of the Constitution. Notably,
the public purpose of a tax may legally exist even
if the motive which impelled the legislature to
impose the tax was to favor one over
another.118 It is inherent in the power to tax that a
State is free to select the subjects of
taxation.119 Inequities which result from a singling
out of one particular class for taxation or
exemption infringe no constitutional limitation. 120

Ordinances regulating waste removal carry a

strong presumption of

Further, the reasonableness of Ordinance No. SP2095 cannot be disputed. It is not confiscatory or
oppressive since the tax being imposed therein is
below what the UDHA actually allows. As pointed
out by respondents, while the law authorizes
LGUs to collect SHT on lands with an assessed
value of more than P50,000.00, the questioned
ordinance only covers lands with an assessed
value exceeding P100,000.00. Even better, on
certain conditions, the ordinance grants a tax
credit equivalent to the total amount of the
special assessment paid beginning in the sixth
(6th) year of its effectivity. Far from being
obnoxious, the provisions of the subject
ordinance are fair and just.

validity.123 Not surprisingly, the overwhelming

majority of U.S. cases addressing a city's
authority to impose mandatory garbage service
and fees have upheld the ordinances against
constitutional and statutory challenges.124
A municipality has an affirmative duty to
supervise and control the collection of garbage
within its corporate limits.125 The LGC specifically
assigns the responsibility of regulation and
oversight of solid waste to local governing bodies
because the Legislature determined that such
bodies were in the best position to develop
efficient waste management programs.126 To
impose on local governments the responsibility to
regulate solid waste but not grant them the
authority necessary to fulfill the same would lead
to an absurd result."127 As held in one U.S. case:
x x x When a municipality has general authority
to regulate a particular subject matter, the
manner and means of exercising those powers,
where not specifically prescribed by the
legislature, are left to the discretion of the
municipal authorities. x x x Leaving the manner
of exercising municipal powers to the discretion
of municipal authorities "implies a range of
reasonableness within which a municipality's
exercise of discretion will not be interfered with or
upset by the judiciary."128

On the Garbage Fee

In this jurisdiction, pursuant to Section 16 of the

LGC and in the proper exercise of its corporate
powers under Section 22 of the same, the
Sangguniang Panlungsod of Quezon City, like
other local legislative bodies, is empowered to
enact ordinances, approve resolutions, and
appropriate funds for the genera l welfare of the
city and its inhabitants. 129Section 16 of the LGC
provides:

In the United States of America, it has been held

that the authority of a municipality to regulate
garbage falls within its police power to protect
public health, safety, and welfare.121 As opined,
the purposes and policy underpinnings of the
police power to regulate the collection and
disposal of solid waste are: (1) to preserve and
protect the public health and welfare as well as
the environment by minimizing or eliminating a

SECTION 16. General Welfare . Every local

government unit shall exercise the powers
expressly granted, those necessarily implied
therefrom, as well as powers necessary,
appropriate, or incidental for its efficient and
effective governance, and those which are
essential to the promotion of the general welfare.
Within their respective territorial jurisdictions,
local government units shall ensure and support,

among other things, the preservation and

enrichment of culture, promote health and safety,
enhance the right of the people to a balanced
ecology, encourage and support the development
of appropriate and self-reliant scientific and
technological capabilities, improve public morals,
enhance economic prosperity and social justice,
promote full employment among their residents,
maintain peace and order, and preserve the
comfort and convenience of their inhabitants.
The general welfare clause is the delegation in
statutory form of the police power of the State to
LGUs.130 The provisions related thereto are
liberally interpreted to give more powers to LGUs
in accelerating economic development and
upgrading the quality of life for the people in the
community.131 Wide discretion is vested on the
legislative authority to determine not only what
the interests of the public require but also what
measures are necessary for the protection of
such interests since the Sanggunian is in the best
position to determine the needs of its
constituents.132
One of the operative principles of decentralization
is that, subject to the provisions of the LGC and
national policies, the LGUs shall share with the
national government the responsibility in the
management and maintenance of ecological
balance within their territorial jurisdiction. 133 In
this regard, cities are allowed to exercise such
other powers and discharge such other functions
and
responsibilities
as
are
necessary,
appropriate, or incidental to efficient and
effective provision of the basic services and
facilities which include, among others, solid waste
disposal system or environmental management
system and services or facilities related to
general hygiene and sanitation.134 R.A. No. 9003,
or the Ecological Solid Waste Management Act of
2000,135 affirms this authority as it expresses that
the LGUs shall be primarily responsible for the
implementation and enforcement of its provisions
within their respective
jurisdictions
while
establishing a cooperative effort among the
national government, other local government
units, non-government organizations, and the
private sector.136
Necessarily, LGUs are statutorily sanctioned to
impose and collect such reasonable fees and
charges for services rendered.137 "Charges" refer
to pecuniary liability, as rents or fees against
persons or property, while "Fee" means a charge
fixed by law or ordinance for the regulation or
inspection of a business or activity.138
The fee imposed for garbage collections under
Ordinance No. SP-2235 is a charge fixed for the

regulation of an activity. The basis for this could

be discerned from the foreword of said
Ordinance, to wit:
WHEREAS, Quezon City being the largest and
premiere city in the Philippines in terms of
population and urban geographical areas, apart
from being competent and efficient in the
delivery of public service, apparently requires a
big budgetary allocation in order to address the
problems relative and connected to the prompt
and efficient delivery of basic services such as
the effective system of waste management,
public information programs on proper garb age
and proper waste disposal, including the
imposition of waste regulatory measures;
WHEREAS, to help augment the funds to be spent
for the citys waste management system, the City
Government
through
the
Sangguniang
Panlungsod deems it necessary to impose a
schedule of reasonable fees or charges for the
garbage collection services for residential
(domestic household) that it renders to the
public.
Certainly, as opposed to petitioners opinion, the
garbage
fee
is
not
a tax.
In Smart
Communications, Inc. v. Municipality of Malvar,
Batangas ,139the Court had the occasion to
distinguish these two concepts:
In Progressive Development Corporation v.
Quezon City, the Court declared that "if the
generating of revenue is the primary purpose and
regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the
fact that incidentally revenue is also obtained
does not make the imposition a tax."
In Victorias Milling Co., Inc. v. Municipality of
Victorias, the Court reiterated that the purpose
and effect of the imposition determine whether it
is a tax or a fee, and that the lack of any
standards for such imposition gives the
presumption that the same is a tax.
We accordingly say that the designation given by
the municipal authorities does not decide
whether the imposition is properly a license tax or
a license fee.1awp++i1 The determining factors
are the purpose and effect of the imposition as
may be apparent from the provisions of the
ordinance. Thus, "[w]hen no police inspection,
supervision, or regulation is provided, nor any
standard set for the applicant to establish, or that
he agrees to attain or maintain, but any and all
persons engaged in the business designated,
without qualification or hindrance, may come,
and a license on payment of the stipulated sum

will issue, to do business, subject to no prescribed

rule of conduct and under no guardian eye, but
according to the unrestrained judgment or fancy
of the applicant and licensee, the presumption is
strong that the power of taxation, and not the
police power, is being exercised."
In Georgia, U.S.A., assessments for garbage
collection services have been consistently treated
as a fee and not a tax.140
In another U.S. case,141 the garbage fee was
considered as a "service charge" rather than a
tax as it was actually a fee for a service given by
the city which had previously been provided at no
cost to its citizens.
Hence, not being a tax, the contention that the
garbage fee under Ordinance No. SP-2235
violates the rule on double taxation 142 must
necessarily fail.
Nonetheless, although a special charge, tax, or
assessment may be imposed by a municipal
corporation, it must be reasonably commensurate
to the cost of providing the garbage service. 143 To
pass judicial scrutiny, a regulatory fee must not
produce revenue in excess of the cost of the
regulation because such fee will be construed as
an illegal tax when the revenue generated by the
regulation exceeds the cost of the regulation. 144
Petitioner
argues
that
the
Quezon
City
Government already collects garbage fee under
Section 47 of R.A. No. 9003, which authorizes
LGUs to impose fees in amounts sufficient to pay
the
costs
of
preparing,
adopting,
and
implementing a solid waste management plan,
and that it has access to the SWM Fund under
Section 46 of the same law. Moreover, Ordinance
No. S-2235 is inconsistent with R.A. No. 9003,
because the ordinance emphasizes the collection
and payment of garbage fee with no concern for
segregation, composting and recycling of wastes.
It also skips the mandate of the law calling for the
active involvement of the barangay in the
collection, segregation, and recycling of garbage.
We now turn to the pertinent provisions of R.A.
No. 9003.
Under R.A. No. 9003, it is the declared policy of
the State to adopt a systematic, comprehensive
and ecological solid waste management program
which shall, among others, ensure the proper
segregation,
collection,
transport,
storage,
treatment and disposal of solid waste through the
formulation
and
adoption
of
the
best
environmental practices in ecological waste
management.145 The
law
provides
that

segregation and collection of solid waste shall be

conducted at the barangay level, specifically for
biodegradable,
compostable
and
reusable
wastes, while the collection of non-recyclable
materials and special wastes shall be the
responsibility
of
the
municipality
or
city.146 Mandatory segregation of solid wastes
shall primarily be conducted at the source, to
include
household,
institutional,
industrial,
commercial
and
agricultural
sources.147 Segregation at source refers to a solid
waste management practice of separating, at the
point of origin, different materials found in soli d
waste in order to promote recycling and re-use of
resources and to reduce the volume of waste for
collection and disposal.148Based on Rule XVII of
the Department of Environment and Natural
Resources (DENR) Administrative Order No. 200134, Series of 2001,149 which is the Implementing
Rules and Regulations ( IRR ) of R.A. No. 9003,
barangays shall be responsible for the collection,
segregation, and recycling of biodegradable,
recyclable , compostable and reusable wastes.150
For the purpose, a Materials Recovery Facility
(MRF), which shall receive biodegradable wastes
for composting and mixed non-biodegradable
wastes for final segregation, re-use and recycling,
is to be established in every barangay or cluster
of barangays.151
According to R.A. 9003, an LGU, through its local
solid waste management board, is mandated by
law to prepare a 10-year solid waste
management plan consistent with the National
Solid Waste Management Framework.152The plan
shall be for the re-use, recycling and composting
of wastes generated in its jurisdiction; ensure the
efficient management of solid waste generated
within its jurisdiction; and place primary
emphasis on implementation of all feasible reuse, recycling, and composting programs while
identifying
the
amount
of
landfill
and
transformation capacity that will be needed for
solid waste which cannot be re-used, recycled, or
composted.153 One of the components of the so
lid waste management plan is source reduction:
(e) Source reduction The source reduction
component shall include a program and
implementation schedule which shows the
methods by which the LGU will, in combination
with the recycling and composting components,
reduce a sufficient amount of solid waste
disposed of in accordance with the diversion
requirements of Section 20.
The source reduction component shall describe
the following:

(1) strategies in reducing the volume of

solid waste generated at source;
(2) measures for implementing such
strategies and the resources necessary to
carry out such activities;
(3) other appropriate waste reduction
technologies that may also be considered,
provide d that such technologies conform
with the standards set pursuant to this
Act;
(4) the types of wastes to be reduced
pursuant to Section 15 of this Act;
(5) the methods that the LGU will use to
determine the categories of solid wastes
to be diverted from disposal at a disposal
facility through re-use , recycling and
composting; and
(6) new facilities and of expansion of
existing facilities which will be needed to
implement
re-use,
recycling
and
composting.
The LGU source reduction component shall
include the evaluation and identification of rate
structures and fees for the purpose of reducing
the amount of waste generated, and other source
reduction strategies, including but not limited to,
program s and economic incentives provided
under Sec. 45 of this Act to reduce the use of
non-recyclable materials, replace disposable
materials and products with reusable materials
and products, reduce packaging, and increase the
efficiency of the use of paper, cardboard, glass,
metal, and other materials. The waste reduction
activities of the community shall al so take into
account, among others, local capability, economic
viability, technical requirements, social concerns,
disposition of residual waste and environmental
impact: Provided , That, projection of future
facilities needed and estimated cost shall be
incorporated in the plan. x x x154
The solid waste management pl an shall also
include an implementation schedule for solid
waste diversion:
SEC. 20. Establishing Mandatory Solid Waste
Diversion. Each LGU plan shall include an
implementation schedule which shows that within
five (5) years after the effectivity of this Act, the
LGU shall divert at least 25% of all solid waste
from waste disposal facilities through re-use,
recycling, and composting activities and other
resource recovery activities: Provided , That the
waste diversion goals shall be increased every

three (3) years thereafter: Provided , further, That

nothing in this Section prohibits a local
government unit from implementing re-use,
recycling, and composting activities designed to
exceed the goal.
The baseline for the twenty-five percent (25%)
shall be derived from the waste characterization
result155 that
each
LGU
is mandated
to
undertake.156In accordance with Section 46 of R.A.
No. 9003, the LGUs are entitled to avail of the
SWM Fund on the basis of their approved solid
waste management plan. Aside from this, they
may also impose SWM Fees under Section 47 of
the law, which states:
SEC. 47. Authority to Collect Solid Waste
Management Fees The local government unit
shall impose fees in amounts sufficient to pay the
costs of preparing, adopting, and implementing a
solid waste management plan prepared pursuant
to this Act. The fees shall be based on the
following minimum factors:
(a) types of solid waste;
(b) amount/volume of waste; and
(c) distance of the transfer station to the
waste management facility.
The fees shall be used to pay the actual costs
incurred by the LGU in collecting the local fees. In
determining the amounts of the fees, an LGU
shall include only those costs directly related to
the adoption and implementation of the plan and
the setting and collection of the local fees.
Rule XVII of the IRR of R.A. No. 9003 sets forth the
details:
Section 1. Power to Collect Solid Waste
Management Fees . The Local SWM Board/Local
SWM Cluster Board shall impose fees on the SWM
services provided for by the LGU and/or any
authorized organization or unit. In determining
the amounts of the fees, a Local SWM Board/Local
SWM Cluster Board shall include only those costs
directly
related
to
the
adoption
and
implementation of the SWM Plan and the setting
and collection of the local fees. This power to
impose fees may be ceded to the private sector
and civil society groups which have been duly
accredited by the Local SWM Boar d/Local SWM
Cluster Board; provided, the SWM fees shall be
covered by a Contract or Memorandum of
Agreement between the respective boa rd and
the private sector or civil society group.

The fees shall pay for the costs of preparing,

adopting and implementing a SWM Plan prepared
pursuant to the Act. Further, the fees shall also be
used to pay the actual costs incurred in collecting
the local fees and for project sustainability.
Section 2. Basis of SWM Service Fees
Reasonable SWM service fees shall be computed
based on but not limited to the following
minimum factors:
a) Types of solid waste to include special
waste
b) amount/volume of waste
c) distance of the transfer station to the
waste management facility
d) capacity or type of LGU constituency
e) cost of construction
f) cost of management
g) type of technology
Section 3. Collection of Fees. Fees may be
collected corresponding to the following levels:
a) Barangay The Barangay may impose
fees for collection and segregation of
biodegradable, compostable and reusable
wastes from households, commerce, other
sources of domestic wastes, and for the
use of Barangay MRFs. The computation of
the fees shall be established by the
respective SWM boards. The manner of
collection of the fees shall be dependent
on the style of administration of respective
Barangay
Councils.
However,
all
transactions shall follow the Commission
on Audit rules on collection of fees.
b) Municipality The municipal and city
councils may impose fees on the barangay
MRFs for the collection and transport of
non-recyclable and special wastes and for
the disposal of these into the sanitary
landfill. The level and procedure for
exacting fees shall be defined by the Local
SWM Board/Local SWM Cluster Board and
supported by LGU ordinances; however,
payments shall be consistent with the
accounting system of government.
c) Private Sector/Civil Society Group On
the basis of the stipulations of contract or

Memorandum of Agreement, the private

sector or civil society group shall impose
fees for collection, transport and tipping in
their SLFs. Receipts and invoices shall be
issued to the paying public or to the
government.
From the afore-quoted provisions, it is clear that
the authority of a municipality or city to impose
fees is limited to the collection and transport of
non-recyclable and special wastes and for the
disposal of these into the sanitary landfill.
Barangays, on the other hand, have the authority
to impose fees for the collection and segregation
of biodegradable, compostable and reusable
wastes from households, commerce, other
sources of domestic wastes, and for the use of
barangay MRFs. This is but consistent with
Section 10 of R.A. No. 9003 directing that
segregation and collection of biodegradable,
compostable and reusable wastes shall be
conducted at the barangay level, while the
collection of non-recyclable materials and special
wastes shall be the responsibility of the
municipality or city.
In this case, the alleged bases of Ordinance No. S2235 in imposing the garbage fee is the volume
of waste currently generated by each person in
Quezon City, which purportedly stands at 0.66
kilogram per day, and the increasing trend of
waste
generation
for
the
past
three
years.157 Respondents
did not elaborate any further. The figure
presented does not reflect the specific types of
wastes generated whether residential, market,
commercial, industrial, construction/demolition,
street
waste,
agricultural,
agro-industrial,
institutional, etc. It is reasonable, therefore, for
the Court to presume that such amount pertains
to the totality of wastes, without any distinction,
generated by Quezon City constituents. To
reiterate, however, the authority of a municipality
or city to impose fees extends only to those
related to the collection and transport of nonrecyclable and special wastes.
Granting, for the sake of argument, that the 0.66
kilogram of solid waste per day refers only to
non-recyclable and special wastes, still, We
cannot sustain the validity of Ordinance No. S2235. It violates the equal protection clause of
the Constitution and the provisions of the LGC
that an ordinance must be equitable and based
as far as practicable on the taxpayers ability to
pay, and not unjust, excessive, oppressive,
confiscatory.158

In the subject ordinance, the rates of the

imposable fee depend on land or floor area and
whether the payee is an occupant of a lot,
condominium,
social
housing
project
or
apartment. For easy reference, the relevant
provision is again quoted below:
On all domestic households in Quezon City;

IMPOSABLE FEE
LAND AREA
Less than 200 sq. m.

PHP 100.00

201 sq. m. 500 sq. m.

PHP 200.00

501 sq. m. 1,000 sq. m.

PHP 300.00

1,001 sq. m. 1,500 sq. m.

PHP 400.00

1,501 sq. m. 2,000 sq. m. or PHP 500.00

more
On all condominium unit and socialized housing
projects/units in Quezon City;
FLOOR AREA

IMPOSABLE FEE

Less than 40 sq. m.

PHP 25.00

41 sq. m. 60 sq. m.

PHP 50.00

61 sq. m. 100 sq. m.

PHP 75.00

101 sq. m. 150 sq. m.

PHP100.00

151 sq. m. 200 sq. [m.] or more

PHP 200.00

On high-rise Condominium Units

a)
High-rise
Condominium

The
Homeowners Association of high rise
condominiums shall pay the annual
garbage fee on the total size of the entire
condominium and socialized Housing Unit
and an additional garbage fee shall be
collected based on area occupied for
every unit already so ld or being
amortized.
b) High-rise apartment units Owners of
high-rise apartment units shall pay the
annual garbage fee on the total lot size of
the entire apartment and an additional

garbage fee based on the schedule

prescribed herein for every unit occupied.
For the purpose of garbage collection, there is, in
fact, no substantial distinction between an
occupant of a lot, on one hand, and an occupant
of a unit in a condominium, socialized housing
project or apartment, on the other hand. Most
likely, garbage output produced by these types of
occupants is uniform and does not vary to a large
degree; thus, a similar schedule of fee is both just
and equitable.159
The rates being charged by the ordinance are
unjust and inequitable: a resident of a 200 sq. m.
unit in a condominium or socialized housing
project has to pay twice the amount than a
resident of a lot similar in size; unlike unit
occupants, all occupants of a lot with an area of
200 sq. m. and less have to pay a fixed rate of
Php100.00; and the same amount of garbage fee
is imposed regardless of whether the resident is
from a condominium or from a socialized housing
project.
Indeed, the classifications under Ordinance No. S2235 are not germane to its declared purpose of
"promoting shared responsibility with the
residents to attack their common mindless
attitude in over-consuming the present resources
and
in
generating
waste."160 Instead
of
simplistically categorizing the payee into land or
floor occupant of a lot or unit of a condominium,
socialized
housing
project
or
apartment,
respondent City Council should have considered
factors that could truly measure the amount of
wastes generated and the appropriate fee for its
collection. Factors include, among others,
household age and size, accessibility to waste
collection, population density of the barangay or
district, capacity to pay, and actual occupancy of
the property. R.A. No. 9003 may also be looked
into for guidance. Under said law, WM service
fees may be computed based on minimum
factors such as type s of solid waste to include
special waste, amount/volume of waste, distance
of the transfer station to the waste management
facility, capacity or type of LGU constituency, cost
of construction, cost of management, and type of
technology. With respect to utility rates set by
municipalities, a municipality has the right to
classify
consumers
under
reasonable
classifications based upon factors such as the
cost of service, the purpose for which the service
or the product is received, the quantity or the
amount received, the different character of the
service furnished, the time of its use or any other
matter which presents a substantial difference as
a ground of distinction. 161[A] lack of uniformity in
the rate charged is not necessarily unlawful
discrimination.
The
establishment
of

classifications and the charging of different rates

for the several classes is not unreasonable and
does not violate the requirements of equality and
uniformity. Discrimination to be unlawful must
draw an unfair line or strike an unfair balance
between those in like circumstances having equal
rights and privileges. Discrimination with respect
to rates charged does not vitiate unless it is
arbitrary and without a reasonable fact basis or
justification.162
On top of an unreasonable classification, the
penalty clause of Ordinance No. SP-2235, which
states:
SECTION 3. Penalty Clause A penalty of 25% of
the garbage fee due plus an interest of 2% per
month or a fraction thereof (interest) shall be
charged against a household owner who refuses
to pay the garbage fee herein imposed. lacks the
limitation required by Section 168 of the LGC,
which provides:
SECTION 168. Surcharges and Penalties on
Unpaid Taxes, Fees, or Charges. The sanggunian
may impose a surcharge not exceeding twentyfive (25%) of the amount of taxes, fees or
charges not paid on time and an interest at the
rate not exceeding two percent (2%) per month
of the unpaid taxes, fees or charges including
surcharges, until such amount is fully paid but in
no case shall the total interest on the unpaid
amount or portion thereof exceed thirty-six (36)
months. (Emphasis supplied)
Finally, on the issue of publication of the two
challenged ordinances.
Petitioner argues that the garbage fee was
collected even if the required publication of its
approval had not yet elapsed. He notes that he
paid his realty tax on January 7, 2014 which
already included the garbage fee. Respondents
counter that if the law provides for its own
effectivity, publication in the Official Gazette is
not necessary so long as it is not penal in nature.
Allegedly, Ordinance No. SP-2095 took effect after
its publication while Ordinance No. SP-2235
became effective after its approval on December
26, 2013.
The pertinent provisions of the LGC state:
SECTION 59. Effectivity of Ordinances or
Resolutions. (a) Unless otherwise stated in the
ordinance or the resolution approving the local
development plan and public investment
program, the same shall take effect after ten (10)
days from the date a copy thereof is posted in a
bulletin board at the entrance of the provincial

capital or city, municipal, or barangay hall, as the

case may be, and in at least two (2) other
conspicuous places in the local government unit
concerned.
(b) The secretary to the sanggunian
concerned shall cause the posting of an
ordinance or resolution in the bulletin
board at the entrance of the provincial
capital and the city, municipal, or
barangay hall in at least two
(2) conspicuous places in the local
government unit concerned not later than
five (5) days after approval thereof.
The text of the ordinance or resolution
shall be disseminated and posted in
Filipino or English and in the language or
dialect understood by the majority of the
people in the local government unit
concerned, and the secretary to the
sanggunian shall record such fact in a
book kept for the purpose, stating the
dates of approval and posting.
(c) The gist of all ordinances with penal
sanctions shall be published in a
newspaper of general circulation within
the province where the local legislative
body concerned belongs. In the absence of
any newspaper of general circulation
within the province, posting of such
ordinances
shall
be
made
in
all
municipalities and cities of the province
where the sanggunian of origin is situated.
(d) In the case of highly urbanized and
independent component cities, the main
features of the ordinance or resolution
duly enacted or adopted shall, in addition
to being posted, be published once in a
local newspaper of general circulation
within the city: Provided, That in the
absence
thereof
the
ordinance
or
resolution shall be published in any
newspaper of general circulation.
SECTION 188. Publication of Tax Ordinances and
Revenue Measures. Within ten (10) days after
their approval, certified true copies of all
provincial, city, and municipal tax ordinances or
revenue measures shall be published in full for
three (3) consecutive days in a newspaper of
local circulation: Provided, however, That in
provinces, cities and municipalities where there
are no newspapers of local circulation, the same
may be posted in at least two (2) conspicuous
and publicly accessible places. (Emphasis
supplied)

On October 17, 2011, respondent Quezon City

Council enacted Ordinance No. SP-2095, which
provides that it would take effect after its
publication
in
a
newspaper
of
general
circulation.163 On the other hand, Ordinance No.
SP-2235, which was passed by the City Council on
December 16, 2013, provides that it would be
effective upon its approval.164
Ten (10) days after its enactment, or on
December 26, 2013, respondent City Mayor
approved the same.165
The case records are bereft of any evidence to
prove petitioners negative allegation that
respondents did not comply with the posting and
publication requirements of the law. Thus, We are
constrained not to give credit to his unsupported
claim.
WHEREFORE, the petition is PARTIALLY GRANTED.
The constitutionality and legality of Ordinance No.
SP-2095, S-2011, or the "Socialized Housing Tax
of Quezon City," is SUSTAINED for being
consistent with Section43 of Republic Act No.
7279. On the other hand, Ordinance No. SP-2235,
S-2013, which collects an annual garbage fee on
all domestic households in Quezon City, is hereby
declared as UNCONSTITUTIONAL AND ILLEGAL.
Respondents are DIRECTED to REFUND with
reasonable dispatch the sums of money collected
relative to its enforcement. The temporary
restraining order issued by the Court on February
5, 2014 is LIFTED with respect to Ordinance No.
SP-2095.
In
contrast,
respondents
are
PERMANENTLY ENJOINED from taking any further
action to enforce Ordinance No. SP. 2235.
SO ORDERED.

COMMISSIONER
OF
CUSTOMS and the
DISTRICT
COLLECTOR OF THE
PORT OF SUBIC,
Petitioners,

- versus -

G.R. No. 179579

Present:
CARPIO, J.,
Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.
Promulgated:

HYPERMIX FEEDS
CORPORATION,

February 1, 2012

Respondent.

subjected to the 7% tariff upon the arrival of the

shipment, forcing them to pay 133% more than
was proper.

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -----x
DECISION
SERENO, J.:
Before us is a Petition for Review under
Rule 45,[1] assailing the Decision[2] and the
Resolution[3] of the Court of Appeals (CA), which
nullified the Customs Memorandum Order (CMO)
No. 27-2003[4] on the tariff classification of wheat
issued by petitioner Commissioner of Customs.
The antecedent facts are as follows:
On
7
November
2003,
petitioner
Commissioner of Customs issued CMO 27-2003.
Under the Memorandum, for tariff purposes,
wheat was classified according to the following:
(1) importer or consignee; (2) country of origin;
and (3) port of discharge.[5] The regulation
provided an exclusive list of corporations, ports of
discharge, commodity descriptions and countries
of origin. Depending on these factors, wheat
would be classified either as food grade or feed
grade. The corresponding tariff for food grade
wheat was 3%, for feed grade, 7%.
CMO 27-2003 further provided for the
proper procedure for protest or Valuation and
Classification Review Committee (VCRC) cases.
Under this procedure, the release of the articles
that were the subject of protest required the
importer to post a cash bond to cover the tariff
differential.[6]
A month after the issuance of CMO 272003, on 19 December 2003, respondent filed a
Petition for Declaratory Relief[7] with the Regional
Trial Court (RTC) of Las Pias City. It anticipated the
implementation of the regulation on its imported
and perishable Chinese milling wheat in transit
from China.[8] Respondent contended that CMO
27-2003 was issued without following the
mandate of the Revised Administrative Code on
public participation, prior notice, and publication
or registration with the University of the
Philippines Law Center.
Respondent
also
alleged
that
the
regulation summarily adjudged it to be a feed
grade supplier without the benefit of prior
assessment and examination; thus, despite
having imported food grade wheat, it would be

Furthermore, respondent claimed that the

equal protection clause of the Constitution was
violated when the regulation treated non-flour
millers differently from flour millers for no reason
at all.
Lastly, respondent asserted that the
retroactive application of the regulation was
confiscatory in nature.
On 19 January 2004, the RTC issued a
Temporary Restraining Order (TRO) effective for
twenty (20) days from notice.[9]
Petitioners thereafter filed a Motion to
Dismiss.[10] They alleged that: (1) the RTC did not
have jurisdiction over the subject matter of the
case, because respondent was asking for a
judicial determination of the classification of
wheat; (2) an action for declaratory relief was
improper; (3) CMO 27-2003 was an internal
administrative rule and not legislative in nature;
and (4) the claims of respondent were speculative
and premature, because the Bureau of Customs
(BOC) had yet to examine respondents products.
They likewise opposed the application for a writ
of preliminary injunction on the ground that they
had not inflicted any injury through the issuance
of the regulation; and that the action would be
contrary to the rule that administrative issuances
are assumed valid until declared otherwise.
On 28 February 2005, the parties agreed
that the matters raised in the application for
preliminary injunction and the Motion to Dismiss
would just be resolved together in the main case.
Thus, on 10 March 2005, the RTC rendered its
Decision[11] without
having
to
resolve
the
application for preliminary injunction and the
Motion to Dismiss.
The trial court
respondent, to wit:

ruled

in

favor

WHEREFORE, in view of
the foregoing, the Petition is
GRANTED and the subject Customs
Memorandum Order 27-2003 is
declared INVALID and OF NO
FORCE AND EFFECT. Respondents
Commissioner of Customs, the
District Collector of Subic or
anyone acting in their behalf are to
immediately cease and desist from
enforcing
the
said
Customs
Memorandum Order 27-2003.
SO ORDERED.[12]

of

The RTC held that it had jurisdiction over

the subject matter, given that the issue raised by
respondent
concerned
the
quasi-legislative
powers of petitioners. It likewise stated that a
petition for declaratory relief was the proper
remedy, and that respondent was the proper
party to file it. The court considered that
respondent was a regular importer, and that the
latter would be subjected to the application of the
regulation in future transactions.
With regard to the validity of the
regulation, the trial court found that petitioners
had not followed the basic requirements of
hearing and publication in the issuance of CMO
27-2003. It likewise held that petitioners had
substituted the quasi-judicial determination of the
commodity
by
a
quasi-legislative
predetermination.[13] The lower court pointed out
that a classification based on importers and ports
of discharge were violative of the due process
rights of respondent.
Dissatisfied with the Decision of the lower
court, petitioners appealed to the CA, raising the
same allegations in defense of CMO 27-2003.
[14]
The appellate court, however, dismissed the
appeal. It held that, since the regulation affected
substantial rights of petitioners and other
importers, petitioners should have observed the
requirements of notice, hearing and publication.
Hence, this Petition.
Petitioners raise the following issues for
the consideration of this Court:
I.

THE COURT OF APPEALS

DECIDED A QUESTION OF
SUBSTANCE WHICH IS NOT IN
ACCORD WITH THE LAW AND
PREVAILING JURISPRUDENCE.

II.

THE
COURT
OF
APPEALS
GRAVELY ERRED IN DECLARING
THAT THE TRIAL COURT HAS
JURISDICTION OVER THE CASE.

The Petition has no merit.

We shall first discuss the propriety of an
action for declaratory relief.
Rule 63, Section 1 provides:
Who may file petition. Any
person interested under a deed,
will, contract or other written
instrument, or whose rights are
affected by a statute, executive

order or regulation, ordinance, or

any other governmental regulation
may, before breach or violation
thereof, bring an action in the
appropriate Regional Trial Court to
determine
any
question
of
construction or validity arising, and
for a declaration of his rights or
duties, thereunder.
The requirements of an action for
declaratory relief are as follows: (1) there must be
a justiciable controversy; (2) the controversy
must be between persons whose interests are
adverse; (3) the party seeking declaratory relief
must have a legal interest in the controversy; and
(4) the issue involved must be ripe for judicial
determination.[15] We find that the Petition filed by
respondent before the lower court meets these
requirements.
First, the subject of the controversy is the
constitutionality of CMO 27-2003 issued by
petitioner Commissioner of Customs. In Smart
Communications v. NTC,[16] we held:
The
determination
of
whether a specific rule or set of
rules issued by an administrative
agency contravenes the law or the
constitution
is
within
the
jurisdiction
of
the
regular
courts. Indeed, the Constitution
vests the power of judicial
review or the power to declare
a law, treaty, international or
executive
agreement,
presidential
decree,
order,
instruction,
ordinance,
or
regulation
in
the
courts,
including the regional trial
courts. This is within the scope
of
judicial
power,
which
includes the authority of the
courts to determine in an
appropriate action the validity
of the acts of the political
departments. Judicial
power
includes the duty of the courts of
justice
to
settle
actual
controversies
involving
rights
which are legally demandable and
enforceable, and to determine
whether or not there has been a
grave
abuse
of
discretion
amounting to lack or excess of
jurisdiction on the part of any
branch or instrumentality of the
Government. (Emphasis supplied)

Meanwhile,

in Misamis

Oriental

Association of Coco Traders, Inc. v. Department of

Finance Secretary,[17] we said:
xxx [A] legislative rule is in
the
nature
of
subordinate
legislation, designed to implement
a primary legislation by providing
the details thereof. xxx
In addition such rule must be
published. 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.
(Emphasis
supplied)
Second, the controversy is between two
parties that have adverse interests. Petitioners
are summarily imposing a tariff rate that
respondent is refusing to pay.
Third, it is clear that respondent has a
legal
and
substantive
interest
in
the
implementation of CMO 27-2003. Respondent has
adequately shown that, as a regular importer of
wheat, on 14 August 2003, it has actually made
shipments of wheat from China to Subic. The
shipment was set to arrive in December 2003.

Upon its arrival, it would be subjected to the

conditions of CMO 27-2003. The regulation calls
for the imposition of different tariff rates,
depending on the factors enumerated therein.
Thus, respondent alleged that it would be made
to pay the 7% tariff applied to feed grade wheat,
instead of the 3% tariff on food grade wheat. In
addition, respondent would have to go through
the procedure under CMO 27-2003, which would
undoubtedly toll its time and resources. The lower
court correctly pointed out as follows:
xxx As noted above, the fact
that petitioner is precisely into the
business of importing wheat, each
and every importation will be
subjected to constant disputes
which
will
result
into (sic) delays in the delivery,
setting aside of funds as cash
bond required in the CMO as
well as the resulting expenses
thereof. It is easy to see that
business uncertainty will be a
constant
occurrence
for
petitioner.
That
the
sums
involved are not minimal is
shown
by
the
discussions
during the hearings conducted
as well as in the pleadings
filed. It may be that the petitioner
can later on get a refund but such
has been foreclosed because the
Collector of Customs and the
Commissioner of Customs are
bound by their own CMO. Petitioner
cannot get its refund with the said
agency. We believe and so find that
Petitioner has presented such a
stake in the outcome of this
controversy as to vest it with
standing to file this petition.
[18]
(Emphasis supplied)
Finally, the issue raised by respondent is
ripe for judicial determination, because litigation
is inevitable[19] for the simple and uncontroverted
reason that respondent is not included in the
enumeration of flour millers classified as food
grade wheat importers. Thus, as the trial court
stated, it would have to file a protest case each
time it imports food grade wheat and be
subjected to the 7% tariff.
It is therefore clear that a petition for
declaratory relief is the right remedy given the
circumstances of the case.
Considering that the questioned regulation
would affect the substantive rights of respondent
as explained above, it therefore follows that

petitioners should have applied the pertinent

provisions of Book VII, Chapter 2 of the Revised
Administrative Code, to wit:
Section 3. Filing. (1) Every
agency shall file with the University
of the Philippines Law Center three
(3) certified copies of every rule
adopted by it. Rules in force on the
date of effectivity of this Code
which are not filed within three (3)
months from that date shall not
thereafter be the bases of any
sanction against any party of
persons.
xxx xxx xxx
Section
9. Public
Participation. - (1) 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.
When an administrative rule is merely
interpretative in nature, its applicability needs
nothing further than its bare issuance, for it gives
no real consequence more than what the law
itself has already prescribed. When, on the other
hand, the administrative rule goes beyond merely
providing for the means that can facilitate or
render least cumbersome the implementation of
the law but substantially increases the burden of
those governed, it behooves the agency to accord
at least to those directly affected a chance to be
heard, and thereafter to be duly informed, before
that new issuance is given the force and effect of
law.[20]
Likewise, in Taada v. Tuvera,[21] we held:
The clear object of the
above-quoted provision is to
give
the
general
public
adequate notice of the various
laws which are to regulate

their actions and conduct as

citizens. Without such notice and
publication, there would be no
basis for the application of the
maxim ignorantia
legis
non
excusat. It would be the height
of injustice
to punish or
otherwise burden a citizen for
the transgression of a law of
which
he
had
no
notice
whatsoever,
not
even
a
constructive one.
Perhaps at no time since the
establishment of the Philippine
Republic has the publication of laws
taken so vital significance that at
this time when the people have
bestowed upon the President a
power heretofore enjoyed solely by
the legislature. While the people
are kept abreast by the mass
media
of
the
debates
and
deliberations
in
the Batasan
Pambansa and for the diligent
ones,
ready
access
to
the
legislative records no such publicity
accompanies
the
law-making
process of the President. Thus,
without publication, the people
have no means of knowing
what presidential decrees have
actually
been
promulgated,
much less a definite way of
informing themselves of the
specific contents and texts of
such
decrees.
(Emphasis
supplied)
Because petitioners failed to follow the
requirements enumerated by the Revised
Administrative Code, the assailed regulation must
be struck down.
Going now to the content of CMO 27-3003,
we likewise hold that it is unconstitutional for
being violative of the equal protection clause of
the Constitution.
The equal protection clause means that no
person or class of persons shall be deprived of
the same protection of laws enjoyed by other
persons or other classes in the same place in like
circumstances. Thus, the guarantee of the equal
protection of laws is not violated if there is a
reasonable classification. For a classification to be
reasonable, it must be shown that (1) it rests on
substantial distinctions; (2) it is germane to the
purpose of the law; (3) it is not limited to existing
conditions only; and (4) it applies equally to all
members of the same class.[22]

Unfortunately, CMO 27-2003 does not

meet these requirements. We do not see how the
quality of wheat is affected by who imports it,
where it is discharged, or which country it came
from.

feasible to do so and when such

analysis is necessary for the proper
classification,
appraisal,
and/or
admission into the Philippines of
imported articles.

Thus, on the one hand, even if other

millers excluded from CMO 27-2003 have
imported food grade wheat, the product would
still be declared as feed grade wheat, a
classification subjecting them to 7% tariff. On the
other hand, even if the importers listed under
CMO 27-2003 have imported feed grade wheat,
they would only be made to pay 3% tariff, thus
depriving the state of the taxes due. The
regulation,
therefore,
does
not
become
disadvantageous to respondent only, but even to
the state.

Likewise, the
customs
officer shall determine the unit
of quantity in which they are
usually bought and sold, and
appraise the imported articles
in accordance with Section 201
of this Code.

It is also not clear how the regulation

intends to monitor
more
closely wheat
importations
and
thus
prevent
their
misclassification. A careful study of CMO 27-2003
shows that it not only fails to achieve this end,
but results in the opposite. The application of the
regulation forecloses the possibility that other
corporations that are excluded from the list
import food grade wheat; at the same time, it
creates an assumption that those who meet the
criteria do not import feed grade wheat. In the
first case, importers are unnecessarily burdened
to prove the classification of their wheat imports;
while in the second, the state carries that burden.
Petitioner Commissioner of Customs also
went beyond his powers when the regulation
limited the customs officers duties mandated by
Section 1403 of the Tariff and Customs Law, as
amended. The law provides:
Section 1403. Duties of
Customs
Officer
Tasked
to
Examine, Classify, and Appraise
Imported
Articles. The
customs
officer tasked to examine, classify,
and
appraise
imported
articles shall determine whether
the packages designated for
examination and their contents
are in accordance with the
declaration
in
the
entry,
invoice and other pertinent
documents and shall make
return in such a manner as to
indicate whether the articles
have been truly and correctly
declared in the entry as regard
their quantity, measurement,
weight, and tariff classification
and not imported contrary to
law. He shall submit samples to
the laboratory for analysis when

Failure on the part of the

customs officer to comply with his
duties shall subject him to the
penalties prescribed under Section
3604 of this Code.
The provision mandates that the customs officer
must first assess and determine the classification
of the imported article before tariff may be
imposed. Unfortunately, CMO 23-2007 has
already classified the article even before the
customs officer had the chance to examine it. In
effect, petitioner Commissioner of Customs
diminished the powers granted by the Tariff and
Customs Code with regard to wheat importation
when it no longer required the customs
officers prior examination and assessment of the
proper classification of the wheat.
It is well-settled that rules and regulations,
which are the product of a delegated power to
create new and additional legal provisions that
have the effect of law, should be within the scope
of the statutory authority granted by the
legislature to the administrative agency. It is
required that the regulation be germane to the
objects and purposes of the law; and that it be
not in contradiction to, but in conformity with, the
standards prescribed by law.[23]
In
summary,
petitioners
violated
respondents right to due process in the issuance
of CMO 27-2003 when they failed to observe the
requirements under the Revised Administrative
Code. Petitioners likewise violated respondents
right to equal protection of laws when they
provided for an unreasonable classification in the
application of the regulation. Finally, petitioner
Commissioner of Customs went beyond his
powers of delegated authority when the
regulation limited the powers of the customs
officer to examine and assess imported articles.
WHEREFORE, in view of the foregoing,
the Petition is DENIED.
SO ORDERED.

G.R. No. 125346

November 11,
2014
LA
SUERTE
CIGAR
&
CIGARETTE
FACTORY, Petitioner,
vs.
COURT OF APPEALS and COMMISSIONER OF
INTERNAL REVENUE, Respondents.
x-----------------------x
G.R. Nos. 136328-29
COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner,
vs.
FORTUNE
TOBACCO
CORPORATION, Respondent.
x-----------------------x
G.R. No. 144942
COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner,
vs.
LA
SUERTE
CIGAR
&
CIGARETTE
FACTORY, Respondent.
x-----------------------x
G.R. No. 148605
STERLING
TOBACCO
CORPORATION, Petitioner,
vs.
COMMISSIONER
OF
INTERNAL
REVENUE, Respondent.
x-----------------------x
G.R. No. 158197
LA
SUERTE
CIGAR
&
CIGARETTE
FACTORY, Petitioner,
vs.
COMMISSIONER
OF
INTERNAL
REVENUE, Respondent.
x-----------------------x
G.R. No. 165499
LA
SUERTE
CIGAR
&
CIGARETTE
FACTORY, Petitioner,
vs.
COMMISSIONER
OF
INTERNAL
REVENUE, Respondent.
DECISION
LEONEN, J.:
These cases involve the taxability of stemmed
leaf tobacco imported and locally purchased by

cigarette manufacturers for use as raw material

in the manufacture of their cigarettes. Under the
National Internal Revenue Code of 1997 (1997
NIRC), before it was amended on December 19,
2012 through Republic Act No. 103511 (Sin Tax
Law), stemmed leaf tobacco is subject to an
excise tax of P0.75 for each kilogram
thereof.2 The 1997 NIRC further provides that
stemmed leaf tobacco - "leaf tobacco which has
had the stem or midrib removed" 3 - "may be sold
in bulk as raw material by one manufacturer
directly to another without payment of the tax,
under such conditions as may be prescribed in
the rules and regulations prescribed by the
Secretary of Finance."4
This is a consolidation of six petitions for review
of several decisions of the Court of Appeals,
involving three cigarette manufacturers and the
Commissioner of Internal Revenue. G.R. No.
125346 is anal5 from the Court of Appeals (Sixth
Division) that rever LEONEN, LEONEN, sed 6 the
Court of Tax Appeals' decision7 and held
petitioner La Suerte Cigar & Cigarette Factory (La
Suerte) liable for deficiency specific tax on its
purchase of imported and locally produced
stemmed leaf tobacco and sale of stemmed leaf
tobacco to Associated Anglo-American Tobacco
Corporation (AATC) during the period from
January 1, 1986 to June 30, 1989. GR. Nos.
136328-29 is an appeal 8 by the Commissioner of
Internal Revenue (Commissioner) from the
decision9 of the Court of Appeals that affirmed the
Court of Tax Appeals' rulings10 that Fortune
Tobacco Corporation (Fortune) was not obliged to
pay the excise tax on its importations of
stemmed leaf tobacco for the periods from
January 1, 1986 to June 30, 1989 and July 1, 1989
to November 30, 1990. In G.R. No. 148605,
Sterling
Tobacco
Corporation
(Sterling)
appeals11 the decision12 of the Court of Appeals
that reversed the Court of Tax Appeals
decision13 and held it liable to pay deficiency
excise taxes on its importation and local
purchases of stemmed leaf tobacco from
November 1986 to June 24, 1989. G.R. No.
144942is an appeal14 from the Court of Appeals
decision15 that affirmed the Court of Tax Appeals
decision16 and ordered the refund of specific
taxes paid by La Suerte on its importation of
stemmed leaf tobacco in April 1995. In G.R. No.
158197, La Suerte sought to appeal 17the
decision18 of the Court of Appeals holding it liable
for deficiency specific tax on its local and
imported purchases of stemmed leaf tobacco and
those it sold for the period from June 21, 1989 to
November 20, 1990. Finally, in G.R. No. 165499,
La Suerte again sought to appeal by
certiorari19 the decision20 of the Court of Appeals
reversing the Court of Tax Appeals and holding it

liable for deficiency specific tax on its importation

of stemmed leaf tobacco in March 1995.
Factual background
Overview of cigarette manufacturing
The primary component of cigarettes is tobacco,
a processed product derived from the leaves of
the plants in the genus Nicotiana. 21 Most
cigarettes contain a mixture or blend of several
types of tobacco from a variety of sources.
The tobacco types grown in the Philippines are:
Virginia (or fluecured),22 which accounts for
59.35% of tobacco production, Burley (or bright
air-cured),23 which makes up 22.21%, and the
Native (or dark air-cured),24 which makes up the
remaining 18.44%.25 "[T]he native type is
normally categorized into three: cigar filler type,
wrapper type and chewing type, or . . . Batek
tobacco."26 Virginia and Burley, considered as the
aromatic type, are intended for cigarette
manufacturing.
Growing and harvesting
"Tobacco
seeds
undergo
a
process
of
germination, which takes about 7 to 10 days,
depending on the tobacco varieties. . . . The
tobacco seedlings are then sown in cold frames
or hotbedsto prevent attacks from insects, and
then transplanted into the fields"27 after 45 to 65
days.28 Harvesting begins 55 to 60 days after
transplanting.29 A farmer carries out either
priming(leaf by leaf) or stalk harvesting (by the
whole plant).30

Curing
"After harvest, tobacco is stored for curing, which
allows for the slow oxidation and degradation of
carotenoids. This allows for the leaves to take on
properties that are usually attributed to the
smoothness of the smoke."31
"Curing methods vary with the type of tobacco
grown. The tobacco barn design varies
accordingly."32 There are two main ways of curing
tobacco in the Philippine setting:
1) Air-curing (for Burley and Native
tobacco) "is carried out by hanging the
tobacco in well-ventilated barns, where
the tobacco is allowed to dry over a period
of 4 to 8 weeks. Air-cured tobacco is
generally low in sugar content, which

gives the tobacco smoke a light, smooth,

semi-sweet flavor. These tobacco leaves
usually
have
a
high
nicotine
content[;]"33 and

cigarettes are subsequently packed, sealed, and

placed in cartons.

2) Flue-curing (for Virginia tobacco)

process "starts by the sticking of tobacco
leaves, which are then hung from tierpoles in curing barns. The procedure will
generally take about a week. Fluecured
tobacco generally produces cigarette
tobacco, which usually has a high content
of sugar, with medium to high levels of
nicotine."34

La Suerte Cigar & Cigarette Factory (La

Suerte),44 Fortune
Tobacco
Corporation
(Fortune),45 and Sterling Tobacco Corporation
(Sterling)46 are domestic corporations engaged in
the production and manufacture of cigars and
cigarettes. These companies import leaf tobacco
from foreign sources and purchase locally
produced leaf tobacco to be used in the
manufacture of cigars and cigarettes.47

Once cured, the leaves are sorted into grades

based on size, color, and quality, and packed in
standard bales.35The bales are then moved to
accredited trading centers where they are
purchased by leaf buyers such as wholesale
tobacco dealers and exporters or cigarette
manufacturing companies.36

The transactions of these cigarette manufacturers

pertinent to these consolidated cases are the
following:

Redrying and aging

After purchase, leaf tobacco is re-dried and then
added with moisture to make the tobacco pliable
enough to remove its large stems.37 The leaves
are stripped or de-stemmed, eitherby hand or
machine, cleaned and compressed into boxes or
porous wooden vats called hogsheads, and
aged.38 Thereafter, the leaves are either exported
or used for the manufacture of cigarettes, cigars,
and other tobacco products.
Primary processing39
In the cigarette factory, the tobacco leaves
undergo a conditioning process where "high
temperatures and humidity restore moisture to
suitable levels for cutting and blending tobacco
and completing the cigarette-making process." 40
"[T]obaccos are precisely cut and blended
according to . . . formulas, or recipes, to produce
tobaccos for various brands of cigarettes. These
brand recipes include ingredients and flavors that
are added to the tobacco to give each brand its
unique characteristics."41
Cigarette making and packing42
"The blended tobacco often referred to as
"filler" or "cut-filler" . . . is delivered by a
pneumatic feed system to cigarette making
machines . . . within the factory." 43 The machine
disperses the shredded tobacco over a
continuous roll of cigarette paper and cuts the
paper to the desired length. The completed

Cigarette manufacturers

1.
La
Suertes
local
purchases,
importations, and sale of stemmed leaf
tobacco from January 1, 1986 to June 30,
1989 (G.R. No. 125346), and from June
1989 to November 1990 (G.R. No.
158197), and importations in March 1995
(G.R. No. 165499) and April 1995 (G.R. No.
144942); 2. Fortunes importation of
tobacco strips from January 1, 1986 to
June 30, 1989, and from July 1, 1989 to
November 30, 1990 (G.R. Nos. 136328
29); and
3. Sterlings importations and local
purchases of stemmed leaf tobacco from
November 1986 to June 24, 1989 (G.R. No.
148605).
History of applicable tax provisions
The first tax code came into existence in 1939
with the enactment of Commonwealth Act No.
46648 (1939 Code). Section 136 of the 1939 Code
imposed specific (excise) taxes on manufactured
products of tobacco, but excluded cigars and
cigarettes, which were subject to tax under a
different section.49 Section 136 provided thus:
SECTION 136. Specific Tax on Products of
Tobacco. On manufactured products of tobacco,
except cigars, cigarettes, and tobacco specially
prepared for chewing so as to be unsuitable for
consumption in any other manner, but including
all other tobacco twisted by hand or reduced into
a condition to be consumed in any manner other
than by the ordinary mode of drying and curing;
and on all tobacco prepared or partially prepared
for sale or consumption, even if prepared without
the use of any machine or instrument and
without being pressed or sweetened; and on all
fine-cut shorts and refuse, scraps, clippings,

cuttings, and sweepings of tobacco, there shall be

collected on each kilogram, sixty centavos.
On tobacco specially prepared for chewing so as
to be unsuitable for use in any other manner, on
each kilogram, forty-eight centavos. (Emphasis
supplied)
Section 132 of the 1939 Code, however, by way
of exception, provided that "stemmed leaf
tobacco . . . may be sold in bulk as raw material
by one manufacturer directly to another, under
such conditions as may be prescribed in the
regulations of the Department of Finance, without
the prepayment of the tax." Section 132 stated:
SECTION 132. Removal of Tobacco Products
Without Prepayment of Tax. Products of tobacco
entirely unfit for chewing or smoking may be
removed free of tax for agricultural or industrial
use, under such conditionsas may be prescribed
in the regulations of the Department of Finance;
and stemmed leaf tobacco, fine-cut shorts, the
refuse of fine-cut chewing tobacco, refuse,
scraps, cuttings, clippings and sweepings of
tobacco may be sold in bulk as raw material
byone manufacturer directly to another, under
such conditions as may be prescribed in the
regulations of the Department of Finance, without
the prepayment of the tax.
"Stemmed leaf tobacco," as herein used means
leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf
tobacco. (Emphasis supplied)
On
September
29,
1954,
upon
the
recommendation of then Acting Collector of
Internal Revenue J. Antonio Araneta, the
Department of Finance promulgated Revenue
Regulations No. V-39 (RR No. V-39), or "The
Tobacco Products Regulations," relative to "the
enforcement of the provisions of Title IV of the
[1939 Tax Code] in so far as they affect the
manufacture or importation of, and the collection
and payment of the specific tax on, manufactured
tobacco or products of tobacco." 50 Section 20(a)
of RR No. V-39, which lays the rules for tax
exemption on tobacco products, states:
SECTION 20. Exemption from tax of tobacco
products intended for agricultural or industrial
purposes. (a) Sale of stemmed leaf tobacco,
etc., by one factory to another. Subject to the
limitations herein established, products of
tobacco entirely unfit for chewing or smoking
may be removed free of tax for agricultural or
industrial use;and stemmed leaf tobacco, finecut
shorts, the refuse of fine-cut chewing tobacco,
refuse, scraps, cuttings, clippings, and sweepings

of tobacco may be sold in bulk as raw materials

by one manufacturer directly to another without
the prepayment of specific tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse
of fine-cut chewing tobacco, scraps, cuttings,
clippings, and sweeping of leaf tobacco or
partially manufactured tobacco or other refuse of
tobacco may be transferred from one factory to
another under an official L-7 in voice on which
shall be entered the exact weight of the tobacco
at the time of its removal, and entry shall be
made in the L-7 register in the place provided on
the page of removals.
Corresponding debit entry will be made in the L-7
register book of the factory receiving the tobacco
under heading "Refuse, etc., received from other
factory," showing the date of receipt, assessment
and invoice numbers, name and address of the
consignor, form in which received, and the weight
of the tobacco. This paragraph should not,
however, be construed to permit the transfer of
materials unsuitable for the manufacture of
tobacco products from one factory to another.
(Emphasis supplied)
Sections 10 and 11 of RR No. V-39 enumerate and
describe the record books to be kept and used by
manufacturers of tobacco products, viz:
SECTION 10. (a) Register, auxiliary, and stamps
requisition books for manufacturers. The
Collector of Internal Revenue shall from time to
time supply provincial revenue agents or the
Chief of the Tobacco Tax Section with the
necessary number of manufacturers official
register books and official auxiliary register
booksas may be required in each locality by
manufacturers of tobacco products. Whenever
any manufacturer shall have qualified himself as
such by executing a proper bond, registering his
factory, and paying the privilege tax and shall
have complied with all the requirements
ofengaging in such business contained in the
National Internal Revenue Code and in these
regulations, the internal revenue agent within
whose district the factory is located shall deliver
to said manufacturer the necessary official
register books and auxiliary register books. These
books consist of the following:
B.I.R. No. 31.09Official RegisterBook, A-3
for manufacturers of chewing and smoking
tobacco. B.I.R. No. 31.10Manufactured
tobacco (Transcript sheet of above).
B.I.R. No. 31.18Official Register Book, A4, for manufacturers of cigar.

B.I.R. No. 31.19(Transcriptsheet of the

above).

factory. The bale book[,] L-7-1/2, is an

auxiliary to the L-7 official register book.

B.I.R. No. 31.27Official Register Book, A5, for Manufacturers of cigarettes.

All official register books and other official

records herein required of manufacturers
shall be kept in the factory premises, or in
the factory warehouse, in the case of bale
books, and open to inspection by any
internal revenue officer at all times of the
day or night.

B.I.R. No.
above).

31.28(Transcript

sheet

of

B.I.R. No. 31.01Official Register Book, L7,

record
of
raw
materials
for
manufacturers of any class of tobacco
products.
B.I.R. No.
above)[.]

31.02(Transcript

sheet

of

B.I.R. No. 31.46Auxiliary Register Book,

L-7-1/2, bale book, for manufacturers of
any class of tobacco products.
B.I.R. No.
above).

31.47(Transcript

sheet

of

B.I.R. No. 31.12Stamp requisition book,

for
manufacturers
of
manufactured
tobacco.
B.I.R. No. 31.21Stamp requisition book,
for manufacturers of cigars.
B.I.R. No. 31.30Stamp requisition book,
for manufacturers of cigarettes.
B.I.R. No. 31.05L-7 Official Invoice Book
for, use in connection with L-7 register
book.
B.I.R. No. 31.05L-7-1/2 OfficialInvoice
Book, for use in connection with L-7-1/2
bale book.
(b) General nature of official register and
auxiliary register books. The L-7 official
register book isthe record of all raw
materials used in the manufacture of
tobacco products of all description in the
factory.It is the primary record of the
internal operations of the factory. It shows
the raw materials used in the manufacture
and the articles actually manufactured or
produced. The Schedule A register books
are the record of the articles actually
manufactured
or
produced,
and
transferred from the credit side of the
official register book, L-7. They show the
amount of taxes paid and the name of the
person to whom the finished products is
consigned or sold when leaving the

....
SECTION 11. Entries to be made in the official
register and auxiliary register books; monthly
transcripts. (a) Official bale book (L-7-1/2). All
leaf tobacco received in any factory or factory
warehouse shall be debited, and any removal of
tobacco from the factory shall be credited in the
official bale book; except cuttings, clippings,
sweepings, and other partially manufactured
tobacco, which shall be credited in the L-7
register book.
The Collector of Internal Revenue may in his
discretion waive the requirements of keeping an
official bale book by small factories.
(b) The Official Register Book (L-7). One L-7
books shall suffice for each manufacturer of
tobacco products, regardless of the classes of
tobacco manufactured by him.All loose leaf
tobacco received in the factory proper and all
bales of leaf tobacco which are opened in the
factory for use in the manufacture of tobacco
products shall be entered in the L-7 official
register book under the heading "Received from
Dealers" at the net weights. In the column
headed "Name["] and "Address" shall be shown
the words "Transferred from tobacco factory
warehouse". All leaf tobacco received into a
factory must be entered in the official bale book
pertaining to the factory and bales of leaf tobacco
shall not be taken up in the L-7 register book until
said bales are transferred for use and credited in
the official bale book. While leaf tobacco must be
taken in the official bale book, this is done for
statistical purposes only. As soon asit enters the
factory for use in manufacture it should be taken
up in the L-7 register book and credited in the
official bale book.
All removals of waste of tobacco, whether
transferred to other factories, removed for
agricultural orindustrial purposes, or destroyed on
the premises or elsewhere, shall be entered in the
official register book, L-7, under the heading "Raw
Materials Removed", showing all information
required therein. (Emphasis supplied)

Section 2 of RR No. V-39 broadly defined

"manufactured
products
of
tobacco"
and
"manufacturer of tobacco products" as follows:

(1) "Stemmed leaf" handstripped

tobacco, clean, good, partially broken leaf
only, free from mold and dust.

Section 2. Definition of terms. When used in

there [sic] regulations, the following terms shall
begiven the interpretations indicated in their
respective definitions given below, except where
the context indicates otherwise:

(2) "Long-filler" handstripped tobacco of

good, long pieces of broken leaf usableas
filler for cigars without further preparation,
and free from mold, dust stems and cigar
cuttings.

(a) "Manufactured products of tobacco"

shall include cigars, cigarettes, smoking
tobacco, chewing, snuff, and all other
forms of manufactured and partially
manufactured tobacco, as defined in
section 194 (M)51 of the National Internal
Revenue Code.

(3) "Short-filler" handstripped or

machine-stripped tobacco, clean, good,
short pieces of broken leaf, which will not
pass through a screen of two inches (2")
mesh.

(b) "Manufacturer of tobacco products"

shall include all persons engaged in the
manufacture of any of the forms of
tobacco mentioned in the next preceding
paragraph.
In 1967, the Secretary of Finance promulgated
Revenue Regulations No. 17-67 (RR No. 17-67), as
amended,52or the "Tobacco Revenue Regulations
on Leaf, Scrap, Other Partially Manufactured
Tobacco and Other Tobacco Products; Grading,
Classification, Inspection, Shipments, Exportation,
Importation and the Manufacturers thereof under
the provisions of Act No. 2613, as amended."
Section 2(i) of RR No. 17-67 defined a
"manufacturer of tobacco" and included in the
definition
one
who
prepares
partially
manufactured tobacco. Section 2(m) defined
"partially manufactured tobacco" as including
stemmed leaf tobacco. Thus, Sections 2(i) and
(m) read:
(i) "Manufacturer of tobacco" Includes every
person whose business it is to manufacture
tobacco o[r] snuff or who employs others to
manufacture tobacco or snuff, whether such
manufacture be by cutting, pressing (not baling),
grinding, or rubbing (grating) any raw or leaf
tobacco, or otherwise preparing raw or leaf
tobacco,
or
manufactured
or
partially
manufactured tobacco and snuff, or putting up for
consumption scraps, refuse, or stems of tobacco
resulting from any process of handling tobacco
stems, scraps, clippings, or waste by sifting,
twisting, screening or by any other process.
....
(m) "Partially manufactured tobacco" Includes:

(4) "Cigar-cuttings" clean cuttings or

clippings from cigars, unsized with any
other form of tobacco.
(5) "Machine-scrap tobacco" machinethreshed, clean, good tobacco, not
included in any of the above terms, usable
in the manufacture of tobacco products.
(6) "Stems" midribs of leaftobacco
removed from the whole leaf or broken
leaf either by hand or machine.
(7) "Waste tobacco" denatured tobacco;
powder or dust, refuse, unfit for human
consumption; discarded materials in the
manufacture of tobacco products, which
may include stems.
Section 3 of RR No. 17-67 classifiedentities that
dealt with tobacco according to the type of permit
that the Bureau of Internal Revenue issued to
each entity. Under this classification, wholesale
leaf tobacco dealers were considered L-3
permittees. Those (referring to wholesale leaf
tobacco
dealers)
that
reprocess
partially
manufactured tobacco for export, for themselves,
and/or for other L-6 or L-7 permittees were
considered L-6 permittees. Manufacturers of
tobacco products such as cigarette manufacturers
were considered L-7 permittees. Section 3 of RR
No. 17-67 reads:
(a) L-3 Wholesale leaf tobacco dealer.
(b) L-3F Wholesale leaf tobacco dealer.
Issued
only in
favor
of Farmer's
Cooperative
Marketing
Association
(FaCoMas) duly organized in accordance
with law. [This function relative to tobacco
trading was transferred to the Philippine
Virginia Tobacco Administration (PVTA)

under Section 15 of Republic Act No.

2265].

be allowed without the prepayment of the specific

tax.53

(c) L-3R Wholesale leaf tobacco dealers.

Issued only in favor of persons or entities
having fully equipped Redrying Plants.

Almost 40 years from the enactment of the 1939

Tax Code, Presidential Decree No. 1158-A,
otherwise known as the "National Internal
Revenue Code of 1977," was promulgated on
June 3, 1977, to consolidate and integrate the
various tax laws which have so far amended or
repealed the provisions found in the 1939 Tax
Code. Section 132 was renumbered as Section
144, and Section 136 as Section 148. Sections
144 and 148, read:

(d) L-3-1/4 Buyers for wholesale leaf

tobacco dealers.
(e) L-4 Wholesale leaf tobacco dealers.
Issued only in favor of persons or entities
having flue-curing barns, who may
purchase or receive green Virginia leaf
tobacco from bona fide tobacco planters
only, or handle green leaf of their own
production, which tobacco shall be sold or
transferred only to holders of L-3 and L-3R
permits after flue-curing the tobacco.
(f) L-5 Tobacco planters selling to
consumers part or the whole of their
tobacco production. (g) L-6 Wholesale
leaf tobacco dealers who, exclusively for
export, except as otherwise provided for in
these regulations, perform the following
functions:
(1)
Handstripped
and/or
threshwhole
leaf
tobacco
for
themselves or for other L-6 or L-7
permittees;
(2)
Re-process
partially
manufactured
tobacco
for
themselves, or for other L-6 or L-7
permittees; (3) Sell their partially
manufactured tobacco to other L-6
permittees.
(h) L-7 Manufacturers of tobacco
products. [L-7 1/2 designates an auxiliary
registered
book
(bale
books),
for
manufacturers of tobacco products.]
(i) B-14 Wholesale leaf tobaccodealers
(Privilege tax receipt)
(j) B-14 (a) Retail leaf tobacco dealers
(Privilege tax receipt)
La Suerte contends that on December 12, 1972,
then Internal Revenue Commissioner Misael P.
Vera issued a ruling which declared that:
. . . . The subsequent sale or transfer by the L-6/L3R permittee for export or to an L-7-1/2 for use in
the manufacture of cigars or cigarettes may also

SEC. 144. Removal of tobacco products without

prepayment of tax.Products of tobacco entirely
unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under
such conditions as may be prescribed in the
regulations of the Department of Finance, and
stemmed leaf tobacco, fine-cut shorts, the refuse
of fine-cuts chewing tobacco, re-refuse, scraps,
cuttings, clippings, stems or midribs, and
sweepings of tobacco may be sold in bulk as raw
material by one manufacturer directly to another,
under such conditions as may be prescribed in
the regulations of the Department of Finance,
without the prepayment of the tax. "Stemmed
leaf tobacco", as herein used means leaf tobacco
which has had the stem or midrib removed. The
term does not include broken leaf tobacco.
....
SEC. 148. Specific tax on products of tobacco.
On manufactured products of tobacco, except
cigars, cigarettes, and tobacco specially prepared
for chewing so as to be unsuitable for
consumption in any other manner, but including
all other tobacco twisted by hand or reduced into
a condition to be consumed in any manner other
than by the ordinary mode of drying and curing;
and on all tobacco prepared orpartially prepared
for sale or consumption, even if prepared without
the use of any machine or instrument and
without being pressed or sweetened; and on all
fine-cut
shorts
and
refuse,
scraps,
clippings,cuttings, stems, and sweepings of
tobacco, there shall be collected on each
kilogram,
seventy-five
centavos:
Provided,
however, That fine-cut shorts and refuse, scraps,
clippings, cuttings, stems and sweepings of
tobacco resulting from the handling, or stripping
of whole leaf tobacco may be transferred,
disposed of, or otherwise sold, without
prepayment ofthe specific tax herein provided for
under such conditions as may be prescribed in
the regulations promulgated by the Secretary of
Finance
upon
recommendation
of
the
Commissioner if the same are to be exported or

to be used in the manufacture of other tobacco

products on which the specific tax will eventually
be paid on the finished product.
On tobacco specially prepared for chewing so as
to be unsuitable for use in any other manner, on
each kilogram, sixty centavos.
Sections 144 and 148 were subsequently
renumbered as Sections 120 and 125 respectively
under Presidential Decree No. 1994, 54 which took
effect on January 1, 1986 (1986 Tax Code); then
as Sections 137 and 141 under Executive Order
No. 273;55 and finally as Sections 140 and 144
under Republic Act No. 8424 or the "Tax Reform
Act of 1997." However, the provisions remained
basically unchanged.
The business transactions of La Suerte, Fortune,
and Sterling that the Commissioner found to be
taxable for specific tax took place during the
effectivity of the 1986 Tax Code, as amended by
Executive Order No. 273. The pertinent provisions
are Sections 137 and 141, thus:
SEC. 137. Removal of tobacco products without
prepayment of tax. Products of tobacco entirely
unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under
such conditions as may be prescribed in the
regulations of the Ministry of Finance. Stemmed
leaf tobacco, fine-cut shorts, the refuse of fine-cut
chewing tobacco, scraps, cuttings, clippings,
stems or midribs, and sweepings of tobacco may
be soldin bulk as raw material by one
manufacturer directly to another, without
payment of the tax under such conditions as may
be prescribed in the regulations of the Ministry of
Finance.
Stemmed leaf tobacco,' as herein used, means
leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf
tobacco.
....

instruments or without being pressed or

sweetened; and
(c) fine-cut shorts and refuse, scraps,
clippings, cuttings, stems and sweepings
of tobacco. Fine-cut shorts and refuse,
scraps, clippings, cuttings, stems and
sweepings of tobacco resulting from the
handling or stripping of whole leaf tobacco
may be transferred, disposed of, or
otherwise sold, without prepayment of the
specific tax herein provided for under such
conditions as may be prescribed in the
regulations promulgated by the Ministry of
Finance upon recommendation of the
Commissioner, if the same are to be
exported or to be used in the manufacture
of other tobacco products on which the
excise tax will eventuallybe paid on the
finished product.
On tobacco specially prepared for chewing so as
to be unsuitable for use in any other manner, on
each kilogram, sixty centavos.
Parenthetically, the present provisionsexplicitly
state the following:
Stemmed leaf tobacco, tobacco prepared or
partially prepared with or without the use of any
machine or instrument or without being pressed
or sweetened, fine-cut shorts and refuse, scraps,
clippings,
cuttings,
stems,
midribs,
and
sweepings of tobacco resulting from the handling
or stripping of whole leaf tobacco shall be
transferred, disposed of, or otherwise sold,
without any prepayment of the excisetax . . . if
the same are to be exported or to be used in the
manufacture of cigars, cigarettes, or other
tobacco products on which the excise tax will
eventually be paid on the finished product, under
such conditions as may be prescribed in the rules
and regulations promulgated by the Secretary of
Finance,
upon
recommendation
of
the
Commissioner.56
BIR assessments

SEC. 141. Tobacco Products. There shall be

collected a tax of seventy-five centavos on each
kilogram of the following products of tobacco:
(a) tobacco twisted by hand or reduced
into a condition to be consumed in any
manner other than the ordinary mode of
drying and curing;
(b) tobacco prepared or partially prepared
with or without the use of any machine or

G.R. No. 125346

Sometime in June, 1989, a team of examiners
from the Bureau of Internal Revenue, led by
Crisanto G. Luna, Revenue Officer III of the Field
Operation Division of the Excise Tax Service,
conducted an examination of the books of La
Suerte by virtue of a letter of authority issued by
then Commissioner Jose U. Ong.
On January 3, 1990, La Suerte received a letter
from then Commissioner Jose U. Ong demanding

the payment of 34,934,827.67 as deficiency

excise tax on La Suertes entire importation and
local purchase of stemmed leaf tobacco for the
period covering January 1, 1986 to June 30, 1989.
On January 12, 1990, La Suerte . . . protest[ed]
the excise tax deficiency assessment . . .
stressing that the BIR assessment was based
solely on Section 141(b) of the Tax Code without,
however, applying Section 137 thereof, the more
specific provision, which expressly allows the sale
of stemmed leaf tobacco as raw material by one
manufacturer
directly
to another
without
payment of the excise tax. However, in a letter,
dated August 31, 1990, Commissioner Jose U.
Ong denied La Suertes protest, insisting that
stemmed leaf tobacco is subject to excise tax
"unless there is an express grant of exemption
from [the] payment of tax."
In a letter dated October 17, 1990, Commissioner
Ong reiterated his demand for the payment of the
alleged deficiency excise taxes due from La
Suerte, to wit:
"Please be informed that in an investigation
conducted by this Office, it was ascertainedthat
you incurred a deficiency specific tax on your
importation and local purchase of stemmed leaf
tobacco covering the period from January 1, 1986
to June 30, 1989 in the total amount of
34,904,247.00 computed as follows:
STEMMEDLEAF TOBACCO
Imported

13,918,465
x 0.75

kls. P10,438,848.
00

Local

32,620,532
x 0.75

kls. 24,465,399.0
0

Total Amount Due (Basic P34,904,247.

Tax)- - - - - - - - - - - 00
. . . ." (page 99, Rollo)
On December 6, 1990, La Suerte filed with the
Court of Tax Appeals a Petition for Review seeking
for the annulment of the assessments. . .
. . . On July 13, 1995, the Tax Court rendered [its]
Decision, the dispositive portion of which reads[:]
"WHEREFORE,
in
all
the
foregoing,
the
assessment of alleged deficiency specific tax in
the amount ofP34,904,247.00 issued by the
Respondent is hereby CANCELLED for lack of
merit.

SO ORDERED."57
The Commissioner appealed the Court of Tax
Appeals decision before the Court of Appeals. On
December 29, 1995, the Court of Appeals Sixth
Division ruled against La Suerteand found that RR
No. V-39 limits the tax exemption on transfers of
stemmed leaf tobacco to transfers between two
L-7 permittees.58 The Court of Appeals ruled as
follows:
IN THE LIGHT OF ALL THE FOREGOING, the
Decision appealed from is hereby REVERSED and
SET ASIDE. Respondent is ordered to pay the
petitioner Commissioner of Internal Revenue the
amount of P34,904,247.00 as deficiency specific
tax on its importations and local purchases of
stemmed leaf tobacco and its sale of stemmed
leaf tobacco to Associated Anglo-American
Tobacco Corporation covering the period from
January 1, 1986 to June 30, 1989, plus 25%
surcharge for late payment and 20% interest per
annum from October 17, 1990 until fully paid
pursuant to sections 248 and 249 of the Tax
Code.
SO ORDERED.59
La Suerte filed a motion for reconsideration,
which was denied by the Court of Appeals in its
June 7, 1996 resolution.60
On August 2, 1996, La Suerte filed the instant
petition for review,61 praying for the reversal of
the Court of Appeals decision and cancellation of
the assessment by the Commissioner. La Suerte
raises the following grounds in support of its
prayer:
A. THE COURT OF APPEALS ERRED WHEN
IT CONSIDERED SECTION 20 (A) OF RR NO.
V-39, SINCE THE COMMISSIONER RAISED
IT FOR THE FIRST TIMEIN THE COURT OF
APPEALS
B. THE COURT OF APPEALS ERRED WHEN
IT HELD THAT SECTION 20(A) OF RR NO. V39 RESTRICTS THE APPLICATION OF
SECTION 137 OF THE TAX CODE, SINCE
LANGUAGE IN SEC. 137 IS UNQUALIFIED,
WHILE
SEC.
20(A)
CONTAINS
NO
RESTRICTIVE LANGUAGE
C. THE COURT OF APPEALS ERRED WHEN
IT IGNORED SEC. 43 OF RR NO. 17-67 AS
WELL AS OPINIONS OF BIR OFFICIALS
WHICH CONFIRMED THE EXEMPTION
OFSTEMMED
LEAF
TOBACCO
FROM
PREPAYMENT OF SPECIFIC TAX

D. THE COURT OF APPEALS ERRED WHEN

IT HELD THAT SEC. 43 OF RR NO. 17-67
DID NOT REPEAL SECTIONS 35 AND 20(A)
OF RR NO. V-39, SINCE THEIR PROVISIONS
ARE REPUGNANT TO EACH OTHER
E. THE COURT OF APPEALS ERRED WHEN
IT HELD THAT RR NO. V-39 IMPOSES
SPECIFIC TAXES ON STEMMED LEAF
TOBACCO, SINCE IT MAKES NO MENTION
AT ALL OF TAXES ON STEMMED LEAF
TOBACCO
F. THE COURT OF APPEALS ERRED WHEN
IT HELD RR NO. V-39 APPLIED TO L-6
PERMITTEES OR MANUFACTURERS OF
STEMMED LEAF TOBACCO, SINCE L-6
CLASSIFICATION WAS NON-EXISTENT AT
THE TIME
G. THE COURT OF APPEALS ERRED WHEN
IT INTERPRETED SECTION 20(A) OF RR NO.
V-39 IN SUCH A WAY AS TO RESULT IN
ADMINISTRATIVE LEGISLATION, SINCE THE
INTERPRETATION
SANCTIONED
THE
RESTRICTION
OF
AN
UNQUALIFIED
PROVISION
OF
LAW
BY
A
MERE
REGULATION
H. THE COURT OF APPEALS ERRED WHEN
IT GAVE NO WEIGHT TO THE DECEMBER
12, 1972 BIR RULING AND OPINIONS OF
OTHER BIR OFFICIALS WHICH CONFIRMED
THE EXEMPTION OF STEMMED LEAF
TOBACCO FROM PREPAYMENT OF SPECIFIC
TAX
I. THE COURT OF APPEALS ERRED WHEN IT
HELD [THAT] NONAPPLICATION OF [THE]
DECEMBER 12 RULING DID NOT IMPINGE
ON PRINCIPLE OF NON-RETROACTIVITY OF
RULINGS BECAUSE THE ASSESSMENT DID
NOT CITE THE RULING, SINCE CITATION OF
A RULING INAN ASSESSMENT [IS] NOT
NECESSARY FOR PRINCIPLE TO APPLY
J. THE COURT OF APPEALS ERRED WHEN IT
DISREGARDED
THE
ADMINISTRATIVE
PRACTICE OF BIR FOR OVER HALF A
CENTURY OF NOT SUBJECTINGSTEMMED
LEAF TOBACCO TO SPECIFIC TAX
K. THE COURT OF APPEALS ERRED WHEN
IT HELD THAT SUBJECTING STEMMED LEAF
TOBACCO TO SPECIFIC TAX IS NOT
PROHIBITED FORM OF DOUBLE TAXATION,
SINCE A TAX ON BOTH STEMMED LEAF
TOBACCO AND CIGARETTES INTO WHICH
IT
IS
MANUFACTURED
IS
DOUBLE
TAXATION

L. THE COURT OF APPEALS ERRED WHEN

IT HELD LA SUERTE LIABLE FOR SPECIFIC
TAX EVENIF NO EFFORT WAS FIRST MADE
TO COLLECT THE TAX FROM THE
MANUFACTURER
OF
STEMMED
LEAF
TOBACCO, SINCE TAX CODE ALLOWS THIS
ONLY IF SPECIAL ALLOWANCE IS GRANTED,
WHICH IS NOT THE CASE
M. THE COURT OF APPEALS ERRED WHEN
IT FAILED TO CONSIDER THAT THE
REENACTMENT OF THE 1939 CODE AS THE
1977 CODE AND 1986 TAX CODES
ADOPTED THE INTERPRETATION IN THE
DECEMBER 1972 BIR RULING
N. THE COURT OF APPEALS ERRED WHEN
IT APPLIED THE RULES OF CONSTRUCTION
ON EXEMPTION FROM TAXES, SINCE NO
TAX EXEMPTION WAS INVOLVED BUT
MERELY
AN
EXEMPTION
FROM
PREPAYMENT OF TAX.62
G.R. No. 13632829
In the letter dated November 24,1989, the
Commissioner demanded from Fortune the
payment of deficiency excise tax in the amount
of P28,938,446.25 for its importation of tobacco
strips from January 1, 1986 to June 30, 1989.
Fortune requested for reconsideration, which was
denied by the Commissioner on August 31, 1990.
Undaunted, Fortune appealed to the Court of Tax
Appeals through a petition for review, which was
docketed as CTA Case No. 4587.63
In the decision dated November 23, 1994, the
Court of Tax Appeals ruled in favor of Fortune and
set aside the Commissioners assessment
of P28,938,446.25 as deficiency excise tax.
Meanwhile, on March 20, 1991, Fortune received
another letter from the Bureau of Internal
Revenue, demanding payment of 1,989,821.86 as
deficiency specific tax on its importation of
stemmed leaf tobacco from July 1, 1989 to
November 30, 1990.64 Fortune filed its protest
and requested the Commissioner to cancel and
withdraw the assessment.65 On April 18, 1991,
the Commissioner denied with finality Fortunes
request.66 Fortune appealed to the Court of Tax
Appeals, and the case was docketed as CTA Case
No. 4616.67
In the decision dated October 6, 1994, the Court
of Tax Appeals ruled in favor of Fortune and set
aside
the
Commissioners
assessment
of P1,989,821.26 as deficiency excisetax on
stemmed leaf tobacco.

The Commissioner filed separate petitions before

the Court of Appeals, challenging the decisions
rendered by the Court of Tax Appeals in CTA Case
Nos. 4587 and 4616. These petitions were
consolidated on November 28, 1996.68
In the decision dated January 30, 1998, the Court
of Appeals Seventeenth Division dismissed the
consolidated petitions filed by the Commissioner
and affirmedthe assailed decisions of the Court of
Tax Appeals. It also denied the Commissioners
motion for reconsideration.
Hence, the Commissioner filed the present
petition69 on January 8, 1999. The Commissioner
claims that the Court of Appeals erred (1) "in
holding that stemmed leaf tobacco is not subject
to the specific tax imposed under Section 141 of
the Tax Code[;]"70 (2) "in not holding that under
Section 137 of the Tax Code, stemmed leaf
tobacco is exempt from specific tax when sold in
bulk as raw material by one manufacturer directly
to another under such conditions as may be
prescribed in the regulations of the Department
of Finance[;]"71 and (3) "in holding that there is
double taxation in the prohibited sense when
specific tax is imposed on stemmed leaf tobacco
and again on the finished product of which
stemmed leaf tobacco is a raw material."72
G.R. No. 144942
In April 1995, "[La Suerte] imported stemmed leaf
tobacco from various sellers abroad." 73 The
Commissioner "assessed specific taxes on the
stemmed leaf tobacco in the amount of
175,909.50, which [La Suerte] paid under
protest."74 "Consequently, [La Suerte] filed a
claim for refund with [the Commissioner], [who]
failed to act on the same."75 Undeterred, La
Suerte appealed to the Court of Tax Appeals,
which in its March 9, 1999 decision, ruled in its
favor. The Commissioner appealed to the Court of
Appeals Third Division, which on August 31, 2000,
rendered its decision in CA-G.R. SP. No. 51902,
affirming the decision of the Court of Tax Appeals.
The Commissioner then filed the instant petition
for review76 asking this court to overturn the
Court of Appeals decision. It avers that the Court
of Appeals erred in holding that Section 137 of
the Tax Code applied "without any conditions as
to the domicile of the manufacturers and that
[the Commissioner] cannot indirectly restrict its
application to local manufacturers."77
The Third Division of this court initially
denied78 the petition due to an insufficient or
defective verification and because "the petition

was filed by revenue lawyers and not by the

Solicitor General."79
The
Commissioner
filed
a
motion
for
clarification80 seeking to clarify whether the
Bureau of Internal Revenuelegal officers can file
petitions for review pursuant to Section 220 of
the Tax Code without the intervention of the
Office of the Solicitor General.
The motion was referred to the En Banc 81 on
August 7, 2001, which issued the resolution on
July 4, 2002, holding that "Section 220 of the Tax
Reform Act must not be understood asoverturning
the long established procedure before this Court
in requiring the Solicitor General to represent the
interest of the Republic. This Court continues to
maintain that it is the Solicitor General who has
the primary responsibility to appear for the
government in appellate proceedings."82 In the
same resolution, this court also declared the
following:
The present controversy ruminate upon the
singular issue of whether or not Revenue
Regulation 1767 [sic] issued by petitioner, in
relation to Section 137 of the InternalRevenue
Code in the imposition of a tax on stemmed-leaf
tobacco, deviated from the tax code. This
question basically inquires then into whether or
not the revenue regulation has exceeded, on
constitutional grounds, the allowable limits of
legislative delegation.
Aware that the dismissal of the petition could
have lasting effect on government tax revenues,
the lifeblood of the state, the Court heeds the
plea of petitioner for a chance to prosecute its
case.83 (Emphasis and underscoring supplied)
This court resolved to reinstate 84 and give due
course85 to the Commissioners petition. G.R. No.
148605
"On January 12, 1990, [Sterling] received a preassessment notice for alleged deficiency excise
tax on itsimportation and local purchase of
stemmed-leaf tobacco for P5,187,432.00 covering
the period from November 1986 to January
1989."86 Sterling filed its protest letter87 dated
January 19, 1990. The Commissioner, through its
letters88 dated August 31, 1990 and October 17,
1990, denied the protest with finality.
Sterling filed before the Court of Tax Appeals a
petition for review89 dated January 3, 1991,
seeking the cancellation of the deficiency
assessment and praying that the Commissioner
be ordered to desist from collecting the assessed
excise tax. On July 13, 1995,the Court of Tax

Appeals rendered its decision ordering the

cancellation of the assessment for deficiency
excise tax.
The Commissioner then appealed90 to the Court
of Appeals. On March 7, 2001, the latter, through
its Ninth Division, rendered a decision reversing
the Court of Tax Appeals ruling, thus:
WHEREFORE, premises considered, the Decision
of the Court of Tax Appeals in C.T.A. Case No.
4532 is hereby REVERSED and SET ASIDE, and
the respondent is ORDERED to pay to the public
petitioner the amount ofP5,187,432.00 as
deficiency specific tax on its imported and locally
purchased stemmed leaf tobacco from November
1986 to June 24, 1989, plus 25% surcharge
on P5,187,432.00, and 20% interest per annum
on the total amount due from December 07, 1990
until full payment, pursuant to Sections 248-49 of
the Tax Code.
SO ORDERED.91
Sterling filed a motion for reconsideration, 92 which
was denied by the Court of Appeals in its June 19,
2001 resolution.
Hence, on August 13, 2001, Sterling filed the
instant petition for review.93
Sterling argues that the Court of Appeals erred in
holding that (1) then Section 141 of the Tax Code
subjects stemmed leaf tobacco to excise tax; (2)
Section 137 of the Tax Code did notexempt
stemmed leaf tobacco from prepayment of excise
tax; (3) Section 20(A) of RR No. V-39 restricts the
application of Section 137 of the Tax Code since
its language was unqualified, while Section 20(A)
contained no restrictive language; (4) RR No. V-39
imposed specific taxes on stemmed leaf tobacco
since its language made no mention of taxes on
stemmed leaf tobacco; (5) the reason behind
limiting exemptions only to transfers fromone L-7
to another L-7 is because sale has previously
been subjected tospecific tax; and (6) the
exemption from specific tax did not apply to
imported stemmed leaf tobacco.94
Sterling further argues that the Court of Appeals
erred in not holding that (1) the Commissioners
interpretation of Section 141 of the Tax Code and
Section 20(A) of RR No. V-39 amounts to an
amendment of Sections 141 and 137 of the Tax
Code by a mere administrative regulation; (2) a
December 12, 1972 Bureau of Internal Revenue
ruling and opinions of other Bureau of Internal
Revenue officials confirmed the exemption of
stemmed leaf tobacco from prepayment of
specific tax; (3) the administrative practice of the

Bureau of Internal Revenue for over half a

century of not subjecting stemmed leaf tobacco
to excise tax proves that no excise taxes were
ever intended to be imposed; (4) imposition of
excise tax on stemmed leaf tobacco would result
in the prohibited form of double taxation; and (5)
the re-enactment of the relevant provisions in the
1977 and 1986 Tax Codes adopted the
interpretation in the December 1972 Bureau of
Internal Revenue ruling.95 Sterling also contends
that the "Court of Appeals erred in applying the
rules of construction on exemption from taxes,
since no tax exemption was involved, but merely
an exemption from prepayment of excise tax."96
G.R. No. 158197
On January 10, 1991, the Commissioner sent a
pre-assessment notice to La Suerte demanding
payment of 11,757,275.25 as deficiency specific
tax on its local purchases and importations and
on the sale of stemmed leaf tobacco during the
period from September 14, 1989 to November 20,
1990.97 On February 8, 1991, La Suerte received
the
formal
assessment
letter
of
the
Commissioner.98
La Suerte filed its protest on March 8, 1991. 99 On
May 14, 1991, La Suerte received the
Commissioners decision "denying the protest
with finality."100
"On June 13, 1991, the Court of Tax Appeals
promulgated a Decision finding for . . . La Suerte
and disposing [as follows:]"101
WHEREFORE, in view of the foregoing, We find
the petition for review meritorious and the same
is hereby GRANTED. Respondents decision dated
April 29, 1991 is hereby set aside and the formal
assessment for the deficiency specific tax in the
sum
of P11,575,275.25
subject
of
the
respondents letter, dated January 30, 1991, is
deemed cancelled.
No pronouncement as to costs of suit.
SO ORDERED.102
The
Commissioner
filed
a
motion
for
reconsideration that was denied by the Court of
Tax Appeals in its April 5, 1995 resolution. 103
The Commissioner appealed to the Court of
Appeals.104 In its decision dated July 18, 2002, the
Court of Appeals reversed the decision of the
Court of Tax Appeals. It cited Commissioner of
Internal Revenue v. La Campaa Fabrica de
Tabacos, Inc.105 as basis for its ruling. La Suerte

filed a motion for reconsideration, but it was

denied by the Court of Appeals in the
resolution106 dated May 9, 2003.
La Suerte prays for the reversal of the Court of
Appeals decision and resolution in its petition for
review,107wherein
it
raises
the
following
arguments:
I. THE HONORABLE COURT OF APPEALS
ERRED WHEN IT HELD THAT SECTION
20(A) OF REV. REGS. NO. V-39 LIMITED
THE CLASS OF MANUFACTURERS WHOSE
SALES OF STEMMED LEAF TOBACCO WERE
EXEMPT FROM PRE-PAYMENT OF SPECIFIC
TAX.
II. EVEN IF SEC. 3 OF RR NO. 17-67 HAD
BEEN WAS [sic] INTENDED TO LIMIT
MANUFACTURERS
EXEMPT
FROM
PREPAYMENT OF SPECIFIC TAX, THIS
WOULD
AMOUNT
TO
UNLAWFUL
DELEGATION OF LEGISLATIVE POWER.
III. RR NO. 17-67 WAS NEITHER ISSUED TO
AMEND RR NO. V-39 NOR TO AMEND THE
TAX CODE, BUT SOLELY TO IMPLEMENT
ACT NO. 2613, AS AMENDED, WHICH WAS
ENACTED IN 1916 AND HAD ABSOLUTELY
NOTHING TO DO WITH TAXES.
IV. SECTION 2(H) OF RR NO. 17-67
EXCEEDED THE CONSTITUTIONAL LIMITS
ON THE DELEGATION OF LEGISLATIVE
POWER.
V. SECTION 3(M) OF RR NO. 17-67 AS
INTERPRETED
BY
COMMISSIONER
EXCEEDED
ALLOWABLE
LIMITS
ON
DELEGATION OF LEGISLATIVE POWER.
VI. THE HONORABLE COURT OFAPPEALS
ERRED IN APPLYING SECTION 20(A) OF RR
NO. V-39 TO LA SUERTES IMPORTS OF
STEMMED LEAF TOBACCO, FOR THE
APPLICABLE PROVISION IS CHAPTER V OF
RR NO. V-39.
VII.
THE
COMMISSIONERS
PRESENT
INTERPRETATION OF SECTIONS 2(M)(1)
AND 3(H)OF RR NO. 17-67, WAS NOT THE
INTERPRETATION
GIVEN
TO
THOSE
SECTIONS BY ITS FRAMERS, AS SHOWN BY
THE LONG ADMINISTRATIVE PRACTICE
AFTER THE ISSUANCE OF RR NO. 17-67
AND THE BIR RULING DATED DECEMBER
12, 1972, WHICH CONFIRMED THE TAXFREE TRANSFER OF STEMMED- LEAF
TOBACCO.108

G.R. No. 165499

On various dates in March 1995, the
Commissioner of Internal Revenue . . . collected
from La Suerte the aggregate amount of THREE
HUNDRED
TWENTY-FIVE
THOUSAND
FOUR
HUNDRED TEN PESOS (P325,410.00) for specific
taxes on La Suertes bulk purchases of stemmedleaf tobacco from foreign tobacco manufacturers.
La Suerte paid the said amount under protest.
....
On September 27, 1996 and October 2, 1996, La
Suerte instituted with the Commissioner of
Internal Revenue . . . and with Revenue District
No. 52, a claim for refund of specific taxes said to
have been erroneously paid on its importations of
stemmed-leaf tobacco for the period of November
1994 up to May 1995, including the amount of
Three Hundred Twenty Five Thousand Four
Hundred Ten Pesos (P325,410.00). . . .
Inasmuch as its claim for refund was not acted
upon by petitioner and in order to toll the running
of the two-year reglementary period within which
to file a judicial claim for such refund as provided
under Section 229 of the 1997 National Internal
Revenue Code, as amended, La Suerte filed on
February 8, 1997 a petition for review with the
CTA.109
On September 23, 1998, the Court of Tax Appeals
rendered judgment granting the petition for
review and ordering the Commissioner to refund
the amount of P325,410.00 to La Suerte.110 The
Commissioner filed a motion for reconsideration,
but this was denied by the Court of Tax Appeals
on December 15, 1998.111
On appeal, the Court of Appeals Fourth Division
reversed112 the Court of Tax Appeals ruling. It
also
denied113 La
Suertes
motion
for
reconsideration.
Hence,
this petition was
filed,114 reiterating the same arguments already
presented in the other cases.
This court ordered the consolidation of G.R. Nos.
13632829 and 125346.115 Thereafter, this court
consolidated G.R. Nos. 165499, 144942, and
148605.116 Finally, this court approved the
consolidation of G.R. Nos. 125346, 13632829,
144942, 148605, 158197, and 165499.117
Issues
I. Whether stemmed leaf tobacco is
subject to excise (specific) tax under
Section 141 of the 1986 Tax Code;

II. Whether Section 137 of the 1986 Tax

Code exempting from the payment of
specific tax the sale of stemmed leaf
tobacco by one manufacturer to another is
not subject to any qualification and,
therefore, exempts an L-7 manufacturer
from paying said tax on its purchase of
stemmed
leaf
tobacco
from
other
manufacturers who are not classified as L7 permittees;
III. Whether stemmed leaf tobacco
imported by La Suerte, Fortune, and
Sterling is exempt from specific tax under
Section 137 of the 1986 Tax Code;
IV. Whether Section 20(a) of RR No. V-39,
in relation to RR No. 17-67, which limits
the exemption from payment of specific
tax on stemmed leaf tobacco to sales
transactions
between
manufacturers
classified as L-7 permittees is a valid
exercise by the Department of Finance
ofits rule-making power under Section
338118 of the 1939 Tax Code;
V. Whether the possessor or owner of
stemmed leaf tobacco may be held liable
for the payment of specific tax if such
tobacco product is removed from the
place of production without payment of
said tax;
VI. Whether the August 31, 1990 ruling of
then
Bureau
of
Internal
Revenue
Commissioner Jose U. Ong denying La
Suertes request for exemption from
specific tax on its local purchase and
importation of stemmed leaf tobacco
violates the principle on non-retroactivity
of administrative ruling for allegedly
contradicting the previous position taken
by the Bureau of Internal Revenue that
such a transaction is not subject to
specific tax as expressed in the December
12, 1972 ruling of then Bureau of Internal
Revenue Commissioner Misael P. Vera; and
VII. Whether the imposition of excise tax
on stemmed leaf tobacco under Section
141 of the 1986 Tax Code constitutes
double taxation.
Arguments of the cigarette manufacturers
The cigarette manufacturers claim that since
Section 137 of the 1986 Tax Code and Section
20(a) of RR No. V-39 do not distinguish "as to the
type of manufacturer that may sell stemmed-leaf
tobacco without the prepayment of specific tax[,]

[t]he logical conclusion is that any kind of

tobacco manufacturer is entitled to this
treatment."119 The authority of the Secretary of
Finance to prescribe the "conditions" refers only
to procedural matters and should not curtail or
modifythe substantive right granted by the
law.120 The cigarette manufacturers add thatthe
reference to an L-7 invoice and L-7 register book
in the second paragraph of Section 20(a) cannot
limit the application of the tax exemption
provision only to transfers between L-7
permittees because (1) it does not so
provide;121 and (2) under the terms of RR No. V39, L-7 referred to manufacturers of any class of
tobacco products, including manufacturers of
stemmed leaf tobacco.122
They further argue that, going by the theory of
the Commissioner, RR No. 17-67 would have
unduly restricted the meaning of "manufacturers"
by limiting it to a few manufacturers suchas
manufacturers
of
cigars
and
cigarettes.123 Allegedly,
RR
No.
17-67
cannotchange the original meaning of L-7 in
Section 20(A) of RR No. V-39 without exceeding
constitutional limits of delegated legislative
power.124 La Suerte further points out that RR No.
17-67 was not even issued for the purpose of
implementing the Tax Code but for the sole
purpose of implementing Act No. 2613; and
Section 3 of RR No. 17-67 restricts the new
designations only for administrative purposes.125
Moreover, the cigarette manufacturers contend
"that Section 132 does not operate as a tax
exemption"
because
"prepayment
means
payment of obligation in advance or before it is
due."126 Consequently, the rules of construction
on tax exemption do not apply. 127 According to
them, "the absence of tax prepayment for the
saleof stemmed leaf tobacco impliedly indicates
the underlying policy of the law: that stemmed
leaf tobacco shall not be taxed twice, first, as
stemmed leaf tobacco and, second, as a
component of the finished products of which it
forms an integral part."128
Fortune, for its part, claims that stemmed leaf
tobacco is not subject to excise tax. It argues that
stemmed leaf tobacco cannot be considered
prepared or partially prepared tobaccobecause it
does not fall within the definition of a "processed
tobacco" under Section 1-b of Republic Act No.
698, as amended.129 Furthermore, it adds that
Section 141 should be strictly construed against
the taxing power.130 "There being no explicit
reference to stemmed leaf tobacco in Section
141, it cannot be claimed or construed to be
subject to specific tax."131

According to Fortune, "a plain reading of Section

141 readily reveals that the intention was to
impose excise taxes on products oftobacco that
are not to be used as raw materials in the
manufacture
of
other
tobacco
products."132"Section 2(m)(1) unduly expanded
the meaning of prepared or partially prepared
tobacco to includea raw material like stemmed
leaf tobacco; hence, ultra viresand invalid."133
As regards the taxability of their importations,
Sterling argues that since locally manufactured
stemmed leaf tobaccos are not subject to specific
tax, it follows that imported stemmed leaf
tobaccos are also not subject to specific tax. 134 On
the other hand, La Suerteclaims that Section
20(A) of RR No. V-39 does not apply to its imports
because the applicable provision is Section
128(b) of the 1986 Tax Code, which states that
"imported articles shall be subject to the same
tax and the same rates and basis of excise taxes
applicable to locally manufactured articles," and
Chapter V of RR No. V-39 (Payment of specific
taxes on imported cigars, cigarettes, smoking and
chewing tobacco).135
Finally, La Suerte and Sterling136 argues that the
Court of Appeals erred: (1) in ignoring Section 43
of RR No. 17-67, December 12, 1972 Bureau of
Internal Revenue ruling and other Bureau of
Internal Revenue opinions confirming the
exemption of stemmed leaf tobacco from
prepayment of specific tax;137 (2) in disregarding
the Bureau of Internal Revenues practice for over
half a century of not subjecting stemmed leaf
tobacco to specific tax;138 (3) in failing to consider
that the re-enactment of the 1939 Tax Code as
the 1977 and 1986 Tax Codes impliedly adopted
the interpretation in the December 12, 1972
ruling; and 4) in holding that nonapplication of
the December 12, 1972 ruling did not impinge on
the
principle
of
non-retroactivity
of
rulings.139 Moreover, it argues that the Tax Code
does not authorize collection of specific tax from
buyers without a prior attempt to collect tax from
manufacturers.140
Respondents arguments
Respondent counters that "under Section 141(b),
partially prepared or manufactured tobacco is
subject to specific tax."141 The definition of
"partially manufactured tobacco" in Section 2(m)
of RR No. 17-67 includes stemmed leaf tobacco;
hence, stemmed leaf tobacco is subject to
specific tax.142 "Imported stemmed leaf tobacco
isalso subject to specific tax under Section 141(b)
in relation to Section 128 of the 1977 Tax
Code."143 Fortunes reliance on the definition of
"processed tobacco" in Section 1-b of Republic

Act No. 698144 as amended by Republic Act No.

1194 is allegedly misplaced because the
definition therein of processed tobacco merely
clarified the type of tobacco product that may not
be imported into the country.145 Respondent
posits that "there is no double taxation in the
prohibited sense even if specific tax is also
imposed on the finished product of which
stemmed
leaf
tobacco
is
a
raw
material."146 Congress
clearly
intended
it
"considering that stemmed leaf tobacco, as
partially prepared or manufactured tobacco, is
subjected to specific tax under Section 141(b),
while cigars and cigarettes, of which stemmed
leaf tobacco is a raw material, are also subjected
to specific tax under Section 142." 147 It adds that
there is no constitutional prohibition against
double taxation.148
"Foreign manufacturers of tobacco products not
engaged in trade or business in the Philippines
cannot be classified as L-7, L-6, or L-3R since they
are beyond the pale of Philippine laws and
regulations."149 "Since the transfer of stemmed
leaf tobacco from one factory to another must be
under an official L-7 invoice and entered in the L7 registers of both transferor and transferee, it is
obvious that the factories contemplated are those
located or operating in the Philippines and
operated
only
by
L-7
permittees."150 The
transaction contemplated under Section 137 is
sale and not importation because the law uses
the word "sold."151 The law uses "importation" or
"imported" whenever the transaction involves
bringing in articles from foreign countries.152
Respondent argues that "the issuance of RR Nos.
V-39 and 17-67 is a valid exercise by the
Department of Finance of its rule-making power"
under Sections 132 and 338 of the 1939 Tax
Code.153 It explains that "the reason for the
exemption from specific tax of the sale of
stemmed leaf tobacco as raw material by one L-7
directly to another L-7 is that the stemmed leaf
tobacco is supposed to have been already
subjected to specific tax when an L-7 purchased
the same from an L-6."154 "Section 20(A) of RR No.
V-39 adheres to the standards set forth in Section
245 because it provides the conditions for a taxfree removal of stemmed leaf tobacco under
Section 137 without negating the imposition of
specific tax under Section 141(b)." 155 "To construe
Section 137 in the restrictive manner suggested
by La Suerte will practically defeat the revenuegenerating provision of Section 141(b)."156
It further argues that the August 31, 1990 ruling
of then Bureau of Internal Revenue Commissioner
Jose U. Ong denying La Suertes request for
exemption from specific tax on its local purchase
and importation of stemmed leaf tobacco does

not violate the principle on non-retroactivity of

administrative ruling. It alleges that an erroneous
ruling, like the December 12, 1972 ruling, does
not give rise to a vested right that can be invoked
by La Suerte.157
Finally, respondent contends that under Section
127, if domestic products are removed from the
place ofproduction without payment of the excise
taxes due thereon, it is not required that the tax
be collected first from the manufacturer or
producer before the possessor thereof shall be
liable.158
Courts ruling
Nature of excise tax
Excise tax is a tax on the production, sale, or
consumption of a specific commodity in a country.
Section 110 of the 1986 Tax Code explicitly
provides that the "excise taxes on domestic
products shall be paid by the manufacturer or
producer before[the] removal [of those products]
from the place of production." "It does not matter
to what use the article[s] subject to tax is put; the
excise taxes are still due, even though the
articles are removed merely for storage in
someother place and are not actually sold or
consumed."159 The excise tax based on weight,
volume capacity or any other physical unit of
measurement is referred to as "specific tax." If
based on selling price or other specified value,
itis referred to as "ad valorem" tax.
Section
prepared
stemmed
excise tax

141
subjects
tobacco,
such
leaf
tobacco,

partially
as
to

Section 141 of the 1986 Tax Code provides:

SEC. 141. Tobacco Products. There shall be
collected a tax of seventy-five centavos on each
kilogram of the following products of tobacco:
(a) tobacco twisted by hand or reduced
into a condition to be consumed in any
manner other than the ordinary mode of
drying and curing;
(b) tobacco prepared orpartially prepared
with or without the use of any machine or
instruments or without being pressed or
sweetened; and
(c) fine-cut shorts and refuse, scraps,
clippings, cuttings, stems and sweepings
of tobacco. Fine-cut shorts and refuse,

scraps, clippings, cuttings, stems and

sweepings of tobacco resulting from the
handling or stripping of whole leaf tobacco
may be transferred, disposed of, or
otherwise sold, without prepayment of the
specific tax herein provided for under such
conditions as may be prescribed in the
regulations promulgated by the Ministry of
Finance upon recommendation of the
Commissioner, if the same are tobe
exported or to be used in the manufacture
of other tobacco products on which the
excise tax will eventually be paid on the
finished product.
On tobacco specially prepared for chewing so as
to be unsuitable for use in any other manner, on
each kilogram, sixty centavos. (Emphasis
supplied)
It is evident that when tobacco is harvested and
processed either by hand or by machine, all
itsproducts become subject to specific tax.
Section 141 reveals the legislative policy to tax
all forms of manufactured tobacco in contrast
to raw tobacco leaves including tobacco refuse
or all other tobacco which has been cut, split,
twisted, or pressed and is capable of being
smoked without further industrial processing.
Stemmed leaf tobacco is subject to the specific
tax under Section 141(b). It is a partially prepared
tobacco. The removal of the stem or midrib from
the leaf tobacco makes the resulting stemmed
leaf tobacco a prepared or partially prepared
tobacco. The following is La Suertes own
illustration of how the stemmed leaf tobacco
comes about: In the process of removing the
stems, the whole leaf tobacco breaks into pieces;
after the stems or midribs are removed, the
tobacco is threshed (cut by machine into fine
narrow strips) and then undergoes a process of
redrying,160 undoubtedly showing that stemmed
leaf tobacco is a partially prepared tobacco. Since
the Tax Code contained no definition of "partially
prepared tobacco," then the term should be
construed
in
its
general,
ordinary,
and
comprehensive sense.161
RR No. 17-67, as amended, supplements the law
by delineating what products of tobacco are
"prepared or manufactured" and "partially
prepared or partially manufactured." Section 2(m)
states:
(m) "Partially manufactured tobacco" Includes:
(1) "Stemmed leaf" handstripped
tobacco, clean, good, partially broken leaf
only, free from mold and dust.

(2) "Long-filler" handstripped tobacco of

good, long pieces of broken leaf usableas
filler for cigars without further preparation,
and free from mold, dust stems and cigar
cuttings.
(3) "Short-filler" handstripped or
machine-stripped tobacco, clean, good,
short pieces of broken leaf, which will not
pass through a screen of two inches (2")
mesh.
(4) "Cigar-cuttings" clean cuttings or
clippings from cigars, unsized with any
other form of tobacco.
(5) "Machine-scrap tobacco" machinethreshed, clean, good tobacco, not
included in any of the above terms, usable
in the manufacture of tobacco products.
(6) "Stems" midribs of leaftobacco
removed from the whole leaf or broken
leaf either by hand or machine.
(7) "Waste tobacco" denatured tobacco;
powder or dust, refuse, unfit for human
consumption;
discarded materials in the manufacture
tobacco products, which may include stems.

of

Insisting on the inapplicability of RR No. 17-67, La

Suerte points to the different definitions given to
stemmed leaf tobacco by Section 2(m)(1) of RR
No. 17-67 and Section 137. It argues that while
RR No. 17-67 defines stemmed leaf tobacco as
handstripped tobacco of clean, good, partially
broken leaf only, free from mold and dust,Section
137 defines it as leaf tobacco which has had the
stemor midrib removed.The term does not
include broken leaf tobacco. We are not
convinced.
Different definitions of the term "stemmed leaf"
are unavoidable, especially considering that
Section 2(m)(1) is an implementing regulation of
Act No. 2613, which was enacted in 1916 for
purposes of improving the qualityof Philippine
tobacco products, while Section 137 defines the
tobacco product only for the purpose of
exempting it from the specific tax. Whichever
definition is adopted, there is no doubt that
stemmed leaf tobacco is a partially prepared
tobacco.
The onus of proving that stemmed leaf tobacco is
not subject to the specific tax lies with the
cigarette manufacturers. Taxation is the rule,

exemption
is
the
exception.162 Accordingly,
statutes granting tax exemptions must be
construed instrictissimi jurisagainst the taxpayer
and liberally in favor of the taxing authority. The
cigarette manufacturers must justify their claim
by a clear and categorical provision in the law.
Otherwise, they are liable for the specific tax on
stemmed leaf tobacco found in their possession
pursuant to Section 127163 of the 1986 Tax Code,
as amended.
Stemmed
leaf
tobacco
transferred
in
bulk
between
cigarette
manufacturers
are
exempt
from
excise
tax
under
Section
137
of
the
1986
Tax
Code
in
conjunction
with
RR
No. V-39 and RR No. 17-67
In the instant case, an exemption on the
taxability of stemmed leaf tobacco is found in
Section 137, which provides the following:
SEC. 137. Removal of tobacco products without
prepayment of tax. Products of tobacco entirely
unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use, under
such conditions as may be prescribed in the
regulations of the Ministry of Finance. Stemmed
leaf tobacco,fine-cut shorts, the refuse of fine-cut
chewing tobacco, scraps, cuttings, clippings,
stems or midribs, and sweepings of tobacco may
be sold in bulk as raw material by one
manufacturer directly to another, without
payment of the tax under such conditions as may
be prescribed in the regulations of the Ministry of
Finance.
Stemmed leaf tobacco,' as herein used, means
leaf tobacco which has had the stem or midrib
removed. The term does not include broken leaf
tobacco. (Emphasis and underscoring supplied)
Section 137 authorizes a tax exemption subject
to the following: (1) that the stemmed leaf
tobacco is sold in bulk as raw material by one
manufacturerdirectly to another; and (2) that the
sale or transfer has complied with the conditions
prescribed by the Department of Finance.
That the title of Section 137 uses the term
"without prepayment" while the body itself uses
"without payment" is of no moment. Both terms
simply mean that stemmed leaf tobacco may be
removed from the factory or place of production
without prior payment of the specific tax.
This court has held in Commissioner of Internal
Revenue v. La Campaa Fabrica de Tabacos,
Inc.,164 reiterated in Compania General de
Tabacos de Filipinas v. Court of Appeals 165 and

Commissioner of Internal Revenue v. La Suerte

Cigar and Cigarette Factory, Inc.166 that the
exemption from specific tax of the sale of
stemmed leaf tobacco is qualified by and is
subject to "such conditions as may be prescribed
in the regulations of the Department of Finance."
These conditions were provided for in RR Nos. V39 and 17-67. Thus, Section 137 must be read
and interpreted in accordance with these
regulations.
Section 20(a) of RR No. V-39 provides the rules
for tax exemption on tobacco products: SECTION
20. Exemption from tax of tobacco products
intended for agricultural or industrial purposes.
(a) Sale of stemmed leaf tobacco, etc., by one
factory to another. Subject to the limitations
herein established, products of tobacco entirely
unfit for chewing or smoking may be removed
free of tax for agricultural or industrial use; and
stemmed leaf tobacco, fine-cut shorts, the refuse
of fine-cut chewing tobacco, refuse, scraps,
cuttings, clippings, and sweepings of tobacco
may be sold in bulk as raw materials by one
manufacturer directly to another without the
prepayment of the specific tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse
of fine-cut chewing tobacco, scraps, cuttings,
clippings, and sweeping of leaf tobacco or
partially manufactured tobaccoor other refuse of
tobacco may be transferred from one factory to
another under an official L-7 invoiceon which shall
be entered the exact weightof the tobacco at the
time of its removal, and entry shall be made in
the L-7 register in the place provided on the page
of removals. Corresponding debit entry will be
made in the L-7 register book of the factory
receiving the tobacco under heading "Refuse,
etc., received from other factory," showing the
date of receipt, assessment and invoice numbers,
name and address of the consignor, form in which
received, and the net weight of the tobacco. This
paragraph should not, however, be construed to
permit the transfer of materials unsuitable for the
manufacture of tobacco products from one
factory to another. (Emphasis supplied)
The conditions under which stemmed leaf
tobacco may be transferred from one factory to
another without prepayment of specific tax are as
follows:
(a) The transfer shall be under an official
L-7 invoice on which shall be entered the
exact weight of the tobacco at the time of
its removal;

(b) Entry shall be made in the L-7 register

in the place provided on the page for
removals; and
(c) Corresponding debit entry shall
bemade in the L-7 register book of the
factory receiving the tobacco under the
heading, "Refuse, etc.,received from the
other factory," showing the date of
receipt, assessment and invoice numbers,
name and address of the consignor, formin
which received, and the weight of the
tobacco.
Under Section 3(h) of RR No. 17-67, entities that
were issued by the Bureau of Internal Revenue
with an L-7 permit refer to "manufacturers of
tobacco products." Hence, the transferor and
transferee of the stemmed leaf tobacco must be
an L-7 tobacco manufacturer.
La Campaaexplained that the reason behind the
tax exemption of stemmed leaf tobacco
transferred between two L-7 manufacturers is
that the same had already been previouslytaxed
when acquired by the L-7 manufacturer from
dealers of tobacco, thus:
[T]he exemption from specific tax of the sale of
stemmed leaf tobacco as raw material by one L-7
directly to another L-7 is because such stemmed
leaf tobacco has been subjected to specific tax
when an L-7 manufacturer purchased the same
from wholesale leaf tobacco dealers designated
under Section 3, Chapter I, Revenue Regulations
No. 17-67 (supra) as L-3, L-3F, L-3R, L-4, or L-6,
the latter being also a stripper of leaf tobacco.
These are the sources of stemmed leaf tobacco to
be used as raw materials by an L-7 manufacturer
which does not produce stemmed leaf tobacco.
When an L-7 manufacturer sells the stemmed leaf
tobacco purchased from the foregoing suppliersto
another L-7 manufacturer as raw material, such
sale is not subject to specific tax under Section
137 (now Section 140), as implemented by
Section 20(a) of Revenue Regulations No. V-39.167
There is no new product when stemmed leaf
tobacco is transferred between two L-7 permit
holders. Thus, there can be no excise tax that will
attach. The regulation, therefore, is reasonable
and does not create a new statutory right.
RR
Nos.
V-39
and
not
exceed
the
limits of legislative delegation

17-67
did
allowable

The cigarette manufacturers contend that the

authority of the Department of Finance to
prescribe conditions is merely procedural. Its rule-

making power is only for the effective

enforcement of the law, which implicitly rules out
substantive modifications. The Secretary of
Finance cannot, by mere regulation, limit the
classes of manufacturers that may be entitled to
the tax exemption. Otherwise, Section 137
(Section 132 in the 1939 Tax Code) would be
invalid as an undue delegation of legislative
power without the required standards or
parameters.
The power of taxation is inherently legislative and
may be imposed or revoked only by the
legislature.168Moreover, this plenary power of
taxation cannot be delegated by Congress to any
other branch of government or private persons,
unless its delegation is authorized by the
Constitution itself.169 Hence, the discretion to
ascertain the following (a) basis, amount, or
rate of tax; (b) person or property that is subject
to tax; (c) exemptions and exclusions from tax;
and (d) manner of collecting the tax may not
be delegated away by Congress.
However, it is well-settled that the power to fill in
the details and manner as to the enforcement
and administration of a law may be delegated to
various specialized administrative agencies like
the Secretary of Finance in this case.170
This court in Maceda v. Macaraig, Jr.171 explained
the rationale behind the permissible delegation of
legislative powers to specialized agencies like the
Secretary of Finance:
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 directand efficacious, not to say specific
solutions.172
Thus, rules and regulations implementing the law
are designed to fill in the details or to make
explicit whatis general, which otherwise cannot
all be incorporated in the provision of the
law.173 Such
rules
and
regulations,
when

promulgated in pursuance of the procedure or

authority conferred upon the administrative
agency by law,174"deserve to be given weight and
respect by the courts in view of the rule-making
authority given to those who formulate them and
their specific expertise in their respective
fields."175 To be valid, a revenue regulation
mustbe within the scope of statutory authority or
standard granted by the legislature. Specifically,
the regulation must (1) be germane to the object
and purpose of the law;176 (2) not contradict, but
conform
to,
the
standards
the
law
prescribes;177 and (3) be issued for the sole
purpose of carrying into effect the general
provisions of our tax laws.178
Section 338 authorizes the Secretary of Finance
to promulgate all needful rules and regulations
for the effective enforcement of the provisions of
the 1939 Tax Code.
The specific authority of the Department of
Finance to issue regulations relating to the
taxation of tobacco products is found in Section
4179 (Specific provisions to be contained in
regulations); Section 125180 (Payment of specific
tax on imported articles to customs officers prior
to release from the customhouse); Section 132
(Removal
of
tobacco
products
without
prepayment of tax); Section 149181 (Extent of
supervision
over
establishments
producing
taxable output); Section 150182 (Records to be
kept by manufacturers; Assessment based
thereon); and Section 152183 (Labels and form of
packages) of the 1939 Tax Code.
RR No. V-39 was promulgated to enforce the
provisions of Title IV (Specific Taxes) of the 1939
Tax Code relating to the manufacture and
importation of, and payment of specific tax on,
manufactured tobacco or products of tobacco. By
an explicit provision in Section 132, the
lawmakers defer to the Department of Finance to
provide the details upon which the removal of
stemmed leaf tobacco may be exempt from the
specific tax in view of its supposed expertise in
the tobacco trade. Section 20(a) of RR No. V-39
adhered to the standards because it provided the
conditions the proper documentation and
recording of raw materials transferred from one
factory to another for a tax-free removal of
stemmed leaf tobacco, without negating the
imposition of specific tax under Section 137. The
"effective enforcement of the provisions of [the
Tax Code]" in Section 338 provides a sufficient
standard for the Secretary of Finance in
determining the conditionsfor the tax-free
removal of stemmed leaf tobacco. Section 4
further provides a limitation on the contents of
revenue regulations to be issued by the Secretary
of Finance.

On the other hand, RR No. 17-67 was

promulgated "[i]n accordance with the provisions
of Section 79 (B) of the Administrative Code, as
amended by Act No. 2803."184 Among the specific
administrative
powers
conferred
upon
a
department head under the Administrative Code
is that of promulgating rules and regulations, not
contrary to law, "necessary to regulate the proper
working
and
harmonious
and
efficient
administration of each and all of the offices and
dependencies of his Department, and for the
strict enforcement and proper execution ofthe
laws relative to matters under the jurisdiction of
said Department."185 Under the 1939 Tax Code,
the Secretary of Finance is authorized to
prescribe regulations affecting the business of
persons dealing in articles subject to specific tax,
including the mode in which the processes of
production of tobacco and tobacco products
should be conducted and the records to be kept
by manufacturers. Clearly then, the provisions of
RR No. 17-67 classifying and regulating the
business of persons dealing in tobacco and
tobacco products are within the rulemaking
authority of the Secretary of Finance.
RR
No.
17-67
new classification

did

not

create

The contention of the cigarette manufacturers

that RR No. 17-67 unduly restricted the meaning
of manufacturers of tobacco products by limiting
it to a few manufacturers suchas manufacturers
of cigars and cigarettes is misleading.
The definitions in RR No. 17-67 of"manufacturer
of tobacco" and "manufacturer of cigars and/or
cigarettes" are in conformity with, as in fact they
are verbatim adoptions of, the definitions under
Section 194(m) and (n) of the 1939 Tax Code.
The cigarette companies further argue that RR
No. 17-67 unduly restricted the meaning of L-7 in
Section 20(a) of RR No. V-39 because when RR
No. V-39 was issued, there was no distinction at
all between L-7, L-3, L-6 permittees, and L-7
referred to manufacturers of any class of tobacco
products including stemmed leaf tobacco.

tobacco, cigars, or cigarettes has been qualified

to conduct his or her business as such, he or she
is issued by the internal revenue agent the
corresponding register books and auxiliary
register books pertaining to his business as well
as the official register book, L-7, to be used as
record of the raw materials for his or her product.
It is, therefore, logical toconclude that the L-7
invoice and L-7 register book under Section 20(a)
refers to those invoice and books used by
manufacturers of chewing and smoking tobacco,
cigars or cigarettes.
RR No. 17-67 clarified RR No. V-39 by explicitly
designating the manufacturers of tobacco
products as L-7 permittees (Section 2), in contrast
to wholesale leaf tobacco dealers and those that
process partially manufactured tobacco such as
stemmed leaf tobacco. RR No. 17-67 did not
create a new and restrictive classification but
only expressed in clear and categorical terms the
distinctions
between
"manufacturers"
and
"dealers" of tobacco that were already implicit in
RR No. V-39.
Indeed, there is no repugnancy between RR No.
17-67 and RR No. V-39, on the one hand, and the
Tax Code, on the other. It is safer to presume that
the term "manufacturer" used in Section 137 on
tax exempt removals referred to an entity that is
engaged in the business of, and was licensed by
the Bureau of Internal Revenue as a,
manufacturer of tobacco products. It does not
include an entity engaged in business as a dealer
in tobacco that, incidentally or in furtherance of
its business as a dealer, strip or thresh whole leaf
tobacco or reprocess partially manufactured
tobacco.187
Such construction is consistent with the rule that
tax exemptions, deemed to be in derogation of
the states sovereign right of taxation, are strictly
applied and may be granted only under clear and
unmistakable terms of the law and not merely
upon a vague implication or inference.188
RR
No.
V-39
must
and
read
together
No. 17-67

be
with

applied
RR

This argument is similarly misplaced.

A reading of the entire RR No. V-39 shows that
the regulation pertains particularly to activities
ofmanufacturers of smoking and chewing
tobacco, cigars and cigarettes.186 This was rightly
so because the regulation was issued to enforce
the tax law provisions in relation to the
manufacture
and
importation
of
tobacco
products. Clearly apparent in Section 10(a) is that
when a manufacturer of chewing and smoking

The cigarette manufacturers argument is

misplaced, stating that RR No. 17-67 could not
modify RR No. V-39 because it was promulgated
to enforce Act No. 2613, as amended (entitled
"An Act to Improve the Methods of Production and
the Quality ofTobacco in the Philippines and to
Develop the Export Trade Therein"), which
allegedly had nothing whatsoever to do with the
Tax Code or with the imposition of taxes.

"The Tobacco Inspection Service,instituted under

Act No. 2613, was made part of the Bureau of
Internal Revenue and Bureau of Customs
administration for . . . internal revenue
purposes."189 The Collector of Internal Revenue
was charged to enforce Act No. 2613, otherwise
known as the Tobacco Inspection Law, with a view
to promoting the Philippine tobacco trade and
thereby
increase
the
revenues
of
the
government. This can be inferred from a reading
of the following provisions of Act No. 2613:
SEC. 6. The Collector of InternalRevenue shall
have the power and it shall be his duty:
(a) To establish general and local rules
respecting the classification, marking, and
packing of tobacco for domestic sale or
factory use and for exportation so far as
may be necessary to secure leaf tobacco
of good quality and to secure its handling
under sanitary conditions, and to the end
that leaf tobacco be not mixed, packed,
and marked and of the same quality when
it is not of the same class and origin.
(b) To establish from time to time
adequate rules defining the standard and
the type of leaf and manufactured tobacco
which shall be exported, as well also as
the manner in which standard tobacco,
shall be packed. Before establishing the
rules above specified, the Collector of
Internal Revenue shall give due notice of
the proposed rules or amendments to
those interested and shall give them an
opportunity to present their objections to
such rules or amendments.
(c) To require, whenever it shall be
deemed expedient the inspection of and
affixture of inspection labels to tobacco
removed from the province of itsorigin to
another province before such removal, or
to tobacco for domestic sale or factory
use.190
SEC. 7. No leaf tobacco or manufactured tobacco
shall be exported until it shall have been
inspected by the Collector of Internal Revenue or
his duly authorized representative and found to
be standard for export.Collector of customs shall
not permit the exportation of tobacco from the
Philippines unless the shipment be in conformity
with the requirements set forth in this Act. The
prohibition contained in this section shall not
apply to waste and refuse tobacco accumulated
in the manufacturing process when it is invoiced
and
marked
as
such
waste
and
refuse.191 (Emphasis supplied)

....
SEC. 9. The Collector of Internal Revenue may
appoint inspectors of tobacco for the purpose of
making the inspections herein required, and may
also detail any officer or employee of the Bureau
to perform such duty. Said inspectors or
employees shall likewise be charged with the
dutyof grading leaf tobacco and shall perform
such other duties as may be required of them in
the promotion of the Philippine tobacco industry.
The Collector of Internal Revenue shall likewise
appoint, with the approval of the Secretary of
Finance, agents in the United States for the
purpose of promoting the export trade in tobacco
with the United States, whose duty it shall be to
inspect shipments of tobacco upon or after their
arrival in that country when so required, to assist
manufacturers of, exporters of, and dealers in
tobacco in disseminating information regarding
Philippine tobacco and, at the request of the
parties, to act as arbitrators between the
exporter in the Philippine Islands and the
importer in the United States whenever a dispute
arises between them as to the quality, sizes,
classes, or shapes shipped or received. When
acting asarbitrator as aforesaid, the agent shall
proceed in accordance with the law governing
arbitration and award inthe locality where the
dispute arises. All agents, inspectors, and
employees acting under and by virtue of this Act
shall be subject to all penal provisions applicable
to internal-revenue officers generally.192(Emphasis
supplied)
....
SEC. 12. The inspection fees collectedby virtue of
the provisions of this Act shall constitute a special
fund to be known a the Tobacco Inspection Fund,
which shall be expended by the Collector of
Internal Revenue, with the approval of the
Secretary of Finance, upon allotment by a Board
consisting of the Commissioner of Internal
Revenue, the Director of Plant Industry, the
Director of the Bureau of Commerce and Industry,
two manufacturers designated by the Manila
Tobacco
Association,
and
two
persons
representing the interests of the tobacco
producers and growers, appointed by the
President of the Philippine Islands[.]
These funds may be expended for any of the
following purposes:
(a) The payment of the expenses incident
to the enforcement of this Act including
the salaries of the inspectors and agents.

(b) The payment of expenses incident to

the reconditioning and returning to the
Philippine Islands of damaged tobacco and
the reimbursement of the value of the
United States internal-revenue stamps lost
thereby.
(c) The advertising of Philippine tobacco
products in the United States and in
foreign countries. (d) The establishment of
tobaccowarehouses in the Philippine
Islands and in the United States at such
points as the trade conditions may
demand.
(e) The payment of bounties to encourage
the production of leaf tobacco of high
quality.
(f) The promotion and defense of the
Philippine tobacco interests in the United
States and in foreign countries.
(g) The establishment, operation, and
maintenance of tobacco experimental
farms for the purpose of studying and
testing the best methods for the
improvement of the leaves:Provided,
however, That thirty per centum of the
total annual income of the tobacco
inspection fund shall be expended for the
establishment,
operation,
and
maintenance of said tobacco experimental
farms and for the investigation and
discovery of efficacious ways and means
for the extermination and control of the
pests and diseases of tobacco: Provided,
further, That in the establishment of
experimental farms, preference shall be
given to municipalities offering the
necessary
suitable
land
for
the
establishment of an experimental farm.
(h) The sending of special agentsand
commissions to study the markets of the
United States and foreign countries with
regard to the Philippine cigars and their
propaganda in said markets.
(i) The organization of exhibits of cigars
and other Philippine tobacco products in
the United States and in foreign
countries.193
SEC. 13. The Collector Internal Revenue shall be
the
executive
officer
charged
with
the
enforcement of the provisions of this Act and of
the regulations issued in accordance therewith,
but it shall be the duty of the Director of
Agriculture, with the approval of the Secretary of

Public Instruction, to execute and enforce the

provisions hereof referring to the cultivation of
tobacco. (Emphasis supplied)
The cigarette manufacturers, thus, erroneously
concluded that Act No. 2613 does not involve
taxation.
Parenthetically, Section 8 of Act No. 2613
pertained to the imposition of tobacco inspection
fees, which are National Internal Revenue taxes,
these being one of the miscellaneous taxes
provided for under the Tax Code. Said Section 8
was in fact repealed by Section 369(b) of the
1939 Tax Code, and the provision regarding
inspection feesare found in Section 302 of the
1939 Tax Code.
Since the two revenue regulations, RR Nos. V-34
and 17-67, are in pari materia, i.e., they both
pertain specifically to the regulation of tobacco
trade, they should be read and applied together.
Statutes are in pari materia when they relate to
the same person or thing or to the same class of
persons or things, or object, or cover the same
specific or particular subject matter.
It is axiomatic in statutory construction that a
statute must be interpreted, not only to be
consistent with itself, but also to harmonize with
other laws on the same subject matter, as to form
a complete, coherent and intelligible system. The
rule is expressed in the maxim, "interpretare et
concordare legibus est optimus interpretandi,"or
every statute must be so construed and
harmonized with other statutes as to form a
uniform system of jurisprudence.194 (Citation
omitted)
The foregoing rules on statutory construction can
be applied by analogy to administrative issuances
suchas RR No. V-39 and RR No. 17-67, especially
since both are issued by the same administrative
agency.
Importation
of
stemmed
tobacco
not
included
in
exemption under Section 137

leaf
the

The transaction contemplated in Section 137

does not include importation of stemmed leaf
tobacco for the reason that the law uses the word
"sold" to describe the transaction of transferring
the raw materials from one manufacturer to
another.
The Tax Code treats an importerand a
manufacturer differently. Section 123 clearly
distinguishes between goods manufactured or
produced in the Philippines and things imported.

The law uses the proper term "importation" or

"imported" whenever the transaction involves
bringing in articles from foreign countries as
provided under Section 125 (cf. Section 124).
Whenever the Tax Code refers to importers and
manufacturers, they are separately mentioned as
two distinct persons or entities (Sections 156 and
160). Under Chapter II, whenever the law uses
the word manufacturer, it only means local
manufacturer or producer of domestic products
(Sections 150, 151, and 152 of the 1939 Tax
Code).
Moreover, foreign manufacturers oftobacco
products not engaged in trade or business in the
Philippines cannot be designated as L-7 since
these are beyond the pale of Philippine law and
regulations. The factories contemplated are those
located oroperating only in the Philippines.
Contrary to La Suertes claim, Chapter V, Section
61 of RR No. V-39195 is not applicable to justify the
tax exemption of its importation of stemmed leaf
tobacco because from the title of Chapter V, the
provision particularly refers to specific taxes on
imported cigars, cigarettes, smoking and chewing
tobacco.
No estoppel against government
The cigarette manufacturers contend that for a
long time prior to the transactions herein
involved, the Collector of Internal Revenue had
never subjected their purchases and importations
of stemmed leaf tobacco to excise taxes. This
prolonged practice allegedly represents the
official and authoritative interpretation of the law
by the Bureau of Internal Revenue which must be
respected.
We are not persuaded.
In Philippine Long Distance Telephone Co. v.
Collector of Internal Revenue,196 this court has
held that this principle is not absolute, and an
erroneous implementation by an officerbased on
a misapprehension of law may be corrected when
the true construction is ascertained. Thus:
The appellant argues that the Collector of Internal
Revenue,
previous
to
the
transactions
hereininvolved, had never collected the franchise
tax on items of the same nature as those herein
in question and this is strong evidence that such
transactions are not subject to tax on the
principle that a prolonged practice on the part of
an executive or administrative officer in charge of
executing a certain statute is an authoritative
construction of great weight. This contention may
be granted, but the principle is not absolute and
may be overcome by strong reasons to the

contrary. If through a misapprehension of law an

officer has erroneously executed it for a long
time, the error may be corrected when the true
construction is ascertained. Such we deem to be
the situation in the present case. Incidentally, the
doctrine
of
estoppel
does
not
apply
here.197 (Emphasis supplied)
This court reiterated this rule in Abello v.
Commissioner of Internal Revenue198 where it
rejected petitioners claim that the prolonged
practice (since 1939 up to 1988) of the Bureau of
Internal Revenue in not subjecting political
contributions to donors tax was an authoritative
interpretation of the statute, entitled to great
weight and the highest respect:
This Court holds that the BIR isnot precluded from
making a new interpretation of the law, especially
when the old interpretation was flawed. It is a
well-entrenched 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 agents. 199 (Emphasis
supplied, citations omitted)
Prolonged practice of the Bureau of Internal
Revenue in not collecting the specific tax on
stemmed leaf tobacco cannot validate what is
otherwise
an
erroneous
application
and
enforcement of the law. The government is never
estopped from collecting legitimate taxes
because of the error committed by its agents.200
In La Suerte Cigar and Cigarette Factory v. Court
of Tax Appeals,201 this court upheld the validity of
a revenue memorandum circular issued by the
Commissioner of Internal Revenue to correct an
error in a previous circular that resulted in the
non-collection of tobacco inspection fees for a
long time and declared that estoppel cannot work
against the government:
. . . the assailed Revenue Memorandum Circular
was issued to rectify the error in General Circular
No. V-27 and to interpret the phrase "tobacco for
domestic sale or factory use" with the view of
arresting huge losses of tobacco inspection fees
which were not collected and imposed since the
said Circular (No. V-27) took effect. Furthermore,
the questioned Revenue Memorandum Circular
was also issued to apprise those concerned of the
construction and interpretation which should be
accorded to Act No. 2613, as amended, and
which respondent is duty bound to enforce. It is
an opinion on how the law should be construed

and there was no attempt whatsoever to enlarge

or restrict the meaning of the law.
The basis for the issuance of said Memorandum
Circular was so stated in Resolution No. 2-67 of
the Tobacco Board, wherein petitioners as
members of the Manila Tobacco Association, Inc.
were duly represented, the pertinent portions of
which read:

be superseded by a ruling which is a mere

interpretation of the law. While opinions and
rulings of officials of the government called upon
to execute or implement administrative laws
command much respect and weight, courts are
not bound to accept the same if they override,
instead of remain consistent and in harmony
with, the law they seek to apply and
implement.203

". . . .

Double taxation

WHEREAS, this original recommendation of Mr.

Hernandez was perfectly in accordance with
existing law, more particularly Sec. 1 of Republic
Act No. 31 which took effect since September 25,
1946, but perhaps thru oversight by the former
Commissioners and officers of the Tobacco
Inspection Service the propriety and legality of
effecting the inspection of tobacco products for
local salesand imported leaf tobacco for factory
use might have overlooked resulting in huge
losses of tobacco inspection fees. . ." (Italics
supplied)

The contention that the cigarette manufacturers

are doubly taxed because they are paying the
specific tax on the raw material and on the
finished product in which the raw material was a
part is also devoid of merit.

....
Tobacco Inspection fees are undoubtedly National
Internal Revenue taxes, they being one of the
miscellaneous taxes provided for under the Tax
Code. Section 228 (formerly Section 302) of
Chapter VII of the Code specificallyprovides for
the collection and manner of payment of the said
inspection fees. It is within the power and duty of
the Commissioner to collect the same, even
without inspection, should tobacco products be
removed clandestinely or surreptitiously from the
establishment of the wholesaler, manufacturer or
redrying plant and from the customs custody in
case of imported leaf tobacco. Errors, omissions
or flaws committed by BIR inspectors and
representatives while in the performance of their
duties cannot beset up as estoppel nor estop the
Government from collecting a tax legally due.
Tobacco inspection fees are levied and collected
for purposes of regulation and control and also as
a source of revenue since fifty percentum (50%)
of said fees shall accrue to the Tobacco Inspection
Fee Fund created by Sec. 12 of Act No. 2613, as
amended and the other fifty percentum, to the
Cultural Center of the Philippines. (Sec. 88,
Chapter VII, NIRC)202 (Emphasis in this paragraph
supplied, citation omitted)
Furthermore, the December 12, 1972 ruling of
Commissioner Misael P. Vera runs counter to
Section 20(a)of RR No. V-39 in relation to RR No.
17-67, which provides that only transfers of
stemmed leaf tobacco between L-7 permittees
are exempt. An implementing regulation cannot

For double taxation in the objectionable or

prohibited sense to exist, "the same property
must be taxed twice, when it should be taxed but
once."204 "[B]oth taxes must be imposed on the
same property or subject- matter, for the same
purpose, by the same. . . taxing authority, within
the same jurisdiction or taxing district, during the
same taxing period, and they must be the same
kind or character of tax."205
At all events, there is no constitutional prohibition
against double taxation in the Philippines. 206 This
court has explained in Pepsi-Cola Bottling
Company of the Philippines, Inc. v. Municipality of
Tanauan, Leyte:207
There is no validity to the assertion that the
delegated
authority
can
be
declared
unconstitutional on the theory of double
taxation.1wphi1 It must be observed that the
delegating authority specifies the limitations and
enumerates the taxes over which local taxation
may not be exercised. The reason is that the
State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in
general, is not forbidden by our fundamental law,
since We have not adopted as part thereof the
injunction against double taxation found in the
Constitution of the United States and some states
of the Union. Double taxation becomes obnoxious
only where the taxpayer is taxed twice for the
benefit of the same governmental entity or by the
same jurisdiction for the same purpose, but not in
a case where one tax is imposed by the State and
the other by the city or municipality. 208 (Emphasis
supplied, citations omitted)
"It is something not favored, but is permissible,
provided some other constitutional requirement is
not thereby violated, such as the requirement
that taxes must be uniform."209

Excise
taxes
are
essentially
taxes
on
property210 because they are levied on certain
specified goods or articles manufactured or
produced in the Philippines for domestic saleor
consumption or for any other disposition, and on
goods imported. In this case, there is no double
taxation in the prohibited sense because the
specific tax is imposed by explicit provisions of
the Tax Code on two different articles or products:
(1) on the stemmed leaf tobacco; and (2) on cigar
or cigarette.211

decision and resolution of the Court of

Appeals in CA-G.R. SP. No. 37124; and
6. DENIES the petition for review filed by
La Suerte Cigar & Cigarette Factory in G.R.
No. 165499 and AFFIRMS the questioned
decision and resolution of the Court of
Appeals in
CA-G.R. SP. No. 50241.

WHEREFORE, this court:

1. DENIESthe petition for review filed by La
Suerte Cigar & Cigarette Factory in G.R.
No. 125346 and AFFIRMSthe questioned
decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 38107;
2. GRANTS the petition for review filed by
the Commissioner of Internal Revenue in
G.R. Nos. 13632829 and REVERSES and
SETS ASIDE the challenged decision and
resolution of the Court of Appeals in CAG.R. SP. Nos. 38219 and 40313. Fortune
Tobacco Corporation is ORDERED to pay
the following taxes:
a. P28,938,446.25 as deficiency
excise tax for the period covering
January 1, 1986to June 30, 1989,
plus 20% interest per annum from
November 24,1989 until fully paid;
and
b. P1,989,821.26
as
deficiency
excise tax for the period covering
July 1, 1989 to November 30, 1990,
plus 20% interest per annum from
March 1,1991 until fully paid.
3. GRANTS the petition for review filed by
the Commissioner of Internal Revenue in
G.R. No. 144942 and REVERSES and SETS
ASIDE the challenged decision of the Court
of Appeals in CA-G.R. SP. No. 51902. La
Suerte Cigar & Cigarette Factorys claim
for refund of the amount of P175,909.50 is
DENIED.
4. DENIES the petition for review filed by
Sterling Tobacco Corporation in G.R. No.
148605 and AFFIRMS the questioned
decision and resolution of the Court of
Appeals in CA-G.R. SP. No. 38159;
5. DENIES the petition for review filed by
La Suerte Cigar & Cigarette Factory in G.R.
No. 158197 and AFFIRMS the questioned

G.R. No. 166482

2012
SILKAIR
(SINGAPORE)
LTD., Petitioner,
vs.
COMMISSIONER
OF
REVENUE, Respondent.

January 25,
PTE.
INTERNAL

DECISION
VILLARAMA, JR., J.:
Assailed in this Rule 45 Petition is the
Decision1 dated September 13, 2004 and
Resolution2 dated December 21, 2004 of the
Court of Appeals (CA) in CA-G.R. SP No.
82902.
Petitioner Silkair (Singapore) Pte. Ltd. is a
foreign corporation duly licensed by the
Securities and Exchange Commission (SEC)
to do business in the Philippines as an on-line
international carrier operating the CebuSingapore-Cebu and Davao-Singapore-Davao
routes. In the course of its international flight
operations, petitioner purchased aviation fuel
from Petron Corporation (Petron) from July 1,
1998 to December 31, 1998, paying the
excise
taxes
thereon
in
the
sum
of P5,007,043.39.
The
payment
was
advanced by Singapore Airlines, Ltd. on
behalf of petitioner.
On October 20, 1999, petitioner filed an
administrative claim for refund in the amount
of P5,007,043.39 representing excise taxes
on the purchase of jet fuel from Petron,

which it alleged to have been erroneously

paid. The claim is based on Section 135 (a)
and (b) of the 1997 Tax Code, which
provides:
SEC. 135. Petroleum Products Sold to
International Carriers and Exempt Entities or
Agencies. Petroleum products sold to the
following are exempt from excise tax:
(a) International
carriers
of
Philippine or foreign registry on
their use or consumption outside the
Philippines: Provided, That
the
petroleum products sold to these
international carriers shall be stored in
abonded storage tank and may be
disposed of only in accordance with
the rules and regulations to be
prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner;
(b) Exempt entities or agencies
covered
by tax
treaties,
conventions
and
other
international agreements for their
use
or
consumption: Provided,
however, That the country of said
foreign international carrier or exempt
entities or agencies exempts from
similar taxes petroleum products sold
to Philippine carriers, entities or
agencies; and
x x x x (Emphasis supplied.)
Petitioner also invoked Article 4(2) of the Air
Transport
Agreement
between
the
Government of the Republic of the
Philippines and the Government of the
Republic
of
Singapore3 (Air
Transport
Agreement between RP and Singapore)
which reads:
ART. 4
xxxx
2. Fuel, lubricants, spare parts, regular
equipment and aircraft stores introduced
into, or taken on board aircraft in the
territory of one Contracting Party by, or on
behalf of, a designated airline of the other
Contracting Party and intended solely for use

in the operation of the agreed services shall,

with the exception of charges corresponding
to the service performed, be exempt from
the same customs duties, inspection fees
and other duties or taxes imposed in the
territory of the first Contracting Party, even
when these supplies are to be used on the
parts of the journey performed over the
territory of the Contracting Party in which
they are introduced into or taken on board.
The materials referred to above may be
required to be kept under customs
supervision and control.4
Due to the inaction by respondent
Commissioner of Internal Revenue, petitioner
filed a petition for review with the Court of
Tax Appeals (CTA) on June 30, 2000.
On July 28, 2003, the CTA rendered its
decision5 denying petitioners claim for
refund. Said court ruled that while
petitioners country indeed exempts from
similar taxes petroleum products sold to
Philippine carriers, petitioner nevertheless
failed to comply with the second requirement
under Section 135 (a) of the 1997 Tax
Code as it failed to prove that the jet fuel
delivered by Petron came from the latters
bonded storage tank. Presiding Justice
Ernesto D. Acosta dissented from the
majority view that petitioners claim should
be denied, stating that even if the bonded
storage tank is required under Section 135
(a), the claim can still be justified under
Section 135 (b) in view of our countrys
existing Air Transport Agreement with the
Republic of Singapore which shows the
reciprocal enjoyment of the privilege of the
designated airline of the contracting parties.
Its motion for reconsideration having been
denied by the CTA, petitioner elevated the
case to the CA. Petitioner assailed the CTA in
not holding that there are distinct and
separate instances of exemptions provided in
paragraphs (a), (b) and (c) of Section 135,
and therefore the proviso found in paragraph
(a) should not have been applied to the
exemption granted under paragraph (b).
The CA affirmed the denial of the claim for
tax refund and dismissed the petition. It
ruled that while petitioner is exempt from
paying excise taxes on petroleum products

purchased in the Philippines by virtue of

Section 135 (b), petitioner is not the proper
party to seek for the refund of the excise
taxes
paid.
Petitioners
motion
for
reconsideration was likewise denied by the
appellate court.
In this appeal, petitioner argues that it is the
proper party to file the claim for refund,
being the entity granted the tax exemption
under the Air Transport Agreement between
RP and Singapore. It disagrees with
respondents reasoning that since excise tax
is an indirect tax it is the direct liability of the
manufacturer, Petron, and not the petitioner,
because this puts to naught whatever
exemption was granted to petitioner by
Article 4 of the Air Transport Agreement.
Petitioner further contends that respondent
is estopped from questioning the right of
petitioner to claim a refund of the excise
taxes paid after issuing BIR Ruling No. 33992 which already settled the matter. It
further points out that the CTA has
consistently ruled in a number of decisions
involving the same parties that petitioner is
the proper party to seek the refund of excise
taxes paid on its purchases of petroleum
products.
Finally,
it
emphasizes
that
respondent never raised in issue petitioners
legal personality to seek a tax refund in the
administrative level. Citing this Courts ruling
in the case of Commissioner of Internal
Revenue v. Court of Tax Appeals, et
al.6petitioner asserts that respondent is in
estoppel to question petitioners standing to
file the claim for refund for its failure to
timely raise the issue in the administrative
level, as well as before the CTA.
On the other hand, the Solicitor General on
behalf of respondent, maintains that the
excise tax passed on to the petitioner by
Petron being in the nature of an indirect tax,
it cannot be the subject matter of an
administrative claim for refund/tax credit,
following the ruling in Contex Corporation v.
Commissioner
of
Internal
Revenue.7Moreover, assuming arguendo that
petitioner falls under any of the enumerated
transactions/persons
entitled
to
tax
exemption under Section 135 of the 1997 Tax
Code, what the law merely contemplates is
exemption from the payment of excise tax to

the seller/manufacturer, in this case Petron,

but not an exemption from payment of
excise tax to the BIR, much more an
entitlement to a refund from the BIR. Being
the buyer, petitioner is not the person
required by law nor the person statutorily
liable to pay the excise tax but the seller,
following the provision of Section 130 (A) (1)
(2).
The Solicitor General also asserts that
contrary to petitioners argument that
respondent
never
raised
in
the
administrative level the issue of whether
petitioner is the proper party to file the claim
for refund, records would show that
respondent actually raised the matter of
whether petitioner is entitled to the tax
refund being claimed in his Answer dated
August 8, 2000, in the Joint Stipulation of
Facts, and in his Memorandum submitted
before
the
CTA
where
respondent
categorically averred that "petitioner x x x is
not the entity directly liable for the payment
of the tax, hence, not the proper party who
should claim the refund of the excise taxes
paid."8
We rule for the respondent.
The core issue presented is the legal
personality
of
petitioner
to
file
an
administrative claim for refund of excise
taxes alleged to have been erroneously paid
to its supplier of aviation fuel here in the
Philippines.
In three previous cases involving the same
parties, this Court has already settled the
issue of whether petitioner is the proper
party to seek the refund of excise taxes paid
on its purchase of aviation fuel from a local
manufacturer/seller. Following the principle
of stare decisis, the present petition must
therefore be denied.
Excise taxes, which apply to articles
manufactured or produced in the Philippines
for domestic sale or consumption or for any
other disposition and to things imported into
the Philippines,9 is basically an indirect tax.
While the tax is directly levied upon the
manufacturer/importer upon removal of the
taxable goods from its place of production or
from the customs custody, the tax, in reality,

is actually passed on to the end consumer as

part of the transfer value or selling price of
the goods, sold, bartered or exchanged. 10 In
early cases, we have ruled that for indirect
taxes (such as valued-added tax or VAT), the
proper party to question or seek a refund of
the tax is the statutory taxpayer, the person
on whom the tax is imposed by law and who
paid the same even when he shifts the
burden thereof to another.11 Thus, in Contex
Corporation v. Commissioner of Internal
Revenue,12 we held that while it is true that
petitioner corporation should not have been
liable for the VAT inadvertently passed on to
it by its supplier since their transaction is a
zero-rated sale on the part of the supplier,
the petitioner is not the proper party to claim
such VAT refund. Rather, it is the petitioners
suppliers who are the proper parties to claim
the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on
to the latter.13
In the first Silkair case14 decided on February
6, 2008, this Court categorically declared:
The proper party to question, or seek a
refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is
imposed by law and who paid the same even
if he shifts the burden thereof to another.
Section 130 (A) (2) of the NIRC provides that
"[u]nless otherwise specifically allowed, the
return shall be filed and the excise tax paid
by the manufacturer or producer before
removal of domestic products from place of
production." Thus,Petron Corporation, not
Silkair, is the statutory taxpayer which
is entitled to claim a refund based on
Section 135 of the NIRC of 1997 and
Article 4(2) of the Air Transport
Agreement between RP and Singapore.
Even if Petron Corporation passed on to
Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a
tax but part of the price which Silkair had to
pay as a purchaser. 15 (Emphasis supplied.)
Just a few months later, the decision in the
second Silkair case16 was
promulgated,
reiterating the rule that in the refund of
indirect taxes such as excise taxes, the
statutory taxpayer is the proper party who
can claim the refund. We also clarified that

petitioner Silkair, as the purchaser and endconsumer, ultimately bears the tax burden,
but this does not transform its status into a
statutory taxpayer.
The person entitled to claim a tax refund is
the statutory taxpayer. Section 22(N) of the
NIRC defines a taxpayer as "any person
subject to tax." In Commissioner of Internal
Revenue v. Procter and Gamble Phil. Mfg.
Corp., the Court ruled that:
A "person liable for tax" has been held to be
a "person subject to tax" and properly
considered a "taxpayer." The terms "liable for
tax" and "subject to tax" both connote a
legal obligation or duty to pay a tax.
The excise tax is due from the manufacturers
of the petroleum products and is paid upon
removal of the products from their refineries.
Even before the aviation jet fuel is purchased
from Petron, the excise tax is already paid by
Petron. Petron, being the manufacturer, is
the "person subject to tax." In this case,
Petron, which paid the excise tax upon
removal of the products from its Bataan
refinery, is the "person liable for tax."
Petitioner is neither a "person liable for tax"
nor "a person subject to tax." There is also
no legal duty on the part of petitioner to pay
the excise tax; hence, petitioner cannot be
considered the taxpayer.
Even if the tax is shifted by Petron to its
customers and even if the tax is billed as a
separate item in the aviation delivery
receipts
and
invoices
issued
to
its
customers, Petron remains the taxpayer
because the excise tax is imposed
directly on Petron as the manufacturer.
Hence,
Petron,
as
the
statutory
taxpayer, is the proper party that can
claim the refund of the excise taxes
paid
to
the
BIR.17 (Emphasis
supplied.)1avvphi1
Petitioners contention that the CTA and CA
rulings would put to naught the exemption
granted under Section 135 (b) of the 1997
Tax Code and Article 4 of the Air Transport
Agreement is not well-taken. Since the
supplier herein involved is also Petron, our
pronouncement in the second Silkair case,
relative to the contractual undertaking of

petitioner to submit a valid exemption

certificate for the purpose, is relevant. We
thus noted:
The General Terms & Conditions for Aviation
Fuel
Supply (Supply
Contract)
signed
between petitioner (buyer) and Petron
(seller) provide:
"11.3 If Buyer is entitled to purchase any
Fuel sold pursuant to the Agreement free of
any taxes, duties or charges, Buyer shall
timely
deliver
to
Seller
a
valid
exemption
certificate
for
such
purchase." (Emphasis supplied)
This provision instructs petitioner to timely
submit a valid exemption certificate to
Petron in order that Petron will not pass on
the excise tax to petitioner. As correctly
suggested by the CTA, petitioner should
invoke its tax exemption to Petron before
buying the aviation jet fuel. Petron, however,
remains the statutory taxpayer on those
excise taxes.
Revenue Regulations No. 3-2008 (RR 3-2008)
provides that "subject to the subsequent
filing of a claim for excise tax credit/refund or
product replenishment, all manufacturers of
articles subject to excise tax under Title VI of
the NIRC of 1997, as amended, shall pay the
excise tax that is otherwise due on every
removal thereof from the place of production
that is intended for exportation
or
sale/delivery to international carriers or to
tax-exempt
entities/agencies."
The
Department of Finance and the BIR recognize
the tax exemption granted to international
carriers but they consistently adhere to the
view that manufacturers of articles subject to
excise tax are the statutory taxpayers that
are liable to pay the tax, thus, the proper
party to claim any tax refunds.18
The above observation remains pertinent to
this case because the very same provision in
the General Terms and Conditions for
Aviation Fuel Supply Contract also appears in
the documentary evidence submitted by
petitioner before the CTA.19 Except for its
bare allegation of being "placed in a very
complicated situation" because Petron, "for
fear of being assessed by Respondent, will
not allow the withdrawal and delivery of the

petroleum products without Petitioners prepayment of the excise taxes," petitioner has
not demonstrated that it dutifully complied
with its contractual undertaking to timely
submit to Petron a valid certificate of
exemption so that Petron may subsequently
file a claim for excise tax credit/refund
pursuant to Revenue Regulations No. 3-2008
(RR 3-2008). It was indeed premature for
petitioner to assert that the denial of its
claim for tax refund nullifies the tax
exemption granted to it under Section 135
(b) of the 1997 Tax Code and Article 4 of the
Air Transport Agreement.
In the third Silkair case20 decided last year,
the Court called the attention to the
consistent
rulings
in
the
previous
two Silkair cases that petitioner as the
purchaser and end-consumer of the aviation
fuel is not the proper party to claim for
refund of excise taxes paid thereon. The
situation clearly called for the application of
the doctrine, stare decisis et non quieta
movere. Follow past precedents and do not
disturb what has been settled. Once a case
has been decided one way, any other case
involving exactly the same point at issue, as
in the case at bar, should be decided in the
same manner.21 The Court thus finds no
cogent reason to deviate from those previous
rulings on the same issues herein raised.
WHEREFORE, the petition for review on
certiorari is DENIED. The Decision dated
September 13, 2004 and Resolution dated
December 21, 2004 of the Court of Appeals
in CA-G.R. SP No. 82902 are AFFIRMED.
With costs against the petitioner.
SO ORDERED.

forwarding,
hauling,
carrying,
handling,
distributing, loading, and unloading general
cargoes and all classes of goods, wares, and
merchandise, and the operation of container
depots, warehousing, storage, hauling, and
packing facilities.6 It is a Value-Added Tax (VAT)
registered entity with Tax Identification No. VAT
Registration No. 004-669-434-000.7 As such, it
filed its quarterly VAT returns for the year 2002
on April 25, 2002, July 25, 2002, October 25,
2002, and January 27, 2003, respectively. 8 It
maintained that during the said period it incurred
input VAT attributable to its zero-rated sales in
the amount of P28,405,167.60, from which only
P3,760,660.74 was applied as tax credit, thus,
reflecting refundable excess input VAT in the
amount
of
P24,644,506.86.9
On April 22, 2004, Nippon filed an administrative
claim for refund10 of its unutilized input VAT in the
amount of P24,644,506.86 for the year 2002
before the Bureau of Internal Revenue (BIR). 11 A
day later, or on April 23, 2004, it filed a judicial
claim for tax refund, by way of petition for
review,12before the CTA, docketed as CTA Case
No.
6967.13
For its part, petitioner the Commissioner of
Internal Revenue (CIR) asserted, inter alia, that
the amounts being claimed by Nippon as
unutilized
input
VAT
were
not
properly
documented, hence, should be denied.14
G.R. No. 212920, September 16, 2015
COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner, v. NIPPON
EXPRESS
(PHILS.) CORPORATION, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed
in
this
petition
for
review
on certiorari1 are the Decision2 dated December
18, 2013 and the Resolution3 dated June 10, 2014
of the Court of Tax Appeals (CTA) En Banc in CTA
EB No. 924, which affirmed the Resolution 4 dated
July 31, 2012 of the CTA Third Division (CTA
Division) in CTA Case No. 6967, granting
respondent Nippon Express (Phils.) Corporation's
(Nippon) motion to withdraw petition for
review5 (motion to withdraw).
The Facts
Nippon is a domestic corporation duly organized
and existing under Philippine laws which is
primarily engaged in the business of freight
forwarding, namely, in the international and
domestic air and sea freight and cargo

Proceedings Before the CTA Division

In a Decision15 dated August 10, 2011, the CTA
Division partially granted Nippon's claim for tax
refund, and thereby ordered the CIR to issue a tax
credit certificate in the reduced amount of
P2,614,296.84, representing its unutilized input
VAT which was attributable to its zero-rated
sales.16It found that while Nippon timely filed its
administrative and judicial claims within the two
(2)-year prescriptive period,17 it, however, failed
to show that the recipients of its services - which,
in this case, were mostly Philippine Economic
Zone Authority registered enterprises - were nonresidents
"doing
business
outside
the
Philippines." Accordingly, it concluded that
Nippon's purported sales therefrom could not
qualify as zero-rated sales, hence, the reduction
in the amount of tax credit certificate claimed. 18
Before its receipt of the August 10, 2011
Decision, or on August 12, 2011, Nippon filed
a motion to withdraw,19 considering that the
BIR, acting on its administrative claim, already
issued a tax credit certificate in the amount of
P21,675,128.91 on July 27, 2011 (July 27, 2011
Tax
Credit
Certificate).

Separately,
the
CIR
moved
for
reconsideration20 of the August 10, 2011 Decision
and filed its comment/opposition21 to Nippon's
motion to withdraw, claiming that: (a) the CTA
Division had already resolved the factual issue
pertaining to Nippon's entitlement to a tax credit
certificate, which, after trial, was proven to be
only in the amount of P2,614,296.84; (b) the
issuance of the July 27, 2011 Tax Credit
Certificate was bereft of factual and legal bases,
and prejudicial to the interest of the government;
and (c) Nippon's motion to withdraw was
"tantamount to [a] withdrawal and abandonment
of its [mjotion for [reconsideration also filed in
this
case."22

a motion to withdraw. It also observed that the

CIR did not deny the existence and issuance of
the July 27, 2011 Tax Credit Certificate. In this
regard, the same may be taken judicial notice of,
and the need for its formal offer dispensed with. 32

Thereafter, Nippon, which maintained that it only

had notice of the August 10, 2011 Decision on
August
16,
2011,23 likewise
sought
for
24
reconsideration, praying that the CTA Division
set aside its August 10, 2011 Decision and render
judgment ordering the CIR to issue a tax credit
certificate in the full amount of P24,644,506.86,
or in the alternative, grant its motion to
withdraw.25cralawred

The Court's Ruling

In a Resolution dated July 31, 2012, 26 the CTA

Division granted Nippon's motion to withdraw
and, thus, considered the case closed and
terminated.27 It found that pursuant to Revenue
Memorandum Circular No. 49-03 (RMC No.
49-03) dated August 15, 2003, Nippon
correctly
availed of the
proper
remedy
notwithstanding the promulgation of the August
10, 2011 Decision. It added that in approving the
withdrawal of Nippon's petition for review, it
exercised its discretionary authority under
Section 3, Rule 50 of the Rules of Court after due
consideration of the reasons proffered by Nippon,
namely: (a) that the parties had already arrived at
a reasonable settlement of the issues; (b) further
legal and related costs would be avoided; and (c)
the court's time and resources would be saved. 28
Aggrieved, the CIR elevated29 its case to the
CTA En Banc.
The CTA En Banc Ruling
In a Decision30 dated December 18, 2013, the
CTA En Banc affirmed the July 31, 2012
Resolution of the CTA Division granting Nippon's
motion to withdraw.31 It debunked the CIR's
assertions that Nippon failed to comply with the
requirements set forth in RMC No. 49-03 - i.e.,
that Nippon failed to notify the BIR that it agreed
with its findings and to file the necessary motion
before the CTA Division prior to the promulgation
of its Decision -noting that RMC No. 49-03 did not
expressly require a taxpayer to inform the BIR of
its assent nor prescribe a definite period for filing

The CIR moved for partial reconsideration 33 which

was, however, denied by the CTA En Banc in a
Resolution34 dated June 10, 2014; hence, this
petition.
The Issue Before the Court
The core issue in this case is whether the CTA
properly granted Nippon's motion to withdraw.

The

petition

is

meritorious.

A perusal of the Revised Rules of the Court of Tax

Appeals35 (RRCTA) reveals the lack of provisions
governing the procedure for the withdrawal of
pending appeals before the CTA. Hence, pursuant
to Section 3, Rule 1 of the RRCTA, the Rules of
Court shall suppletorily apply:
Sec. 3. Applicability of the Rules of Court. - The
Rules of Court in the Philippines shall apply
suppletorily to these Rules.
Rule 50 of the Rules of Court - an adjunct rule to
the appellate procedure in the CA under Rules 42,
43, 44, and 46 of the Rules of Court which are
equally adopted in the RRCTA 36 - states that when
the case is deemed submitted for resolution,
withdrawal of appeals made after the filing of the
appellee's brief may still be allowed in the
discretion of the court:
RULE
50
DISMISSAL OF APPEAL
xxxx
Section 3. Withdrawal of appeal. An appeal
may be withdrawn as of right at any time before
the filing of the appellee's brief. Thereafter, the
withdrawal may be allowed in the discretion
of the court. (Emphasis supplied)
Impelled by the BIR's supervening issuance of the
July 27, 2011 Tax Credit Certificate, Nippon filed a
motion to withdraw the case, proffering that:
Having arrived at a reasonable settlement of the
issues with the [CIR]/BIR, and to avoid incurring
further legal and related costs, not to mention the
time and resources of [the CTA], [Nippon] most
respectfully moves for the withdrawal of its
Petition for Review.37
Finding the aforementioned grounds to be
justified, the CTA Division allowed the withdrawal
of Nippon's appeal thereby ordering the case
closed and terminated, notwithstanding the fact
that the said motion was filed after the

promulgation of its August 10, 2011 Decision.

While it is true that the CTA Division has the
prerogative to grant a motion to withdraw under
the authority of the foregoing legal provisions,
the attendant circumstances in this case should
have
incited
it
to
act
otherwise.
First, it should be pointed out that the August 10,
2011 Decision was rendered by the CTA Division
after a full-blown hearing in which the parties had
already ventilated their claims. Thus, the findings
contained therein were the results of an
exhaustive study of the pleadings and a judicious
evaluation of the evidence submitted by the
parties, as well as the report of the commissioned
certified
public
accountant.
In Reyes
v.
Commission on Elections,38 the Court only noted,
and did not grant, a motion to withdraw the
petition filed after it had already acted on said
petition, ratiocinating in the following wise:
It may well be in order to remind petitioner that
jurisdiction, once acquired, is not lost upon the
instance of the parties, but continues until the
case is terminated. When petitioner filed her
Petition for Certiorari jurisdiction vested in the
Court and, in fact, the Court exercised such
jurisdiction when it acted on the petition. Such
jurisdiction cannot be lost by the unilateral
withdrawal of the petition by petitioner.39
The primary reason, however, that militates
against the granting of the motion to withdraw is
the fact that the CTA Division, in its August 10,
2011 Decision, had already determined that
Nippon was only entitled to refund the reduced
amount of P2,614,296.84 since it failed to prove
that the recipients of its services were nonresidents
"doing
business
outside
the
Philippines"; hence, Nippon's purported sales
therefrom could not qualify as zero-rated sales,
necessitating the reduction in the amount of
refund claimed. Markedly different from this is the
BIR's
determination
that
Nippon
should
receiveP21,675,128.91 as per the July 27, 2011
Tax
Credit
Certificate,
which
is,
in
all, P19,060,832.07larger than the amount
found due by the CTA Division. Therefore, as aptly
pointed out by Associate Justice Teresita J.
Leonardo-De Castro during the deliberations on
this case, the massive discrepancy alone between
the administrative and judicial determinations of
the amount to be refunded to Nippon should have
already raised a red flag to the CTA Division.
Clearly, the interest of the government, and,
more significantly, the public, will be greatly
prejudiced by the erroneous grant of refund - at a
substantial amount at that - in favor of Nippon.
Hence, under these circumstances, the CTA
Division should not have granted the motion to
withdraw.

In this relation, it deserves mentioning that the

CIR is not estopped from assailing the validity of
the July 27, 2011 Tax Credit Certificate which was
issued by her subordinates in the BIR. In matters
of taxation, the government cannot be estopped
by the mistakes, errors or omissions of its agents
for upon it depends the ability of the government
to serve the people for whose benefit taxes are
collected.40
Finally, the Court has observed that based on the
records, Nippon's administrative claim for the first
taxable quarter of 2002 which closed on March
31, 2002 was already time-barred 41 for being filed
onApril 22, 2004, or beyond the two (2)-year
prescriptive
period
pursuant
to
Section
112(A)42 of the National Internal Revenue Code of
1997. Although prescription was not raised as an
issue, it is well-settled that if the pleadings or the
evidence on record show that the claim is barred
by prescription, the Court may motu proprio order
its
dismissal
on
said
ground.43
All told, the CTA committed a reversible error in
granting Nippon's motion to withdraw. The August
10, 2011 Decision of the CTA Division should
therefore be reinstated, without prejudice,
however, to the right of either party to appeal the
same
in
accordance
with
the
RRCTA.
WHEREFORE, the petition is GRANTED. The
Decision dated December 18, 2013 and the
Resolution dated June 10, 2014 of the Court of
Tax Appeals En Banc in CTA EB Case No. 924 are
hereby SET ASIDE. The Decision dated August
10, 2011 of the Court of Tax Appeals Third
Division in CTA Case No. 6967 is REINSTATED,
without prejudice, however, to the right of either
party to appeal the same in accordance with the
Revised Rules of the Court of Tax Appeals.
SO

ORDERED.chanroblesvirtuallawlibrary

Sereno, C.J., (Chairperson), Leonardo-De Castro,

Bersamin, and Perez, JJ., concur.
Endnotes:
40

"It is a well-settled rule that the government

cannot be estopped by the mistakes, errors or
omissions of its agents. It has been specifically
held that estoppel does not apply to the
government, especially on matters of taxation.
Taxes are the nation's lifeblood through which
government agencies continue to operate and
with which the State discharges its functions for
the welfare of its constituents. Thus, the
government cannot be estopped from collecting
taxes by the mistake, negligence, or omission of
its agents. Upon taxation depends the ability of
the government to serve the people for whose

benefit taxes are collected. To safeguard such

interest, neglect or omission of government
officials entrusted with the collection of taxes
should not be allowed to bring harm or detriment
to the people." (Visayas Geolhermai Power
Company v. CIR, G.R. No. 197525, June 4, 2014,
725
SCRA
130,
149.)
41

"First, Section 112(A) clearly, plainly, and

unequivocally provides that the taxpayer 'may,
within two (2) years after the close of the taxable
quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of the
creditable input tax due or paid to such sales.' In
short, the law states that the taxpayer may apply
with the Commissioner for a refund or credit
'within two (2) years, which means at anytime
within two years. Thus, the application for refund
or credit may be filed by the taxpayer with the
Commissioner on the last day of the two-year
prescriptive period and it will still strictly comply
with the law. The two year prescriptive period is a
grace period in favor of the taxpayer and he can
avail of the full period before his right to apply for
a tax refund or credit is barred by prescription."
(CIR v. San Rogue Power Corporation, G.R. Nos.
187485, 196113, and 197156, February 12, 2013,
690
SCRA
336,
390-391.)
42

Section 112 (A) of the National

Revenue
Code
of
reads:chanRoblesvirtualLawlibrary

Internal
1997

Section 112. Refunds or Tax Credits of Input Tax. (A) Zero-rated or Effectively Zero-rated Sales. any VAT-registered person, whose sales are zerorated or effectively zero-rated may, within two
(2) years after the close of the taxable
quarter when the sales were made, apply for
the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to
such sales, except transitional input tax, to the
extent that such input tax has not been applied
against
output
tax:
x
x
x.
x x x x (Emphasis and underscoring supplied)

G.R. No. 197525

June 4, 2014

VISAYAS
GEOTHERMAL
COMPANY, Petitioner,
vs.
COMMISSIONER
OF
REVENUE, Respondent.

POWER
INTERNAL

DECISION
MENDOZA, J.:
Before the Court is a petition for review on
certiorari under Rule 45 of the Rules of Court
assailing the February 7, 2011 Decision 1 and
the June 27, 2011 Resolution2 of the Court of
Tax Appeals En Banc (CTA En Banc) in CTA EB
Case Nos. 561 and 562, which reversed and
set aside the April 17, 2009 Decision of the
CT A Second Division in CTA Case No. 7559.
The Facts:
Petitioner
Visayas
Geothermal
Power
Company (VGPC) is a special limited
partnership duly organized and existing
under Philippine Laws with its principal office
at Milagro, Ormoc City, Province of Leyte. It
is principally engaged in the business of
power
generation
through
geothermal
energy and the sale of generated power to
the
Philippine
National
Oil
Company
(PNOC),pursuant to the Energy Conversion
Agreement.
VGPC filed with the Bureau of Internal
Revenue (BIR)its Original Quarterly VAT
Returns for the first to fourth quarters of

taxable year 2005 on April 25, 2005, July 25,

2005, October 25, 2006, and January 20,
2006, respectively.
On December 6, 2006, it filed an
administrative claim for refund for the
amount of 14,160,807.95 with the BIR
District Office No. 89 of Ormoc City on the
ground that it was entitled to recover excess
and unutilized input VAT payments for the
four quarters of taxable year 2005, pursuant
to Republic Act (R.A.) No. 9136,3 which
treated sales of generated power subject to
VAT to a zero percent (0%) rate starting June
26, 2001.
Nearly one month later, on January3, 2007,
while its administrative claim was pending,
VGPC filed its judicial claim via a petition for
review with the CTA praying for a refund or
the issuance of a tax credit certificate in the
amount of 14,160,807.95, covering the four
quarters of taxable year 2005.
In its April 17, 2009 Decision, the CTA Second
Division partially granted the petition as
follows:
WHEREFORE, in view of the foregoing
considerations, the Petition for Review is
hereby PARTIALLY GRANTED. Accordingly,
respondent is ORDERED TO REFUND or, in
the alternative, TO ISSUE A TAX CREDIT
CERTIFICATE in favor of petitioner the
reduced amount of SEVEN MILLION SIX
HUNDRED NINENTY NINE THOUSAND THREE
HUNDRED SIXTY SIX PESOS AND 37/100
(P7,699,366.37) representing unutilized input
VAT paid on domestic purchases of noncapital goods and services, services rendered
by non-residents, and importations of noncapital goods for the first to fourth quarters
of taxable year 2005.
SO ORDERED.4
The CTA Second Division found that only the
amount
of
7,699,366.37
was
duly
substantiated by the required evidence. As to
the timeliness of the filing of the judicial
claim, the Court ruled that following the case
of Commissioner of Internal Revenue (CIR) v.
Mirant Pagbilao Corporation (Mirant), 5 both
the administrative and judicial claims were
filed within the two-year prescriptive period

provided in Section 112(A) of the National

Internal Revenue Code of 1997 (NIRC),the
reckoning point of the period being the close
of the taxable quarter when the sales were
made.
In its October 29, 2009 Resolution,6 the CTA
Second Division denied the separate motions
for partial reconsideration filed by VGPC and
the CIR. Thus, both VGPC and the CIR
appealed to the CTA En Banc.
In
the
assailed
February
7,
2011
Decision,7 the CTA En Banc reversed and set
aside the decision and resolution of the CTA
Second Division, and dismissed the original
petition for review for having been filed
prematurely, to wit:
WHEREFORE, premises considered:
i. As regards CTA EB Case No. 562, the
Petition
for
Review
is
hereby
DISMISSED; and
ii. As regards CTA EB Case No. 561, the
Petition
for
Review
is
hereby
GRANTED.
Accordingly, the Decision, dated April 17,
2009, and the Resolution, dated October 29,
2009, of the CTA Former Second Division are
hereby REVERSED and SET ASIDE, and
another one is hereby entered DISMISSING
the Petition for Review filed in CTA Case No.
7559 for having been filed prematurely.
SO ORDERED.8
The CTA En Banc explained that although
VGPC seasonably filed its administrative
claim within the two-year prescriptive period,
its judicial claim filed with the CTA Second
Division was prematurely filed under Section
112(D) of the National Internal Revenue
Code (NIRC).Citing the case of CIR v. Aichi
Forging Company of Asia, Inc. (Aichi), 9 the
CTA En Banc held that the judicial claim filed
28 days after the petitioner filed its
administrative claim, without waiting for the
expiration of the 120-day period, was
premature and, thus, the CTA acquired no
jurisdiction over the case.

The VGPC filed a motion for reconsideration,

but the CTA En Banc denied it in the assailed
June 27, 2011 Resolution for lack of merit. It
stated that the case of Atlas Consolidated
Mining v. CIR (Atlas)10 relied upon by the
petitioner had long been abandoned.
Hence, this petition.
ASSIGNMENT OF ERRORS
I
The CTA En Banc erred in finding that the
120-day and 30-day periods prescribed
under Section 112(D) of the 1997 Tax Code
are jurisdictional and mandatory in the filing
of the judicial claim for refund. The CTADivision should take cognizance of the
judicial appeal as long as it is filed with the
two-year prescriptive period under Section
229 of the 1997 Tax Code.
II
The CTA En Banc erred in finding that Aichi
prevails over and/or overturned the doctrine
in Atlas, which upheld the primacy of the
two-year period under Section 229 of the Tax
Code. The law and jurisprudence have long
established the doctrine that the taxpayer is
duty-bound to observe the two-year period
under Section 229 of the Tax Code when
filing its claim for refund of excess and
unutilized VAT.
III
The CTA En Banc erred in finding that
Respondent CIR is not estopped from
questioning the jurisdiction of the CTA.
Respondent CIR, by her actions and
pronouncements,
should
have
been
precluded from questioning the jurisdiction of
the CTA-Division.
IV
The CTA En Banc erred in applying Aichi to
Petitioner VGPCs claim for refund. The novel
interpretation of the law in Aichi should not
be made to apply to the present case for
being contrary to existing jurisprudence at
the
time
Petitioner
VGPC
filed
its

administrative
refund.11

and

judicial

claims

for

Petitioner VGPC argues that (1) the law and

jurisprudence have long established the rule
regarding compliance with the two-year
prescriptive period under Section 112(D) in
relation to Section 229 of the 1997 Tax Code;
(2) Aichi did not overturn the doctrine in
Atlas, which upheld the primacy of the twoyear period under Section 229; (3)
respondent CIR is estopped from questioning
the jurisdiction of the CTA and Aichi cannot
be indiscriminately applied to all VAT refund
cases; (4) applying Aichi invariably to all VAT
refund cases would effectively grant
respondent CIR unbridled discretion to
deprive a taxpayer of the right to effectively
seek judicial recourse, which clearly violates
the standards of fairness and equity; and (5)
the novel interpretation of the law in Aichi
should not be made to apply to the present
case for being contrary to existing
jurisprudence at the time VGPC filed its
administrative and judicial claims for refund.
Aichi should be applied prospectively.
Ruling of the Court
Judicial claim not premature
The assignment of errors is rooted in the core
issue of whether the petitioners judicial
claim for refund was prematurely filed.
Two sections of the NIRC are pertinent to the
issue at hand, namely Section 112 (A) and
(D) and Section 229, to wit:
SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-rated or Effectively Zerorated

Sales.Any
VAT-registered
person, whose sales are zero-rated or
effectively zero-rated may, within two
(2) years after the close of the taxable
quarter when the sales were made,
apply for the issuance of a tax credit
certificate or refund of creditable input
tax due or paid attributable to such
sales, except transitional input tax, to
the extent that such input tax has not
been applied against output tax:
Provided, however, That in the case of

zero-rated sales under Section 106(A)

(2)(a)(1), (2) and (B) and Section 108
(B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof
had been duly accounted for in
accordance with the rules and
regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That
where the taxpayer is engaged in
zero-rated or effectively zero-rated
sale and also in taxable or exempt sale
of goods of properties or services, and
the amount of creditable input tax due
or paid cannot be directly and entirely
attributed to any one of the
transactions, it shall be allocated
proportionately on the basis of the
volume of sales.
xxx
(D) Period within which Refund or Tax
Credit of Input Taxes shall be Made.- In
proper cases, the Commissioner shall
grant a refund or issue the tax credit
certificate for creditable input taxes
within one hundred twenty (120) days
from the date of submission of
complete documents in support of the
application filed in accordance with
Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for
tax refund or tax credit, or the failure on the
part of the Commissioner to act on the
application within the period prescribed
above, the taxpayer affected may, within
thirty (30) days from the receipt of the
decision denying the claim or after the
expiration of the one hundred twenty day
period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
SEC. 229. Recovery 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, of any sum alleged to
have been excessively or in any manner
wrongfully collected without authority, or of
any sum alleged to have been excessively 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 filed after the expiration of two (2) 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.
[Emphases supplied]
It has been definitively settled in the recent
En Banc case of CIR v. San Roque Power
Corporation (San Roque),12that it is Section
112 of the NIRC which applies to claims for
tax credit certificates and tax refunds arising
from sales of VAT-registered persons that are
zero-rated or effectively zero-rated, which
are, simply put, claims for unutilized
creditable input VAT.
Thus, under Section 112(A), the taxpayer
may, within 2 years after the close of the
taxable quarter when the sales were made,
via an administrative claim with the CIR,
apply for the issuance of a tax credit
certificate or refund of creditable input tax
due or paid attributable to such sales. Under
Section 112(D), the CIR must then act on the
claim within 120 days from the submission of
the taxpayers complete documents. In case
of (a) a full or partial denial by the CIR of the
claim, or (b) the CIRs failure to act on the
claim within 120 days, the taxpayer may file
a judicial claim via an appeal with the CTA of
the CIR decision or unacted claim, within 30
days (a) from receipt of the decision; or (b)
after the expiration of the 120-day period.
The 2-year period under Section 229 does
not apply to appeals before the CTA in
relation to claims for a refund or tax credit
for unutilized creditable input VAT.Section
229 pertains to the recovery of taxes
erroneously,
illegally,
or
excessively
collected.13 San Roque stressed that "input

VAT is not excessively collected as

understood under Section 229 because, at
the time the input VAT is collected, the
amount paid is correct and proper." 14 It is,
therefore, Section 112 which applies
specifically with regard to claiming a refund
or tax credit for unutilized creditable input
VAT.15

Accordingly, the general rule is that the

120+30 day period is mandatory and
jurisdictional from the effectivity of the 1997
NIRC on January 1, 1998, up to the present.
As an exception, judicial claims filed from
December
10,
2003
to
October
6,
201024 need not wait for the exhaustion of
the 120-day period.

Upholding the ruling in Aichi,16 San Roque

held that the 120+30 day period prescribed
under Section 112(D) mandatory and
jurisdictional.17 The jurisdiction of the CTA
over decisions or inaction of the CIR is only
appellate in nature and, thus, necessarily
requires the prior filing of an administrative
case before the CIR under Section 112. 18 The
CTA can only acquire jurisdiction over a case
after the CIR has rendered its decision, or
after the lapse of the period for the CIR to
act, in which case such inaction is considered
a denial.19 A petition filed prior to the lapse of
the 120-day period prescribed under said
Section would be premature for violating the
doctrine on the exhaustion of administrative
remedies.20

A review of the facts of the present case

reveals that petitioner VGPC timely filed its
administrative claim with the CIR on
December 6, 2006, and later, its judicial
claim with the CTA on January 3, 2007. The
judicial claim was clearly filed within the
period of exception and was, therefore, not
premature and should not have been
dismissed by the CTA En Banc.

There is, however, an exception to the

mandatory and jurisdictional nature of the
120+30 day period. The Court in San Roque
noted that BIR Ruling No. DA-489-03, dated
December 10, 2003, expressly stated that
the "taxpayer-claimant need not wait for the
lapse of the 120-day period before it could
seek judicial relief with the CTA by way of
Petition for Review."21 This BIR Ruling was
recognized as a general interpretative rule
issued by the CIR under Section 4 22 of the
NIRC and, thus, applicable to all taxpayers.
Since the CIR has exclusive and original
jurisdiction to interpret tax laws, it was held
that taxpayers acting in good faith should
not be made to suffer for adhering to such
interpretations. Section 24623 of the Tax
Code, in consonance with equitable estoppel,
expressly provides that a reversal of a BIR
regulation or ruling cannot adversely
prejudice a taxpayer who in good faith relied
on the BIR regulation or ruling prior to its
reversal. Hence, taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its
issuance on December 10, 2003 up to its
reversal by this Court in Aichion October 6,
2010, where it was held that the 120+30 day
period was mandatory and jurisdictional.

In the present petition, VGPC prays that the

Court grant its claim for refund or the
issuance of a tax credit certificate for its
unutilized input VAT in the amount
of P14,160,807.95. The CTA Second Division,
however,
only
awarded
the
amount
of P7,699,366.37. The petitioner has failed to
present any argument to support its
entitlement to the former amount.
In any case, the Court would have been
precluded from considering the same as such
would require a review of the evidence,
which would constitute a question of fact
outside the Courts purview under Rule 45 of
the Rules of Court. The Court, thus, finds that
the petitioner is entitled to the refund
awarded to it by the CTA Second Division in
the amount of P7,699,366.37.
Atlas
doctrine
has
no
relevance
to
the
120+30
day
period
for
filing judicial claim
Although the core issue of prematurity of
filing has already been resolved, the Court
deems it proper to discuss the petitioners
argument that the doctrine in Atlas, which
allegedly upheld the primacy of the 2-year
prescriptive period under Section 229,should
prevail over the ruling in Aichi regarding the
mandatory and jurisdictional nature of the
120+30 day period in Section 112.
In this regard, it was thoroughly explained in
San Roque that the Atlas doctrine only

pertains to the reckoning point of the 2-year

prescriptive period from the date of payment
of the output VAT under Section 229, and has
no relevance to the 120+30 day period
under Section 112, to wit:
The Atlas doctrine, which held that claims for
refund or credit of input VAT must comply
with the two-year prescriptive period under
Section 229, should be effective only from its
promulgation on 8 June 2007 until its
abandonment on 12 September 2008 in
Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period
from the date of payment of the output VAT.
Prior to the Atlas doctrine, the two-year
prescriptive period for claiming refund or
credit of input VAT should be governed by
Section 112(A) following the verba legis rule.
The Mirant ruling, which abandoned the Atlas
doctrine, adopted the verba legis rule, thus
applying Section 112(A) in computing the
two year prescriptive period in claiming
refund or credit of input VAT.
The Atlas doctrine has no relevance to the
120+30 day periods under Section 112(C)
because the application of the 120+30 day
periods was not in issue in Atlas. The
application of the 120+30 day periods was
first raised in Aichi, which adopted the verba
legis rule in holding that the 120+30 day
periods are mandatory and jurisdictional. The
language of Section 112(C) is plain, clear,
and unambiguous. When Section 112(C)
states that "the Commissioner shall grant a
refund or issue the tax credit within one
hundred twenty (120) days from the date of
submission of complete documents," the law
clearly gives the Commissioner 120 days
within which to decide the taxpayers claim.
Resort to the courts prior to the expiration of
the 120-day period is a patent violation of
the doctrine of exhaustion of administrative
remedies, a ground for dismissing the judicial
suit
due
to
prematurity.
Philippine
jurisprudence is awash with cases affirming
and reiterating the doctrine of exhaustion of
administrative remedies. Such doctrine is
basic and elementary. 25
[Underscoring supplied]
Thus, Atlas is only relevant in determining
when to file an administrative claim with the

CIR for refund or credit of unutilized

creditable input VAT, and not for determining
when to file a judicial claim with the CTA.
From June 8, 2007 to September 12, 2008,
the 2-year prescriptive period to file
administrative claims should be counted
from the date of payment of the output VAT
tax. Before and after said period, the 2-year
prescriptive period is counted from the close
of the taxable quarter when the sales were
made, in accordance with Section 112(A). In
either case, the mandatory and jurisdictional
120+30 day period must be complied with
for the filing of the judicial claim with the
CTA, except for the period provided under
BIR Ruling No. DA-489-03, as previously
discussed.
The Court further noted that Atlas was
decided in relation to the 1977 Tax Code
which had not yet provided for the 30-day
period for the taxpayer to appeal to the CTA
from the decision or inaction of the CIR over
claims for unutilized input VAT. Clearly then,
the Atlas doctrine cannot be invoked to
disregard compliance with the 120+30 day
mandatory and jurisdictional period. 26 In San
Roque, it was written:
The old rule that the taxpayer may file the
judicial claim, without waiting for the
Commissioners decision if the two-year
prescriptive period is about to expire, cannot
apply because that rule was adopted before
the enactment of the 30-day period. The 30day period was adopted precisely to do away
with the old rule, so that under the VAT
System the taxpayer will always have 30
days to file the judicial claim even if the
Commissioner acts only on the 120th day, or
does not act at all during the 120-day period.
With the 30-day period always available to
the taxpayer, the taxpayer can no longer file
a judicial claim for refund or credit of input
VAT without waiting for the Commissioner to
decide until the expiration of the 120-day
period.27
At any rate, even assuming that the Atlas
doctrine was relevant to the present case, it
could not be applied since it was held to be
effective only from its promulgation on June
8, 2007 until its abandonment on September
12, 2008 when Mirant was promulgated. The
petitioner in this case filed both its

administrative and judicial claims outside the

said period of effectivity.

petitioner could not have overturned the

doctrine laid down in Aichi.

Aichi not applied prospectively

CIR not estopped

Petitioner VGPC also argues that Aichi should

be applied prospectively and, therefore,
should not be applied to the present case.
This position cannot be given consideration.

The petitioners argument that the CIR

should have been estopped from questioning
the jurisdiction of the CTA after actively
participating in the proceedings before the
CTA
Second
Division
deserves
scant
consideration.

Article 8 of the Civil Code provides that

judicial decisions applying or interpreting the
law shall form part of the legal system of the
Philippines and shall have the force of law.
The interpretation placed upon a law by a
competent
court
establishes
the
contemporaneous legislative intent of the
law. Thus, such interpretation constitutes a
part of the law as of the date the statute is
enacted. It is only when a prior ruling of the
Court is overruled, and a different view
adopted, that the new doctrine may have to
be applied prospectively in favor of parties
who have relied on the old doctrine and have
acted in good faith.28
Considering that the nature of the 120+30
day period was first settled in Aichi, the
interpretation by the Court of its being
mandatory and jurisdictional in nature retro
acts to the date the NIRC was enacted. It
cannot be applied prospectively as no old
doctrine was overturned.
The petitioner cannot rely either on the
alleged jurisprudence prevailing at the time
it filed its judicial claim. The Court notes that
the jurisprudence relied upon by the
petitioner consists of CTA cases. It is
elementary that CTA decisions do not
constitute precedent and do not bind this
Court or the public. Only decisions of this
Court constitute binding precedents, forming
part of the Philippine legal system. 29
As regards the cases30 which were later
decided allegedly in contravention of Aichi, it
is of note that all of them were decided by
Divisions of this Court, and not by the Court
En Banc.1wphi1 Any doctrine or principle of
law laid down by the Court, either rendered
En Bancor in Division, may be overturned or
reversed only by the Court sitting En
Banc.31 Thus, the cases cited by the

It is a well-settled rule that the government

cannot be estopped by the mistakes, errors
or omissions of its agents.32 It has been
specifically held that estoppel does not apply
to the government, especially on matters of
taxation. Taxes are the nations lifeblood
through
which
government
agencies
continue to operate and with which the State
discharges its functions for the welfare of its
constituents.33 Thus, the government cannot
be estopped from collecting taxes by the
mistake, negligence, or omission of its
agents. Upon taxation depends the ability of
the government to serve the people for
whose benefit taxes are collected. To
safeguard such interest, neglect or omission
of government officials entrusted with the
collection of taxes should not be allowed to
bring harm or detriment to the people.34
Rules on claims for refund or tax credit of
unutilized input VAT
For clarity and guidance, the Court deems it
proper to outline the rules laid down in San
Roque with regard to claims for refund or tax
credit of unutilized creditable input VAT. They
are as follows:
1. When to file an administrative claim with
the CIR:
a. General rule Section 112(A)
and Mirant Within 2 years from
the close of the taxable quarter
when the sales were made.
b. Exception Atlas
Within 2 years from the date of payment of
the output VAT, if the administrative claim
was filed from June 8, 2007 (promulgation of

Atlas) to September 12, 2008 (promulgation

of Mirant).
2. When to file a judicial claim with the CTA:

SO ORDERED.
GUALBERTO
LLANA,
Petitioner,

J.

DELA

Present:

a. General rule Section

112(D); not Section 229
i. Within 30 days from the
full or partial denial of the
administrative claim by
the CIR; or
ii. Within 30 days from
the expiration of the 120day period provided to
the CIR to decide on the
claim. This is mandatory
and
jurisdictional
beginning January L 1998
( effectivity of 1997 NI
RC).
b. Exception - BIR Ruling No. DA489-03
The judicial claim need not await the
expiration of the 120-day period, if such was
filed from December 10, 2003 (issuance of
BIR Ruling No. DA-489-03) to October 6, 2010
(promulgation of Aichi).
WHEREFORE, the petition is PARTIALLY
GRANTED. The February 7, 2011 Decision
and the June 27, 2011 Resolution of the
Court of Tax Appeals En Banc, in CT A EB
Case Nos. 561 and 562 are REVERSED and
SET ASIDE. The April 17, 2009 Decision and
the October 29, 2009 Resolution of the CTA
Former Second Division in CTA Case No. 7559
are REINSTATED.
Public respondent is hereby ORDERED TO
REFUND or, in the alternative, TO ISSUE A
TAX CREDIT CERTIFICATE, in favor or the
petitioner the amount of SEVEN MILLION SIX
HUNDRED NINETY NINE THOUSAND THREE
HUNDRED SIXTY SIX PESOS AND 37/100
(P7,699,366.37) representing unutilized input
VAT paid on domestic purchases of noncapital goods and services, services rendered
by nonresidents, and importations of noncapital goods for the first to fourth quarters
of taxable year 2005.

G. R. No. 180989

- versus -

THE CHAIRPERSON,
COMMISSION ON AUDIT,
THE EXECUTIVE
SECRETARY and THE
NATIONAL TREASURER,
Respondents.

CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTR
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,*
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA,
SERENO,
REYES, and
PERLAS-BERNABE, JJ.
Promulgated:
February 7, 2012

x------------------------------------x
DECISION
SERENO, J.:
This is a Petition for Certiorari under Rule
65 of the Rules of Court with a prayer for the
issuance of a temporary restraining order
pursuant to Section 7, Article IX-D of the 1987
Constitution, seeking to annul and set aside
Commission on Audit (COA) Circular No. 89-299,
which lifted its system of pre-audit of government
financial transactions.

Statement of the Facts and the Case

On 26 October 1982, the COA issued
Circular No. 82-195, lifting the system of pre-audit
of government financial transactions, albeit with
certain exceptions. The circular affirmed the state
policy that all resources of the government shall
be managed, expended or utilized in accordance
with law and regulations, and safeguarded
against loss or wastage through illegal or
improper disposition, with a view to ensuring
efficiency, economy and effectiveness in the
operations of government. Further, the circular
emphasized that the responsibility to ensure
faithful adherence to the policy rested directly
with the chief or head of the government agency

concerned. The circular was also designed to

further facilitate or expedite government
transactions without impairing their integrity.

It also issued COA Circular No. 89-299, as

amended by Circular No. 89-299A, which in
Section 3.2 provides:

After the change in administration due to

the February 1986 revolution, grave irregularities
and anomalies in the governments financial
transactions were uncovered. Hence, on 31 March
1986, the COA issued Circular No. 86-257, which
reinstated the pre-audit of selected government
transactions. The selective pre-audit was
perceived to be an effective, although temporary,
remedy against the said anomalies.

3.2 Whenever
circumstances
warrant, however, such as
where the internal control
system of a government
agency is inadequate, This
Commission may reinstitute
pre-audit or adopt such
other
control
measures,
including
temporary
or
special pre-audit, as are
necessary and appropriate
to protect the funds and
property of the agency.

With the normalization of the political

system and the stabilization of government
operations, the COA saw it fit to issue Circular
No. 89-299, which again lifted the pre-audit of
government transactions of national government
agencies (NGAs) and government-owned or
-controlled corporations (GOCCs). The rationale
for the circular was, first, to reaffirm the concept
that fiscal responsibility resides in management
as embodied in the Government Auditing Code of
the Philippines; and, second, to contribute to
accelerating the delivery of public services and
improving government operations by curbing
undue bureaucratic red tape and ensuring
facilitation of government transactions, while
continuing to preserve and protect the integrity of
these transactions. Concomitant to the lifting of
the pre-audit of government transactions of NGAs
and GOCCs, Circular No. 89-299 mandated the
installation, implementation and monitoring of an
adequate internal control system, which would be
the direct responsibility of the government
agency head.
Circular No. 89-299 further provided that
the pre-audit activities retained by the COA as
therein outlined shall no longer be a pre-requisite
to the implementation or prosecution of projects
and the payment of claims. The COA aimed to
henceforth focus its efforts on the post-audit of
financial accounts and transactions, as well as on
the assessment and evaluation of the adequacy
and effectivity of the agencys fiscal control
process. However, the circular did not include the
financial transactions of local government units
(LGUs) in its coverage.
The COA later issued Circular No. 94-006
on 17 February 1994 and Circular No. 95-006 on
18 May 1995. Both circulars clarified and
expanded
the
total
lifting
of
pre-audit
activities on all financial transactions of NGAs,
GOCCs, and LGUs. The remaining audit activities
performed by COA auditors would no longer be
pre-requisites
to
the
implementation
or
prosecution of projects, perfection of contracts,
payment
of
claims,
and/or
approval
of
applications filed with the agencies.[1]

On 18 May 2009, COA issued Circular No. 2009002, which reinstituted the selective pre-audit of
government transactions in view of the rising
incidents of irregular, illegal, wasteful and
anomalous disbursements of huge amounts of
public funds and disposals of public property. Two
years later, or on 22 July 2011, COA issued
Circular No. 2011-002, which lifted the pre-audit
of government transactions implemented by
Circular No. 2009-002. In its assessment,
subsequent developments had shown heightened
vigilance of government agencies in safeguarding
their resources.
In the interregnum, on 3 May 2006,
petitioner dela Llana wrote to the COA regarding
the recommendation of the Senate Committee on
Agriculture and Food that the Department of
Agriculture set up an internal pre-audit service.
On 18 July 2006, the COA replied to petitioner,
informing him of the prior issuance of Circular No.
89-299.[2] The 18 July 2006 reply of the COA
further emphasized the required observance of
Administrative Order No. 278 dated 8 June 1992,
which directed the strengthening of internal
control systems of government offices through
the installation of an internal audit service (IAS).
On 15 January 2008, petitioner filed this Petition
for Certiorari under Rule 65. He alleges that the
pre-audit duty on the part of the COA cannot be
lifted by a mere circular, considering that preaudit is a constitutional mandate enshrined in
Section 2 of Article IX-D of the 1987 Constitution.
[3]
He further claims that, because of the lack of
pre-audit by COA, serious irregularities in
government transactions have been committed,
such as the P728-million fertilizer fund scam,
irregularities in the P550-million call center
laboratory project of the Commission on Higher
Education, and many others.

On 22 February 2008, public respondents

filed their Comment[4] on the Petition. They argue
therein that the Petition must be dismissed, as it
is not proper for a petition for certiorari,
considering that (1) there is no allegation
showing that the COA exercised judicial or quasijudicial functions when it promulgated Circular
No. 89-299; and (2) there is no convincing
explanation showing how the promulgation of the
circular was done with grave abuse of discretion.
Further, the Petition is allegedly defective in form,
in that there is no discussion of material dates as
to when petitioner received a copy of the circular;
there is no factual background of the case; and
petitioner failed to attach a certified true copy of
the circular. In any case, public respondents aver
that the circular is valid, as the COA has the
power under the 1987 Constitution to promulgate
it.
On 9 May 2008,
Reply[5] to the Comment.

petitioner

filed

his

On 17 June 2008, this Court resolved to require

the
parties
to
submit
their
respective
memoranda. On 12 September 2008, public
respondents submitted their Memorandum.[6] On
15 September 2008, Amethya dela Llana-Koval,
daughter of petitioner, manifested to the Court
his demise on 8 July 2008 and moved that she be
allowed to continue with the Petition and
substitute for him. Her motion for substitution
was granted by this Court in a Resolution dated 7
October 2008. On 5 January 2009, petitioner,
substituted
by
his
daughter,[7] filed
his
[8]
Memorandum.
The main issue for our resolution in this Petition is
whether or not petitioner is entitled to the
extraordinary writ of certiorari.
Procedural Issues
Technical Defects of the Petition
Public respondents correctly allege that
petitioner failed to attach a certified true copy of
the assailed Order, and that the Petition lacked a
statement of material dates. In view, however, of
the serious matters dealt with in this Petition, this
Court opts to tackle the merits thereof with least
regard to technicalities. A perusal of the Petition
shows that the factual background of the case,
although brief, has been sufficiently alleged by
petitioner.
Standing
This Petition has been filed as a taxpayers suit.

A taxpayer is deemed to have the

standing to raise a constitutional issue when it is
established that public funds from taxation have
been disbursed in alleged contravention of the
law or the Constitution. [9] Petitioner claims that
the issuance of Circular No. 89-299 has led to the
dissipation of public funds through numerous
irregularities
in
government
financial
transactions. These transactions have allegedly
been left unchecked by the lifting of the pre-audit
performed by COA, which, petitioner argues, is its
Constitutional duty. Thus, petitioner has standing
to file this suit as a taxpayer, since he would be
adversely affected by the illegal use of public
money.
Propriety of Certiorari
Public respondents aver that a petition for
certiorari is not proper in this case, as there is no
indication that the writ is directed against a
tribunal, a board, or an officer exercising judicial
or quasi-judicial functions, as required in
certiorari proceedings.[10] Conversely, petitioner
for his part claims that certiorari is proper under
Section 7, Article IX-A of the 1987 Constitution,
which provides in part:
Section 7. x x x. Unless
otherwise
provided
by
this
Constitution or by law, any
decision, order, or ruling of each
Commission may be brought to the
Supreme Court on certiorari by the
aggrieved party within thirty days
from receipt of a copy thereof.
Petitioner is correct in that decisions and orders
of the COA are reviewable by the court via a
petition for certiorari. However, these refer to
decisions and orders which were rendered by the
COA in its quasi-judicial capacity. Circular No. 89299 was promulgated by the COA under its quasilegislative or rule-making powers. Hence, Circular
No. 89-299 is not reviewable by certiorari.
Neither is a petition for prohibition
appropriate in this case. A petition for prohibition
is filed against any tribunal, corporation, board, or
person whether exercising judicial, quasi-judicial,
or ministerial functions who has acted without or
in excess of jurisdiction or with grave abuse of
discretion, and the petitioner prays that judgment
be rendered, commanding the respondent to
desist from further proceeding in the action or
matter specified in the petition. [11] However,
prohibition only lies against judicial or ministerial
functions, but not against legislative or quasilegislative functions. [12]

Nonetheless, this Court has in the past seen fit to

step in and resolve petitions despite their being
the subject of an improper remedy, in view of the
public importance of the issues raised therein.
[13]
In this case, petitioner avers that the conduct
of pre-audit by the COA could have prevented the
occurrence of the numerous alleged irregularities
in government transactions that involved
substantial amounts of public money. This is a
serious allegation of a grave deficiency in
observing a constitutional duty if proven correct.
This Court can use its authority to set aside errors
of practice or technicalities of procedure,
including the aforementioned technical defects of
the Petition, and resolve the merits of a case with
such serious allegations of constitutional breach.
Rules of procedure were promulgated to provide
guidelines for the orderly administration of
justice, not to shackle the hand that dispenses it.
[14]

Substantive Issues
The 1987 Constitution has made the COA
the guardian of public funds, vesting it with broad
powers
over
all
accounts
pertaining
to
government revenues and expenditures and the
use of public funds and property, including the
exclusive authority to define the scope of its audit
and examination; to establish the techniques and
methods for the review; and to promulgate
accounting and auditing rules and regulations.
[15]
Its exercise of its general audit power is
among the constitutional mechanisms that give
life to the check and balance system inherent in
our form of government.[16]
Petitioner claims that the constitutional
duty of COA includes the duty to conduct preaudit. A pre-audit is an examination of financial
transactions
before
their consumption
or
payment.[17] It seeks to determine whether the
following conditions are present: (1) the proposed
expenditure complies with an appropriation law
or other specific statutory authority; (2) sufficient
funds are available for the purpose; (3) the
proposed expenditure is not unreasonable or
extravagant, and the unexpended balance of
appropriations to which it will be charged is
sufficient to cover the entire amount of the
expenditure; and (4) the transaction is approved
by the proper authority and the claim is duly
supported by authentic underlying evidence.[18] It
could, among others, identify government agency
transactions that are suspicious on their face
prior to their implementation and prior to the
disbursement of funds.

Petitioner anchors his argument on Section 2 of

Article IX-D of the 1987 Constitution, which reads
as follows:
Section 2.
1.
The
Commission on Audit shall have
the power, authority, and duty to
examine, audit, and settle all
accounts pertaining
to
the
revenue and receipts of, and
expenditures or uses of funds
and property, owned or held in
trust by, or pertaining to, the
Government, or any of its
subdivisions,
agencies,
or
instrumentalities,
including
government-owned or controlled
corporations
with
original
charters, and on a post- audit
basis:
a.

constitutional
bodies, commissions
and offices that have
been granted fiscal
autonomy under this
Constitution;

b.

autonomous
state colleges and
universities;

c.

other
government-owned
or
controlled
corporations
and
their
subsidiaries;
and

d.

such
nongovernmental
entities
receiving
subsidy or equity,
directly or indirectly,
from or through the
Government, which
are required by law
or
the
granting
institution to submit
to such audit as a
condition of subsidy
or equity. However,
where the internal
control system of
the
audited
agencies
is
inadequate,
the
Commission
may
adopt
such
measures,
including
temporary
or

special pre-audit,
as are necessary
and appropriate to
correct
the
deficiencies. It shall
keep the general
accounts
of
the
Government and, for
such period as may
be provided by law,
preserve
the
vouchers and other
supporting
papers
pertaining thereto.
2.
The
Commission
shall
have
exclusive authority, subject to
the limitations in this Article, to
define the scope of its audit
and examination, establish the
techniques and methods required
therefor,
and
promulgate
accounting and auditing rules and
regulations, including those for the
prevention and disallowance of
irregular, unnecessary, excessive,
extravagant, or unconscionable
expenditures
or
uses
of
government funds and properties.
(Emphasis supplied)
He claims that under the first paragraph
quoted above, government transactions must
undergo a pre-audit, which is a COA duty that
cannot be lifted by a mere circular.
We find for public respondents.
Petitioners allegations find no support in
the aforequoted Constitutional provision. There is
nothing in the said provision that requires the
COA to conduct a pre-audit of all government
transactions and for all government agencies.
The only clear reference to a pre-audit
requirement is found in Section 2, paragraph 1,
which provides that a post-audit is mandated for
certain government or private entities with state
subsidy or equity and only when the internal
control system of an audited entity is inadequate.
In such a situation, the COA may adopt
measures, including a temporary or special preaudit, to correct the deficiencies.
Hence, the conduct of a pre-audit is not a
mandatory duty that this Court may compel the
COA to perform. This discretion on its part is in
line with the constitutional pronouncement that
the COA has the exclusive authority to define the
scope of its audit and examination. When the
language of the law is clear and explicit, there is
no room for interpretation, only application.

[19]

Neither can the scope of the provision be

unduly enlarged by this Court.
WHEREFORE, premises considered, the
Petition is DISMISSED.
SO ORDERED.

with this Court on March 7, 2000. Petitioner

then filed a Consolidated Reply on April 24,
2000, whereupon this case was considered
submitted for decision.
[G. R. No. 140835. August 14, 2000]
RAMON
A.
GONZALES, petitioner,
vs. HON. ANDRES R. NARVASA, as
Chairman,
PREPARATORY
COMMISSION ON CONSTITUTIONAL
REFORMS;
HON. RONALDO
B.
ZAMORA, as Executive Secretary;
COMMISSION ON AUDIT; ROBERTO
AVENTAJADO,
as
Presidential
Consultant on Council of Economic
Advisers/Economic
Affairs;
ANGELITO
C.
BANAYO,
as
Presidential
Adviser
for/on
Political
Affairs;
VERONICA
IGNACIO-JONES, as Presidential
Assistant/ Appointment Secretary
(In
charge
of
appointments), respondents.
DECISION
GONZAGA-REYES, J.:
In
this
petition
for
prohibition
and mandamus filed on December 9, 1999,
petitioner Ramon A. Gonzales, in his capacity
as a citizen and taxpayer, assails the
constitutionality of the creation of the
Preparatory Commission on Constitutional
Reform (PCCR) and of the positions of
presidential
consultants,
advisers
and
assistants. Petitioner asks this Court to enjoin
the PCCR and the presidential consultants,
advisers and assistants from acting as such,
and to enjoin Executive Secretary Ronaldo B.
Zamora from enforcing their advice and
recommendations. In
addition,
petitioner
seeks to enjoin the Commission on Audit
from passing in audit expenditures for the
PCCR and the presidential consultants,
advisers and assistants. Finally, petitioner
prays for an order compelling respondent
Zamora to furnish petitioner with information
on certain matters.
On January 28, 2000, respondent Hon.
Andres R. Narvasa, impleaded in his capacity
as Chairman of the PCCR, filed his Comment
to the Petition. The rest of the respondents,
who are being represented in this case by
the Solicitor General, filed their Comment

I. Preparatory Commission on Constitutional

Reform
The
Preparatory
Commission
on
Constitutional Reform (PCCR) was created by
President Estrada on November 26, 1998 by
virtue of Executive Order No. 43 (E.O. No. 43)
in order to study and recommend proposed
amendments and/or revisions to the 1987
Constitution,
and
the
manner
of
implementing the same.[1] Petitioner disputes
the constitutionality of the PCCR on two
grounds. First, he contends that it is a public
office which only the legislature can create
by way of a law.[2] Secondly, petitioner
asserts that by creating such a body the
President is intervening in a process from
which he is totally excluded by the
Constitution
the
amendment
of
the
fundamental charter.[3]
It is alleged by respondents that, with
respect to the PCCR, this case has become
moot and academic. We agree.
An action is considered moot when it no
longer presents a justiciable controversy
because the issues involved have become
academic or dead.[4] Under E.O. No. 43, the
PCCR was instructed to complete its task on
or before June 30, 1999.[5] However, on
February 19, 1999, the President issued
Executive Order No. 70 (E.O. No. 70), which
extended the time frame for the completion
of the commissions work, viz
SECTION 6. Section 8 is hereby amended to
read as follows:
Time Frame. The Commission shall
commence its work on 01 January 1999
and complete the same on or before 31
December 1999. The Commission shall
submit its report and recommendations
to the President within fifteen (15)
working days from 31 December 1999.
The PCCR submitted its recommendations to
the President on December 20, 1999 and
was dissolved by the President on the same
day. It had likewise spent the funds allotted
to it.[6] Thus, the PCCR has ceased to exist,

having lost its raison detre. Subsequent

events have overtaken the petition and the
Court has nothing left to resolve.
The staleness of the issue before us is
made more manifest by the impossibility of
granting
the
relief
prayed
for
by
petitioner. Basically, petitioner asks this
Court to enjoin the PCCR from acting as such.
[7]
Clearly, prohibition is an inappropriate
remedy since the body sought to be enjoined
no longer exists. It is well established that
prohibition is a preventive remedy and does
not lie to restrain an act that is alreadyfait
accompli.[8] At this point, any ruling regarding
the PCCR would simply be in the nature of an
advisory opinion, which is definitely beyond
the permissible scope of judicial power.
In addition to the mootness of the issue,
petitioners lack of standing constitutes
another obstacle to the successful invocation
of judicial power insofar as the PCCR is
concerned.
The question in standing is whether a
party has alleged such a personal stake in
the outcome of the controversy as to assure
that concrete adverseness which sharpens
the presentation of issues upon which the
court so largely depends for illumination of
difficult
constitutional
questions. [9] In
assailing the constitutionality of E.O. Nos. 43
and 70, petitioner asserts his interest as a
citizen and taxpayer. [10] A citizen acquires
standing only if he can establish that he has
suffered some actual or threatened injury as
a result of the allegedly illegal conduct of the
government; the injury is fairly traceable to
the challenged action; and the injury is likely
to be redressed by a favorable action.
[11]
In Kilosbayan, Incorporated v. Morato,
[12]
we denied standing to petitioners who
were assailing a lease agreement between
the Philippine Charity Sweepstakes Office
and the Philippine Gaming Management
Corporation, stating that,
in Valmonte
v.
Philippine
Charity
Sweepstakes Office, G.R. No. 78716, Sept.
22, 1987, standing was denied to a petitioner
who sought to declare a form of lottery
known as Instant Sweepstakes invalid
because, as the Court held,
Valmonte brings the suit as a citizen, lawyer,
taxpayer and father of three (3) minor

children. But nowhere in his petition does

petitioner claim that his rights and privileges
as a lawyer or citizen have been directly and
personally injured by the operation of the
Instant Sweepstakes. The interest of the
person assailing the constitutionality of a
statute must be direct and personal. He must
be able to show, not only that the law is
invalid, but also that he has sustained or in
immediate danger of sustaining some direct
injury as a result of its enforcement, and not
merely that he suffers thereby in some
indefinite way. It must appear that the
person complaining has been or is about to
be denied some right or privilege to which he
is lawfully entitled or that he is about to be
subjected to some burdens or penalties by
reason of the statute complained of.
We apprehend no difference between the
petitioner in Valmonte and the present
petitioners. Petitioners do not in fact show
what particularized interest they have for
bringing this suit. It does not detract from
the high regard for petitioners as civic
leaders to say that their interest falls short of
that required to maintain an action under
Rule 3, d 2.
Coming now to the instant case,
petitioner has not shown that he has
sustained or is in danger of sustaining any
personal injury attributable to the creation of
the PCCR. If at all, it is only Congress, not
petitioner, which can claim any injury in this
case since, according to petitioner, the
President
has
encroached
upon
the
legislatures powers to create a public office
and to propose amendments to the Charter
by
forming
the
PCCR. Petitioner
has
sustained no direct, or even any indirect,
injury. Neither does he claim that his rights
or privileges have been or are in danger of
being violated, nor that he shall be subjected
to any penalties or burdens as a result of the
PCCRs activities. Clearly, petitioner has failed
to establish his locus standi so as to enable
him to seek judicial redress as a citizen.
A taxpayer is deemed to have the
standing to raise a constitutional issue when
it is established that public funds have been
disbursed in alleged contravention of the law
or the Constitution.[13], Thus payers action is
properly brought only when there is an
exercise by Congress of its taxing or

spending power.[14] This was our ruling in a

recent
case
wherein
petitioners
Telecommunications and Broadcast Attorneys
of the Philippines (TELEBAP) and GMA
Network, Inc. questioned the validity of
section 92 of B.P. No. 881 (otherwise knows
as the Omnibus Election Code) requiring
radio and television stations to give free air
time to the Commission on Elections during
the campaign period.[15] The Court held that
petitioner TELEBAP did not have any interest
as a taxpayer since the assailed law did not
involve the taxing or spending power of
Congress.[16]
Many other rulings have premised the
grant or denial of standing to taxpayers upon
whether or not the case involved a
disbursement of public funds by the
legislature. In Sanidad v. Commission on
Elections,[17] the petitioners therein were
allowed to bring a taxpayers suit to question
several presidential decrees promulgated by
then President Marcos in his legislative
capacity calling for a national referendum,
with the Court explaining that
...[i]t is now an ancient rule that the valid
source of a statute Presidential Decrees are
of such nature may be contested by one who
will sustain a direct injury as a result of its
enforcement. At the instance of taxpayers,
laws providing for the disbursement of public
funds may be enjoined, upon the theory that
the expenditure of public funds by an officer
of the State for the purpose of executing an
unconstitutional
act
constitutes
a
misapplication of such funds. The breadth of
Presidential Decree No. 991 carries an
appropriation of Five Million Pesos for the
effective implementation of its purposes.
Presidential Decree No. 1031 appropriates
the sum of Eight Million Pesos to carry out its
provisions. The interest of the aforenamed
petitioners as taxpayers in the lawful
expenditure of these amounts of public
money sufficiently clothes them with that
personality to litigate the validity of the
Decrees appropriating said funds.
In still another case, the Court held that
petitioners
the
Philippine
Constitution
Association,
Inc.,
a
non-profit
civic
organization - had standing as taxpayers to
question the constitutionality of Republic Act
No. 3836 insofar as it provides for retirement

gratuity and commutation of vacation and

sick leaves to Senators and Representatives
and to the elective officials of both houses of
Congress.[18] And in Pascual v. Secretary of
Public Works,[19] the Court allowed petitioner
to maintain a taxpayers suit assailing the
constitutional soundness of Republic Act No.
920
appropriating
P85,000
for
the
construction, repair and improvement of
feeder roads within private property. All
these cases involved the disbursement of
public funds by means of a law.
Meanwhile, in Bugnay Construction and
Development Corporation v. Laron,[20] the
Court declared that the trial court was wrong
in allowing respondent Ravanzo to bring an
action for injunction in his capacity as a
taxpayer in order to question the legality of
the contract of lease covering the public
market entered into between the City of
Dagupan and petitioner. The Court declared
that Ravanzo did not possess the requisite
standing to bring such taxpayers suit since
[o]n its face, and there is no evidence to the
contrary, the lease contract entered into
between petitioner and the City shows that
no public funds have been or will be used in
the construction of the market building.
Coming now to the instant case, it is
readily apparent that there is no exercise by
Congress of its taxing or spending
power. The PCCR was created by the
President by virtue of E.O. No. 43, as
amended by E.O. No. 70. Under section 7 of
E.O. No. 43, the amount of P3 million is
appropriated for its operational expenses to
be sourced from the funds of the Office of
the President. The relevant provision states Appropriations. The initial amount of
Three Million Pesos (P3,000,000.00) is
hereby appropriated for the operational
expenses of the Commission to be
sourced from funds of the Office of the
President,
subject
to
the
usual
accounting and auditing rules and
regulations. Additional amounts shall be
released to the Commission upon
submission
of
requirements
for
expenditures.
The appropriations for the PCCR were
authorized by the President, not by
Congress. In fact, there was no an

appropriation
at
all.
In
a
strict
sense, appropriation has been defined as
nothing
more
than
the
legislative
authorization prescribed by the Constitution
that money may be paid out of the Treasury,
while appropriation made by law refers to
the act of the legislature setting apart or
assigning to a particular use a certain sum to
be used in the payment of debt or dues from
the State to its creditors. [21] The funds used
for the PCCR were taken from funds intended
for the Office of the President, in the exercise
of the Chief Executives power to transfer
funds pursuant to section 25 (5) of article VI
of the Constitution.
In the final analysis, it must be stressed
that the Court retains the power to decide
whether or not it will entertain a taxpayers
suit.[22] In the case at bar, there being no
exercise by Congress of its taxing or
spending power, petitioner cannot be
allowed to question the creation of the PCCR
in his capacity as a taxpayer, but rather, he
must establish that he has a personal and
substantial interest in the case and that he
has sustained or will sustain direct injury as a
result of its enforcement. [23] In other words,
petitioner must show that he is a real party
in interest - that he will stand to be benefited
or injured by the judgment or that he will be
entitled to the avails of the suit.[24] Nowhere
in his pleadings does petitioner presume to
make such a representation.
II.
Presidential
Assistants

Consultants,

Advisers,

The second issue raised by petitioner

concerns
the
presidential
consultants.
Petitioner alleges that in 1995 and 1996, the
President created seventy (70) positions in
the Office of the President and appointed to
said positions twenty (20) presidential
consultants, twenty-two (22) presidential
advisers, and twenty-eight (28) presidential
assistants.[25] Petitioner asserts that, as in the
case of the PCCR, the President does not
have the power to create these positions.[26]
Consistent with the abovementioned
discussion on standing, petitioner does not
have the personality to raise this issue
before the Court. First of all, he has not
proven that he has sustained or is in danger
of sustaining any injury as a result of the
appointment
of
such
presidential
advisers. Secondly, petitioner has not alleged

the necessary facts so as to enable the Court

to determine if he possesses a taxpayers
interest in this particular issue. Unlike the
PCCR which was created by virtue of an
executive order, petitioner does not allege by
what official act, whether it be by means of
an executive order, administrative order,
memorandum order, or otherwise, the
President attempted to create the positions
of presidential advisers, consultants and
assistants. Thus, it is unclear what act of the
President petitioner is assailing. In support of
his allegation, petitioner merely annexed a
copy of the Philippine Government Directory
(Annex C) listing the names and positions of
such presidential consultants, advisers and
assistants
to
his
petition. However,
appointment is obviously not synonymous
with creation. It would be improvident for this
Court to entertain this issue given the
insufficient nature of the allegations in the
Petition.
III. Right to Information
Finally, petitioner asks us to issue a writ
of mandamus ordering Executive Secretary
Ronaldo B. Zamora to answer his letter
(Annex D) dated October 4, 1999 requesting
for the names of executive officials holding
multiple positions in government, copies of
their appointments, and a list of the
recipients of luxury vehicles seized by the
Bureau of Customs and turned over to
Malacanang.[27]
The right to information is enshrined in
Section 7 of the Bill of Rights which provides
that
The right of the people to information on
matters of
public concern shall be
recognized. Access to official records, and to
documents, and papers pertaining to official
acts, transactions, or decisions, as well as to
government research data used as basis for
policy development, shall be afforded the
citizen, subject to such limitations as may be
provided by law.
Under both the 1973[28] and 1987
Constitution, this is a self-executory provision
which can be invoked by any citizen before
the courts. This was our ruling in Legaspi v.
Civil Service Commission,[29] wherein the
Court classified the right to information as a
public
right
and
when

a [m]andamus proceeding
involves
the
assertion of a public right, the requirement of
personal interest is satisfied by the mere fact
that the petitioner is a citizen, and therefore,
part of the general public which possesses
the right. However, Congress may provide for
reasonable conditions upon the access to
information. Such limitations were embodied
in Republic Act No. 6713, otherwise knows as
the Code of Conduct and Ethical Standards
for Public Officials and Employees, which
took effect on March 25, 1989. This law
provides that, in the performance of their
duties, all public officials and employees are
obliged to respond to letters sent by the
public within fifteen (15) working days from
receipt
thereof
and
to
ensure
the
accessibility of all public documents for
inspection by the public within reasonable
working hours, subject to the reasonable
claims of confidentiality.[30]
Elaborating on the significance of the
right to information, the Court said
in Baldoza
v.
Dimaano[31] that
[t]he
incorporation of this right in the Constitution
is a recognition of the fundamental role of
free
exchange
of
information
in
a
democracy. There can be no realistic
perception by the public of the nations
problems, nor a meaningful democratic
decisionmaking if they are denied access to
information of general interest. Information is
needed to enable the members of society to
cope with the exigencies of the times. The
information to which the public is entitled to
are those concerning matters of public
concern, a term which embrace[s] a broad
spectrum of subjects which the public may
want to know, either because these directly
affect their lives, or simply because such
matters naturally arouse the interest of an
ordinary citizen. In the final analysis, it is for
the courts to determine in a case by case
basis whether the matter at issue is of
interest or importance, as it relates to or
affects the public.[32]
Thus, we agree with petitioner that
respondent Zamora, in his official capacity as
Executive Secretary, has a constitutional and
statutory duty to answer petitioners letter
dealing
with
matters
which
are
unquestionably of public concern that is,
appointments made to public offices and the
utilization of public property. With regard to
petitioners request for copies of the

appointment papers of certain officials,

respondent Zamora is obliged to allow the
inspection and copying of the same subject
to the reasonable limitations required for the
orderly conduct of official business. [33]
WHEREFORE, the petition is dismissed,
with the exception that respondent Zamora
is ordered to furnish petitioner with the
information requested.
SO ORDERED.
Davide, Jr., C.J., Melo, Vitug, Kapunan,
Mendoza,
Panganiban,
Quisumbing,
Purisima,
Pardo,
Buena,
YnaresSantiago, and De Leon, Jr., JJ., concur.
Bellosillo, J., abroad, on official business.
Puno, J., vote to dismiss on the ground
that the case is moot.
CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J., CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated
:
March 9, 2010
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DECISION
CORONA, J.:
In
this
original
petition
for certiorari and mandamus,[1] petitioner
Chamber
of
Real
Estate
and
Builders
Associations,
Inc.
is
questioning
the
constitutionality of Section 27 (E) of Republic Act
(RA) 8424[2] and the revenue regulations (RRs)
issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving
creditable withholding taxes.[3]
Petitioner is an association of real estate
developers and builders in the Philippines. It
impleaded former Executive Secretary Alberto
Romulo, then acting Secretary of Finance Juanita
D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of
minimum corporate income tax (MCIT) on
corporations and creditable withholding tax
(CWT) on sales of real properties classified as
ordinary assets.
Section 27(E) of RA 8424 provides for MCIT
on domestic corporations and is implemented by
RR 9-98. Petitioner argues that the MCIT violates
the due process clause because it levies income
tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J)
(as amended by RR 6-2001) and 2.58.2 of RR 298, and Section 4(a)(ii) and (c)(ii) of RR 7-2003,
all of which prescribe the rules and procedures for
the collection of CWT on the sale of real
properties
categorized
as
ordinary
assets. Petitioner contends that these revenue
regulations are contrary to law for two
reasons: first, they ignore the different treatment
by RA 8424 of ordinary assets and capital assets
and second, respondent Secretary of Finance has
no authority to collect CWT, much less, to base
the CWT on the gross selling price or fair market
value of the real properties classified as ordinary
assets.
Petitioner also asserts that the enumerated
provisions of the subject revenue regulations
violate the due process clause because, like the
MCIT, the government collects income tax even
when the net income has not yet been
determined.
They
contravene
the
equal
protection clause as well because the CWT is
being levied upon real estate enterprises but not
on other business enterprises, more particularly
those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take
cognizance of the present case;
(2) whether or not the imposition of the
MCIT on domestic corporations is
unconstitutional and
(3) whether or not the imposition of CWT
on income from sales of real
properties classified as ordinary
assets under RRs 2-98, 6-2001 and
7-2003, is unconstitutional.

OVERVIEW
PROVISIONS

OF

THE

ASSAILED

Under the MCIT scheme, a corporation,

beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when
such MCIT is greater than the normal corporate
income tax imposed under Section 27(A). [4] If the
regular income tax is higher than the MCIT, the
corporation does not pay the MCIT. Any excess of
the MCIT over the normal tax shall be carried
forward and credited against the normal income
tax for the three immediately succeeding taxable
years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic

Corporations. -

(1)
Imposition of Tax. A [MCIT] of
two percent (2%) of the gross
income as of the end of the taxable
year, as defined herein, is hereby
imposed on a corporation taxable
under this Title, beginning on the
fourth taxable year immediately
following the year in which such
corporation
commenced
its
business operations, when the
minimum income tax is greater
than the tax computed under
Subsection (A) of this Section for
the taxable year.

(2)
Carry Forward of Excess
Minimum Tax. Any excess of the
[MCIT] over the normal income tax
as computed under Subsection (A)
of this Section shall be carried

forward and credited against the

normal income tax for the three (3)
immediately succeeding taxable
years.

(3)

Relief from the [MCIT] under

certain conditions. The Secretary of
Finance is hereby authorized to
suspend the imposition of the
[MCIT] on any corporation which
suffers losses on account of
prolonged labor dispute, or because
of force majeure, or because of
legitimate business reverses.

The Secretary of Finance is

hereby authorized to promulgate,
upon
recommendation
of the
Commissioner, the necessary rules
and regulations that shall define
the terms and conditions under
which he may suspend the
imposition of the [MCIT] in a
meritorious case.

(4)
Gross Income Defined. For
purposes of applying the [MCIT]
provided under Subsection (E)
hereof, the term gross income shall
mean gross sales less sales returns,
discounts and allowances and cost
of goods sold. Cost of goods sold
shall include all business expenses
directly incurred to produce the
merchandise to bring them to their
present location and use.

For
trading
or
merchandising concern, cost of
goods sold shall include the invoice
cost of the goods sold, plus import
duties, freight in transporting the
goods to the place where the goods
are actually sold including insurance
while the goods are in transit.

For
a
manufacturing
concern,
cost
of
goods
manufactured and sold shall include
all costs of production of finished
goods, such as raw materials used,
direct labor and manufacturing
overhead, freight cost, insurance

premiums and other costs incurred

to bring the raw materials to the
factory or warehouse.

In the case of taxpayers

engaged in the sale of service, gross
income means gross receipts less
sales returns, allowances, discounts
and cost of services. Cost of services
shall mean all direct costs and
expenses necessarily incurred to
provide the services required by the
customers and clients including (A)
salaries and employee benefits of
personnel,
consultants
and
specialists directly rendering the
service and (B) cost of facilities
directly utilized in providing the
service such as depreciation or
rental of equipment used and cost of
supplies: Provided, however, that in
the case of banks, cost of services
shall include interest expense.

On August 25, 1998, respondent Secretary of

Finance (Secretary), on the recommendation of
the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section
27(E).[5]The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic
Corporations.
(1)

Imposition of the Tax. A

[MCIT] of two percent (2%) of
the gross income as of the
end of the taxable year
(whether calendar or fiscal
year,
depending
on
the
accounting period employed)
is hereby imposed upon any
domestic
corporation
beginning the fourth (4th)
taxable
year
immediately
following the taxable year in
which
such
corporation
commenced
its
business
operations. The MCIT shall be
imposed
whenever
such
corporation
has
zero
or
negative taxable income or
whenever the amount of
minimum corporate income
tax is greater than the normal
income tax due from such
corporation.

For purposes of these Regulations,

the term, normal income tax
means the income tax rates
prescribed under Sec. 27(A) and
Sec. 28(A)(1) of the Code xxx at
32% effective January 1, 2000 and
thereafter.

transfer of real property, other than capital

assets, by persons residing in the Philippines and
habitually engaged in the real estate business
were subjected to CWT:
Sec.
2.57.2. Income
payment subject to [CWT] and
rates prescribed thereon:
xxx xxx xx

xxx xxx xxx

(2)
Carry forward of excess
[MCIT]. Any excess of the [MCIT]
over the normal income tax as
computed under Sec. 27(A) of the
Code shall be carried forward on
an annual basis and credited
against the normal income tax for
the
three
(3)
immediately
succeeding taxable years.
xxx xxx xxx

(J) Gross selling price or total

amount of consideration
or its
equivalent paid to the seller/owner for
the sale, exchange or transfer of. Real
property, other than capital assets,
sold by an individual, corporation,
estate, trust, trust fund or pension
fund and the seller/transferor is
habitually engaged in the real estate
business in accordance with the
following schedule
xxx xxx xxx

Meanwhile, on April 17, 1998, respondent

Secretary, upon recommendation of respondent
CIR, promulgated RR 2-98 implementing certain
provisions of RA 8424 involving the withholding of
taxes.[6] Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or
Those
which
are
exempt
from
a
withholding tax at
source as prescribed
in Sec. 2.57.5 of
these regulations.
Exempt

With a selling price of

five
hundred
thousand
pesos
(P500,000.00) or less.

1.5%

With a selling price of

more
than
five
hundred
thousand
pesos (P500,000.00)
but not more than
two
million
pesos
(P2,000,000.00).
3.0%

With selling price of

more than two million
pesos
(P2,000,000.00)

5.0%

Gross selling price shall mean the

consideration stated in the sales
document or the fair market value
determined in accordance with
Section 6 (E) of the Code, as
amended, whichever is higher. In
an exchange, the fair market value
of the property received in
exchange, as determined in the
Income Tax Regulations shall be
used.

Where the consideration or part

thereof is payable on installment,
no withholding tax is required to be
made on the periodic installment
payments where the buyer is an
individual not engaged in trade or
business. In such a case, the
applicable rate of tax based on the
entire
consideration
shall
be
withheld on the last installment or
installments to be paid to the
seller.

However, if the buyer is engaged in

trade or business, whether a
corporation or otherwise, the tax
shall be deducted and withheld by
the buyer on every installment.

This provision was amended by RR 6-2001

on July 31, 2001:
Sec.
2.57.2. Income
payment subject to [CWT] and
rates prescribed thereon:
xxx xxx xxx
(J)
Gross selling price or total
amount of consideration or its
equivalent paid to the seller/owner
for the sale, exchange or transfer
of real property classified as
ordinary asset. - A [CWT] based on
the
gross
selling
price/total
amount of consideration or the fair
market
value
determined
in
accordance with Section 6(E) of
the Code, whichever is higher,
paid to the seller/owner for the
sale, transfer or exchange of real
property, other than capital asset,
shall be imposed upon the
withholding
agent,/buyer,
in
accordance with the following
schedule:

xxx xxx xxx

Gross selling price shall
remain the consideration stated in
the sales document or the fair
market
value
determined
in
accordance with Section 6 (E) of
the Code, as amended, whichever
is higher. In an exchange, the fair
market value of the property
received in exchange shall be
considered as the consideration.
xxx xxx xxx
However, if the buyer is
engaged in trade or business,
whether
a
corporation
or
otherwise, these rules shall apply:

(i) If the sale is a sale of

property on the installment
plan (that is, payments in the
year of sale do not exceed
25% of the selling price), the
tax shall be deducted and
withheld by the buyer on
Where the seller/transferor is exempt from every installment.
[CWT] in accordance with Sec. 2.57.5 of
these regulations.
(ii) If, on the other hand,
the sale is on a cash basis or
is a deferred-payment sale
not
on
the
installment
plan (that is, payments in the
Upon the following values of real property,
where the seller/transferor is habitually year of sale exceed 25% of
the selling price), the buyer
engaged in the real estate business.
shall withhold the tax based
on the gross selling price or
fair market value of the
With a selling price of Five Hundred
property, whichever is higher,
Thousand Pesos (P500,000.00) or less.
on the first installment.

With a selling price of more than Five

Hundred Thousand Pesos (P500,000.00) but
not
more
than
Two
Million
Pesos
(P2,000,000.00).

With a selling price of more than two Million

Pesos (P2,000,000.00).

In any case, no Certificate

Authorizing Registration (CAR) shall
be issued to the buyer unless the
[CWT] due on the sale, transfer or
exchange of real property other
than capital asset has been fully
paid.(Underlined amendments in
the original)

Section 2.58.2 of RR 2-98 implementing

Section 58(E) of RA 8424 provides that any sale,
barter or exchange subject to the CWT will not be
recorded by the Registry of Deeds until the CIR
has certified that such transfers and conveyances
have been reported and the taxes thereof have
been duly paid:[7]
Sec. 2.58.2. Registration with the
Register
of
Deeds. Deeds
of
conveyances of land or land and
building/improvement
thereon
arising from sales, barters, or
exchanges
subject
to
the
creditable expanded withholding
tax shall not be recorded by the
Register of Deeds unless the [CIR]
or
his
duly
authorized
representative has certified that
such transfers and conveyances
have been reported and the
expanded
withholding
tax,
inclusive of the documentary
stamp tax, due thereon have been
fully paid xxxx.
On February 11, 2003, RR No. 7-2003 [8] was
promulgated, providing for the guidelines in
determining whether a particular real property is
a capital or an ordinary asset for purposes of
imposing the MCIT, among others. The pertinent
portions thereof state:
Section
4. Applicable
taxes
on
sale, exchange or other
disposition
of
real
property. - Gains/Income
derived
from
sale,
exchange,
or
other
disposition
of
real
properties shall, unless
otherwise
exempt,
be
subject to applicable taxes
imposed under the Code,
depending on whether the
subject
properties
are
classified as capital assets
or ordinary assets;

a.

In the case
of
individual
citizen
(including estates and
trusts),
resident
aliens,
and
non-

resident
aliens
engaged in trade or
business
in
the
Philippines;

(ii)

The sale of
real property located in
the
Philippines,
classified as ordinary
assets, shall be subject
to
the
[CWT]
(expanded) under Sec.
2.57..2(J) of [RR 2-98],
as amended, based on
the gross selling price
or current fair market
value as determined in
accordance
with
Section 6(E) of the
Code,
whichever
is
higher,
and
consequently, to the
ordinary income tax
imposed under Sec.
24(A)(1)(c) or 25(A)(1)
of the Code, as the
case may be, based on
net taxable income.

xxx xxx xxx

c.

In the case
corporations.

of

domestic

xxx xxx xxx

(ii)
The sale of land and/or
building classified as ordinary
asset and other real property
(other than land and/or building
treated
as
capital
asset),
regardless of the classification
thereof, all of which are located in
the Philippines, shall be subject to
the [CWT] (expanded) under Sec.
2.57.2(J)
of
[RR
2-98],
as

amended, and consequently, to

the ordinary income tax under
Sec. 27(A) of the Code. In lieu of
the ordinary income tax, however,
domestic
corporations
may
become subject to the [MCIT]
under Sec. 27(E) of the Code,
whichever is applicable.
We shall now tackle the
issues raised.

EXISTENCE
OF
A
JUSTICIABLE
CONTROVERSY
Courts will not assume jurisdiction over a
constitutional question unless the following
requisites are satisfied: (1) there must be an
actual case calling for the exercise of judicial
review; (2) the question before the court must be
ripe
for
adjudication; (3) the person challenging the validi
ty of the act must have standing to do so; (4) the
question of constitutionality must have been
raised at the earliest opportunity and (5) the
issue of constitutionality must be the very lis
mota of the case.[9]
Respondents aver that the first three
requisites are absent in this case. According to
them, there is no actual case calling for the
exercise of judicial power and it is not yet ripe for
adjudication because
[petitioner] did not allege that
CREBA, as a corporate entity, or
any of its members, has been
assessed by the BIR for the
payment of [MCIT] or [CWT] on
sales of real property. Neither did
petitioner allege that its members
have shut down their businesses as
a result of the payment of the MCIT
or
CWT. Petitioner
has
raised
concerns in mere abstract and
hypothetical form without any
actual,
specific
and
concrete
instances cited that the assailed
law and revenue regulations have
actually and adversely affected
it. Lacking empirical data on which
to base any conclusion, any
discussion on the constitutionality

of the MCIT or CWT on sales of real

property is essentially an academic
exercise.

Perceived or alleged hardship to

taxpayers alone is not an adequate
justification
for
adjudicating
abstract
issues.
Otherwise,
adjudication would be no different
from the giving of advisory opinion
that does not really settle legal
issues.[10]
An actual case or controversy involves a
conflict of legal rights or an assertion of opposite
legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or
abstract difference or dispute.[11] On the other
hand, a question is considered ripe for
adjudication when the act being challenged has a
direct adverse effect on the individual challenging
it.[12]
Contrary to respondents assertion, we do
not have to wait until petitioners members have
shut down their operations as a result of the MCIT
or CWT. The assailed provisions are already being
implemented. As we stated in Didipio EarthSavers Multi-Purpose Association, Incorporated
(DESAMA) v. Gozun:[13]
By the mere enactment of
the questioned law or the approval
of the challenged act, the dispute
is said to have ripened into a
judicial controversy even without
any other overt act. Indeed, even a
singular
violation
of
the
Constitution and/or the law is
enough to awaken judicial duty. [14]
If
the
assailed
provisions
are
indeed
unconstitutional, there is no better time than the
present to settle such question once and for all.
Respondents next argue that petitioner has no
legal standing to sue:
Petitioner is an association
of some of the real estate
developers and builders in the
Philippines. Petitioners
did
not
allege that [it] itself is in the real
estate business. It did not allege
any material interest or any wrong
that it may suffer from the

enforcement
of
[the
assailed
provisions].[15]
Legal standing or locus standi is a partys
personal and substantial interest in a case such
that it has sustained or will sustain direct injury
as a result of the governmental act being
challenged.[16] In Holy
Spirit
Homeowners
Association, Inc. v. Defensor,[17] we held that the
association had legal standing because its
members stood to be injured by the enforcement
of the assailed provisions:

Philippine taxation system. It came about as a

result of the perceived inadequacy of the selfassessment system in capturing the true income
of corporations.[21] It was devised as a relatively
simple and effective revenue-raising instrument
compared to the normal income tax which is
more difficult to control and enforce. It is a means
to ensure that everyone will make some
minimum contribution to the support of the public
sector. The congressional deliberations on this are
illuminating:

Petitioner association has

the legal standing to institute the
instant petition xxx. There is no
dispute
that
the
individual
members of petitioner association
are residents of the NGC. As such
they are covered and stand to be
either benefited or injured by the
enforcement of the IRR, particularly
as regards the selection process of
beneficiaries and lot allocation to
qualified
beneficiaries.
Thus,
petitioner association may assail
those provisions in the IRR which it
believes to be unfavorable to the
rights
of
its
members.
xxx
Certainly,
petitioner
and
its
members have sustained direct
injury arising from the enforcement
of the IRR in that they have been
disqualified and eliminated from
the selection process.[18]

Senator Enrile. Mr. President, we

are not unmindful of the practice of
certain corporations of reporting
constantly a loss in their operations
to avoid the payment of taxes, and
thus avoid sharing in the cost of
government. In this regard, the Tax
Reform Act introduces for the first
time a new concept called the
[MCIT] so as to minimize tax
evasion,
tax
avoidance,
tax
manipulation in the country and for
administrative
convenience. This
will go a long way in ensuring that
corporations will pay their just
share in supporting our public life
and our economic advancement.[22]

In any event, this Court has the discretion to take

cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal
standing when paramount public interest is
involved.[19] The questioned MCIT and CWT affect
not only petitioners but practically all domestic
corporate taxpayers in our country. The
transcendental importance of the issues raised
and their overreaching significance to society
make it proper for us to take cognizance of this
petition.[20]
CONCEPT AND RATIONALE OF THE
MCIT
The MCIT on domestic corporations is a
new concept introduced by RA 8424 to the

Domestic corporations owe their corporate

existence and their privilege to do business to the
government. They also benefit from the efforts of
the government to improve the financial market
and to ensure a favorable business climate. It is
therefore fair for the government to require them
to make a reasonable contribution to the public
expenses.
Congress intended to put a stop to the
practice of corporations which, while having large
turn-overs, report minimal or negative net income
resulting in minimal or zero income taxes year in
and year out, through under-declaration of
income or over-deduction of expenses otherwise
called tax shelters.[23]
Mr. Javier (E.) [This] is what the
Finance Dept. is trying to remedy,
that is why they have proposed the
[MCIT]. Because from experience
too, you have corporations which
have been losing year in and year
out and paid no tax. So, if the
corporation has been losing for the
past five years to ten years, then
that corporation has no business to

be in business. It is dead. Why

continue if you are losing year in
and year out? So, we have this
provision to avoid this type of tax
shelters, Your Honor.[24]
The primary purpose of any legitimate
business is to earn a profit. Continued and
repeated losses after operations of a corporation
or consistent reports of minimal net income
render its financial statements and its tax
payments
suspect. For
sure,
certain
tax
avoidance schemes resorted to by corporations
are allowed in our jurisdiction. The MCIT serves to
put a cap on such tax shelters. As a tax on gross
income, it prevents tax evasion and minimizes
tax avoidance schemes achieved through
sophisticated and artful manipulations of
deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the
MCIT, the following safeguards were incorporated
into the law:
First, recognizing the birth pangs of
businesses and the reality of the need to recoup
initial major capital expenditures, the imposition
of the MCIT commences only on the fourth
taxable year immediately following the year in
which the corporation commenced its operations.
[25]
This grace period allows a new business to
stabilize first and make its ventures viable before
it is subjected to the MCIT.[26]
Second, the law allows the carrying
forward of any excess of the MCIT paid over the
normal income tax which shall be credited
against the normal income tax for the three
immediately succeeding years.[27]
Third, since certain businesses may be
incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend
the imposition of MCIT if a corporation suffers
losses due to prolonged labor dispute, force
majeure and legitimate business reverses.[28]
Even before the legislature introduced the
MCIT to the Philippine taxation system, several
other countries already had their own system of
minimum
corporate
income
taxation. Our
lawmakers noted that most developing countries,
particularly Latin American and Asian countries,
have the same form of safeguards as we do. As
pointed out during the committee hearings:
[Mr. Medalla:] Note that most
developing countries where you
have of course quite a bit of room
for underdeclaration of gross
receipts have this same form of
safeguards.

In the case of Thailand, half a

percent (0.5%), theres a minimum
of income tax of half a percent
(0.5%) of gross assessable income.
In Korea a 25% of taxable income
before
deductions
and
exemptions. Of
course
the
different countries have different
basis for that minimum income
tax.

The other thing youll notice is the

preponderance of Latin American
countries that employed this
method. Okay,
those
are
additional
Latin
American
countries.[29]

At present, the United States of America, Mexico,

Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.[30]
MCIT IS NOT VIOLATIVE OF DUE
PROCESS
Petitioner claims that the MCIT under Section
27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property without
due process of law. It explains that gross income
as defined under said provision only considers the
cost of goods sold and other direct expenses;
other major expenditures, such as administrative
and interest expenses which are equally
necessary to produce gross income, were not
taken into account.[31] Thus, pegging the tax base
of the MCIT to a corporations gross income is
tantamount to a confiscation of capital because
gross income, unlike net income, is not realized
gain.[32]
We disagree.
Taxes
are
the
lifeblood
of
the
government. Without taxes, the government can
neither exist nor endure. The exercise of taxing
power derives its source from the very existence
of the State whose social contract with its citizens
obliges it to promote public interest and the
common good.[33]
Taxation is an inherent attribute of
sovereignty.[34] It is a power that is purely

legislative.[35] Essentially, this means that in the

legislature primarily lies the discretion to
determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs
(place) of taxation. [36] It has the authority to
prescribe a certain tax at a specific rate for a
particular public purpose on persons or things
within its jurisdiction. In other words, the
legislature wields the power to define what tax
shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or
what) it shall be imposed and where it shall be
imposed.
As a general rule, the power to tax is plenary and
unlimited in its range, acknowledging in its very
nature no limits, so that the principal check
against its abuse is to be found only in the
responsibility of the legislature (which imposes
the tax) to its constituency who are to pay it.
[37]
Nevertheless,
it
is
circumscribed
by
constitutional limitations. At the same time, like
any other statute, tax legislation carries a
presumption of constitutionality.
The constitutional safeguard of due
process is embodied in the fiat [no] person shall
be deprived of life, liberty or property without due
process of law. In Sison, Jr. v. Ancheta, et al.,
[38]
we held that the due process clause may
properly be invoked to invalidate, in appropriate
cases, a revenue measure [39] when it amounts to
a confiscation of property. [40] But in the same
case, we also explained that we will not strike
down a revenue measure as unconstitutional (for
being violative of the due process clause) on the
mere allegation of arbitrariness by the taxpayer.
[41]
There must be a factual foundation to such an
unconstitutional taint.[42] This merely adheres to
the authoritative doctrine that, where the due
process clause is invoked, considering that it is
not a fixed rule but rather a broad standard, there
is a need for proof of such persuasive character.
[43]

Petitioner is correct in saying that income

is distinct from capital.[44] Income means all the
wealth which flows into the taxpayer other than a
mere return on capital. Capital is a fund or
property existing at one distinct point in time
while income denotes a flow of wealth during a
definite period of time.[45] Income is gain derived
and severed from capital.[46] For income to be
taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received
and

(3) the gain must not be excluded by law

or treaty from
taxation.[47]

Certainly, an income tax is arbitrary and

confiscatory if it taxes capital because capital is
not income. In other words, it is income, not
capital, which is subject to income tax. However,
the MCIT is not a tax on capital.
The MCIT is imposed on gross income
which is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the
cost of goods[48] and other direct expenses from
gross sales. Clearly, the capital is not being
taxed.
Furthermore, the MCIT is not an additional tax
imposition. It is imposed in lieu of the normal
net income tax, and only if the normal income tax
is
suspiciously
low. The
MCIT
merely
approximates the amount of net income tax due
from a corporation, pegging the rate at a very
much reduced 2% and uses as the base the
corporations gross income.
Besides, there is no legal objection to a broader
tax base or taxable income by eliminating all
deductible items and at the same time reducing
the applicable tax rate.[49]
Statutes
taxing
the gross "receipts," "earnings," or
"income" of
particular
corporations are found in many
jurisdictions. Tax
thereon
is
generally held to be within the
power of a state to impose; or
constitutional, unless it interferes
with
interstate
commerce
or
violates the requirement as to
uniformity of taxation.[50]
The United States has a similar alternative
minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader
tax base.[51] Since our income tax laws are of
American origin, interpretations by American
courts of our parallel tax laws have persuasive
effect on the interpretation of these laws.
[52]
Although our MCIT is not exactly the same as
the AMT, the policy behind them and the
procedure
of
their
implementation
are
comparable. On the question of the AMTs
constitutionality, the United States Court of
Appeals for the Ninth Circuit stated inOkin v.
Commissioner:[53]
In enacting the minimum tax,
Congress attempted to remedy
general taxpayer distrust of the
system
growing
from
large
numbers of taxpayers with large

incomes who were yet paying no

taxes.
xxx xxx xxx
We thus join a number of other
courts
in
upholding
the
constitutionality of the [AMT]. xxx
[It] is a rational means of obtaining
a broad-based tax, and therefore is
constitutional.[54]
The U.S. Court declared that the congressional
intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a
legitimate governmental end to which the AMT
bore a reasonable relation.[55]
American courts have also emphasized that
Congress has the power to condition, limit or
deny deductions from gross income in order to
arrive at the net that it chooses to tax. [56] This is
because deductions are a matter of legislative
grace.[57]
Absent any other valid objection, the
assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with
the reduction of the tax rate from 32% to 2%, is
not constitutionally objectionable.
Moreover, petitioner does not cite any
actual,
specific
and
concrete
negative
experiences of its members nor does it present
empirical data to show that the implementation
of the MCIT resulted in the confiscation of their
property.
In sum, petitioner failed to support, by any
factual or legal basis, its allegation that the MCIT
is arbitrary and confiscatory. The Court cannot
strike down a law as unconstitutional simply
because of its yokes.[58] Taxation is necessarily
burdensome because, by its nature, it adversely
affects property rights.[59] The party alleging the
laws unconstitutionality has the burden to
demonstrate
the
supposed
violations
in
understandable terms.[60]
RR 9-98 MERELY CLARIFIES
SECTION 27(E) OF RA 8424
Petitioner alleges that RR 9-98 is a
deprivation of property without due process of
law because the MCIT is being imposed and
collected even when there is actually a loss, or a
zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic
Corporations.

(1) Imposition of the Tax. xxx The

MCIT shall be imposed whenever
such corporation has zero or
negative
taxable
income or
whenever the amount of [MCIT] is
greater than the normal income tax
due
from
such
corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be
imposed whenever such corporation has zero or
negative taxable income, merely defines the
coverage of Section 27(E). This means that even
if a corporation incurs a net loss in its business
operations or reports zero income after deducting
its expenses, it is still subject to an MCIT of 2% of
its gross income. This is consistent with the law
which imposes the MCIT on gross income
notwithstanding the amount of the net
income. But the law also states that the MCIT is
to be paid only if it is greater than the normal net
income.Obviously, it may well be the case that
the MCIT would be less than the net income of
the corporation which posts a zero or negative
taxable income.
We now proceed to the issues involving
the CWT.
The withholding tax system is a procedure
through which taxes (including income taxes) are
collected.[61] Under Section 57 of RA 8424, the
types of income subject to withholding tax are
divided into three categories: (a) withholding of
final tax on certain incomes; (b) withholding of
creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second
category (CWT) and maintains that the revenue
regulations on the collection of CWT on sale of
real estate categorized as ordinary assets are
unconstitutional.
Petitioner,
after
enumerating
the
distinctions between capital and ordinary assets
under RA 8424, contends that Sections 2.57.2(J)
and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and
(c)(ii) of RR 7-2003 were promulgated with grave
abuse of discretion amounting to lack of
jurisdiction and patently in contravention of
law[62] because
they
ignore
such
distinctions. Petitioners conclusion is based on
the
following
premises: (a)
the
revenue
regulations use gross selling price (GSP) or fair
market value (FMV) of the real estate as basis for
determining the income tax for the sale of real
estate classified as ordinary assets and (b) they
mandate the collection of income tax on a per
transaction basis, i.e., upon consummation of the
sale via the CWT, contrary to RA 8424 which calls
for the payment of the net income at the end of
the taxable period.[63]

Petitioner theorizes that since RA 8424

treats capital assets and ordinary assets
differently, respondents cannot disregard the
distinctions set by the legislators as regards the
tax base, modes of collection and payment of
taxes on income from the sale of capital and
ordinary assets.
Petitioners arguments have no merit.
AUTHORITY OF THE SECRETARY
OF FINANCE TO ORDER THE
COLLECTION OF CWT ON SALES
OF REAL PROPERTY CONSIDERED
AS ORDINARY ASSETS
The Secretary of Finance is granted, under
Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations
for the effective enforcement of the provisions of
the law.Such authority is subject to the limitation
that the rules and regulations must not override,
but must remain consistent and in harmony with,
the law they seek to apply and implement. [64] It is
well-settled that an administrative agency cannot
amend an act of Congress.[65]
We have long recognized that the method of
withholding tax at source is a procedure of
collecting income tax which is sanctioned by our
tax laws.[66] The withholding tax system was
devised for three primary reasons: first, to
provide the taxpayer a convenient manner to
meet his probable income tax liability; second, to
ensure the collection of income tax which can
otherwise be lost or substantially reduced
through failure to file the corresponding returns
and third, to improve the governments cash flow.
[67]
This results in administrative savings, prompt
and efficient collection of taxes, prevention of
delinquencies and reduction of governmental
effort to collect taxes through more complicated
means and remedies.[68]
Respondent Secretary has the authority to
require the withholding of a tax on items of
income payable to any person, national or
juridical, residing in the Philippines. Such
authority is derived from Section 57(B) of RA
8424 which provides:
SEC. 57. Withholding of Tax at
Source.
xxx xxx xxx
(B)

Withholding
of
Creditable
Tax
at
Source. The
[Secretary] may, upon
the
recommendation

of the [CIR], require

the withholding of a
tax on the items of
income
payable
to
natural
or
juridical
persons, residing in
the
Philippines,
by
payorcorporation/persons as
provided for by law, at
the rate of not less
than one percent (1%)
but not more than
thirty-two
percent
(32%) thereof, which
shall
be
credited
against the income tax
liability of the taxpayer
for the taxable year.
The questioned provisions of RR 2-98, as
amended, are well within the authority given by
Section 57(B) to the Secretary, i.e., the graduated
rate of 1.5%-5% is between the 1%-32% range;
the withholding tax is imposed on the income
payable and the tax is creditable against the
income tax liability of the taxpayer for the
taxable year.
EFFECT OF RRS ON THE TAX BASE
FOR
THE
INCOME
TAX
OF
INDIVIDUALS
OR
CORPORATIONS
ENGAGED IN THE REAL ESTATE
BUSINESS

Petitioner maintains that RR 2-98, as amended,

arbitrarily shifted the tax base of a real estate
business income tax from net income to GSP or
FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance
tax payments by a taxpayer in order to extinguish
its
possible
tax
obligation. [69] They
are
installments on the annual tax which may be due
at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income
tax from the sale of real property classified as
ordinary assets remains to be the entitys net
income imposed under Section 24 (resident
individuals) or Section 27 (domestic corporations)
in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT is to
be deducted from the net income tax payable by
the taxpayer at the end of the taxable year.
[71]
Precisely, Section 4(a)(ii) and (c)(ii) of RR 72003 reiterate that the tax base for the sale of

real property classified as ordinary

remains to be the net taxable income:
Section 4. Applicable taxes on
sale,
exchange
or
other
disposition
of
real
property.
- Gains/Income derived from sale,
exchange, or other disposition of
real
properties
shall
unless
otherwise exempt, be subject to
applicable taxes imposed under
the Code, depending on whether
the
subject
properties
are
classified as capital assets or
ordinary assets;
xxx xxx xxx
a. In the case of individual
citizens (including estates
and trusts), resident aliens,
and non-resident aliens
engaged
in
trade
or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property
located
in
the
Philippines,
classified as ordinary assets, shall
be subject
to the
[CWT]
(expanded) under Sec. 2.57.2(j) of
[RR 2-98], as amended, based on
the [GSP] or current [FMV] as
determined in accordance with
Section
6(E)
of
the
Code,
whichever
is
higher,
and
consequently,
to the ordinary
income tax imposed under
Sec. 24(A)(1)(c) or 25(A)(1) of
the Code, as the case may be,
based on net taxable income.
xxx xxx xxx
c. In the case
corporations.

of

domestic

The sale of land and/or building

classified as ordinary asset and
other real property (other than
land and/or building treated as
capital asset), regardless of the
classification thereof, all of which
are located in the Philippines, shall
be subject
to the
[CWT]
(expanded) under Sec. 2.57.2(J) of
[RR 2-98], as amended, and
consequently,
to the ordinary
income tax under Sec. 27(A) of
the Code. In lieu of the ordinary

assets

income tax, however, domestic

corporations may become subject
to the [MCIT] under Sec. 27(E) of
the same Code, whichever is
applicable. (Emphasis supplied)
Accordingly, at the end of the year, the
taxpayer/seller shall file its income tax return and
credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer
shall pay the difference. If, on the other hand, the
tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its
net income.
The use of the GSP/FMV as basis to
determine the withholding taxes is evidently for
purposes
of
practicality
and
convenience. Obviously,
the
withholding
agent/buyer who is obligated to withhold the tax
does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding
agents knowledge and privity are limited only to
the particular transaction in which he is a party. In
such a case, his basis can only be the GSP or FMV
as these are the only factors reasonably known or
knowable by him in connection with the
performance of his duties as a withholding agent.
NO
BLURRING
OF
BETWEEN ORDINARY
CAPITAL ASSETS

DISTINCTIONS
ASSETS
AND

RR 2-98 imposes a graduated CWT on income

based on the GSP or FMV of the real property
categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a final
tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based
on its GSP or FMV. This final tax is also withheld at
source.[72]
The differences between the two forms of
withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same
manner as capital assets. Final withholding tax
(FWT) and CWT are distinguished as follows:
FWT
a) The amount
of income tax
withheld by the
withholding
agent
is
constituted as
a full and final
payment of the

CWT
a) Taxes withheld
on certain income
payments
are
intended to equal
or
at
least
approximate the
tax due of the
payee on said

income tax due

from the payee
on the said
income.

income.

b)The liability
for payment of
the tax rests
primarily
on
the payor as a
withholding
agent.

b)
Payee
of
income
is
required to report
the income and/or
pay the difference
between the tax
withheld and the
tax due on the
income. The
payee also has
the right to ask
for a refund if the
tax withheld is
more than the tax
due.

c) The payee is
not required to
file an income
tax return for
the particular
income.[73]

c) The income
recipient is still
required to file an
income tax return,
as prescribed in
Sec. 51 and Sec.
52 of the NIRC, as
amended.[74]

As previously stated, FWT is imposed on the sale

of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The
inherent and substantial differences between
FWT and CWT disprove petitioners contention
that ordinary assets are being lumped together
with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA
8424.
Petitioner insists that the levy, collection
and payment of CWT at the time of transaction
are contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment
and assessment of income tax involving ordinary
assets.[75]
The fact that the tax is withheld at source
does not automatically mean that it is treated
exactly the same way as capital gains. As
aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time
of the transaction by withholding the tax due
from the income payable is the essence of the
withholding tax method of tax collection.
NO RULE THAT ONLY PASSIVE
INCOMES CAN BE SUBJECT TO CWT
Petitioner submits that only passive
income can be subjected to withholding tax,

whether
final
or
creditable. According
to
petitioner, the whole of Section 57 governs the
withholding of income tax on passive income. The
enumeration in Section 57(A) refers to passive
income being subjected to FWT. It follows that
Section 57(B) on CWT should also be limited to
passive income:
SEC. 57. Withholding
Source.

of

Tax

at

(A) Withholding of Final Tax on

Certain Incomes. Subject to rules
and regulations, the [Secretary]
may
promulgate,
upon
the
recommendation of the [CIR],
requiring the filing of income tax
return by certain income payees,
the tax imposed or prescribed
by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)
(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5); 28(A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)
(7)(c), 28(B)(1), 28(B)(2), 28(B)
(3), 28(B)(4), 28(B)(5)(a), 28(B)
(5)(b), 28(B)(5)(c); 33; and 282
of this Code on specified items
of income shall be withheld by
payor-corporation and/or person
and paid in the same manner and
subject to the same conditions as
provided in Section 58 of this Code.
(B) Withholding
of Creditable
Tax at Source. The [Secretary]
may, upon the recommendation of
the [CIR], require the withholding of
a tax on the items of income
payable to natural or juridical
persons,
residing
in
the
Philippines,
by
payorcorporation/persons as provided for
by law, at the rate of not less than
one percent (1%) but not more
than thirty-two percent (32%)
thereof, which shall be credited
against the income tax liability of
the taxpayer for the taxable
year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final
tax can be imposed on certain kinds of income
and enumerates these as passive income. The
BIR defines passive income by stating what it is
not:

if the income is generated in

the active pursuit and performance
of
the
corporations
primary
purposes, the same is not passive
income[76]
It is income generated by the taxpayers assets.
These assets can be in the form of real properties
that return rental income, shares of stock in a
corporation that earn dividends or interest
income received from savings.
On the other hand, Section 57(B) provides
that the Secretary can require a CWT on income
payable to natural or juridical persons, residing in
the Philippines. There is no requirement that this
income be passive income. If that were the intent
of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section
57(A) refers to FWT while Section 57(B) pertains
to CWT. The former covers the kinds of passive
income enumerated therein and the latter
encompasses any income other than those listed
in 57(A). Since the law itself makes distinctions, it
is wrong to regard 57(A) and 57(B) in the same
way.
To repeat, the assailed provisions of RR 298, as amended, do not modify or deviate from
the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is
subject to CWT. It has been held that, where a
statute does not require any particular procedure
to be followed by an administrative agency, the
agency may adopt any reasonable method to
carry out its functions.[77] Similarly, considering
that the law uses the general term income, the
Secretary and CIR may specify the kinds of
income the rules will apply to based on what is
feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight
and respect by the courts[78] in view of the rulemaking authority given to those who formulate
them and their specific expertise in their
respective fields.
NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS
Petitioner avers that the imposition of CWT
on GSP/FMV of real estate classified as ordinary
assets deprives its members of their property
without due process of law because, in their line
of business, gain is never assured by mere
receipt of the selling price. As a result, the
government is collecting tax from net income not
yet gained or earned.
Again, it is stressed that the CWT is creditable
against the tax due from the seller of the

property at the end of the taxable year. The seller

will be able to claim a tax refund if its net income
is less than the taxes withheld. Nothing is taken
that is not due so there is no confiscation of
property
repugnant
to
the
constitutional
guarantee of due process. More importantly, the
due process requirement applies to the power to
tax.[79] The CWT does not impose new taxes nor
does it increase taxes.[80] It relates entirely to the
method and time of payment.
Petitioner protests that the refund remedy
does not make the CWT less burdensome
because taxpayers have to wait years and may
even resort to litigation before they are granted a
refund.[81]This argument is misleading. The
practical problems encountered in claiming a tax
refund do not affect the constitutionality and
validity of the CWT as a method of collecting the
tax.
Petitioner complains that the amount
withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of
money and other expenses which can then save
the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists
the expenses and pitfalls of the trade which add
to the burden of the realty industry: huge
investments and borrowings; long gestation
period; sudden and unpredictable interest rate
surges;
continually
spiraling
development/construction costs; heavy taxes and
prohibitive up-front regulatory fees from at least
20 government agencies.[82]
Petitioners lamentations will not support
its attack on the constitutionality of the
CWT. Petitioners
complaints
are
essentially
matters of policy best addressed to the executive
and
legislative
branches
of
the
government. Besides, the CWT is applied only on
the amounts actually received or receivable by
the real estate entity. Sales on installment are
taxed on a per-installment basis.[83]Petitioners
desire to utilize for its operational and capital
expenses money earmarked for the payment of
taxes may be a practical business option but it is
not a fundamental right which can be demanded
from the court or from the government.
NO VIOLATION OF EQUAL PROTECTION
Petitioner claims that the revenue
regulations are violative of the equal
protection clause because the CWT is
being levied only on real estate
enterprises. Specifically, petitioner points
out that manufacturing enterprises are
not similarly imposed a CWT on their
sales, even if their manner of doing
business is not much different from that

of a real estate enterprise. Like a

manufacturing concern, a real estate
business is involved in a continuous
process of production and it incurs costs
and expenditures on a regular basis. The
only difference is that goods produced by
the real estate business are house and lot
units.[84]
Again, we disagree.
The equal protection clause under the
Constitution means that no person or class of
persons shall be deprived of the same protection
of laws which is enjoyed by other persons or
other classes in the same place and in like
circumstances.[85] Stated differently, all persons
belonging to the same class shall be taxed
alike. It follows that the guaranty of the equal
protection of the laws is not violated by
legislation
based
on
a
reasonable
classification. Classification, to be valid, must (1)
rest on substantial distinctions; (2) be germane to
the purpose of the law; (3) not be limited to
existing conditions only and (4) apply equally to
all members of the same class.[86]
The taxing power has the authority to make
reasonable classifications for purposes of
taxation.[87] Inequalities which result from a
singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.
[88]
The real estate industry is, by itself, a class
and can be validly treated differently from other
business enterprises.
Petitioner, in insisting that its industry should be
treated similarly as manufacturing enterprises,
fails to realize that what distinguishes the real
estate business from other manufacturing
enterprises, for purposes of the imposition of the
CWT, is not their production processes but the
prices of their goods sold and the number of
transactions involved. The income from the sale
of a real property is bigger and its frequency of
transaction limited, making it less cumbersome
for the parties to comply with the withholding tax
scheme.
On the other hand, each manufacturing
enterprise may have tens of thousands of
transactions with several thousand customers
every month involving both minimal and
substantial amounts. To require the customers of
manufacturing enterprises, at present, to
withhold the taxes on each of their transactions
with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system
of taxation and may well defeat the purpose of
the withholding tax system.

Petitioner counters that there are other

businesses wherein expensive items are also sold
infrequently, e.g. heavy
equipment,
jewelry,
furniture, appliance and other capital goods yet
these are not similarly subjected to the CWT.
[89]
As already discussed, the Secretary may adopt
any reasonable method to carry out its functions.
[90]
Under Section 57(B), it may choose what to
subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will
also show that petitioners argument is not
accurate. The sales of manufacturers who have
clients within the top 5,000 corporations, as
specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations. [91]
SECTION 2.58.2 OF RR NO. 2-98 MERELY
IMPLEMENTS SECTION 58 OF RA 8424
Lastly, petitioner assails Section 2.58.2 of
RR 2-98, which provides that the Registry of
Deeds should not effect the regisration of any
document transferring real property unless a
certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except
to rely on its contention that the CWT is
unconstitutional. We have ruled that it is
not. Furthermore, this provision uses almost
exactly the same wording as Section 58(E) of RA
8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of
Taxes Withheld at Source.
(E) Registration with Register of
Deeds. - No registration of any
document
transferring
real
property shall be effected by
the Register of Deeds unless
the
[CIR]
or
his
duly
authorized representative has
certified that such transfer has
been reported, and the capital
gains or [CWT], if any, has
been paid: xxxx any violation of
this provision by the Register of
Deeds shall be subject to the
penalties imposed under Section
269 of this Code. (Emphasis
supplied)
CONCLUSION
The renowned genius Albert Einstein was once
quoted as saying [the] hardest thing in the world
to understand is the income tax.[92] When a party

questions the constitutionality of an income tax

measure, it has to contend not only with Einsteins
observation but also with the vast and wellestablished jurisprudence in support of the
plenary
powers
of
Congress
to
impose
taxes. Petitioner has miserably failed to discharge
its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.
WHEREFORE,
the
petition
is
hereby DISMISSED.
Costs against petitioner.
SO ORDERED

G.R. No. 172087

March 15, 2011

PHILIPPINE
AMUSEMENT
AND
GAMING
CORPORATION
(PAGCOR), Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE (BIR),
represented herein by HON. JOSE MARIO
BUAG,
in
his
official
capacity
as
COMMISSIONER
OF
INTERNAL
REVENUE, Public
Respondent,
JOHN DOE and JANE DOE, who are persons
acting for, in behalf, or under the authority
of Respondent.Public and Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for
Certiorari and Prohibition1 with prayer for the
issuance of a Temporary Restraining Order and/or
Preliminary Injunction, dated April 17, 2006, of
petitioner Philippine Amusement and Gaming
Corporation (PAGCOR), seeking the declaration of
nullity of Section 1 of Republic Act (R.A.) No. 9337
insofar as it amends Section 27 (c) of the National
Internal Revenue Code of 1997, by excluding
petitioner from exemption from corporate income
tax for being repugnant to Sections 1 and 10 of
Article III of the Constitution. Petitioner further
seeks to prohibit the implementation of Bureau of
Internal Revenue (BIR) Revenue Regulations No.
16-2005 for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential
Decree (P.D.) No. 1067-A2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067B3 (supplementing P.D. No. 1067-A) was issued
exempting PAGCOR from the payment of any type
of tax, except a franchise tax of five percent (5%)
of the gross revenue.4 Thereafter, on June 2,
1978, P.D. No. 1399 was issued expanding the
scope of PAGCOR's exemption.5
To consolidate the laws pertaining to the
franchise and powers of PAGCOR, P.D. No.
18696 was issued. Section 13 thereof reads as
follows:
Sec. 13. Exemptions. x x x

(1) Customs Duties, taxes and other

imposts on importations. - All importations
of equipment, vehicles, automobiles,
boats, ships, barges, aircraft and such
other gambling paraphernalia, including
accessories or related facilities, for the
sole and exclusive use of the casinos, the
proper and efficient management and
administration thereof and such other
clubs, recreation or amusement places to
be established under and by virtue of this
Franchise shall be exempt from the
payment of duties, taxes and other
imposts, including all kinds of fees, levies,
or charges of any kind or nature.
Vessels and/or accessory ferry boats
imported or to be imported by any
corporation having existing contractual
arrangements with the Corporation, for
the sole and exclusive use of the casino or
to be used to service the operations and
requirements of the casino, shall likewise
be totally exempt from the payment of all
customs duties, taxes and other imposts,
including all kinds of fees, levies,
assessments or charges of any kind or
nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise
Holder: No tax of any kind or form, income
or otherwise, as well as fees, charges, or
levies of whatever nature, whether
National or Local, shall be assessed and
collected under this Franchise from the
Corporation; nor shall any form of tax or
charge attach in any way to the earnings
of the Corporation, except a Franchise Tax
of five percent (5%)of the gross revenue
or earnings derived by the Corporation
from its operation under this Franchise.
Such tax shall be due and payable
quarterly to the National Government and
shall be in lieu of all kinds of taxes, levies,
fees or assessments of any kind, nature or
description,
levied,
established,
or
collected by any municipal, provincial or
national government authority.
(b) Others: The exemption herein
granted for earnings derived from
the operations conducted under
the franchise, specifically from the
payment of any tax, income or
otherwise, as well as any form of
charges, fees or levies, shall inure
to the benefit of and extend to
corporation(s),
association(s),
agency(ies), or individual(s) with
whom the Corporation or operator
has any contractual relationship in

connection with the operations of

the casino(s) authorized to be
conducted under this Franchise and
to those receiving compensation or
other
remuneration
from
the
Corporation as a result of essential
facilities furnished and/or technical
services
rendered
to
the Corporation or operator.
The fee or remuneration of foreign
entertainers contracted by the Corporation
or operator in pursuance of this provision
shall be free of any tax.
(3) Dividend Income. Notwithstanding
any provision of law to the contrary, in the
event the Corporation should declare a
cash dividend income corresponding to
the participation of the private sector
shall, as an incentive to the beneficiaries,
be subject only to a final flat income rate
of ten percent (10%) of the regular income
tax rates. The dividend income shall not in
such case be considered as part of the
beneficiaries' taxable income; provided,
however, that such dividend income shall
be totally exempted from income or other
form of taxes if invested within six (6)
months from the date the dividend income
is received in the following:
(a) operation of the casino(s) or
investments in any affiliate activity
that will ultimately redound to the
benefit of the Corporation; or any
other corporation with whom the
Corporation
has
any
existing
arrangements in connection with or
related to the operations of the
casino(s);
(b) Government bonds, securities,
treasury notes, or government
debentures; or
(c)
BOI-registered
or
oriented corporation(s).7

export-

PAGCOR's tax exemption was removed in June

1984 through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430, which
was issued in September 1984.
On January 1, 1998, R.A. No. 8424, 8 otherwise
known as the National Internal Revenue Code of
1997, took effect. Section 27 (c) of R.A. No. 8424
provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income
tax, except petitioner PAGCOR, the Government

Service and Insurance Corporation, the Social

Security System, the Philippine Health Insurance
Corporation,
and
the
Philippine
Charity
Sweepstakes Office, thus:

Finance, to raise the VAT rate to 12%. The

said provisions were alleged to be
violative of Section 28 (2), Article VI of the
Constitution, which section vests in
Congress the exclusive authority to fix the
rate of taxes, and of Section 1, Article III of
the Constitution on due process, as well as
of Section 26 (2), Article VI of the
Constitution, which section provides for
the "no amendment rule" upon the last
reading of a bill;

(c) Government-owned
or
Controlled
Corporations, Agencies or Instrumentalities. - The
provisions of existing special general laws to the
contrary
notwithstanding,
all
corporations,
agencies
or
instrumentalities
owned
and
controlled by the Government, except the
Government Service and Insurance Corporation
(GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC),
the Philippine Charity Sweepstakes Office (PCSO),
and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax
upon their taxable income as are imposed by this
Section upon corporations or associations
engaged in similar business, industry, or activity. 9
With the enactment of R.A. No. 933710 on May 24,
2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The
particular amendment that is at issue in this case
is Section 1 of R.A. No. 9337, which amended
Section 27 (c) of the National Internal Revenue
Code of 1997 by excluding PAGCOR from the
enumeration of GOCCs that are exempt from
payment of corporate income tax, thus:
(c) Government-owned
or
Controlled
Corporations, Agencies or Instrumentalities. - The
provisions of existing special general laws to the
contrary
notwithstanding,
all
corporations,
agencies, or instrumentalities owned and
controlled by the Government, except the
Government Service and Insurance Corporation
(GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC),
and the Philippine Charity Sweepstakes Office
(PCSO), shall pay such rate of tax upon their
taxable income as are imposed by this Section
upon corporations or associations engaged in
similar business, industry, or activity.
Different groups came to this Court via petitions
for certiorari and
prohibition11 assailing
the
validity and constitutionality of R.A. No. 9337, in
particular:
1) Section 4, which imposes a 10% Value
Added Tax (VAT) on sale of goods and
properties; Section 5, which imposes a
10% VAT on importation of goods; and
Section 6, which imposes a 10% VAT on
sale of services and use or lease of
properties,
all
contain
a
uniform
proviso authorizing the President, upon
the recommendation of the Secretary of

2) Sections 8 and 12 were alleged to be

violative of Section 1, Article III of the
Constitution, or the guarantee of equal
protection of the laws, and Section 28 (1),
Article VI of the Constitution; and
3) other technical aspects of the passage
of the law, questioning the manner it was
passed.
On September 1, 2005, the Court dismissed all
the petitions and upheld the constitutionality of
R.A. No. 9337.12
On the same date, respondent BIR issued
Revenue
Regulations
(RR)
No.
16-2005,13 specifically identifying PAGCOR as one of
the franchisees subject to 10% VAT imposed
under Section 108 of the National Internal
Revenue Code of 1997, as amended by R.A. No.
9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on
Selected Services.
xxxx
(h) x x x
Gross Receipts of all other franchisees, other than
those covered by Sec. 119 of the Tax Code,
regardless of how their franchisees may have
been granted, shall be subject to the 10% VAT
imposed under Sec.108 of the Tax Code. This
includes,
among
others,
the
Philippine
Amusement and Gaming Corporation (PAGCOR),
and its licensees or franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS
NULL
AND
VOID AB
INITIO FOR BEING
REPUGNANT TO THE EQUAL PROTECTION

[CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF

THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS
NULL
AND
VOID AB
INITIO FOR
BEING
REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE]
EMBODIED IN SECTION 10, ARTICLE III OF THE
1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3,
PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR
BEING BEYOND THE SCOPE OF THE BASIC LAW,
RA 8424, SECTION 108, INSOFAR AS THE SAID
REGULATION IMPOSED VAT ON THE SERVICES OF
THE PETITIONER AS WELL AS PETITIONERS
LICENSEES OR FRANCHISEES WHEN THE BASIC
LAW,
AS
INTERPRETED
BY
APPLICABLE
JURISPRUDENCE, DOES NOT IMPOSE VAT ON
PETITIONER OR ON PETITIONERS LICENSEES OR
FRANCHISEES.14
The BIR, in its Comment15 dated December 29,
2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2)
OF
P.D.
1869
ARE
BOTH
VALID
AND
CONSTITUTIONAL PROVISIONS OF LAWS THAT
SHOULD
BE
HARMONIOUSLY
CONSTRUED
TOGETHER SO AS TO GIVE EFFECT TO ALL OF
THEIR PROVISIONS WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF
SECTION 1 AND SECTION 10, ARTICLE III OF THE
1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED
VALID AND CONSTITUTIONAL UNTIL STRICKEN
DOWN BY LAWFUL AUTHORITIES.
The Office of the Solicitor General (OSG), by way
of Manifestation In Lieu of Comment,16 concurred
with the arguments of the petitioner. It added
that although the State is free to select the
subjects of taxation and that the inequity
resulting from singling out a particular class for
taxation or exemption is not an infringement of
the constitutional limitation, a tax law must
operate with the same force and effect to all
persons, firms and corporations placed in a

similar situation. Furthermore, according to the

OSG, public respondent BIR exceeded its
statutory authority when it enacted RR No. 162005, because the latter's provisions are contrary
to the mandates of P.D. No. 1869 in relation to
R.A. No. 9337.
The main issue is whether or not PAGCOR is still
exempt from corporate income tax and VAT with
the enactment of R.A. No. 9337.
After a careful study of the positions presented by
the parties, this Court finds the petition partly
meritorious.
Under Section 1 of R.A. No. 9337, amending
Section 27 (c) of the National Internal Revenue
Code of 1977, petitioner is no longer exempt from
corporate income tax as it has been effectively
omitted from the list of GOCCs that are exempt
from it. Petitioner argues that such omission is
unconstitutional, as it is violative of its right to
equal protection of the laws under Section 1,
Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty,
or property without due process of law, nor shall
any person be denied the equal protection of the
laws.
In City of Manila v. Laguio, Jr.,17 this Court
expounded the meaning and scope of equal
protection, thus:
Equal protection requires that all persons or
things similarly situated should be treated alike,
both as to rights conferred and responsibilities
imposed. Similar subjects, in other words, should
not be treated differently, so as to give undue
favor to some and unjustly discriminate against
others. The guarantee means that no person or
class of persons shall be denied the same
protection of laws which is enjoyed by other
persons or other classes in like circumstances.
The "equal protection of the laws is a pledge of
the protection of equal laws." It limits
governmental
discrimination.
The
equal
protection clause extends to artificial persons but
only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the
subjects of legislation. If the classification is
reasonable, the law may operate only on some
and not all of the people without violating the
equal protection clause. The classification must,
as an indispensable requisite, not be arbitrary. To
be valid, it must conform to the following
requirements:

1) It must
distinctions.

be

based

on

substantial

2) It must be germane to the purposes of

the law.
3) It must not be limited to existing
conditions only.
4) It must apply equally to all members of
the class.18
It is not contested that before the enactment of
R.A. No. 9337, petitioner was one of the five
GOCCs exempted from payment of corporate
income tax as shown in R.A. No. 8424, Section 27
(c) of which, reads:
(c)
Government-owned
or
Controlled
Corporations, Agencies or Instrumentalities. - The
provisions of existing special or general laws to
the contrary notwithstanding, all corporations,
agencies
or
instrumentalities
owned
and
controlled by the Government, except the
Government Service and Insurance Corporation
(GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC),
the Philippine Charity Sweepstakes Office (PCSO),
and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax
upon their taxable income as are imposed by this
Section upon corporations or associations
engaged in similar business, industry, or
activity.19
A perusal of the legislative records of the
Bicameral Conference Meeting of the Committee
on Ways on Means dated October 27, 1997 would
show that the exemption of PAGCOR from the
payment of corporate income tax was due to the
acquiescence of the Committee on Ways on
Means to the request of PAGCOR that it be
exempt from such tax.20 The records of the
Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I
noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin
yon.

CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon
request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance
Commission.
CHAIRMAN ENRILE. Philippine Insurance --Health, health ba. Yon ang request ng Chairman, I
will accept. (laughter) Pag-Pag-ibig yon, maliliit na
sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the
revenue gainers if we factored in an amount that
would reflect the VAT and other sales taxes--CHAIRMAN ENRILE. No, were talking of this
measure only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising
from the exemption. Assuming that when we
release the money into the hands of the public,
they will not use that to --- for wallpaper. They will
spend that eh, Mr. Chairman. So when they spend
that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be
other sales taxes no. Is there a quantification? Is
there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that
entire seven billion. In effect, it is not circulating
in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this
is taken and spent by government, somebody
receives it in the form of wages and supplies and
other services and other goods. They are not
being taken from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax
exemption. That will be extra income for the
taxpayers.

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether
we covered the tax on --- Whether on a universal
basis, we included a tax on cockfighting winnings.

HON. ROXAS. Precisely, so they will be spending

it.21
The discussion above bears out that under R.A.
No. 8424, the exemption of PAGCOR from paying
corporate income tax was not based on a
classification showing substantial distinctions

which make for real differences, but to reiterate,

the exemption was granted upon the request of
PAGCOR that it be exempt from the payment of
corporate income tax.
With the subsequent enactment of R.A. No. 9337,
amending R.A. No. 8424, PAGCOR has been
excluded from the enumeration of GOCCs that
are exempt from paying corporate income tax.
The records of the Bicameral Conference Meeting
dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950
and House Bill No. 3555, show that it is the
legislative intent that PAGCOR be subject to the
payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the
proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the
reasons why we're even considering this VAT bill
is we want to show the world who our creditors,
that we are increasing official revenues that go to
the national budget. Unfortunately today, Pagcor
is unofficial.
Now, in 2003, I took a quick look this morning,
Pagcor had a net income of 9.7 billion after
paying some small taxes that they are subjected
to. Of the 9.7 billion, they claim they remitted to
national government seven billion. Pagkatapos,
there are other specific remittances like to the
Philippine Sports Commission, etc., as mandated
by various laws, and then about 400 million to
the President's Social Fund. But all in all, their net
profit today should be about 12 billion. That's why
I am questioning this two billion. Because while
essentially they claim that the money goes
to government, and I will accept that just
for the sake of argument. It does not pass
through the appropriation process. And I
think that at least if we can capture 35
percent
or
32
percent
through
the
budgetary process, first, it is reflected in
our official income of government which is
applied to the national budget, and
secondly,
it
goes
through
what
is
constitutionally mandated as Congress
appropriating and defining where the
money is spent and not through a board of
directors
that
has
absolutely
no
accountability.

REP. PUENTEBELLA. And Negros at the same time

ay Kasimanwa. But I would not want to put my
friends from the Department of Finance in a
difficult position, but may we know your
comments on this knowing that as Senator
Osmea just mentioned, he said, "I accept that
that a lot of it is going to spending for basic
services," you know, going to most, I think,
supposedly a lot or most of it should go to
government spending, social services and the
like. What is your comment on this? This is going
to affect a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other,
Monico.
REP. PUENTEBELLA. I know that. But I wanted to
ask them, Mr. Senator, because you may have
your own pre-judgment on this and I don't blame
you. I don't blame you. And I know you have your
own research. But will this not affect a lot, the
disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can
add to that question also. Wouldn't it be easier for
you to explain to, say, foreign creditors, how do
you explain to them that if there is a fiscal gap
some of our richest corporations has [been]
spared [from] taxation by the government which
is one rich source of revenues. Now, why do you
save, why do you spare certain government
corporations on that, like Pagcor? So, would it be
easier for you to make an argument if everything
was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the
DOF to respond to those before we call
Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes,
from
definitely
improving
the
collection, it will help us because it will then
enter as an official revenue although when
dividends declare it also goes in as other
income. (sic)
xxxx

REP. PUENTEBELLA. Well, with all due respect, Mr.

Chairman, follow up lang.
There is wisdom in the comments of my good
friend from Cebu, Senator Osmea.
SEN. OSMEA. And Negros.

REP. TEVES. Mr. Chairman.

xxxx
THE CHAIRMAN
Teves.

(REP.

LAPUS).

Congressman

REP. TEVES. Yeah. Pagcor is controlled under

Section 27, that is on income tax. Now, we
are talking here on value-added tax. Do you
mean to say we are going to amend it from
income tax to value-added tax, as far as
Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just
amending that section with regard to the
exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr.
Chairman.
THE CHAIRMAN
Nograles.

(REP.

LAPUS).

Congressman

REP. NOGRALES. Just a point of inquiry from the

Chair. What exactly are the functions of Pagcor
that are VATable? What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own
income tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat
natin sa kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is,
what are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret
agreement or the way they craft their contract,
which basis?
THE CHAIRMAN (SEN. RECTO). Congressman
Nograles, the Senate version does not
discuss a VAT on Pagcor but it just takes
away their exemption from non-payment of
income tax.22
Taxation is the rule and exemption is the
exception.23 The burden of proof rests upon the
party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed. 24 As a
rule, tax exemptions are construed strongly
against the claimant. 25 Exemptions must be
shown to exist clearly and categorically, and
supported by clear legal provision.26
In this case, PAGCOR failed to prove that it is still
exempt from the payment of corporate income
tax, considering that Section 1 of R.A. No. 9337
amended Section 27 (c) of the National Internal
Revenue Code of 1997 by omitting PAGCOR from
the exemption. The legislative intent, as shown

by the discussions in the Bicameral Conference

Meeting, is to require PAGCOR to pay corporate
income tax; hence, the omission or removal of
PAGCOR from exemption from the payment of
corporate income tax. It is a basic precept of
statutory construction that the express mention
of one person, thing, act, or consequence
excludes all others as expressed in the familiar
maxim
expressio
unius
est
exclusio
alterius.27 Thus, the express mention of the
GOCCs exempted from payment of corporate
income tax excludes all others. Not being
excepted, petitioner PAGCOR must be regarded
as coming within the purview of the general rule
that GOCCs shall pay corporate income tax,
expressed in the maxim: exceptio firmat regulam
in casibus non exceptis.28
PAGCOR cannot find support in the equal
protection clause of the Constitution, as the
legislative records of the Bicameral Conference
Meeting dated October 27, 1997, of the
Committee on Ways and Means, show that
PAGCORs exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A.
No. 8424, or the National Internal Revenue Code
of 1997, was not made pursuant to a valid
classification based on substantial distinctions
and the other requirements of a reasonable
classification by legislative bodies, so that the law
may operate only on some, and not all, without
violating the equal protection clause. The
legislative records show that the basis of the
grant of exemption to PAGCOR from corporate
income tax was PAGCORs own request to be
exempted.
Petitioner further contends that Section 1 (c) of
R.A. No. 9337 is null and void ab initio for
violating the non-impairment clause of the
Constitution. Petitioner avers that laws form part
of, and is read into, the contract even without the
parties expressly saying so. Petitioner states that
the private parties/investors transacting with it
considered the tax exemptions, which inure to
their benefit, as the main consideration and
inducement for their decision to transact/invest
with it. Petitioner argues that the withdrawal of its
exemption from corporate income tax by R.A. No.
9337 has the effect of changing the main
consideration
and
inducement
for
the
transactions of private parties with it; thus, the
amendatory provision is violative of the nonimpairment clause of the Constitution.
Petitioners contention lacks merit.
The non-impairment clause is contained in
Section 10, Article III of the Constitution, which
provides that no law impairing the obligation of

contracts shall be passed. The non-impairment

clause is limited in application to laws that
derogate from prior acts or contracts by
enlarging, abridging or in any manner changing
the intention of the parties. 29 There is impairment
if a subsequent law changes the terms of a
contract between the parties, imposes new
conditions, dispenses with those agreed upon or
withdraws remedies for the enforcement of the
rights of the parties.30
As regards franchises, Section 11, Article XII of
the Constitution31 provides that no franchise or
right shall be granted except under the condition
that it shall be subject to amendment, alteration,
or repeal by the Congress when the common
good so requires.32
In Manila Electric Company v. Province of
Laguna,33 the Court held that a franchise partakes
the nature of a grant, which is beyond the
purview of the non-impairment clause of the
Constitution.34 The pertinent portion of the case
states:
While the Court has, not too infrequently, referred
to tax exemptions contained in special franchises
as being in the nature of contracts and a part of
the inducement for carrying on the franchise,
these exemptions, nevertheless, are far from
being strictly contractual in nature. Contractual
tax exemptions, in the real sense of the term and
where the non-impairment clause of the
Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts,
such as those contained in government bonds or
debentures, lawfully entered into by them under
enabling laws in which the government, acting in
its private capacity, sheds its cloak of authority
and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked
without impairing the obligations of contracts.
These contractual tax exemptions, however, are
not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature
of a grant which is beyond the purview of the
non-impairment clause of the Constitution.
Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the
1935 and the 1973 Constitutions, is explicit that
no franchise for the operation of a public utility
shall be granted except under the condition that
such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the
common good so requires.35
In this case, PAGCOR was granted a franchise to
operate and maintain gambling casinos, clubs
and other recreation or amusement places,
sports, gaming pools, i.e., basketball, football,

lotteries, etc., whether on land or sea, within the

territorial jurisdiction of the Republic of the
Philippines.36 Under Section 11, Article XII of the
Constitution, PAGCORs franchise is subject to
amendment, alteration or repeal by Congress
such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of
R.A. No. 9337, amending Section 27 (c) of R.A.
No. 8424 by withdrawing the exemption of
PAGCOR from corporate income tax, which may
affect any benefits to PAGCORs transactions with
private parties, is not violative of the nonimpairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court
holds that the provision subjecting PAGCOR to
10% VAT is invalid for being contrary to R.A. No.
9337. Nowhere in R.A. No. 9337 is it provided that
petitioner can be subjected to VAT. R.A. No. 9337
is clear only as to the removal of petitioner's
exemption from the payment of corporate income
tax, which was already addressed above by this
Court.
As pointed out by the OSG, R.A. No. 9337 itself
exempts petitioner from VAT pursuant to Section
7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as
amended, is hereby further amended to read as
follows:
Section 109. Exempt Transactions. - (1) Subject to
the provisions of Subsection (2) hereof, the
following transactions shall be exempt from the
value-added tax:
xxxx
(k) Transactions
which
are
exempt under
international agreements to which the Philippines
is a signatory orunder special laws, except
Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT,
because PAGCORs charter, P.D. No. 1869, is a
special law that grants petitioner exemption from
taxes.
Moreover, the exemption of PAGCOR from VAT is
supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424,
thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same
Code (R.A. No. 8424), as amended, is hereby
further amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services

and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied,
assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services,
including the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%)
Rate. The following services performed in the
Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate;

PAGCOR was subject to zero rate as it was

rendered to a tax-exempt entity. The Court ruled
that PAGCOR and Acesite were both exempt from
paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter
creating
PAGCOR,
grants
the
latter
an
exemption from the payment of taxes. Section 13
of P.D. 1869 pertinently provides:
Sec. 13. Exemptions.

xxxx

xxxx

(3) Services rendered to persons or entities

whose exemption under special laws or
international agreements to which the Philippines
is a signatory effectively subjects the supply of
such services to zero percent (0%) rate;

(2) Income and other taxes. - (a) Franchise

Holder: No tax of any kind or form, income or
otherwise, as well as fees, charges or levies of
whatever nature, whether National or Local, shall
be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or
charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five (5%)
percent of the gross revenue or earnings derived
by the Corporation from its operation under this
Franchise. Such tax shall be due and payable
quarterly to the National Government and shall
be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description,
levied, established or collected by any municipal,
provincial, or national government authority.

x x x x38
As pointed out by petitioner, although R.A. No.
9337 introduced amendments to Section 108 of
R.A. No. 8424 by imposing VAT on other services
not previously covered, it did not amend the
portion of Section 108 (B) (3) that subjects to
zero percent rate services performed by VATregistered persons to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a
signatory effectively subjects the supply of such
services to 0% rate.
Petitioner's exemption from VAT under Section
108 (B) (3) of R.A. No. 8424 has been thoroughly
and extensively discussed in Commissioner of
Internal Revenue v. Acesite (Philippines) Hotel
Corporation.39 Acesite was the owner and
operator of the Holiday Inn Manila Pavilion Hotel.
It leased a portion of the hotels premises to
PAGCOR.
It
incurred
VAT
amounting
to P30,152,892.02 from its rental income and sale
of food and beverages to PAGCOR from January
1996 to April 1997. Acesite tried to shift the said
taxes to PAGCOR by incorporating it in the
amount assessed to PAGCOR. However, PAGCOR
refused to pay the taxes because of its taxexempt status. PAGCOR paid only the amount
due to Acesite minus VAT in the sum
of P30,152,892.02. Acesite paid VAT in the
amount of P30,152,892.02 to the Commissioner
of
Internal
Revenue,
fearing
the
legal
consequences of its non-payment. In May 1998,
Acesite sought the refund of the amount it paid
as VAT on the ground that its transaction with

(b) Others: The exemptions herein granted for

earnings derived from the operations conducted
under the franchise specifically from the payment
of any tax, income or otherwise, as well as any
form of charges, fees or levies, shall inure to the
benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with
whom the Corporation or operator has any
contractual relationship in connection with the
operations of the casino(s) authorized to be
conducted under this Franchise and to those
receiving compensation or other remuneration
from the Corporation or operator as a result of
essential facilities furnished and/or technical
services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption
refers only to PAGCOR's direct tax liability and not
to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly
gives PAGCOR a blanket exemption to taxes with

no distinction on whether the taxes are direct or

indirect. We are one with the CA ruling that
PAGCOR is also exempt from indirect taxes, like
VAT, as follows:
Under the above provision [Section 13 (2) (b) of
P.D. 1869], the term "Corporation" or operator
refers to PAGCOR. Although the law does not
specifically mention PAGCOR's exemption from
indirect taxes, PAGCOR is undoubtedly exempt
from such taxes because the law exempts from
taxes persons or entities contracting with
PAGCOR
in
casino
operations.
Although,
differently worded, the provision clearly exempts
PAGCOR from indirect taxes. In fact, it goes one
step further by granting tax exempt status to
persons dealing with PAGCOR in casino
operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30, 152,892.02 VAT
and neither is Acesite as the latter is effectively
subject to zero percent rate under Sec. 108 B (3),
R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or
individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect
taxes. It must be noted that the indirect tax of
VAT, as in the instant case, can be shifted or
passed to the buyer, transferee, or lessee of the
goods, properties, or services subject to VAT.
Thus, by extending the tax exemption to
entities or individuals dealing with PAGCOR
in casino operations, it is exempting
PAGCOR from being liable to indirect taxes.
The manner of charging VAT does not make
PAGCOR liable to said tax.
It is true that VAT can either be incorporated in
the value of the goods, properties, or services
sold or leased, in which case it is computed as
1/11 of such value, or charged as an additional
10% to the value. Verily, the seller or lessor has
the option to follow either way in charging its
clients and customer. In the instant case, Acesite
followed the latter method, that is, charging an
additional 10% of the gross sales and rentals. Be
that as it may, the use of either method, and in
particular, the first method, does not denigrate
the fact that PAGCOR is exempt from an indirect
tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay
the 10% VAT charged by Acesite, the latter is not
liable for the payment of it as it is exempt in this
particular transaction by operation of law to pay
the indirect tax. Such exemption falls within the
former Section 102 (b) (3) of the 1977 Tax Code,

as amended (now Sec. 108 [b] [3] of R.A. 8424),

which provides:
Section 102. Value-added tax on sale of services.(a) Rate and base of tax - There shall be levied,
assessed and collected, a value-added tax
equivalent to 10% of gross receipts derived by
any person engaged in the sale of services x x x;
Provided, that the following services performed in
the Philippines by VAT registered persons shall be
subject to 0%.
xxxx
(3) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the Philippines
is a signatory effectively subjects the supply of
such services to zero (0%) rate (emphasis
supplied).
The rationale for the exemption from indirect
taxes provided for in P.D. 1869 and the extension
of such exemption to entities or individuals
dealing with PAGCOR in casino operations are
best
elucidated
from
the
1987
case
ofCommissioner of Internal Revenue v. John
Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization
(WHO) upon an international agreement was
upheld. We held in said case that the exemption
of contractee WHO should be implemented to
mean that the entity or person exempt is the
contractor itself who constructed the building
owned by contractee WHO, and such does not
violate the rule that tax exemptions are personal
because the manifest intention of the agreement
is to exempt the contractor so that no
contractor's tax may be shifted to the contractee
WHO. Thus, the proviso in P.D. 1869, extending
the exemption to entities or individuals dealing
with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be
shifted to PAGCOR.40
Although the basis of the exemption of PAGCOR
and Acesite from VAT in the case of The
Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation was Section 102
(b) of the 1977 Tax Code, as amended, which
section was retained as Section 108 (B) (3) in R.A.
No. 8424,41 it is still applicable to this case, since
the provision relied upon has been retained in
R.A. No. 9337.421avvphi1
It is settled rule that in case of discrepancy
between the basic law and a rule or regulation
issued to implement said law, the basic law
prevails, because the said rule or regulation
cannot go beyond the terms and provisions of the

basic law.43 RR No. 16-2005, therefore, cannot go

beyond the provisions of R.A. No. 9337. Since
PAGCOR is exempt from VAT under R.A. No. 9337,
the BIR exceeded its authority in subjecting
PAGCOR to 10% VAT under RR No. 16-2005;
hence, the said regulatory provision is hereby
nullified.
WHEREFORE, the petition is PARTLY GRANTED.
Section 1 of Republic Act No. 9337, amending
Section 27 (c) of the National Internal Revenue
Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the
enumeration
of
government-owned
and
controlled corporations exempted from corporate
income tax is valid and constitutional, while
BIR Revenue Regulations No. 16-2005 insofar as
it subjects PAGCOR to 10% VAT is null and void
for being contrary to the National Internal
Revenue Code of 1997, as amended by Republic
Act No. 9337.
No costs.
SO ORDERED.